Pub. 5 2016 Issue 7

September 2016 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 The proposal does provide that there will be three types of loans that will be exempt from the ability to repay required analysis: 1. Short-Term Loans. A lender could make up to three short-terms loans to a consumer as long as the first loan has a principal of no more than $500; the second loan’s principal is at least 1/3 smaller than the first loan; and the third loan’s principal is at least 2/3 smaller than the first loan’s principal. None of these loans can be vehicle title loans, or open-ended. A lender would be prohibited from making a loan under this exemption if it would result in the consumer receiving more than six short-term loans – or being in debt for more than 90 days during a 12-month period. 2. Longer-Term Loans: PALApproach. This exemption is based on the National Credit Union Administrator’s Payday Alternative Loan (NCUA PAL) Program. The loan principal must be between $200 - $1,000, with fully amortizing payments, a term from 46 days but not longer than six months, a maximum interest rate of no more than is allowed under the NCUA PAL regulations, and a maximum application fee of $20. 3. Longer-Term Loans: Portfolio Approach. Loans made under this exemption must have fully amortizing payments, a term of 46 days to 24 months, a single origination fee of not more than $50 or a fee that represents a reasonable proportion of the lender’s cost of underwriting loans made under this exemption, a maximum APR of 36% (excluding the origination fee), no prepayment penalty, and a portfolio default rate less than or equal to 5% per year. A lender would be prohibited from making a loan under this exemption if it would result in the consumer receiving more than three such loans within a 180-day period. There are also provisions restricting payment transfer attempts, the furnishing of information to a consumer reporting agency and record retention requirements. The following types of consumer loans are excluded from being covered by the proposal: 1) purchase money vehicle loans; 2) home mortgages and other real estate loans; 3) credit cards; 4) student loans; 5) non-recourse pawn loans; and 6) overdraft services and lines of credit. The Bureau, in its proposal, states that it believes that the last approach – the Portfolio Approach – is where the occasional loan to longstanding customers will fall. As we here at the KBA delve into the details in preparation for our comment letter, we ask your help by letting us know how you believe this proposal will affect your current practices, and what we can request in the way of change to make it better. Comments to the Bureau are due October 7, 2016.