Pub. 5 2016 Issue 7

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 6 O N JULY 22, 2016, the Consumer Financial Protection Bureau (the Bureau) published its long-awaited proposal regarding payday, vehicle title and certain high-cost installment loans (“covered loans”) under its authority granted by the Dodd- Frank Act to “identify and prevent unfair, deceptive and abusive acts and practices”. The Bureau is concerned that lenders that make “covered loans” have developed business models that deviate substantially from other lenders by failing to assess consumers’ ability to repay their loans, and by setting up repayment systems that are harmful to consumers by seeking to withdraw payments from consumers’ accounts. If the proposal were as simple as this, there would be a sense of relief in knowing that a KBA member’s occasional $500 loan to a customer for a new furnace, or a $300 unsecured loan to cover an unexpected medical cost for a known customer would not be considered a “covered loan”. However, this proposal is 300 pages long … and we all know where the devil lives … it’s in the details. The purpose of this article is to get us all thinking about how this proposed rule – if it stands substantially as it is – will affect our lending practices. The first order of business is to know what exactly is a “covered loan” and what happens if a lender makes one under the proposal. There are two types of loans that are covered: 1) a short-term loan which is a loan with a term of 45 days or less; and 2) a longer-term loan which is a loan with a term of more than 45 days, and the total cost of the loan has a greater than 36% all-in APR (includes charges not included in Reg. Z’s APR), the loan is collateralized with a lien on a vehicle, there is a leveraged payment mechanism involving a withdrawal from the consumer’s deposit account, or the loan terms contain a balloon payment feature. The proposal considers it an abusive and unfair practice to make these types of loans without a reasonable determination of the consumer’s ability to repay – and for longer-term loans an additional evaluation of the possibility of volatility in the consumer’s income, obligations and expenses. There is a list of verifiable information that the lender must obtain in order to adequately demonstrate the ability to repay including verifying income by obtaining a reliable record of income payments; verifying major financial obligations by using a national consumer report, the bank’s own records and a consumer report from the consumer reporting agency; and verifying housing expenses by obtaining a record of recent payments. There are additional restrictions on making short- term or longer-term loans when the borrower has another loan outstanding. KBA LEADERS LEDGER WILL THE CFPB’S PROPOSAL TO REIN IN PAYDAY LENDERS AFFECT YOUR RETAIL LENDING PRACTICES? By Kathy Taylor, SVP- General Counsel