United States: Mid-South Regulatory Compliance Group Quarterly Report Vol. 14 No. 4

Last Updated: November 24 2017
Article by Butler Snow LLP


On October 5, 2017, the CFPB issued a final rule (the "Rule") imposing limitation on (1) short-term consumer loans, (2) longer-term consumer installment loans with balloon payments, and (3) higher-rate consumer installment loans repayable by a payment authorization. The Rule requires lenders originating short-term loans and longer-term balloon payment loan to evaluate whether each consumer has the ability to repay the loan along with current obligations and expenditures. The Rule provides an alternative loan for lenders who want to avoid the ability to repay determination. The Rule curtails repeated unsuccessful attempts to debit a consumer's account for short-term loans, balloon payment loans, and installment loans that involve a payment authorization and an APR over 36%.

The Rule addresses the following types of loans: (1) "short-term" consumer loans with a term of 45 days or less; (2) "longer-term" consumer balloon payment loans; and (3) "longer-term" consumer loans that exceed 45 days where the rate exceeds a 36% APR as defined under the Truth in Lending Act and where the lender obtained a leverage payment mechanism (collectively "covered loans"). The Rule defines "leveraged payment mechanism" to mean the right to initiate a transfer of money through any means from a consumer's account, as defined by the Electronic Funds Transfer Act. A leveraged payment mechanism does not include a single payment transfer initiated a consumer's request. Types of leverage payment mechanisms include checks, drafts or similar payment instruments written by the consumer, electronic fund transfer authorizations (including debit card authorizations), remotely created checks, remotely created payment orders, and transfers by account-holding institutions.

Excluded Loans. The Rule excludes the following type of loans from coverage:

  • Purchase money loans (expressly limited to the cost of the goods and does not include refinances of a purchase money loan);
  • Real estate-secured credit, including home mortgages and credit secured by personal property used as a dwelling;
  • Credit cards;
  • Student loans, both federal and private;
  • Overdraft services and lines of credit;
  • Business-Purpose Loans;
  • Wage advance programs; and
  • No-cost advances.
  • "Alternative loans" and "Accommodation loans" are also conditionally exempt from coverage of the Rule. "Alternative loans" are closed-end loans with the following features:
  • Terms are from 1 to 6 months;
  • A principal amount of $200 to $1,000;
  • The loan is repayable in 2 or more payments that are substantially equal in amount and fall due in substantially equal intervals;
  • The loan is fully amortizing;
  • The lender does not impose any charge other than the rate and application fees permitted for federal credit unions under the regulations issued by the National Credit Union Administration (NCUA);
  • The lender has determined from its records that the loan would not result in the consumer being indebted on more than 3 outstanding loans from a lender within a period of 180 days;
  • The lender does not make more than one alternative loan at a time to a consumer; and
  • The lender maintains and complies with policies and procedures for
  • documenting proof of recurring income.
  • Loans made by federal credit unions in compliance with conditions set forth by the NCUA for a Payday Alternative Loan are deemed to comply with the requirements listed above and are thus conditionally exempt from the Rule.
  • An "Accommodation loan" includes loans made by a lender who makes 2,500 or fewer covered short-term balloon-payment loans per year and derives no more than 10% of its receipts from such loans. This exclusion was intended to support community bank short-term loans that might be made, for example, to a depositor without substantial underwriting. The terms of the exemption, however, are not limited to bank loans.
  • Ability to repay. The Rule requires lenders to verify the consumer has the "ability to repay" before originating short-term loans and longer-term balloon-payment loans. The failure to determine a consumer's ability to repay either a short-term loan or a longer-term balloon-payment loan is considered an unfair and abusive practice. For a short-term loan, the lender must reasonably conclude that the consumer can make payments for major financial obligations, make all payments under the loan, and meet basic living expenses during the shorter of the term of loan or the period ending 45 days after consummation of the loan, and for 30 days thereafter. For a covered longer-term balloon-payment loan, the lender must reasonably conclude that the consumer can make payments for major financial obligations, make all payments under the loan, and meet basic living expenses during the relevant monthly period, and for 30 days after having made the highest payment under the loan.

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