On July 7, the CFPB issued its long-awaited final rule (the 2020 Final Rule) amending the regulations that govern payday loans, vehicle title loans and certain high-cost installment loans. As expected, the CFPB revoked the mandatory underwriting provisions from its own final rule dated November 17, 2017 (the 2017 Final Rule), and reaffirmed the payment provisions from that same rule. In response to the doubts that the recent Seila Law decision cast on the CFPB’s rulemaking ability during the time period when it had a director who was not removable at will by the President, the CFPB issued a separate ratification document for the payment provisions.
The Revoked Provisions
The most discussed provision in the 2017 Final Rule is almost certainly the provision that deemed it an unfair and abusive practice for a lender to make a covered short-term loan or a covered longer-term balloon-payment loan without reasonably determining that the applicant had an ability to repay the loan according to its terms. This provision has been excised by the 2020 Final Rule, largely because of fears that it would entirely cut off a particularly vulnerable—and often unbanked—group from the credit market, leaving them with nowhere to turn when in need of emergency funds.
The supplementary information issued alongside the 2020 Final Rule discusses a Federal Reserve survey, the results of which showed that about 25% of adults skipped medical care in 2018 because they couldn’t afford it and about 40% would be unable to cover an emergency expense costing $400 or would have to sell something or borrow money to cover it. The CFPB’s press release notes the need for the continued availability of small-dollar lending products, particularly given the financial struggles that many are experiencing as a result of the COVID-19 pandemic.
The following five provisions have also been revoked by the 2020 Final Rule:
- The provision establishing specific underwriting requirements for covered short-term loans or covered longer-term balloon-payment loans
- The principal step-down exemption that allowed lenders to make covered short-term loans without an ability-to-repay determination in certain circumstances
- The provisions requiring lenders to furnish certain information regarding covered short-term loans and longer-term balloon-payment loans to registered information systems
- The related recordkeeping provisions
- The related compliance date provisions
The Ratified Provisions
The 2020 Final Rule reaffirms the provision prohibiting lenders (or their agents, including payment processors) from making a third attempt to withdraw funds from an account after two consecutive attempts have failed without new and specific consumer consent. The final rule also reaffirms the provisions requiring written notice before the first attempt to withdraw funds and before any subsequent attempts with different dates, amounts or payment channels. The CFPB denied a petition to commence rulemaking excluding debit and prepaid cards from these provisions on the grounds that these payment methods do not give rise to NSF fees.
To aid lenders in complying with these new requirements, the CFPB released a set of Payday Lending Rule FAQs and an updated Small Entity Compliance Guide. The FAQs include a discussion of the two types of loans that are exempt from the 2020 Final Rule: certain alternative loans and certain accommodation loans. The FAQs also include a list of eight types of loans that are excluded from being covered loans under the 2020 Final Rule:
- Purchase money security interest loans
- Real estate secured credit
- Credit card accounts
- Student loans
- Nonrecourse pawn loans
- Overdraft service and overdraft lines of credit
- Wage advance program loans
- No-cost advances
What Happens Next?
The CFPB plans to monitor and assess the effects of these provisions to determine whether further action is needed. The CFPB also announced in its press release that it will be undertaking new research to identify the types of information that should be disclosed to consumers during the small‑dollar lending process to enable them to make more informed choices.
The provisions that the CFPB has reaffirmed and ratified (along with the rest of the 2017 Final Rule) are currently stayed by an order from the United States District Court for the Western District of Texas, Austin Division, but the CFPB’s press release states that it will seek to put them into effect with a reasonable period for entities to come into compliance.
There may yet be additional challenges to the 2020 Final Rule from both sides: consumer protection groups challenging the revoked provisions and lenders challenging the reaffirmed and ratified provisions. Additionally, the Seila Law decision has brought an elephant into the room with the possibility that a new CFPB director appointed by a new President could be rewriting these rules in 2021.
Manatt’s consumer financial services team will continue to monitor these and other developments at the CFPB. If you require assistance, please contact the authors or any other member of the team.