Yesterday the Consumer Financial Protection Bureau (CFPB) dropped 1,300-pages of proposed federal guidelines on the payday loan industry. The new rules look a lot like the ones the CFPB proposed last March, with a few changes here and there. The regulations could go into full effect as soon as 2018, and because of how the CFPB is set up, they won’t need congressional approval.

The Biggest Changes

The new rules require short-term loan lenders to determine if a customer can make the payment and fees associated with a loan. That means lenders will need to look at a customer’s basic living expenses and major financial obligations (including housing costs), verify the customer’s net income, and then determine if the customer can reasonably afford the loan.

Another rule makes it difficult for lenders to offer subsequent short-term loans within 30 days after a loan has been fully paid off. That’s unless the lender can provide documentation that shows the borrower’s financial situation has proportionally improved between loans. Even then, loan roll overs would be capped at three and followed by a mandatory 30-day cooling off period.

When It Arrives

The final rule will be issued in Spring of 2017. Then, according to the proposed rule, the CFPB will give a 15-month compliance period, which means that the final rule will not be fully effective until the third quarter of 2018.

The regulations may have a negative effect on the short-term loan market, particularly for payday loans, single payment auto title loans, and certain installment loans. According to The New York Times, loan volume could fall 55-percent.

What You Can Do

The proposed rule came out yesterday, June 2. From now until Sept. 14, the CFPB is requesting public comments about the rule. We encourage you to submit your opinion. The easiest way will be to email your comment to FederalRegisterComments@cfpb.gov. Be sure to include Docket No. CFPB-2016-0025 or RIN 3170–AA40 in the subject line of your email.

A Rough Start

It was clear from the start that CFPB Director Richard Cordray had it out for the payday loan industry. And even just recently in an NPR interview, Cordray said that by using short-term loans, Americans are being “set up to fail.” He compared using a payday loan to jumping in a taxi to get across town and unexpectedly being taken across the country on a “ruinously expensive” road trip.

But there are many who feel that this sector of the financial industry is important. Dennis Shaul, the CEO of the Community Financial Services Association (CFSA), said that the new regulations are unwarranted and present “a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense.”

There are those, however, who think the regulations don’t go far enough. Nick Bourke, a Pew Charitable Trusts research director, said that the new regulations miss the mark and act as little more than a new underwriting process.

Bourke pointed out at that the original proposal required certain loan payments (outside of the payday loan sphere) to not cost more than 5-percent of the borrower’s monthly income. This percentage point has been removed from the new rules. It has been replaced with the requirement that lenders must determine if a customer can afford the loan.

There have been speculations, though, that some of the steeper rules from the original proposal that are absent in the new guidelines may reappear when the final rule is presented next year. Still, certain watchdog groups, like the Center for Responsible Lending (CRL), fear that the rules may leave room for loopholes.

“The lesson from the last 20 years since this industry started is that it's been remarkably effective at evading attempts at regulation and using a very high-powered lobbying machine to push for loopholes," said CRL President Mike Calhoun.

Final Thoughts

Some may see this new rule proposal and Google’s upcoming PPC changes as an affront on our industry. But the truth is we are finally receiving the same regulations that similar industries (such as credit cards companies, mortgage companies, etc.) have had for some time. It’s our turn to learn how to adapt to tougher legislation.

We believe that the industry will be able to pull through these changes. And fortunately we have time to do so, since these changes don’t go into effect until 2018. If you have any questions along the way, please feel free to reach out. We’ll do our best assist you in this transition.