WASHINGTON – The world of short-term lending was rocked on Thursday when a regulator issued a rule cracking down on payday lending while another made it easier for banks to offer an alternative product.
The Consumer Financial Protection Bureau finalized its long-awaited rule to curb short-term, high-interest loans that are typically due in two to four weeks, requiring lenders to perform a repayment capacity test to ensure borrowers can afford such products. .
Less than an hour later, the Office of the Comptroller of the Currency surprised the financial services world by taking its own initiative, rescinding guidelines that made it more difficult for banks to offer a payday-like product called a payday advance. deposit.
Dueling moves effectively mean that the CFPB was closing a door in one area, while the OCC was opening its own for national banks.
The OCC presented its decision as a decision to avoid duplication with CFPB efforts.
“Today, I approved the cancellation of the OCC’s guidelines for deposit advance products, with immediate effect,” Acting Currency Controller Keith Noreika said in a press release. The CFPB salary rule, he added, “requires a review of the OCC guidelines.”
But the CFPB payday rule was never directed against banks or credit unions. Indeed, CFPB director Richard Cordray said Thursday there was an exclusion for community banks and credit unions that make 2,500 or less short-term or lump sum loans per year and draw less. 10% of their income from these loans.
“We have no intention of disrupting lending from community banks and credit unions. They found effective ways to provide small loans that consumers are able to afford without high failure rates, ”Cordray said.
Ultimately, the moves will leave financial services more fragmented. Payday lenders have already started providing longer-term loans, with terms of 45 days or more, which the CFPB rule does not cover, in response to the final rule. (An earlier proposal would have covered these loans as well, but that part has not been finalized and the CFPB says it needs to look into the matter.)
Nationally chartered banks are again free to offer deposit advance products, while state chartered institutions under the supervision of the Federal Deposit Insurance Corp. still face limitations on these loans. The OCC and FDIC acted in concert earlier to curb deposit advance products, but only the OCC rescinded its guidance on Thursday. It was not immediately clear whether the FDIC would follow suit.
The decisions of the CFPB and the OCC come against a backdrop of tensions between Noreika and Cordray. The interim monitor sharply criticized the CFPB’s recent rule banning mandatory arbitration clauses, releasing a study claiming it is costly for consumers and banks.
CFPB officials said on Thursday they were unaware the OCC was taking action on deposit advance products.
“We have no idea on that,” Brian Shearer, a CFPB lawyer, told reporters on a conference call.
Here is a guide to CFPB and OCC rules.
The CFPB troubleshooting rule
Even outside of the OCC movement, the CFPB rule has an uncertain future. Payday lenders have suggested as a precaution that the CFPB rush to rule so Cordray can leave to pursue an offer for the governor of Ohio. They are likely to challenge the rule in court.
Republicans are also likely to attempt to repeal it under the Congressional Review Act, a process that only requires a majority vote.
The next CFPB chief could also go back, delay or eliminate the rule at a later time. Cordray’s term expires in July, and the Trump administration is likely to move quickly to appoint a successor whenever the CFPB director chooses to leave.
The CFPB said it drafted its rule because it “determined that the risky practices of lenders push borrowers into the debt trap or force them to cede control of their financial decisions.”
The new payday regulations will require lenders to perform a repayment capacity test to determine if borrowers can make loan repayments while still being able to pay essential living expenses during the life of the loan and 30 days after the loan. highest loan payment. .
Opponents of the rule argue it will cut a lifeline of cash to consumers who need a quick injection of cash.
The rule allows other “less risky” loans that are sometimes offered by community banks and credit unions to waive the full payment test.
Under the rule, to assess borrowers’ ability to repay, lenders must perform a “full payment test” to verify that someone can afford the loan without taking on more credit. For some short-term loans, lenders may opt for a “principal repayment option” for loans that are repaid more gradually.
As part of the full payment test, a lender must verify a borrower’s income and other expenses. The rule limits the number of short-term loans that can be made in quick sequence to three.
The principal repayment option is allowed for short-term loans up to $ 500, where borrowers can repay debt over time. This option is limited to low risk credit products. For example, this option is not allowed when the automatic title is a guarantee.
The rule also exempts “alternative payday loans” which are authorized by the National Credit Union Administration.
For loans subject to the full repayment test or the principal repayment option, lenders must collect and report information on these loans using “credit reporting systems” registered by the CFPB. Companies should ask the office for the designation of the reporting system.
The rule also includes a measure to prevent insufficient fund charges from accumulating on the part of lenders who repeatedly attempt to withdraw payments from borrowers’ accounts. The measures apply to short-term loans, lump sum loans and any loan with an APR greater than 36% in which lenders have authorized access to checking or prepaid accounts.
“These protections will give consumers the ability to challenge any unauthorized or erroneous debit attempt and arrange to cover unforeseen payments due,” the CFPB said in a backgrounder. “This should mean fewer consumers are being charged for payments they didn’t authorize or anticipated, or they are charging increased fees for returned payments and insufficient funds.”
Specifically, lenders must notify borrowers in writing before the first attempt to collect payments. After two consecutive unsuccessful attempts, the lender is prohibited from making further attempts without the authorization of the borrower.
The CFPB said the repayment capacity protections apply to loans that require all or most of the debt to be paid off at one time, including title loans, deposit advances, and mortgage loans. long term. But the protections against excessive penalty charges apply to a larger portion of the credit market.
OCC deposit advance rule
In a Federal Register notice, the OCC argued that the CFPB salary rule includes a number of requirements that would overlap with the 2013 OCC guidelines, such as underwriting requirements or cooling off periods. .
“Thus, the continuation of the guidelines would subject banks to potentially inconsistent regulatory guidelines and undue burden as banks prepare to implement the requirements of the CFPB payday rule,” the OCC said.
The OCC also argued that banks should be given more leeway to offer deposit advances, in order to provide consumers with an alternative to “less regulated lenders”.
“The OCC is concerned that banks are able to meet consumers’ needs for short-term, low-value credit,” the advisory said.
Instead of these guidelines, the OCC listed three main principles that banks should follow with regard to what the agency has called “innovative, short-term, low-value loan products.” These principles included safety and soundness, risk management and reasonable underwriting. In addition, the OCC said, its reviewers would “continue to rate” banks on these products.
“The OCC will take appropriate action to remedy any unsafe or unhealthy banking practices or any legal violations associated with these products,” the advisory said.
“The OCC may consider issuing new guidelines in the future,” Noreika said in the press release.