Last month, the Consumer Financial Protection Bureau finalized a regulation that provides more protection to consumers who take out short-term, unsecured loans, often referred to as “payday loans.”
Do you know everything you need to know about the newest rule? Here’s a basic rundown:
- The CFPB rule seeks to reduce the likelihood of a borrower’s inability to repay a payday loan.
- The rule covers all loans with a terms of 45 days or less, excluding overdraft, credit cards, pawn, and other specified types of credit.
- Lenders cannot use vehicle titles as security.
- Under the rule, lenders must either…
- make a “reasonable determination” to assess each applicant’s ability to repay the loan, or
- limit their payday loans to $500 maximum, restrict total indebtedness to 90 days within a 12-month period, and offer any subsequent loans within 30 days at 2/3 of the previous loan’s size.
The CFPB refers to Option A as the “ability to repay” process, and it isn’t likely to be a tenable option for most borrowers. According to an analysis by The Pew Charitable Trusts, “few loans are likely to be made under the ATR process because most borrowers cannot meet the affordability standard and because lenders may find the process too costly.”
In other words, the the more elaborate option is more or less the only option—which is something of a trend in the world of consumer lending compliance.