United States: CFPB Update - Bank Short Term Loans "Payday" For Banks? CFPB Outlines Sweeping Proposal To Level The Playing Field Between Payday Lenders, Banks And Credit Unions

Direct from Richmond, Virginia: yesterday, I (Travis) visited the Greater Richmond Convention Center, where the Consumer Financial Protection Bureau (CFPB) announced at a field hearing a sweeping proposal for new rules regarding payday/deposit advance loans, auto title loans, and certain high-interest, longer-term loans. (A Fact Sheet summary is here.) After CFPB Director Richard Cordray outlined the CFPB's proposal, the Bureau heard from, first, a panel of industry and consumer advocates and, then, members of the public. The hearing was packed and the audience ̶ comprised of payday lender employees, consumer advocates, and others ̶ lively, with one or another of those groups applauding after nearly every person's turn at the microphone.

Leveling the short-term lending playing field between banks, credit unions and payday lenders The CFPB proposal may present an opportunity for banks because it will level the short-term loan playing field between banks, credit unions (CUs), and payday lenders. Under current law, banks have been at a major disadvantage to their nonbank payday competitors because banks have to follow regulatory guidance that does not apply to nonbanks. As a result, most banks have exited the short-term loan business. If the CFPB goes forward with its proposal, banks may have a chance to get back into short-term lending and capture some of the estimated $12 billion in interest and fees that consumers pay each year for payday and auto title loans.

Under the proposal, banks and CUs stand to benefit because their payday competitors will see their margins reduced by added costs and reduced profits. The proposal would require a verification of ability to repay for every loan origination, including rollovers: "For each loan, lenders would have to verify the consumer's income, major financial obligations, and borrowing history to determine whether there is enough money left to repay the loan after covering other major financial obligations and living expenses." This is a major change from the status quo, in which many payday lenders only verify income but do not consider other expenses.

This aspect of the proposal will be less burdensome on banks and CUs than on payday lenders because banks and CUs have traditionally verified their customers' ability to repay their loans. Moreover, because banks and CUs have a real-time window into customers' cash flows in the form of account data, they can verify their customers' ability to repay more easily than a payday lender can.

In the face of these heightened regulatory requirements, some payday lenders may choose to exit the market, and those that remain will be forced to substantially alter their products. The level playing field may also impact consumer behavior. Faced with requests for more documents from their local payday lenders, consumers may find it as convenient, or perhaps even more convenient, to borrow from their bank or CU instead.

Options for lenders: prevention versus protection The CFPB's proposal would give lenders the choice of complying with one of two sets of requirements: "prevention" or "protection." The prevention framework would require an upfront analysis of a consumer's ability to repay the loan. The protection framework would require less upfront work but would limit the loan's terms to make it easier for consumers to repay. Assuming the rule is finalized with this prevention/protection dichotomy, lenders will have a choice to make: whether to offer consumers two types of loans, or to offer only one or the other.

For short-term loans (repayable in 45 days or fewer), some payday lenders may opt for the "protection" framework (which the proposal limits to unsecured loans that do not exceed $500) because they do not wish to take on the responsibility – and potential liability – of the ability-to-repay analysis. Some payday lenders will offer loans under both frameworks because they will want to offer loans larger than $500 and/or to take a security interest in their customers' automobiles.

For longer-term loans (repayable in more than 45 days), the CFPB is proposing two possible approaches for the "protection framework": (1) a 28 percent interest rate cap, $1,000 principal limit, $20 application fee limit, and no more than two loans in six months; or (2) a 5 percent limit for the payment-to-income ratio. Given these limits, it seems likely that most payday lenders that make longer-term loans will choose the "prevention" option. This means more work up front, but it will not curtail profits as much as the limits on interest or payment size.

Industry representatives and consumer advocates talking past each other Yesterday's field hearing illustrated the vast gulf between the positions of the industry and the consumer advocates. In the panel session, industry group participants – with the exception of the CU representative, who contended that credit unions already meet the proposed standards – expressed grave concerns both with the proposal and rhetoric of the CFPB. Consumer advocates generally praised the proposal, although some said it does not go far enough. After the panel session, dozens of members of the public spoke for a minute each. The speakers alternated between two distinct groups: (1) payday lender employees talking about how proud they are of their work and the emergency situations with which they help their customers, and (2) consumer advocates and religious leaders describing the harm to consumers that they see from payday loans.

Obama threatens to veto bill that would weaken CFPB Also yesterday, President Obama gave a speech in which he praised the CFPB's payday proposal. He also said the Republican budget would make it harder for the CFPB to do its job, and he reiterated his threat to veto any bill that unravels Wall Street reform.

Procedural posture The CFPB has not yet issued a formal proposed rule. Before it does so, it will convene a Small Business Review Panel to gather feedback from small lenders. Separate and apart from the notice-and-comment procedures under the Administrative Procedures Act, the Consumer Financial Protection Act requires that, when the CFPB is developing a rule that may have a significant economic impact on a substantial number of small entities, the CFPB must convene a panel consisting of representatives from the CFPB, the Small Business Administration, and the Office of Management and Budget's Office of Information and Regulatory Affairs. In the coming weeks, the panel will have an outreach meeting with representatives of small businesses to receive feedback on the potential economic impacts of the proposed regulations and alternatives.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions