The CFPB recently released a Final Rule regarding “Payday, Vehicle Title, and Certain High-Cost Installment Loans”. The intent is to help ensure borrowers can afford to repay these types of loans that require repayment of the entire balance or a large portion of the balance at one time or shortly after receiving the funds.
Covered loans include any that require repayment of the entire loan, a single advance, or a substantial portion of either within 45 days, in a single payment, or in a balloon payment. Regardless of the payment requirements, there is also a two-part test that can grab additional loans, referred to as “longer-term loans”, and bring them into coverage as well. These “longer-term loans” are covered if the APR exceeds 36% and the lender has the right to initiate a transfer from the consumer’s account for payment (does not include a single transfer upon the consumer’s request). For open-end credit, this includes plans that have an APR exceeding 36% for any billing cycle or if a finance charge is imposed on a $0 balance during any billing cycle.
The following are exempt from this rule:
- Purchase money loans when secured by the property being purchased;
- Loans secured by real property or a dwelling;
- Credit cards;
- Student loans;
- Overdraft services; and,
- Overdraft lines of credit.
The Rule also includes an exception for “accommodation” loans. Banks who don’t rely on payday, vehicle or high-cost installment loans as a major portion of their business, may still make such loans without falling under these new requirements. There is also an exemption for “alternative” loans that meet certain requirements, including fee restrictions under NCUA regulations.
We believe that accommodation loan exception will likely benefit many banks. Even if you make a covered loan, you will qualify under the “accommodation” loan exception if:
- You and your affiliates together have made no more than 2,500 covered loans in the current year and the prior year; AND,
- No more than 10% of you and your affiliates’ (that used the same tax year) total income plus the cost of goods sold in the prior tax year came from covered loans.
Certain longer-term loans can be excluded when determining if you meet these tests.
The Rule will take effect 21 months after it’s published in the Federal Register. Also, in light of the final Rule, the OCC rescinded their previously issued guidance on deposit advance products (OCC Bulletin 2013-40).