The Consumer Financial Protection Bureau released its final rule on payday and title lending on Thursday and largely limited the rule’s scope to short-term loans of 45 days or less.
The final rule requires financial institutions offering these short-term, single-payment loans to determine whether the consumer has the ability to repay the loan and places a cap on the number of loans lenders can make to a borrower.
Under the earlier proposed language of the rule, medium- to long-term vehicle title loan lenders — such as Westlake Financial Services’ subsidiary Wilshire Consumer Credit — would have been regulated by these restrictions. However, the final rule’s 45-days-or-less limit excludes Wilshire, which offers loan terms as low as 18 to 24 months, the company’s compliance department confirmed to Auto Finance News.
“The final rule does not apply ability-to-repay protections to all of the longer-term loans that would have been covered under the proposal,” the CFPB wrote in its condensed fact sheet. “The CFPB is conducting further study to consider how the market for longer-term loans is evolving and the best ways to address concerns about existing and potential practices.”
Especially when it comes to short-term loans, the bureau found there is an incentive to sign up consumers who can’t repay, thus trapping them in a cycle of debt repayment. Because it is actually more profitable for the lender when a consumer is unable to pay, many financial institutions in the space ran no checks on the consumer’s ability to repay.
“The example of the consumer who takes out one payday loan for an emergency and then pays it right back is a misleading exception to the norm,” Richard Cordray, director of the CFPB, wote in prepared remarks. “Most of these loans go instead to people who are re-borrowing the same loan many times.”
In the case of vehicle title loans, that means a consumer’s car is repossessed. The CFPB found that one out of every five single-payment auto title loan sequences ended up in repossession for failure to repay.
Under the new rule, “Lenders are required to determine that the borrower has sufficient income to pay the loan and to meet major financial obligations and basic living expenses during the term of the loan and for 30 days after paying off the loan,” the bureau wrote.
The rule goes into effect 21 months after its registration in the Federal Register, and it will likely face opposition from a Republican-led congress and lawsuits from the small-dollar lending community. The American Financial Services Association (AFSA) approved of the rule’s more limited scope.
“AFSA is pleased to see that the bureau has made the important distinction between beneficial traditional installment lending, and payday and title lending,” the association wrote online. “The extent to which AFSA members are affected by the rule’s requirements regards payment withdrawal practices, related disclosures, and record-keeping.”
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