WASHINGTON (Legal Newsline) – The Consumer
Financial Protection Bureau (CFPB) recently released proposed new rules
designed to regulate payday, automobile title and some high-cost installment
loans in an effort to protect consumers from the financial woes associated with
frequent loan and overdraft fees.
The public comment period on the proposed new rules ends on
The CFPB said in a release that it has “serious concerns
that risky lender practices in the payday, auto title, and payday installment
markets are pushing borrowers into debt traps.”
Specifically, the CFPB said it
is concerned that “consumers are being set up to fail with loan payments that they
are unable to repay.” The CFPB said it is also concerned that these payment
issues affect other aspects of consumers’ lives, resulting in steep penalty
fees, bank account closures and vehicle seizures.
Protections built into the proposed new rules include a
requirement that lenders assess the borrower’s ability to make each payment in
full when due while still being able to afford living expenses, a principal
payoff option for some short-term loans, allowing lenders to offer less-risky,
longer-term lending options and a requirement that lenders provide written
notice to borrowers before they attempt to debt the borrower’s account for
payment on any loan covered by the proposal.
Lenders that do not comply with any of the proposed rules
would be subject to a CFPB enforcement action for abusive and unfair practice.
Robert Stern, a partner at Orrick, Herrington &
Sutcliffe LLP, said the payday lending industry is already starting to react to
the proposed new rules.
“We’ve already started to see the drumbeat from some of
the payday industries,” Stern told Legal
Stern said the degree of resistance from the industry will
depend on the final ruling on the proposal, but that he thinks the industry may
lobby for legislation to be heard on the issue. He said two related bills are
already before Congress.
“Occasionally, these interest groups may actually file litigation
if lobby(ing) is unsuccessful,” Stern said.
In addition, he said banks are already
developing products to protect themselves from the changes.
“Now in light of the new regulations, I think what you’ll see is that the banks will not commit to those products anymore because the regulation makes it less profitable for them to do so," Stern said.
Stern said the overall effect of the new rules is that they
are “going to reduce some of the loans that are originated.” He said the CFPB
won’t cap rates, but it will reduce the loan volume.
According to a preliminary analysis of the new rules prepared
by Stern and Orrick partner Howard Altarescu, even if the proposed new rules do
not significantly reduce loan volume, “the requirements to determine a borrower’s
ability-to-repay will likely increase origination costs for those payday
lenders who do not presently employ traditional underwriting practices.”
and Altarescu wrote that those lenders face increased costs, paperwork and
procedures that “could fundamentally alter their business model and/or
Stern said although the CFPB thinks the impact of the new
rules will be largely limited to the payday, title and other installment loan industries,
“(the rules are) broadly written enough…that there’s certainly a potential
impact on (other industries).”