What to Watch if CFPB Drops Rule on Small-Dollar Lending

By Jeff Bater

Sweeping new regulations on payday loans and small-dollar installment loans could be CFPB Director Richard Cordray’s swan song. Cordray is expected to step down early, perhaps in the next few weeks, in order to run for governor of Ohio.

The CFPB’s June 2016 proposed rule covered payday loans, generally required to be repaid in a single payment on receipt of the borrower’s next paycheck. Payday lenders would have to determine whether borrowers have the ability to repay loans and would also limit the number of loans a borrower can take out in quick succession.

The proposed rule also covered small-dollar installment loans, offered by community banks, among other lenders. For loans with a balloon payment, lenders would be required to ensure a borrower can pay all of the payments when due, as well as major financial obligations and basic living expenses during the term of the loan and for 30 days after paying the loan’s highest payment.

The rule has generated a large volume of feedback from payday lenders, banks, and consumer advocates, as well as more than 1.3 million public comments.

Here are four things to watch for as the CFPB readies a final rule:

Underwriting Requirements

Banks would like changes to make the small-dollar lending market more attractive for them. Last year’s proposal on payday lending made it too easy for payday lenders to issue dangerous loans and too difficult for banks to make small-dollar loans, Alex Horowitz, a senior research officer at Pew Charitable Trusts, told Bloomberg BNA.

The proposal imposed extensive underwriting requirements that were vague enough to create regulatory uncertainty but specific enough to be cumbersome, Horowitz said. For instance, lenders would have to pull a credit report to assess applicants’ monthly debt payments, as well as document an applicant’s income and living expenses.

“So that would have made it very difficult for banks, community banks, and credit unions to offer small loans,” he said.

The American Bankers Association, in a comment letter on the proposal, said banks will be able to provide small-dollar loans only if they can use “a simple, streamlined process” to evaluate and provide credit.

Lenders are hoping the CFPB reconsiders what was known as “the 5-percent option.” The CFPB had considered allowing lenders to make longer-term loans under the condition that the amount the consumer is required to pay each month is no more than 5 percent of gross monthly income. To the disappointment of lenders, the option was dropped from the proposed rule.

Quyen Truong, a partner at Stroock & Stroock & Lavan in Washington and a former CFPB assistant director and deputy general counsel, said the bureau probably won’t change course. She said it’s unlikely that “the CFPB would make significant changes to the proposed rule that would, practically speaking, cause banks to dramatically increase small-dollar lending.”

Short-Term Only?

The bureau might focus only on short-term loans — and put aside regulation of longer-term credit for another day, said Robert Jaworski, a partner with Reed Smith in Princeton, N.J.

Splitting a rule isn’t unheard of. The CFPB is dividing its rulemaking of debt collection into two stages. Last year, the bureau announced a regulatory outline, and released proposals under consideration that would increase protections pertaining to third-party debt collectors. The agency said it planned to address issues involving first-party debt collectors, such as banks and other lenders, at another time.

“It wouldn’t be unprecedented,” Jaworski said, adding that if the CFPB elects not to regulate longer-term small-dollar loans, “it takes away a lot of opposition from the more legitimate lenders,” he said. “It would be kind of like what he (Cordray) tried to do with the debt collection rule.”

Ability-to-Pay

When the proposal was released last year, consumer groups were unhappy with loopholes they felt would cause the rule to fall short of ensuring borrowers can repay the loans without financial hardship. For instance, one rule provision exempted the first six loans per year from the ability-to-repay requirement. Consumer advocates pointed out even one unaffordable loan can badly hurt borrowers.

“We believe that lenders should be required to determine borrowers’ ability to repay a loan before making the loan, without financial hardship and without being forced into a cycle of debilitating repeat borrowing,” said Lisa Stifler, deputy director of state policy at the Center for Responsible Lending.

State Preemption

The payday lending industry has said the final rule should focus on those unregulated payday lenders that cause the greatest harm to consumers. Jamie Fulmer, senior vice president of public affairs at Advance America, said the line has been blurred between payday lenders regulated by states and localities and “illegal lenders and scam artists operating in the shadows.”

Advance America is also watching to see whether the final rule will appropriately consider existing state rules. “The proposed rule would preempt laws that have been crafted, debated and refined over decades by local and state policymakers who know their constituents best,” Fulmer said.

More than three-dozen states have specific statutes that set requirement for payday loans, according to the National Conference of State Legislatures.

The issue of state sovereignty emerged during a 2016 hearing held by the House Financial Services Subcommittee on Financial Institutions and Consumer Credit. Indiana Attorney General Greg Zoeller told lawmakers that his state has extensive experience crafting short-term loan regulations to protect consumers and said the authority should not be preempted by “federal government overreach.”

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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