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Wednesday, February 24, 2016

CFPB Considering ‘Ability to Repay’ Rules for Small Dollar Loans

The CFPB is continuing to consider applying “ability-to-repay” standards to small dollar loans, which would require lenders to verify a prospective borrower’s income, major financial obligations and borrowing history before making a loan, director Richard Cordray said. The standards would echo those required by the CARD Act for credit card issues. Cordray added that the bureau is also continuing to consider exceptions for loans that meet certain screening requirements and include certain consumer protections.

For loans of 45 days or less, the proposal – which was first introduced by the CFPB last spring – would allow a lender to avoid the “ability-to-repay” standards if they abided by a 60-day “cooling off” period between loans or rollovers unless the borrower’s financial condition could be documented to have changed, with a two-rollover cap. The loan could not exceed $500, carry more than one finance charge or require the customer to offer his car as collateral. Lenders would be prohibited from debiting a customer’s deposit account without a three-business-day notice and would be required to stop attempting after two unsuccessful debits.

For loans of more than 45 days, the lender would be required to determine the borrower’s ability to repay the loan; to limit the loan’s amount to $1,000, impose a maximum 28% interest rate and $20 application fee; or to limit repayment to 5% of the borrower’s gross monthly income.

Cordray’s remarks suggest that the proposal has not undergone significant changes since the initial draft was released, despite a review by a panel of small business entities. The bureau is expected to formally propose the guidelines in March.

Read Cordray's remarks.

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