Is The CFPB Helping Credit Unions?
By: Shannon Basile, Compliance Analyst
On October 5, 2017 the Consumer Financial Protection Bureau (CFPB) released its final rule regarding payday loans, vehicle title loans, and certain high-cost installment loans. The CFPB has determined that current payday loan practices are unfair and abusive to consumers. Therefore the rule is designed to prevent lenders from granting loans to borrowers that are financially unable to meet the loan obligation.
The typical payday loan requires a borrower to pay back the loan in full within a short period of time, usually fourteen to thirty days, or may provide a longer term with a balloon payment. The cost of these loans can be equal to a 300% interest rate. In many cases borrowers are not able to repay the loans and meet their other financial obligations. As a result, borrowers are forced to take out new loans creating a cycle of debt that many are unable to get out of.
The CFPB plans to accomplish its goal of protecting consumers from payday lenders by requiring any lender who offers loans with a lump sum payoff or balloon payment to ensure the borrower can pass the “full-payment test.” The test will be used to determine if the borrower is capable of paying the loan back while still meeting their other financial obligations and basic living expenses. The CFPB has developed specific full-payment test criteria and reporting requirements lenders must follow to be in compliance with the rule. Those requirements include:
- Verify the consumer’s net monthly income using a reliable record of income payment, unless a reliable record is not reasonably available;
- Verify the consumer’s monthly debt obligations using a national consumer report and a consumer report from a “registered information system”;
- Verify the consumer’s monthly housing cost using a national consumer report if possible, or otherwise rely on the consumer’s written statement of monthly housing expenses;
- Forecast a reasonable amount for basic living expenses, other than debt obligations and housing cost; and
- Determine the consumer’s ability to repay the loan based on the lender’s projections of the consumer’s residual income or debt-to-income ratio.
The rule allows lenders to avoid the full-payment test requirement if the loan provides borrowers the option to pay off the debt gradually and the borrower pays off at least one third of the original principal before any new loan is granted. The number of loans allowed within a certain amount of time is also limited under the new rule.
In addition, the rule prevents lenders from making more than two attempts to debit a borrowers account for repayment of a short-term, balloon-payment or longer term loan with a rate over 36%. After two unsuccessful account debit attempts, the lender must obtain an updated authorization from the borrower before any future payment transfer attempts can be made. The lender must also provide borrowers with written notice before making account debits at times or in amounts that were not previously disclosed to the borrower.
So how does all this apply to credit unions? For starters, loans offered by credit unions typically do not meet the definition of a payday loan. Loans that are determined to be less risky, such as “payday alternative loans” authorized by the National Credit Union Administration are exempt from the full-payment test requirements. In a recent interview CFPB Director Richard Cordray stated, “I have no intention of disrupting lending by community banks and credit unions. They have found effective ways to make small-dollar loans that consumers are able to pay without high rates of failures.”
The new payday lending rule may put a stop to unethical lenders taking advantage of consumers who are already struggling financially but it does not take away the need for short-term loans. This is where credit unions can step in to fill the void by providing members with a safe and responsible way to borrow. Not only will credit unions be doing what they do best, helping members make good financial choices, but they can use the opportunity to educate members and grow lifelong membership bonds by helping people when they need it most.
For more information click here to view a CFPB factsheet summarizing the payday loan rule.