On Tuesday, July 7, 2020, the Consumer Financial Protection Bureau (“CFPB”) formally rescinded rules implemented under former CFPB Director Richard Cordray aimed at determining a consumer’s ability to repay small-dollar loans.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