On October 5, 2017, the CFPB finalized its long-awaited rule on payday, vehicle title, and certain high-cost installment loans, commonly referred to as the “payday lending rule.” The final rule places ability-to-repay requirements on lenders making covered short-term loans and covered longer-term balloon-payment loans. For all covered loans, and for certain longer-term installment loans, the final rule also restricts attempts by lenders to withdraw funds from borrowers’ checking, savings, and prepaid accounts using a “leveraged payment mechanism.”

In general, the ability-to-repay provisions of the rule cover loans that require repayment of all or most of a debt at once, such as payday loans, vehicle title loans, deposit advances, and longer-term balloon-payment loans. The rule defines the latter as including loans with a single payment of all or most of the debt or with a payment that is more than twice as large as any other payment. The payment provisions restricting withdrawal attempts from consumer accounts apply to the loans covered by the ability-to-repay provisions as well as to longer-term loans that have both an annual percentage rate (“APR”) greater than 36%, using the Truth-in-Lending Act (“TILA”) calculation methodology, and the presence of a leveraged payment mechanism that gives the lender permission to withdraw payments from the borrower’s account. Exempt from the rule are credit cards, student loans, non-recourse pawn loans, overdraft, loans that finance the purchase of a car or other consumer product that are secured by the purchased item, loans secured by real estate, certain wage advances and no-cost advances, certain loans meeting National Credit Union Administration Payday Alternative Loan requirements, and loans by certain lenders who make only a small number of covered loans as accommodations to consumers.

The rule’s ability-to-repay test requires lenders to evaluate the consumer’s income, debt obligations, and housing costs, to obtain verification of certain consumer-supplied data, and to estimate the consumer’s basic living expenses, in order to determine whether the consumer will be able to repay the requested loan while meeting those existing obligations. As part of verifying a potential borrower’s information, lenders must obtain a consumer report from a nationwide consumer reporting agency and from CFPB-registered information systems. Lenders will be required to provide information regarding covered loans to each registered information system. In addition, after three successive loans within 30 days of each other, the rule requires a 30-day “cooling off” period after the third loan is paid before a consumer may take out another covered loan.

Under an alternative option, a lender may extend a short-term loan of up to $500 without the full ability-to-repay determination described above if the loan is not a vehicle title loan. This option allows three successive loans but only if each successive loan reflects a reduction or step-down in the principal amount equal to one-third of the original loan’s principal. This alternative option is not available if using it would result in a consumer having more than six covered short-term loans in 12 months or being in debt for more than 90 days on covered short-term loans within 12 months.

The rule’s provisions on account withdrawals require a lender to obtain renewed withdrawal authorization from a borrower after two consecutive unsuccessful attempts at debiting the consumer’s account. The rule also requires notifying consumers in writing before a lender’s first attempt at withdrawing funds and before any unusual withdrawals that are on different dates, in different amounts, or by different channels, than regularly scheduled.

The final rule includes several significant departures from the Bureau’s proposal of June 2, 2016. In particular, the final rule:

• Does not extend the ability-to-repay requirements to longer-term loans, except for those that include balloon payments;
• Defines the cost of credit (for determining whether a loan is covered) using the TILA APR calculation, rather than the previously proposed “total cost of credit” or “all-in” APR approach;
• Provides more flexibility in the ability-to-repay analysis by allowing use of either a residual income or debt-to-income approach;
• Allows lenders to rely on a consumer’s stated income in certain circumstances;
• Permits lenders to take into account certain scenarios in which a consumer has access to shared income or can rely on expenses being shared; and
• Does not adopt a presumption that a consumer will be unable to repay a loan sought within 30 days of a previous covered loan.

The rule will take effect 21 months after its publication in the Federal Register, except for provisions allowing registered information systems to begin taking form, which will take effect 60 days after publication.