On February 6, 2019, the CFPB issued a proposal to reconsider the mandatory underwriting provisions of its pending 2017 rule governing payday, vehicle title, and certain high-cost installment loans (the Payday/Small Dollar Lending Rule, or the Rule).

The CFPB proposed and finalized its 2017 Payday/Small Dollar Lending Rule under former Director Richard Cordray. Compliance with that Rule was set to become mandatory in August 2019. However, in October 2018, the CFPB (under its new leadership of former Acting Director Mick Mulvaney) announced that it planned to revisit the Rule’s underwriting provisions (known as the ability-to-repay provisions), and it expected to issue proposed rules addressing those provisions in January 2019. The Rule also became subject to a legal challenge, and in November 2018 a federal court issued an order staying that August 2019 compliance date pending further order.

The 2017 Rule had identified two practices as unfair and abusive: (1) making a covered short-term loan or longer-term balloon payment loan without determining that the consumer has the ability to repay the loan; and (2) absent express consumer authorization, making attempts to withdraw payments from a consumer’s account after two consecutive payments have failed. Under that 2017 Rule, creditors would have been required to underwrite payday, vehicle title, and certain high-cost installment loans (i.e., determine borrowers’ ability to repay). The Rule also would have required creditors to furnish information regarding covered short-term loans and covered longer-term balloon loans to “registered information systems.” See our previous coverage of the Rule here and here.

Yesterday’s notice of proposed rulemaking would eliminate the ability-to-repay provisions for those loans entirely, as well as the requirement to furnish information on the loans to registered information systems. Comments are due on that proposal 90 days after publication in the Federal Register.

In a separate notice issued simultaneously, the CFPB proposes to delay the August 2019 compliance date for the mandatory underwriting provisions of the 2017 Rule until November 19, 2020. That proposal requests public comment for 30 days. The CFPB expressed concern that if the August 2019 compliance date for those mandatory underwriting provisions is not delayed, industry participants would incur compliance costs that could affect their viability, only to have those provisions ultimately rescinded through the above-mentioned rulemaking. Accordingly, the CFPB is soliciting comments separately on a delay that will, the agency asserts, ensure an “orderly” resolution of the reconsideration of those underwriting provisions.

Of the original 2017 Rule, the only provisions that would remain are the payment provisions and a few other provisions relating to maintaining written policies and procedures to ensure compliance with the payment provisions. As noted above, the payment provisions prohibit payday and certain other lenders from making a new attempt to withdraw funds from a consumer’s account if two consecutive attempts have already failed, unless the consumer has given his or her consent for further withdrawals. Those provisions also require such lenders to give a consumer written notice prior to making the first payment withdrawal attempt and again before any subsequent attempts on different dates, or which involve different amounts or payment channels.

The CFPB’s lengthy summary of its proposal explains that the limited data and other sources on which the agency had relied in drafting the 2017 Rule were insufficiently robust or reliable to support a conclusion that consumers do not understand the risks of these loan products or that they lack the ability to protect themselves in selecting or using these products. Moreover, the CFPB explained that the mandatory underwriting provisions in the 2017 Rule would restrict access to credit and reduce competition for “liquidity loan products” like payday loans. In addition, the CFPB noted, some states have determined that these products, subject to state-law limitations, may be in certain of their citizens’ interests.

To make the pill a little less difficult to swallow, it seems, the CFPB emphasized in yesterday’s proposal that it still has supervisory and enforcement authority in this space, and that it has brought several enforcement actions against payday lenders in just the past year (including an action announced just one day before the proposal was issued, in which the CFPB fined a payday lender $100,000 for overcharging borrowers and making harassing collection calls).

The Payday Lending Rule has been the subject of much scrutiny from all sides since it was introduced in June 2016, and the scrutiny will likely continue. Consumer advocates argue that the CFPB’s latest proposal eliminates crucial borrower protections, while the small-dollar lending industry argues that the proposal doesn’t go far enough because the payment provisions that would remain in the rule are flawed. The CFPB itself reflects this dichotomy. It proposes to eliminate the mandatory underwriting provisions for these small-dollar loans, asserting that they are depriving certain borrowers of access to needed credit. However, the agency appears still to require its examiners, under a review for unfair, deceptive, or abusive acts or practices (UDAAP), to review and determine whether an entity fails to “underwrite a given credit product on the basis of ability to repay.” Perhaps commenters on the proposal will request a reconciliation of those different approaches.

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