CSBS Issue Briefings - January 2020

CSBS ISSUE BRIEFING

Small Dollar Lending

CSBS Official Public Position A final rule issued by the Consumer Financial Protection Bureau (CFPB) in 2017 (but not yet implemented due to a court order and efforts to reassess the rule) would bring federal consumer protections to the small dollar lending space for the first time. If implemented, the rule will cover any bank or nonbank lender that makes a small dollar loan with a term of less than 45 days and certain loans with longer-terms and balloon-payments. However, the final rule includes an important exception that would allow community banks to provide up to 2,500 “accommodation” style small dollar loans per year to their customers without having to comply with the rule’s requirements. State regulators were pleased to see that the CFPB responded to our comments on this topic by including the de minimis exemption for community banks. State regulators believe it is essential for community banks to be able to serve as sources of small dollar credit in the communities they serve. Why it Matters to State Regulators The original rule proposed by the CFPB would have covered any small dollar loan made by banks, despite not offering evidence of consumer harms resulting from this type of bank lending. State regulators were concerned that the proposed rules would disincentivize banks from offering small dollar credit to their customers. The inclusion of the de minimis exemption for bank small dollar lending will allow for some lending, but it will not result in banks offering small dollar loan products on a large scale. Under new leadership, the CFPB announced in January that it intended to engage in a rulemaking effort revisit the requirements of the 2017 small dollar loan rule. In February 2019, the CFPB issued a revised version of the rule that would rescind the mandatory underwriting provisions within the 2017 Final Rule. The CFPB said it made the new proposal because it determined that the evidence underlying the unfair or deceptive acts or practice, known as UDAAP, component of the rule was not robust or reliable to support that determination and because the rule will have a significant detrimental impact on credit availability. The CFPB is not proposing to reconsider the payment provisions of the 2017 final rule. The Bureau finalized their proposed changes in June and delayed the August 2019 compliance date of the rule to November 2020. Agency leadership from the FDIC, Federal Reserve, and OCC have signaled that joint action on small dollar lending may be on the horizon. Agency rulemaking could play out in a variety of ways. The agencies could choose to rescind their deposit advance guidance, which would essentially be a return to policies in effect prior to 2014. We could see another scenario in which the guidance is left in place and no additional guidance on small dollar lending is released. In this case, banks would be unlikely to participate. Another option would be for the agencies to clarify their guidance and apply it specifically to short-term loans with terms of 45 days or less. Several groups such as the Pew Research Center have suggested that regulators should provide a green light to installment loans that allow for reasonable pricing (double digit APR’s), affordable payments, and reasonable time to repay (terms longer than 45 days), while giving a red light for single payment or balloon payment small dollar loans. The rule sets a floor for federal consumer protections in the small dollar lending market and does not prevent states from implementing laws that are stricter than the CFPB’s requirements.

FOR STATE REGULATOR USE ONLY