CFPB Releases Small-Dollar Lending Proposal

At 12:01 a.m. this morning, the CFPB released its highly anticipated proposal on small-dollar lending.  Based on the Bureau's press release and an initial review, the proposal will make it difficult for any lender to offer affordable, easy to use products to consumers that have few, if any, other short-term liquidity options.  Loans covered under the rule include payday loans, vehicle title loans, deposit advance products, and certain "high-cost" installment loans and open-end loans.

In the proposal, the CFPB contemplates alternative approaches for short-term loans (45 days or less) and long-term loans (greater than 45 days).  It also creates options for what the Bureau refers to as "less risky" long-term loans.   

  • Ability to Repay Provisions for Short-Term/Long Term Loans: The general provisions for small-dollar lending, known as the "Full-Payment Test", propose ability-to-repay (ATR) protections that would require lenders to determine upfront that consumers can afford to repay their loans without re-borrowing.  The ATR requirements would include an analysis of a borrower's ability to meet major financial obligations, and still be able pay basic living expenses.  Lenders would be required to verify the amount of income that a borrower receives, after taxes, from employment, government benefits, or other sources.  In addition, lenders would be required to check a consumer's credit report to verify the amount of outstanding loans and required payments.
    • The Full-Payment Test includes a "Principal Payoff Option" for certain short-term loans.  Under this option, a borrower could take out a loan up to $500 without the full requirements under the full-payment test.  This option would be restricted to lower-risk situations and would require the debt to be repaid either in a single payment or with up to two extensions where the principal is paid down at each step.  Loans under this option could not be structured as open-end credit, and lenders would also be barred from offering the option to consumers who have outstanding short-term or balloon-payment loans or have been in debt on short-term loans more than 90 days in a rolling 12-month period.
    • The proposal would require lenders to use credit reporting systems to report and obtain information about loans under the full-payment test or the principal payoff option.
  • "Less Risky" Long-Term Loans: The proposal allows for two "less risky" longer-term lending options:
    • Option 1: National Credit Union Administration (NCUA) model – Lenders could utilize a loan modeled after the NCUA "payday alternative loans" program, where interest rates are capped at 28 percent and the application fee is no more than $20.
    • Option 2: Lenders could offer loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a "reasonable" origination fee, so long as the lender's projected default rate on these loans is 5 percent or less.  The lender would have to refund the origination fees any year that the default rate exceeds 5 percent.
    • For both options, lenders would be limited as to how many of either type of loan they could make per consumer per year.
  • The proposal would also limit repeated debit attempts for collection. 

The Bureau also announced that it is launching an inquiry into "other potentially high-risk" loan products and practices that are not specifically covered by the proposal.

CBA President and CEO Richard Hunt responded by stating:

"The CFPB has indicated it would like to see banks provide small-dollar loans to consumers in need, like the nearly half of the country who cannot afford a $400 emergency expense.  Judging from tonight's highly restrictive proposal, the Bureau continues to miss the mark for millions of Americans struggling to make ends meet and effectively forces most banks to stay on the sidelines due to greater compliance burdens.  Consumers across the country will now turn to pawnshops, offshore lending, and fly-by-night entities that will be more costly to them.  We will continue to work with the Bureau to develop products and services that are reasonable and meet consumer needs."

Comments on the proposed rule are due by September 14, 2016.  Generally, the final rule would become effective 15 months after it is published in the Federal Register.  The Bureau is proposing that certain provisions necessary to implement the consumer reporting components of the proposal would become effective 60 days after publication of the final rule in the Federal Register to facilitate an orderly implementation process.

CBA will provide a more detailed analysis of the proposal once we have fully reviewed it.  CBA's Small-Dollar Working Group will assist in gathering member input for CBA's comment.

Additional Resources:

CBA Small-Dollar Lending One-Pager

CBA Small-Dollar Lending Myth vs. Fact

If you have any questions, please contact David Pommerehn, Senior Counsel, at 202-552-6368 or dpommerehn@consumerbankers.com