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CFPB Issues Final Rule on Small-Dollar Lending

On Tuesday, July 7, 2020, the Consumer Financial Protection Bureau (“CFPB”) formally rescinded rules implemented under former CFPB Director Richard Cordray aimed at determining a consumer’s ability to repay small-dollar loans.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.

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The CFPB Proposes Ambitious Payday Lending Regulations

On June 2, 2016, the CFPB released its long-awaited proposed regulations for payday loans, vehicle title and certain high-cost installment loans.  Comments on the proposed rules must be received on or before September 14, 2016.

While most payday lenders would need to make significant changes to their products and practices under the proposed rules, the final rules could well be delayed though legal challenges in court.  The scope of the proposal is extraordinary, even requiring a new credit reporting system, that would need to be built, to facilitate the ability-to-repay requirements of the proposal.  The CFPB is relying on its authority under the Dodd-Frank UDAAP provisions to issue the rules, which is admittedly very broad, but even that might not be enough to support this ambitious proposal.

Nevertheless, because we cannot predict how courts would ultimately rule on the CFPB’s authority, it’s important to understand the proposed rules, prepare comments, and consider what business model changes might be needed.   This article therefore summarizes the key provisions of the proposal.

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Bank Regulators take Aim at Payday Lenders and AML Control

In two recent posts on BryanCavePayments.com, Bryan Cave attorneys have addressed new developments related to the CFPB’s efforts to regulate payday lenders through their banking relationships as well as statements from New York’s top banking regulators suggesting that bank executives should be held personally liable for anti-money laundering violations.

On April 1st (but unfortunately not part of any April Fools joke), John Reveal published a post on the CFPB’s efforts against payday lenders.

In May 2014, the Department of Justice (DOJ) and the FDIC were criticized by the U.S. House of Representatives’ Committee on Oversight and Government Reform in May 2014 Report for using the DOJ’s “Operation Choke Point” to force banks out of providing services to payday lenders and other “lawful and legitimate merchants”. The Committee’s report noted, among other things, that the DOJ was inappropriately demanding, without legal authority, that “bankers act as the moral arbiters and policemen of the commercial world”.

Now the CFPB has announced that it is considering rules that would end “payday debt traps”.  At least the CFPB is following standard regulatory processes in doing so rather than trying to regulate payday lenders by punishing their bankers.  The CFPB’s announcement, published March 26, 2015 (available here), outlines its proposals in preparation for convening a Small Business Review Panel to gather feedback from small lenders, which the CFPB refers to as “the next step in the rulemaking process”.

The CFPB’s proposal considers payday loans, deposit advance products, vehicle title loans, and certain other loans, and includes separate proposals for loans with maturities of 45 days or less, and for longer-term loans.  Broadly speaking, the CFPB is considering two different approaches – prevention and protection – that lenders could choose from.

You can read the rest of John’s post here.

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