The US Consumer Financial Protection Bureau (CFPB), the US federal consumer finance agency, is considering proposing regulations to govern certain types of short-term loans to better protect consumers from falling into an ever-increasing,  seemingly never-ending, cycle of debt. The proposals under consideration would cover short-term credit with payment in full due within 45 days. These proposals would cover credits such as payday loans, where people get money in return for it being repaid on the customer’s next pay day, and certain vehicle title loans, where a borrower will pledge a car title as collateral for the loan. Some states have laws that specifically govern pay day lending and other short-term credit products, but many do not. These proposals would set a federal standard. States may impose stricter requirements.

With many lenders, their sole (or primary) consideration is how do they get paid, not necessarily whether the borrower can afford the loan. Oftentimes, a borrower may be required to authorize direct debits from his or her bank account for repayments  —  authorizations which may be difficult to terminate upon demand, thus leaving the borrower to the whim of the lender.

Among the proposals the CFPB is considering are the following:

  • The lender would have to determine if the borrower can pay the loan when due without having to default or roll over the loan; this would involve verifying the borrower’s income and financial obligations; generally there would be a 60 day “cooling off” period between loans
  • A short-term loan subject to the requirements would have to have a repayment period of 45 days (the minimum) to 6 months (the maximum) with 28% interest rate cap and a $20 application fee cap
  • Lenders could have the option of offering a loan with a longer term for repayment so long as the borrower is not required to pay more than 5% of his or her gross-monthly income per month and there is a limit on the number of loan extensions permitted
  • If the borrower authorizes the lender to debit his or her bank account for repayment, a lender would be required to provide the borrower at least three business days’ notice before the debit could be submitted to the bank and provide certain disclosures with respect to the repayment; the creditor would not be permitted to make more than two unsuccessful attempts to debit the account without having to get another authorization from the borrower

On March 26, 2015, the CFPB issued a press release regarding its intentions, which contains links to more information.

The next step for the CFPB is to solicit the views of its Small Business Review Panel, which advises the CFPB on proposals that might have a direct impact on small businesses. It also will be soliciting comment from other affected parties while developing proposed regulations which then would be released for public comment.