In an effort to rein in short-term, high-cost loans that often take advantage of Americans who need the most help with their finances, the Consumer Financial Protection Bureau has finalized its new rule intended to make these heavily criticized financing operations to be more responsible about the loans they offer. But will bank-backed lawmakers in Congress use their authority to once again try to shut down a pro-consumer regulation?

Payday loans have terms that are typically 10 to 14 days in length, and are marketed as emergency stopgaps to help borrowers get through to their next paycheck. The loans are often only for few hundred dollars, but they also come with interest and fees that, when added up, equate to annual percentage rates in excess of 200% or more of the loan’s value. Because of the exceedingly high effective interest rates on these loans, they are currently against the law in a number of states.

These loans are also often criticized for trapping borrowers in a debt cycle, needing to take out a new loan to pay back the current loan when it comes due. According to the CFPB, four out of five payday borrowers take out a second loan within a month of the previous loan, with many borrowers taking out 10 more consecutive loans.

Another form of short-term, high-cost lending is the auto-title loan, which uses the borrower’s vehicle as collateral against the loan. However, because of the sometimes exorbitant fees and interest associated with these loans, research shows that one-in-five auto-title loans ends with the borrower’s car being seized. Critics say that this is then likely to put the borrower in a deeper financial hole as they may not be able to get to their jobs. Just like payday lending, auto-title loans are against the law in some states.

There are also a variety of other loans that consumer advocates consider predatory because of their high costs and punitive terms, like deposit advance loans where the borrower is loaned money in expectation of a regular direct-deposit (usually a paycheck, benefits check, or settlement payment); and longer-term installment loans where the borrower faces a balloon payment at the end, frequently for an amount that the borrower is unable to pay. All of these dubious financing models are affected by the new rule issued this morning.

That is, if Congress and the payday loan industry aren’t able to use legislative and legal maneuvers to quash it.

The Rules

Ability To Repay
Central to the new, 1,700-page rule [PDF] is the “ability to repay” concept — the notion that short-term lenders should not be writing loans they know can’t be repaid in full after the initial term of the loan.

Under the new rule, lenders will be required to determine whether or not the borrower has that ability to repay, not just for the term of the loan but for 30 days after the highest value payment is made on the loan. For products like payday and auto-title loans that are intended to be one-shot deals, that would mean the 30 days after the first loan is due. For the other, longer-term loans with multiple payment dates, that would depend on when the borrower is expected to repay the largest amount.

Lenders will have to verify the borrower’s income and check for other major financial obligations, along with doing an estimate of the borrower’s basic living expenses for the time covered by the rule. Because some borrowers — particularly those paid in cash — may not have much in the way of paperwork showing their weekly earnings and expenses, lenders will be allowed to take borrowers on their word about these matters.

Limits On Repeat Borrowing
While the rule wants lenders to minimize repeat borrowing, it doesn’t outlaw it completely. Rather, borrowers would be limited to three successive short-term loans. After that third loan in a row, the lender must honor a mandatory 30-day “cooling-off” period before writing another loan to this borrower.

Restrictions On Access To Debit Accounts
Many short-term lenders demand access to the borrower’s checking or prepaid debit card account. However, if a lender makes unsuccessful attempts to debit funds to repay the loan, the borrower may be penalized with overdraft fees that effectively drive up the cost of the loan.

Under the new rule, for any short-term loan (and any longer-term loan with an APR over 36%), the lender will be limited to two unsuccessful attempts at debiting from the borrower’s account. After that, they will be blocked from further debit attempts unless the borrower reauthorizes the access.

Additionally, if a lender is going to attempt a debit at an irregular interval or for an unexpected amount, it must provide the borrower with written notice. CFPB says this rule will give borrowers the opportunity to head off any surprise debits, either by alerting their bank if they think it’s an error or by making sure that account is properly funded.

The “Principal-Payoff” Option
The CFPB will allow lenders to skip the “ability to repay” test for certain loans under $500, but only if certain conditions are met, including:

• The borrower can’t have any recent or outstanding short-term/balloon-payment loans.
• The borrower can’t have already had more than six short-term loans or been in debt for more than 90 days on short-term loans during the previous 12 months.
• The lender must disclose to the prospective borrower all the debt risks associated with the loan. These disclosure notices must be written in plain language.
• Lenders can make up to two subsequent, successive loans but only if the borrower pays off at least one-third of the
original principal with each extension.
• This exception would not apply to auto-title loans or offers of open-ended credit.

Not All Lenders Are Covered

The rule does include an exception for lenders for whom short-term lending is not their primary business. If a lender writes 2,500 or fewer such loans per year and these loans account for no more than 10% of the lender’s revenue, then the new rules do not apply.

The CFPB says this exception is intended to protect lower-risk short-term lenders like those made by community banks or credit unions to their current customers.

Speaking of credit unions, the rule does not cover most loans that meet the National Credit Union Administration’s guidelines for “payday alternative loans,” as those loan products don’t have balloon payments are come with strict limits on the number of such loans that can be made over any six-month period.

Finally, “wage advance” programs, where an employer advances an employee money that is subsequently deducted from the next paycheck, would be allowed so long as there are no additional costs.

Coming In 2019… Maybe
While the new rule will soon be published in the federal register, it’s going to be at least 21 months before lenders have to abide by these new guidelines — and that’s if certain bank-backed lawmakers and the payday lending industry don’t succeed in getting it shut down.

Lawmakers have already tried to shut down the CFPB payday rule before it was written. The Financial Choice Act, introduced by Rep. Jeb Hensarling — who received nearly $2 million from the financial sector in 2016 and is already nearing the $700,000 mark for 2018 — would explicitly strip the CFPB of its ability to regulate small-dollar lenders.

That bill is still pending, after passing the House in June on a party-line vote, but seems unlikely to anywhere in the Senate where it would face too much opposition to be passed.

However, Hensarling and his anti-consumer ilk have another tool they will certainly try to use on the payday rule: the Congressional Review Act. That’s a (until this administration) little-used law that allows Congress to roll back new federal rules if they disapprove of them.

Congressional Republicans are currently using the CRA to shut down the recently finalized CFPB rule on forced arbitration, though again that measure is currently stalled in the Senate, which has until early November to act or let the rule go into effect.

The other tool, which will likely be deployed by the payday industry regardless of what Congress does, is the courtroom. Just as in the arbitration dispute, where industry trade groups are now suing to halt the rule from being enforced, the payday loan rule seems destined for the courtroom.

But Let’s Celebrate For Today

Though the payday rule is far from being put into effect, consumer advocates are nonetheless applauding today’s finalizing of the regulation.

“The CFPB rule limits payday lenders’ ability to put families into a vicious cycle of debt by adopting the common sense requirement that lenders consider a borrower’s ability to repay and by restricting the number of unaffordable back-to-back loans,” said Lauren Saunders, associate director of the National Consumer Law Center.

Our colleague Suzanne Martindale, senior attorney for Consumers Union, says that “Too many Americans end up sinking deep into a quicksand of debt when they take out expensive high cost loans,” and that these loans often “prove nearly impossible to pay back and borrowers wind up taking out multiple loans or defaulting, making them worse off than when they started borrowing.”

“The Bureau’s rule is a commonsense step to help ensure that when a lender makes a short-term loan, the consumer has a reasonable chance of paying it off instead of falling behind,” adds Martindale.

The nonpartisan Pew Charitable Trusts called the final rule a “strong step” and a “major improvement” over the rule as it was proposed in 2016, but notes that there is still much to be done to implement the rule.

“Bank and credit union regulators must now create the clear guidelines these lenders need in order to make small installment loans safely and profitably,” says Nick Bourke, director of The Pew Charitable Trusts’ consumer finance project. “If they do, millions of consumers can save billions of dollars by gaining access to lower-cost credit.”

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