Written by Eamonn Moran
On October 5, the Consumer Financial Protection Bureau (CFPB or Bureau) released its long-anticipated final rule on small-dollar lending, which covers payday, vehicle title, and certain high-cost installment loans. Along with providing consumer protections governing the underwriting of covered short-term and longer-term balloon-payment loans – including payday and vehicle title loans – the rule also contains disclosure and payment withdrawal attempt requirements for covered short-term loans, covered longer-term balloon-payment loans, and certain high-cost covered longer-term loans. In one of the most significant differences from the proposal, the Bureau is not, at this time, finalizing the ability-to-repay determination requirements proposed for certain high-cost installment loans, but it is finalizing those requirements as to covered short-term and longer-term balloon-payment loans.
We note that the rule excludes from coverage some new fintech innovations, such as certain no-cost advances and programs to advance earned wages when offered by employers or their business partners.
Based on prior discussions with various stakeholders, the Bureau solicited and received comments on the proposed rule in connection with the definition of lender under proposed 12 C.F.R. § 1041.2(a)(11) about some newly formed companies that are seeking to develop programs that provide innovative access to consumers’ wages in ways that do not seem to pose the kinds of risks and harms presented by covered loans. The CFPB acknowledges that some, but not all, of these companies are fintech businesses. In addition, their business models differ – some are developing new products as an outgrowth of businesses focusing mainly on payroll processing, for example, while others are not associated with consumers’ employers but rather are focused primarily on formulating new means of advising consumers about how to improve their cash management approach. In particular, the Bureau observes that a number of these innovative financial products are seeking to assist consumers in finding ways to draw on the accrued cash value of wages they have earned but not yet been paid. “Some of these products are doing so without imposing any fees or finance charges, other than a charge for participating in the program that is designed to cover processing costs. Others are developing different models that may involve fees or advances on wages not yet earned,” the Bureau states.
The Bureau notes that some efforts to give consumers access to accrued wages may not be “credit” at all, while other initiatives are structured in more complicated ways that are more likely to constitute “credit” under the definition set forth in § 1041.2(a)(11) and Regulation Z. For instance, when an employer allows an employee to draw accrued wages ahead of a scheduled payday and then later reduces the employee’s paycheck by the amount drawn, there is a plausible argument that the transaction does not involve “credit” because the employee may not be incurring a debt at all. This is especially likely where the employer does not reserve any recourse upon the payment made to the employee other than the corresponding reduction in the employee’s paycheck. On the other hand, if an employer cannot simply reduce the amount of an employee’s paycheck because payroll processing has already begun, there may be a need for a mechanism for the consumer to repay the funds after they are deposited in the consumer’s account.
The Bureau has decided in 12 C.F.R. § 1041.3(d)(7) to exclude such wage advance programs – to the extent they constitute credit – from coverage under the rule if they meet certain additional conditions. The Bureau notes that the payment of accrued wages on a periodic basis, such as bi-weekly or monthly, “appears to be largely driven by efficiency concerns with payroll processing and employers’ cash management.” In addition, the Bureau believes that the kinds of risks and harms that underlie many of the new requirements in the rule “may not be present where these types of innovative financial products are subject to appropriate safeguards.” The Bureau has concluded that “new and innovative financial products that meet these conditions will tend not to produce the kinds of risks and harms that the Bureau’s final rule is seeking to address with respect to covered loans.”
This accommodation may be an attempt to foster and support innovation in the industry that poses little to no consumer risk. The Bureau states that it has “consistently expressed interest in encouraging more experimentation in this space,” but also cautions that “nothing prevents [it] from reconsidering these assumptions in a future rulemaking if there is evidence that such products are harming consumers.” The Bureau made changes in the rule in response to comments it received. In particular, the Bureau’s changes appear to be supportive of certain promising innovations, including innovative income-smoothing and financial management products and services. It is reasonable to expect the regulators to make additional accommodations for fintech-related products and services in the future, assuming that there are appropriate safeguards and consumer protections put in place.
For a more detailed summary of the rule along with additional takeaways, please click here.
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