CFPB Adds “Ability to Pay” Requirement to Payday Loans

by Goodwin

On October 5, 2017 the Consumer Financial Protection Bureau (CFPB) revealed its final rule regulating payday lending.  For the past five years, the CFPB had been doing research and seeking comments from the industry on how to address its concerns with what it calls “lending traps” associated with small-dollar lending.  It has finalized a Rule, 12 CFR Part 1041, which, most significantly, will require lenders to determine a borrower’s ability to repay various types of small-dollar loans, including covered payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.  Covered “payday loans” are those that have a repayment term of less than 45 days and require borrowers to either (a) post-date a check for their full balance, including fees, or (b) allow lenders to directly debit the borrower’s account for the full balance of the loan.  Covered “auto title loans” whose terms are 30 days or less using a vehicle as collateral, and covered “balloon payment loans” are loans that allow borrowers to make a series of small payments before the entire balance comes due.

The Rule’s Coverage

The new Rule, which the CFPB  first proposed in June and received more than one million comments, is set to become effective in 21 months from the date it is published in the Federal Register.  The most significant change, as mentioned above, is the requirement that lenders determine whether borrowers can afford their payday loans before issuing them using a “full payment test.”  A full payment test means that the borrower can afford the loan (principal balance plus all fees and charges in the allotted time) and his existing financial obligations.  However,  lenders can avoid this requirement by offering an option which allows borrowers to pay debt more gradually under a principal payoff option.  In addition, the Rule specifically exempts less risky options offered by community banks or credit unions, such as those that are authorized by the National Credit Union Administration, and certain no-cost advances or advances offered by employers.

Additionally, the Rule has components that cover payday loans and loans “with terms of more than 45 days that have (1) a cost of credit that exceeds 36 percent per annum; and (2) a form of ‘leveraged payment mechanism’ that gives the lender a right to withdraw payments from the consumer’s account.”  These components prohibit lenders from making more than two unsuccessful attempts to debit a borrower’s account without additional borrower authorization.  They also require lenders to give consumers written notice before the first attempt to debit the consumer’s account to collect payment for any loan covered by the Rule.

Finally, if lenders avoid the full payment test using the principal payoff option, they still face some regulations.  There are still restrictions on multiple loans—under this option, lenders may offer up to two extensions, but only if the borrower pays off at least one-third of the original principal each time, and do not have more than six outstanding short-term or balloon-payment loans over a rolling 12-month period. And the principal-payoff option is not available for loans for which the lender takes an auto title as collateral.

Industry Reaction

This new Rule has sharp critics in the payday lending circles, but has also created some opportunities for more traditional lenders, as shown by industry groups.  For instance, the Online Lenders Alliance, which represents payday lenders, has been openly critical of the rule, accusing it of “crushing innovation” and promising to fight the Rule.  And in what some outlets are calling a kind of rebuke to the Rule, Acting Comptroller of the Currency Keith Noreika has rescinded Obama-era guidance which provided requirements for national banks that offer deposit advance products.  In comparison, the American Bankers Association has issued support for the Rule’s deference to community banks, and sees an opportunity for these institutions to move into the smaller dollar lending space.

The Rule’s Future

The Rule’s future is unclear, particularly because so much could change within the CFPB in the twenty-one months before the Rule becomes effective.  By the time the Rule is set to become effective the current CFPB Director, Richard Cordray, will have been replaced by a new director, appointed by a Republican, who may be less aggressive in his or her regulatory goals and could reverse course on this Rule.  In addition, and more immediately, the current Republican Congress can use the Congressional Review Act to nullify the Rule. Rep. Blaine Luetkemeyer of Missouri, has stated an intention to have Congress vote on the new Rule. See Luetkemeyer Statement on October 5, 2017. (“I will work with my colleagues on the House Financial Services Committee to hold the CFPB accountable and reverse this final rule that harms consumers across the country.”).  Accordingly, Lenderlaw watch will monitor the roll-out of this Rule, and will report on any changes as they develop.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Goodwin | Attorney Advertising

Written by:


Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.