On Tuesday, July 7, 2020, the Consumer Financial Protection Bureau (“CFPB”) formally rescinded rules implemented under former CFPB Director Richard Cordray aimed at determining a consumer’s ability to repay small-dollar loans. In 2017, then Director Cordray instituted mandatory underwriting provisions that would have required payday lenders to assess, as part of the underwriting process, whether borrowers could afford to repay their loans without reborrowing. Upon review of these mandatory provisions, the CFPB did not find the requisite legal and statutory guidance to further enforce these underwriting standards.
While small-dollar loans provide for increased consumer access to capital, especially during the COVID-19 pandemic, this renewed focus on small-dollar lending is a noticeable directional turn from the consumer lending advice of prior administrations. Under the previous presidential administration, regulators were more cautious of banks’ lending in this space and worried about risks, such as high interest rates and perceived repayment risks, associated with lending small-dollar loans to consumers.[1] In 2013, prudential regulators, including the OCC and the FDIC, went as far to release guidance that essentially discouraged banks from engaging in small-dollar lending activity altogether.[2]
Regulators under the current administration have signaled that they are more open to reengaging banks in the practice of small-dollar lending, so as to meet the unmet short-term credit needs of the American consumer.[3] In its press release concerning the repeal of these provisions, the Bureau stated that “rescinding the mandatory underwriting provisions of the 2017 rule ensures that consumers have access to credit and competition in states that have decided to allow their residents to use these small-dollar loan products, subject to state law limitations,” and noted that a subset of consumers might have a particular need for products such as payday loans as a result of the economic downturn brought about by the COVID-19 pandemic.
Consumer advocates disagree however, noting that the ongoing impacts of the pandemic make it precisely the wrong time to rescind such underwriting provisions. Jeremy Funk, spokesperson for Allied Progress, that CFPB Director Kraninger “stamped an official seal on one of the worst practices payday lenders – and now there’s nothing stopping the industry from ruining families with 400% interest rates in the middle of a recession.”[4] In response to criticism, the Bureau said that responsible consumers understand the harms associated with payday and small-dollar loans and would therefore be better prepared to avoid harm. Essentially, the CFPB does not believe that an ability to repay assessment is critical to preventing consumer harm.
While consumer advocates might worry, the repeal of these provisions does not leave consumers without recourse or protection from unfair, deceptive, or abusive acts or practices. In its press release, the Bureau assured American borrowers that consumer protections will remain in place at the state and federal levels. To be clear, provisions that protected consumers from the pitfalls of payday and small-dollar loans existed before the mandatory underwriting provisions introduced in 2017, and these statutes will continue to be enforced. Included in the final rule are payment provisions that never went into effect. The newly implemented provisions prohibit payday and small-dollar lenders from direct debiting funds from a consumer’s bank account after two consecutive failed withdrawal attempts. Additionally, the provisions require that consumer lenders provide borrowers with written notice prior to making the first withdrawal from the consumer’s bank account.
It remains to be seen whether many banks will take this opportunity to return to deposit advanced products, though the recent steps by banking regulators have encouraged at least some consumer lending in this space so far.[5] Coupled with the CFPB’s no-action letter template introduced in May to encourage banks to offer small dollar loans in amounts up to $2,500, this week’s final rule will encourage more lenders to enter the small-dollar lending space and develop such products with minimal fear of supervisory action. For small-dollar lenders and those in the short term market, greater access to consumer credit satisfies a need that would otherwise remain unmet under current regulations.
As the CFPB gains a deeper understanding of the impact of its final rule, it may offer further information and supervisory guidance related to small-dollar lending. Entities may choose to consult directly with the prudential regulator when determining how their financial services products might impact consumers and the broader consumer financial services market.
[1] Fed. Deposit. Ins. Corp., Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products 10 (2013), https://www.fdic.gov/news/news/press/2013/pr13105a.pdf.
[2] See, e.g., American Bankers Association, Comment Letter on Proposed Retirement of Certain Financial Institution Letters (Oct. 10, 2018), https://www.aba.com/-/media/documents/comment-letter/cl-retirement2018oct10.pdf?rev=ad4f4278e0464f58b0fca4afefa397af.
[3] Office of the Comptroller of the Currency, OCC BULL. 2018-14, Installment Lending: Core Lending Principles for Short-term, Small-dollar Installment Lending (2018), https://www.occ.treas.gov/news-issuances/bulletins/2018/bulletin-2018-14.html.
[4] Jon Hill, CFPB Finalize Repeal of Payday Lender Underwriting Rules, Law360 (Jul. 7, 2020), https://www.law360.com/fintech/articles/1289855/cfpb-finalizes-repeal-of-payday-lender-underwriting-rules?nl_pk=7ad363ad-d937-490f-a817-b52d071c78d2&utm_source=newsletter&utm_medium=email&utm_campaign=fintech.
[5] Andrew Ackerman, Banks Urged to Issue More Small-Dollar Loans in Response to Outbreak, Wall. St. J. (Mar. 26, 2020), https://www.wsj.com/articles/banks-urged-to-issue-more-small-dollar-loans-in-response-to-outbreak-11585239163.
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