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Full-Payment Test, Other Rules Would Help Safeguard Borrowers Against Vicious Cycle of Payday Loans: CFPB Proposal

June 2nd, 2016 · No Comments · PayDay Loans

by Kristy Welsh

(Last Updated On: February 26, 2018)

CFPB proposes rules to protect borrowers of payday loans, auto title loans, and other high-cost loansIn March of 2015, the Consumer Financial Protection Bureau (CFPB) announced that it was considering proposing new rules to payday lending that would “prevent or protect” borrowers. Well, now we have them. Here’s the gist of the CFPB’s proposed rules to strengthen consumer protections in payday lending, as well as auto title loans, and other high-cost loans.

Require lenders to use “full-payment test”

This is a safeguard, of sorts, intended to help prevent borrowers from getting in over their heads. To that end, lenders would be tasked with applying the “full-payment test” to determine whether the borrower can realistically pay back the loan, in full, and still cover basic living expenses:

“For short-term loans and installment loans with a balloon payment, full payment means affording the total loan amount and all the fees and finance charges without having to reborrow within the next thirty days.

“For payday and auto title installment loans without a balloon payment, full payment means affording all of the payments when due.”

Allow “principle payoff option” as exception to the full-payment test

Yes. Short-term loans up to $500 could be exempt from the full-payment test, but only as part of the “principle payoff option.” This option would allow lenders to extend a loan twice, provided the borrower pays at least a third of the principle with each extension.

This option would not be made available to borrowers who:

  • Have outstanding short-term or balloon-payment loans
  • Have been in debt on short-term loans more than 90 days in a rolling 12-month period

Make longer-term loans more manageable

There would be two scenarios for longer-term loan options:

1) Longer-term loans that cap interest rates at 28 percent and application fees at $20

2) Longer-term loans that are “payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a reasonable origination fee, so long as the lender’s projected default rate on these loans is 5 percent or less.”

Limit direct debit attempts

Lenders would only be allowed to initiate a direct debit on a borrower’s account two times, but only after notifying the borrower — in writing — that the direct debits are coming. If both of those attempts fail, the lender must then get authorization from the borrower before making any subsequent attempts.

What do you think of the proposed rules? Do they go far enough? Why or why not?

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