Compliance Considerations: The Power of Disruption Part 2

The CFPB, Director Cordray presiding, approved a Final Rule on Payday, Vehicle Title and Certain High-Cost Installment Loans (“Payday Rule”) on October 4, 2017 (published November 17, 2017). Compliance with the substantive requirements for consumer finance companies is required on August 19, 2019. Although the CFPB indicated a willingness to revisit the Payday Rule in a statement issued on January 16, 2018, the current rule offers a chilling glimpse of where regulatory disruption can go.

The rule applies to short-term loans with terms of 45 days or less, longer-term balloon loans, and longer terms loans with elevated interest rate and a leveraged payment mechanism. The Payday Rule proposes enhanced underwriting procedures to establish the borrower’s ability to pay.

The Payday Rule provides:

It is an unfair and abusive practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that the consumers will have the ability to repay the loans according to their terms.

The “reasonable determination” mandated by the rule requires a lender to determine the applicant’s debt-to-income ratio, estimate the applicant’s basic living expenses, determine residual income, and project rental housing expenses into the future. Lenders also have to determine if the customer has taken too many short-term loans too recently, because the Payday Rule establishes hard stops to new lending if the customer has too many loans in effect. The source of this information can be the applicant, subject to the lender’s obligation to verify. The lender is also required to consult national consumer reports, “registered” consumer reports, and the lender’s records to substantiate the applicant’s debt obligations.

In order for the Payday Rule’s underwriting and loan counting requirements to work, there has to be a source of data that is adequate to supply lenders the necessary information. The Payday Rule addresses this problem, by requiring lenders to furnish information to “registered information systems,” a special category of new credit bureaus established by the Payday Rule.

The disruption here comes from the establishment of new obligations to furnish information to new bodies for a subset of similar financial products. The longstanding rule in the consumer finance industry has been that while credit reporting must be accurate, creditors are not obliged to furnish information to the credit bureaus. For the consumer finance industry, compliance with the Payday Rule requires reliable means of determining that a given product is covered, and then suitable treatment for covered transactions at every phase.

Conclusion

If legislators and regulators are disrupting consumer finance by creating more unique categories of transactions that are subject to special rules, this will continue to complicate the methods that merchants, lenders, and servicers use to remain compliant. Looking forward into 2018, it is critical for AFSA and Members to monitor the impact of new laws and regulations and remain in close contact with the parties responsible for introducing new disruptive concepts. AFSA and Members will also focus on how technology can be leveraged to ensure that compliance requirements are satisfied while prioritizing reliability and efficiency.