CFPB issues new small-dollar loan rules

The Consumer Financial Protection Bureau on Oct. 5, 2017, disclosed tough new rules for short-term, small-dollar lenders, like payday loan and auto title loan companies. Key provisions of the rules, which have been five years in the making, require small-dollar lenders to assess the ability of applicants to repay before making loans, as well as limit the ability of lenders to collect on these loans by debiting the bank accounts of borrowers. The new rules, spelled out In a 1,700 document, are set to become effective beginning June 2019. But the rulemaking could get shelved or revised. “The final rule likely faces a potential vote to repeal it in Congress,” attorneys with the law firm Kilpatrick, Townsend & Stockton LLP noted in a recent blog post. They also pointed out that CFPB Director Richard Cordray’s term at the helm of the CFPB is set to expire in 2018, and any presidentially appointed replacement would have the authority to weaken or scuttle the rules.

Payday lenders have been operating under a negative public image cloud for years. The loans they make are small (typically $500 or less) and are advertised to cash-strapped workers looking for financial assistance until their next paychecks. While popular – the Community Financial Services Association claims over 19 million households carry such loans – they are costly. Several studies suggest the annual percentage rates on these loans run as high as 300 percent.

As a condition of a receiving a payday loan, a borrower typically provides the lender with a post-dated check for the full amount plus fees, or authorizes the lender to debit the funds from the borrower’s checking account on a specified date (the next payday). The problem, according to the CFBP and other detractors, is that too often borrowers can’t repay the full amounts owed at the end of the loan terms or doing so leaves them cash-strapped again. This results in many rolling over or refinancing their loans, and racking up expensive new charges. (Auto title lenders operate similarly, taking possession of the borrower’s car title until the borrower repays the loan, interest and other fees, typically with a 45-day term.)

“This cycle of piling on new debt to pay back old debt can turn a single affordable loan into a long-term debt trap,” Cordray said in a statement accompanying the new rules. “It is a bit like getting into a taxi for a ride across town, then finding yourself stuck in a ruinously costly cross-country journey, with no exit ramps.”

Strong opposition from CFSA

The Community Financial Services Association, established in 1999 as the national organization for small-dollar, short-term lending or payday advances, blasted the new CFPB rule, arguing among other things that the consumer watchdog agency failed to heed the wishes expressed in nearly 1 million comment letters opposing the regulations.

“There was an unprecedented outcry against this rule during the comment period – setting a record for a CFPB rulemaking and marking one of the largest of any federal agency,” CFSA Chief Executive Officer Dennis Shaul said in a statement. “Yet, from the start, the CFPB’s small-dollar loan rule was crafted pursuant to a predetermined ideological agenda that relied on biased data, anecdotes, and closed-door dealings with so-called consumer groups that have long sought to eliminate small-dollar lending.” Shaul hinted that small-dollar lenders may pursue legal action to stop the rule from taking effect.

Cordray insisted that the CFPB’s rulemaking was well thought out. “The Bureau has spent five years developing this rule,” he said. “Over that time, we conducted supervisory examinations and enforcement investigations that have given us deep insight into the business practices of man of these lenders.”

What about banks?

In the wake of the CFPB’s rulemaking, the Office of the Comptroller of the Currency dismissed regulatory guidelines it published several years ago on bank deposit advance loans. Deposit advances are similar to payday loans, but are made by banks, which automatically debit loan amounts when borrowers’ paychecks arrive in their accounts via direct deposit.

Acting Comptroller Keith A. Noreika, said the bank regulatory agency may revisit the issue of deposit advances, but for now it would be an “undue burden” to banks preparing for the new CFPB rules. What’s more, Noreika said, the market for small-dollar, short-term consumer loans has become less attractive to banks in recent years.

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