After weeks of meeting with industry executives and financial advocates, the Consumer Financial Protection Bureau (CFPB) released its proposal for new rules to regulate short-term lending. The rules are sharp and restrictive, and seek to eliminate private lenders altogether.
While these rules are geared towards the payday loan industry, they are broad enough to encompass all forms of short term lending, including deposit advances, car title loans, and higher interest installment loans. If implemented, these rules could favor the big banks by making them the only legal way to lend and borrow in the country.
What the proposed rule changes don’t include are caps on interest rates. Congress will not allow the CFPB to implement a rate cap, so instead the Bureau focused on tightening the restrictions on being approved for payday loans.
These are the proposed rules:
- Lenders will now be obligated to make a good faith determination that the loan will be to be repaid within 45 days. This includes not only verifying income, but also to verify the borrowers financial obligations – bills, mortgage, student loans, child or spousal support payments, etc. The lender must determine the borrower can repay the loan in full.
- The borrowing history of the customer will also need to be verified, both to see if they have had problems repaying previous loans and to check if they have other current outstanding loans.
- There will be a 60 day “cooling off” period between repaying one loan, and being able to borrow again. The lender must be able to verify that the borrower is not currently in that cooling off period.
- The lender must verify the borrower hasn’t taken out more than 6 short term loans within the last 12 months, and that the borrower hasn’t been in debt for more than 90 days during that previous 12 months.
- The lender will immediately report or log the loan with all available financial reporting systems.
With these rule changes, the process of applying for and being approved for a payday loan or any other short term loan becomes much more difficult. Once the loan has been approved, there are further rule changes that apply:
- The loan cannot be for more than $500
- The loan can only last for 45 days maximum, with only one finance charge during that time.
- Using a vehicle as collateral is no longer permitted.
- The loan must be designed in such a way to “taper the borrower off from indebtedness.” This is vaguely worded, but means the lender must have a plan for debt forgiveness in place, for those borrowers who cannot repay their loan within the allotted 45 day period.
The CFPB claims these rules are to protect borrowers, but essentially they seek to make payday loans so unwieldy to process the lenders will go out of business. That will be too bad for the millions of people who need payday loans every year, because the CFPB isn’t going to propose an alternative outside of the exclusionary mainstream banking system.