The CFPB Has Released Their Landmark Final Payday Rule. Now Comes the Hard Part.
Yesterday, after many hard-fought fights and persistent pressure by consumer advocates across the country, the Consumer Financial Protection Bureau (CFPB) released its long-awaited final rules that would regulate payday, auto-title and other forms of predatory short-term, small-dollar lending. We applaud the CFPB for crafting these rules and making them official – and thus enforceable — in a very charged and divisive atmosphere with strong opposition from Capitol Hill and the payday lending industry.
By releasing these regulations, the Bureau has done something truly historic. These rules represent the first-ever attempt at the federal level to regulate an industry that each year siphons off more than $8 billion dollars from the pockets of hard-working individuals and families. Built on over five years of CFPB research, community and stakeholder engagement—including more than one million comments submitted during the public comment process last year—this landmark regulation ensures that consumers everywhere are protected from the many predatory practices that plague the payday lending industry.
While the CFPB’s final rule puts us on a path to ending the payday debt trap once and for all, it falls short of that goal in one significant respect. The final rule is narrower than what the Bureau proposed last summer. In limiting some of stronger aspects of the final rule, such as the ability to repay standard, to loans with terms of 45 days or less and longer-term loans with a balloon payment, the CFPB has left the long-term installment lending market unregulated. As Prosperity Now’s comment letter points out, a long-term loan can be just as predatory as a short-term loan, and the small dollar industry has taken note and is adopting more longer term loan products.
Despite this shortcoming—which the CFPB’s has said it would address in separate regulations to be issued later in the future—the final payday rule is a welcomed and much needed step in the right direction as it strikes at what has been the bedrock of the small dollar market: payday and auto-title loans. By releasing this rule, the Bureau has provided a great starting point that could be built on in the future with additional rules that apply to long term installment products.
In crafting its final payday rules, the CFPB included several strong provisions recommended by Prosperity Now and its partners during the public comment period, including:
- Requirements that lenders ensure a borrower has the ability to repay a loan. By requiring lenders to assess a borrower’s ability to repay (ATR) their loan without the need to reborrow or fall short on other financial obligations, the Bureau’s final rule introduces the gold standard of underwriting to a market that has intentionally chosen to not rely on such measures as a way to keep consumers in long-term cycles of debt. We are extremely pleased that the rule keeps the ATR provision in place.
- Ensuring consumers have greater control over their own bank accounts. A key component of how payday and other forms of unsecured small-dollars loans work is that for a consumer to be extended credit, the lender must first be given access to a consumer’s bank account for repayment. The result of this transaction is lenders repeatedly reaching into a consumer’s account to satisfy a debt, even if the funds are not available for repayment. In turn, this often leads to nonsufficient funds fees and another associated bank fees that borrowers end up having to pay. Fortunately, the CFPB’s final rule puts an end to this practice as they limit a lender’s ability to collect payment through a borrower’s account to two unsuccessful attempts before they must request permission to continue to debit the account. This small but significant change has the protentional to protect countless borrowers from racking up a considerable amount of additional debt from bank fees.
While there’s much to celebrate with the release of this historic rule, much like the CFPB’s arbitration rule that was released over the summer, Congress—with the aid of the small dollar industry—will likely introduce legislation or file Congressional Review Act challenges to repeal the payday rule. In the coming months, it is going to be critically important that we oppose these efforts in as many ways as possible, and push back against the weakening or repealing of the CFPB’s final rule on payday.
Going forward, as these developments continue to unfold, we will be reaching out to you through our Consumer Protections Advocacy Campaign with ways to support the rule and the CFPB, so please stay tuned. If we are going to save this important rule, your advocacy is going to be essential.