Small Banks, Credit Unions Win Carve-Out in CFPB Payday Rule

By Jeff Bater

Community banks and credit unions are poised to emerge as winners from the Consumer Financial Protection Bureau’s regulatory crackdown on the $3.6 billion payday lending market.

The CFPB’s Oct. 5 final rule on small-dollar loans exempts lenders who make 2,500 or fewer short-term or balloon payment loans per year and derive less than 10 percent of their revenue from such loans. That carve-out was drafted with small banks and credit unions in mind.

The bureau “has no intention of disrupting lending by community banks and credit unions,” CFPB Director Richard Cordray told reporters on an Oct. 5 conference call. “They have found effective ways to make small-dollar loans that consumers are able to repay without high rates of failure.”

The rule, five years in the making, requires payday lenders to determine upfront whether consumers have the ability to repay their loans. The rule also places limits on repeat loans. Lenders must respect a mandatory 30-day cooling-off period after the third covered short-term or longer-term balloon-payment loan in quick succession.

In addition to the carve-out for lower-volume small-dollar lenders, the CFPB rule exempts several categories of loans common to banks and credit unions, including secured installment loans for vehicles or consumer goods, overdraft lines of credit, and so-called payday alternative loans issued by federally-insured credit unions.

‘Looking Good’

The Independent Community Bankers of America said in an Oct. 5 statement that “thousands” of smaller institutions are poised to benefit.

“The exemption was what we specifically asked the bureau to carve out,” Lilly Thomas, ICBA’s senior regulatory counsel, told Bloomberg BNA “It will help give community banks the flexibility to continue lending to its customers.”

Jim Nussle, president and CEO of the Credit Union National Association, tweeted that he spoke with Cordray by phone “and while it’s still early, it’s looking good” for credit unions in relation to the small-dollar rule.

Nick Bourke, director of The Pew Charitable Trusts’ consumer finance project, said the final rule is “a major improvement” over the 2016 proposal because it opens the door to lower-cost installment loans from banks and credit unions. But federal regulators and states still have important work to do, he added.

Cost of Entry

The cost of setting up small-dollar lending programs could discourage many small banks or credit unions from entering the space and make it unlikely they’ll make up for the volume should payday lenders retrench.

“The majority of community banks are not active in personal loans with the exception of mortgages and with their limited resources they would have to build out a new lending platform to support these small-dollar loans, which is very costly,” one banking industry group representative told Bloomberg BNA. “Likely they may make a few one-off loans, but it won’t be to a sizable percentage of consumers in need.”

Similarly, the volume limit in the exemption means larger institutions are going to stay away.

“That 2,500 number just isn’t enough for the big banks” said Benjamin G. Diehl, special counsel at Stroock & Stroock & Lavan LLP in Los Angeles.

Clear Guidelines

Pew’s Bourke said bank and credit union regulators must now create the clear guidelines that small banks and credit unions need in order to make small installment loans safely and profitably.

He said states should act quickly, too, because the CFPB’s rule left the regulation of high-cost installment loans to them. “State legislatures can prevent the spread of today’s annual rates of 400 percent on payday installment loans by requiring affordable payments, lower prices, and reasonable time to repay,” Bourke said.

To contact the reporter on this story: Jeff Bater in Washington at

To contact the editor responsible for this story: Michael Ferullo at

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