For credit unions seeking to provide loans under the Bureau of Consumer Financial Protection (CFPB)’s payday lending rule, today, August 19, 2019 would have been the compliance deadline for many of the requirements. On June 6, 2019, the CFPB delayed the compliance date for the mandatory ability-to-repay (ATR) provisions to November 19, 2020, while the CFPB works to rescind this part of the rule. As for the other aspects of the rule, including the payment transfer restrictions and recordkeeping requirements, the mandatory compliance deadline would also have been today; however, the U.S. District Court for the Western District of Texas recently issued a stay of this compliance deadline, meaning it may not go into effect before the underlying lawsuit is resolved or the stay is lifted. In any event, this presents a great opportunity to discuss the non-ATR aspects of the CFPB’s Payday rule. So, what is a “covered loan” you ask?
The rule covers both short term and longer term balloon payment loans. Covered short-term loans include both open-end and closed-end credit products that have terms of 45 days or less, or where the consumer is required to repay substantially the entire amount of the loan or advance in less than 45 days. Longer-term balloon payment loans are those close-end or open-end loans that have a longer than 45 day term, but require the consumer to repay substantially the entire amount of the loan or advance more than 45 days after consummation in either a single payment or at least one payment that is more than twice as large as any other payment. See, 12 CFR §1041.3(b).
In addition to the two covered loans discussed above, the final rule also covers a third loan type, known as “covered longer-term loans.” This category include loans that do not fit the previous definitions discussed above, but carry a “cost of credit” that exceeds 36 percent and has a leveraged payment mechanism giving the lender a right to initiate transfers from the consumer’s account without further action by the consumer. See, 12 CFR §1041.3(b)(3). Cost of credit is determined according to the finance charge rules set out in section 1026.4 of Regulation Z. This product type is less common for credit unions given the 18% lending rate cap established in section 701.21(c)(7) of NCUA’s regulations for federal credit unions.
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