Harsh New Regulations For Payday and Car Title Lenders?

In March of this year, the Consumer Financial Protection Bureau (CFPB) recommended a set of sweeping new rules and regulations for the Payday and Car Title industry.  The Consumer Financial Protection Bureau (CFPB) is an independent agency of the United States government responsible for consumer protection in the financial sector. Its jurisdiction includes banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors, other financial companies operating in the United States.  The CFPB's creation was authorized by the Dodd–Frank Wall Street Reform and Consumer Protection Act, whose passage in 2010 was a legislative response to the financial crisis of 2007–08 and the subsequent Great Recession.

While the CFPB recognizes consumers’ need for affordable credit, it is deeply concerned that the practices often associated with Payday and Car Tile lenders – such as failure to underwrite for affordable payments, repeatedly rolling over or refinancing loans, holding a security interest in a vehicle as collateral, accessing the consumer’s account for repayment, and performing costly withdrawal attempts – can trap consumers in debt. These debt traps also can leave consumers vulnerable to deposit account fees and closures, vehicle repossession, and other financial difficulties, including bankruptcy.

The proposals under consideration provide two different approaches to eliminating debt traps – prevention and protection. Under the prevention requirements, lenders would have to determine at the outset of each loan that the consumer is not taking on unaffordable debt. Under the protection requirements, lenders would have to comply with various restrictions designed to ensure that consumers can affordably repay their debt. Lenders could choose which set of requirements to follow.

The above proposals actually seemed designed to end Payday and Car Title loans.  Using the CFPB’s own data, it estimates a decrease in loan volume of between 69% to 84% for Payday and Car Title lenders that choose to use the new “Prevention” option outlined in the CFPB’s new rules.  The CFPB estimates a loan volume decrease of between 55% to 62% if lenders use the alternative “Protection” option as outlined in the new rules.  Either way, it is easy to see that the CFPB’s new rules are designed to end Payday and Car Title loans as we know them[3].

The next step in the CFPB’s process is to convene a Small Business Review Panel.  A Small Business Review Panel is a means by which the CFPB can obtain input from small businesses that are likely to be directly affected by a regulation that the CFPB may issue. Under the law, when a rule under development may have a significant economic impact on a substantial number of small entities, representatives from the CFPB, the Chief Counsel for Advocacy of the Small Business Administration (SBA), and the Office of Management and Budget’s Office of Information and Regulatory Affairs form a Review Panel. The Panel meets with a selected group of representatives from small businesses. During this outreach meeting, small businesses provide the Panel with important feedback on the potential economic impacts of complying with proposed regulations. They may also provide feedback on regulatory options under consideration and regulatory alternatives to minimize these impacts.

While these new regulations are still a ways from being implemented and the final outcome of the new rules remains uncertain, the CFPB is putting Payday and Car Title lenders on notice that unfair and abusive loan practices will not be tolerated.