CFPB issues final rule on small dollar loans | Bryan Cave Leighton Paisner

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On Tuesday July 7, 2020, the Consumer Financial Protection Bureau (“CFPB”) officially repealed rules implemented under former CFPB director Richard Cordray aimed to determine a consumer’s ability to repay small loans.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 borrowing again. After examining these mandatory provisions, the CFPB has not found the legal and statutory directives required to strengthen the application of these underwriting standards.

While small loans allow consumers to have better access to capital, especially during the COVID-19 pandemic, this renewed focus on lending in small dollars is a notable directional shift from consumer credit advice from previous administrations. Under the previous presidential administration, regulators were more cautious of bank lending in this space and worried about the risks, such as high interest rates and perceived repayment risks, associated with lending small dollars. to consumers.[1] In 2013, prudential regulators, including the OCC and the FDIC, went so far as to issue guidelines that essentially discouraged banks from engaging in small dollar lending activities.[2]

Regulators under the current administration have signaled that they are more open to re-engaging banks in the practice of small dollar lending, in order to meet the unsatisfied short-term credit needs of the American consumer.[3] In its press release regarding the repeal of these provisions, the Bureau said that “the repeal of 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 low amount loans. products, subject to the limitations of state law, ”and noted that a subset of consumers may have a particular need for products such as payday loans due to the economic downturn caused by the COVID pandemic -19.

Consumer advocates disagree, however, noting that the continuing impacts of the pandemic make it precisely the wrong time to cancel these underwriting arrangements. Jeremy Funk, spokesperson for Allied Progress, that CFPB director Kraninger “has put an official seal on one of the most convenient payday lenders – and now nothing prevents the industry from ruining families with 400% interest rate in the middle of a recession ”.[4] In response to criticism, the Bureau said responsible consumers understand the harms associated with payday loans and small loans and would therefore be better prepared to avoid the harm. In essence, the CFPB does not believe that an assessment of repayment capacity is essential to prevent harm to consumers.

While consumer advocates may be concerned, repealing these provisions does not leave consumers without recourse or protection against unfair, deceptive or abusive acts or practices. In its press release, the Bureau assured US borrowers that consumer protections would remain in place at the state and federal levels. To be clear, provisions that protected consumers from the pitfalls of payday loans and low-value loans existed before the mandatory underwriting provisions introduced in 2017, and these laws will continue to be enforced. The final rule includes payment provisions that never came into effect. The newly implemented provisions prohibit payday lenders and small lenders from directly withdrawing funds from a consumer’s bank account after two consecutive failed withdrawal attempts. Additionally, the provisions require consumer lenders to provide borrowers with written notice before making the first withdrawal from the consumer’s bank account.

It remains to be seen whether many banks will seize this opportunity to revert to advanced deposit products, although recent actions by banking regulators have encouraged at least some consumer lending in this space so far.[5] Coupled with the CFPB no-action letter template introduced in May to encourage banks to offer small dollar loans up to $ 2,500, this week’s final rule will encourage more lenders to enter the lending space. low dollar and develop such products with minimal fear of supervisory action. For low dollar lenders and those in the short-term market, improved access to consumer credit addresses a need that would otherwise remain unmet under current regulations.

As the CFPB better understands the impact of its final rule, it may offer additional information and supervisory advice related to small dollar loans. Entities may choose to consult directly with the prudential regulator to determine 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 Concerning Deposit Advance Products 10 (2013), https://www.fdic.gov/news/news/press/2013/pr13105a.pdf.

[2] See, for example, American Bankers Association, Comment Letter on Proposed Retirement of Certain Financial Institution Letters (October 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 loan: Basics of short-term and small installment loans (2018), https://www.occ.treas.gov/news-issuances/bulletins/2018/bulletin-2018-14.html.

[4] Jon Hill, CFPB finalizes repeal of payday lender underwriting rules, Law360 (July 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 loans in response to outbreak, Wall. St. J. (March 26, 2020), https://www.wsj.com/articles/banks-urged-to-issue-more-small-dollar-loans-in-response-to-outbreak-11585239163.

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