Payday and auto title loan rule revised

Business memo on Payday and auto title loan rule
Name
Institution
Business Memo
To: Top management
From: Assistant supervisor
Date: 29th January 2018
Subject: Payday and auto title loan rule
This memo is about the proposed payday and auto title loan rule, the industries it affects and the actions imposed. Payday loans are typically small-dollar loans ranging between $300 to $500 payable in full within two or four weeks. The loans are expensive to low-income consumers since the payments include $15 charge for every $100 representing 15 percent. On the other hand, the auto title loans are also short-term loans payable in less than four weeks though the borrowers are required to produce the car title or the truck title as the collateral. Once implemented, risk lenders will be required by the proposed rule to determine the affordability of the borrowers and whether they have the capacity to pay in full amount without entering into debt traps. Also under the new proposed rule, the installment loans with interest rates exceeding 36% annually will be regulated so that lenders cannot make multiple withdrawal attempts to borrower’s checking (CFPB 2016).
By proposing the new Payday and Auto Title Loan Rule, the Consumer Financial Protection Bureau targets small- dollar and short-term credit market within the payday loans industry. In what looks like a twist to their business, the payday and auto title lenders will have to take new steps in providing borrowers with covered loans (Kirsch, Mayer, & Silber 2014).

They will be required to make a sound determination of the ability of the borrowers to pay loans before giving them out.
The proposed rule will put consumer protections in place that facilitate strong – ability that requires borrowers to repay all or most loans at once. The proposed rule will as well require that all risk lenders conduct a “full- payment test” of their borrowers so as to determine whether the borrowers can repay greater loans above $500 in full without re-borrowing. At the same time, the borrowers should meet the expenses of their life while making sound financial decisions. Under the “full- payment test”, the following will be provided:
• Requirements to determine the affordability – lenders will be required to determine if the income of the borrowers can repay their debts at the same time meeting personal financial needs.
• Projection of the consumers’ ability – it requires all lenders to project the living expenses, housing costs, debt obligations and the income volatility of the consumer for a specific period term of the loan.
Under the proposed rule, all installments loans with interest rates exceeding 36% will be regulated. Regulation of such loans will include lenders being allowed or authorized to access the checking of the borrowers. However, even with the authorization of the lender to access the borrower’s checking, it will be deemed abusive and unfair if the lender withdraws funds without any new or specific authorization for the second time with failure (CFPB Releases Report on Online Payday Lending, 2016). Regardless of the channel used in the two failed attempts, the prohibition will apply. And in case the lender would want to withdraw funds from either the checking or the prepaid account of the borrower regarding the covered loans, a written notice should be provided by the lender three days before any attempt to withdraw payments.
The proposed Payday and auto title loan rule is significant in the sense that it will protect the consumers from the exploitive risk lenders since the lenders will have to determine the loan repayment ability of the borrower before making credit. The rule will the reduce risks that lenders are subjected to as a result of loan default by the borrowers will be reduced as the lenders would have full consumers’ information based on their loan affordability. Finally, the rule will help bring sanity and order in the credit industry as lenders would not be allowed to withdraw funds from consumers’ accounts after two consecutive attempts fail unless new authorization sought from the consumer.
References
CFPB Releases Report on Online Payday Lending. (2016). Credit Union Magazine, 82(6), 37.
CFPB. (2016). Payday, Vehicle Title, and Certain High-Cost Installment Loans. Retrieved from https://www.federalregister.gov/articles/2016/07/22/2016-13490/payday-vehicle-title-and-certain-high-cost-installment-loans.
Kirsch, L., Mayer, R. N., & Silber, N. I. (2014). The CFPB and Payday Lending: New Agency/Old Problem. Journal Of Consumer Affairs, 48(1), 1-16. doi:10.1111/joca.12036