United States

CFPB has plans for the regulation of payday loans


In remarks at the Consumer Financial Protection Bureau's (CFPB or Bureau) field hearing on payday lending in Richmond, Virginia, CFPB director, Richard Cordray, announced the release of an outline of prospective proposals it is considering for payday and similar loans which would eliminate “debt traps” associated with these products by the CFPB. The outline is not considered a formal proposal; rather it is intended to solicit feedback from the Small Business Review Panel tasked with providing input to the Bureau from small lenders. The process is still in the preliminary stages, and the Bureau has indicated that they will complete additional outreach and analysis before publishing a Notice of Proposed Rulemaking. 

The prospective proposals would apply to two types of credit:

  • Short-term credit products that require consumers to pay back the loan in full within 45 days, such as payday loans, vehicle title loans, deposit advance products and certain high-cost installment loans and open-end loans
  • Longer-term credit products of more than 45 days, with payments made via direct access to the consumer's deposit account or paycheck, or where the creditor holds a security interest in the consumer's vehicle and the all-in APR (including add-on charges) is more than 36 percent. 

The proposals offer two approaches to eliminate debt traps – prevention or protection.  For either type of credit, lenders would have the option of either preventing debt traps at the start of the loan, or protecting against debt traps throughout the lending process. Specific requirements and restrictions would apply to each approach. 

Prevention programs would require lenders to determine at the outset that the consumer can repay the loan (interest, principal and fees for add-on products) when due, without defaulting or re-borrowing. Included in the proposals are requirements for lenders to: 

  • Verify the consumer's income, major financial obligations and borrowing history to determine there is sufficient money to repay the loan after covering other major financial obligations and living expenses
  • Determine if the consumer can repay the loan each time the consumer wants to refinance or re-borrow
  • Adhere to a 60-day cooling-off period between loans
  • Document improvement in the borrower's financial circumstances, enough to repay a new loan without re-borrowing, before making a second or third loan within the 60-day window or refinancing the loan into another loan with similar terms
  • Adhere to a prohibition applicable to all lenders against making a new short-term loan for 60 days

Protection programs would require lenders to provide affordable repayment options and limit the number of loans a borrower could take out in a row and over the course of a year. The proposals include requiring the following from the lenders:

  • Not keep consumers in debt on short-term loans for more than 90 days in a 12-month period
  • Cap rollovers at two (three loans total), followed by the mandatory 60-day cooling-off period.
  • Make second and third consecutive loans only if the lender offers an affordable way out of debt (by either reducing the principal with each loan so that it is repaid after the third loan, or providing a no-cost “off-ramp” after the third loan to allow the consumer to repay the loan over time without further fees)
  • Limit the debt to $500, not carry more than one finance charge or not require the consumer's vehicle as collateral
  • Offer a minimum term of 45 days and a maximum of six months on longer-term loans
  • Provide certain specific protections that may include interest rate, application fee, and payment caps or a maximum number of these types of loans in a 12-month period

The prospective proposals also cover payment collection practices, requiring notification to the borrower three business days before accessing a deposit account, or requiring the lender obtain renewed authorization from the consumer if two consecutive attempts to collect money from the consumer's account were unsuccessful.

Once the Bureau issues the Notice of Proposed Rulemaking, comments from institutions that include this type of lending in their product mix will be important in forming the details of the final requirements. The Bureau has also issued a much shorter factsheet describing the proposals being considered.