The CFPB’s final payday rule: The PAL exemption

On October 5, the CFPB announced it had finalized its rule on payday loans. The final rule seeks to provide “common-sense protections” for payday loans, auto title loans, deposit advance products and certain other longer term loans with balloon payments. A key protection under the new rule is that lenders will be required to conduct an ability-to-repay analysis to determine whether the borrower can repay the full amount of the loan without re-borrowing. The final rule also imposes requirements concerning withdrawal practices, disclosures and recordkeeping. The final rule covers a number of different types of loans, but the rule also provides a number of exclusions and exemptions, one of which is of particular importance for credit unions – the PAL exemption.

New section 1041.3(e) exempts “alternative loans” from the payday rule. In the preamble, the CFPB explains that this exemption applies to any loan that meets the conditions outlined in the final rule so that any lender, not just federal credit unions, may qualify for this exemption. The CFPB found that this was the best approach to ensure the rules are applied consistently to all lenders. In order to qualify as an “alternative loan,” the loan must meet all of the following conditions:

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