United States: CFPB Proposes Underwriting And Payment Processing Requirements For Payday, Title, And High-Rate Installment Loans

On June 2, 2016, the CFPB proposed new ability-to-repay and payment processing requirements for short-term and certain longer-term consumer loans. Relying largely on the CFPB's authority to prohibit unfair or abusive practices, the proposal would generally require that lenders making payday, vehicle title, and certain high-rate installment loans either originate loans satisfying strict product characteristic limitations set by the rule or make an ability-to-repay determination based on verified income and other information.

To facilitate the ability-to-repay determination, the CFPB is also proposing to establish special "registered information systems" to which lenders would have to report information about these loans. In addition, servicers would have to obtain new payment authorizations from consumers after making two consecutive unsuccessful attempts at extracting payment from consumer accounts, and would be subject to new disclosure requirements related to payment processing.

The rule's basics are summarized below, and additional details will follow in a Mayer Brown Legal Update. Comments on the proposal are due on September 14, 2016. Once the CFPB considers those comments and issues a final rule, it anticipates providing a 15-month window after publication before lenders will be required to comply. Legal challenges brought against the agency in connection with the rulemaking could of course affect that timeline.

Ability to Repay and Alternatives

The CFPB's ability-to-repay requirements distinguish between short-term and longer-term loans. By "short-term loans," the CFPB is addressing loans commonly referred to as "payday" or "deposit advance" loans, but including any consumer loan that is repayable within 45 days. A lender of such a loan would be required to make a reasonable determination that the consumer can repay the loan according to its terms. The lender would have to consider and verify the amount and timing of the consumer's income and major financial obligations, and ensure that the consumer can make all payments under the loan as they become due while still being able to pay his/her basic living expenses. The proposal does not set specific requirements or guidelines for determining sufficient residual income.

The lender also would be required to review the consumer's borrowing history, using information from its records, the records of its affiliates, and a consumer report from a new "registered information system" if such a report is available. The consumer's borrowing history would determine whether any of several presumptions of the consumer's inability to repay would apply. If so, the proposal would further limit the lender's ability to originate the loan—or potentially prohibit the loan altogether. For instance, a consumer must generally wait at least 30 days after paying off a prior short-term loan before seeking another one, unless the loan meets a detailed set of requirements regarding a reduction in principal.

However, the rule proposes that certain short-term loans would be exempt from the ability-to-repay requirement. Specifically, lenders may make loans that are limited in amount, fully amortizing, not secured by the consumer's vehicle, and subject to renewal restrictions, without considering and verifying the consumer's ability to repay. In general, a lender would be able to make up to three such loans in a sequence, with the first being no larger than $500 and each subsequent renewal falling in principal amount by one-third of the amount of the initial loan. In any consecutive 12-month period, however, a consumer would not be permitted to have more than six covered short-term loans outstanding or have covered short-term loans outstanding for an aggregate period of more than 90 days.

The proposal also addresses certain longer-term installment loans with high rates and fees, that have either a "leveraged payment mechanism" (e.g., a recurring ACH or other preauthorized access to the consumer's deposits or income) or a non-purchase-money security interest in the consumer's vehicle. Specifically, for consumer loans that are repayable over a longer term than 45 days, with a total cost of credit (an "all-in APR") that exceeds 36%, and a leveraged payment mechanism or a non-purchase money security interest in the consumer's vehicle, the lender must determine the consumer's ability to repay as described above for short-term loans.

Similar to the short-term covered loans, the CFPB proposes certain longer-term loans that would be presumed to fail the ability-to-repay requirement. For instance, if a lender sought to make a covered longer-term loan, it would need to confirm (among other things) that at least 30 days had passed since the consumer paid off a prior short-term loan (or a covered longer-term balloon loan), unless every payment of the new loan would be substantially smaller than the largest required payment on the old loan. Otherwise the lender could only offer the longer-term loan if it could establish that the consumer's financial situation had significantly improved.

However, the proposal provides for two types of longer-term loans to which the general ability-to-repay requirement would not apply. The first of these loans is modeled after the National Credit Union Administration's (NCUA's) Payday Alternative Loan. The loan must be closed-end, between $200 and $1,000, not more than 6 months in duration, and require at least 2 regular periodic payments no less frequently than monthly. It also must be fully amortizing and carry a total cost of credit not in excess of the NCUA limit.

The second type of longer-term loan that would escape the general ability-to-repay requirement is somewhat more complicated. Similar to the first type, the loan would have to be payable in 2 or more regular, fully-amortizing payments due no less frequently than monthly. However, the loan may be up to 24 months in duration and bear a total cost of credit up to 36% plus a limited origination fee. To retain origination fees for these loans, the lender must maintain a portfolio default rate of not more than 5% per year (based on the dollar-volume of defaulted loans). If the lender's default rate exceeds 5%, the lender would have to refund all origination fees for consumers over the past year, including for those borrowers who did not default.

In its 2015 outline for this proposal, the CFPB described an NCUA-type product as one of two safe harbors from the general ability-to-repay requirement, but there are significant differences between the outline and the proposal with respect to the second safe harbor product. Most significantly, the outline's second safe-harbor product could have been no longer than 6 months in duration, had no portfolio default aspect, and permitted the payment on the loan to be as much as 5% of the consumer's income (without regard to the corresponding cost of credit expressed as an all-in APR). Following the publication of that 2015 outline, several banks indicated support for payday alternative loans under such a "5% of income" safe-harbor provision. These banks apparently believed that a 5-month, $500 loan product ultimately requiring $625 in payments could be made profitably with an assumed 6% default rate.

The proposed structure of the second safe-harbor product has similar economics to the specific $500 loan product the banks suggested might work if, and only if, a 5% default rate can be achieved. However, the amount of interest that a lender may charge on the proposed product varies based on loan amount, whereas the version of the product in the 2015 outline would have resulted in a cost of credit that varied based on the consumer's income. In addition, it remains to be seen whether banks or other payday alternative lenders will be willing to bear the risk of the refund provision. On the other hand, lenders may find more flexibility in the fact that the proposed product may be longer in duration (6 vs. 24 months) and may find originating a product that does not depend on verified income to be simpler upfront. It is possible that these factors may offset the revised cost structure and portfolio default rate requirement.


The CFPB proposal and its ability-to-repay requirement would not apply to: (i) loans in which a security interest is taken in purchased goods; (ii) residential mortgage loans; (iii) credit card accounts; (iv) student loans; (v) non-recourse pawn transactions; or (vi) overdraft services and lines of credit (including when offered with prepaid cards). However, the CFPB warns that it will not ignore unfair, deceptive, or abusive practices in connection with those products that it sees through its supervisory or enforcement activities. In addition, certain of those products—credit card accounts and most closed-end residential mortgage loans—are already subject to ability-to-repay requirements.

Originally published June 6, 2016

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2016. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.