The CFPB issued its final payday loan rule yesterday in a release running 1,690 pages.  Lenders covered by the rule include nonbank entities as well as banks and credit unions. In addition to payday loans, the rule covers auto title loans, deposit advance products, and certain high-rate installment and open-end loans.  The final rule becomes effective 21 months after publication in the Federal Register (except for certain provisions necessary to implement the rule’s consumer reporting requirements, which become effective 60 days after the rule’s publication).

The final rule establishes limitations for a “covered loan,” which can be either (1) any short-term consumer credit with a term of 45 days or less, (2) any longer-term balloon-payment consumer credit, or (3) longer-term consumer credit with a term of more than 45 days and without a balloon payment where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains a form of “leveraged payment mechanism” giving the lender a right to initiate transfers from the consumer’s account.

Among the changes from the CFPB’s proposal: vehicle security is no longer relevant to whether longer-term credit is a “covered loan” and a “leveraged payment mechanism” no longer includes payments obtained through a payroll deduction or other direct access to the consumer’s paycheck.

The final rule excludes from coverage (1) purchase-money credit secured by the car or other consumer goods purchased, (2) real property or dwelling-secured credit if the lien is recorded or perfected, (3) credit cards, (4) student loans, (5) non-recourse pawn loans, (6) overdraft services and overdraft lines of credit, (7) alternative loans that meet conditions similar to those applicable to loans made under the NCUA’s Payday Alternative Loan Program, and (8) subject to certain conditions, employer wage advance programs, no cost-advances, and accommodation loans.

The final rule contains an “ability to repay” requirement for covered short-term credit and longer-term balloon payment credit but provides an alternative.  A lender must choose between:

• A “full payment test,” under which the lender must make a reasonable determination of the consumer’s ability to repay the loan and cover major financial obligations and living expenses over the term of the loan and the succeeding 30 days.  Under this test, the lender must take account of the consumer’s basic living expenses and obtain and verify evidence of the consumer’s income and major financial obligations  Unlike the proposed rule, the final rule does not require income verification in all instances.  In circumstances where a lender determines that a reliable income record is not reasonably available, such as when a consumer receives some income in cash and spends that money in cash, the lender can reasonably rely on the consumer’s statements alone as evidence of income.  Further new liberality allows a lender to verify housing expenses other than a payment for a debt obligation that appears on a national consumer report by reasonably relying on the consumer’s written statement.  The final rule does not include the proposal’s presumptions of unaffordability.  Among other changes from the proposal, the final rule permits lenders and consumers to rely on income from third parties, such as spouses, to which the consumer has a reasonable expectation of access as part of the ability to repay determination and permits lenders in certain circumstances to consider whether another person is regularly contributing to the payment of major financial obligations or basic living expenses.  A 30-day cooling off period applies after a sequence of three covered short-term or longer-term balloon payment loans.

• A “principal-payoff option,” under which the lender can make up to three sequential loans in which the first has a principal amount up to $500, the second has a principal amount that is at least one-third smaller than the principal amount of the first, and the third has a principal amount that is at least two-thirds smaller than the principal amount of the first.  A lender could not use this option if (1) the consumer had in the past 30 days an outstanding covered short-term loan or an outstanding longer-term balloon payment loan, and (2) the new loan would result in the consumer having more than six covered short-term loans during a consecutive 12-month period or being in debt for more than 90 days on covered short-term loans during a consecutive 12-month period.  When using this option, the lender cannot take vehicle security or structure the loan as open-end credit.

In a major change from the proposal, the final rule does not include an underwriting requirement for covered longer-term credit without a balloon payment.  Instead, for such credit, lenders are subject only to the final rule’s “penalty fee prevention” provisions, which apply to all covered loans.  Under these provisions:

• If two consecutive attempts to collect money from a consumer’s account made through any channel are returned for insufficient funds, the lender cannot make any further attempts to collect from the account unless the consumer has provided a new and specific authorization for additional payment transfers.  The final rule contains specific requirements and conditions for the authorization.

• A lender generally must give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumer’s checking, savings, or prepaid account.  The notice must include information such as the date of the payment request, payment channel, payment amount (broken down by principal, interest, fees, and other charges), and additional information “unusual attempts,” such as when the payment is for a different amount than the regular payment or initiated on a date other than the date of a regularly scheduled payment.

The final rule also requires the CFPB’s registration of consumer reporting agencies as “registered information systems” to whom lenders must furnish information about covered short-term and longer-term balloon payment credit and from whom lenders must obtain consumer reports for use in extending such credit.  If there is no registered information system or if no registered information system has been registered for at least 180 days of the final rule’s 21-month effective date, lenders will be unable to use the “principal-payoff” option.  The CFPB expects that there will be at least one registered information system by the effective date.