CFPB Proposal Could Cripple Innovation in Small-Dollar Credit

The Consumer Financial Protection Bureau today released a proposed rule that would sharply curtail short-term, small-dollar consumer loans. The rule would define certain small-dollar loans as “abusive and unfair” if lenders fail to reasonably determine borrowers’ ability to repay the loan or satisfy an exception.

While principally targeted at payday and auto title loans, the rule would cover a wide swath of short-term, small-dollar credit, including all loans with a term of 45 days or less, as well as longer-term loans that have an all-in APR exceeding 36 percent and that are repaid directly from a borrower’s account or secured by a car.

Virtually no banks currently offer deposit advances, the principal bank-based product covered under the rule, but — according to a recent ABA survey — most banks make small-dollar loans either as part of an established program or, more frequently, as an accommodation to serve a customer upon request. Overdraft protection services would be excluded from the rule.

ABA expressed concern that the CFPB’s highly prescriptive proposal could impede innovation by banks — as urged by other regulatory agencies — in small-dollar lending. “While the bureau has frequently expressed interest in expanding banks’ trusted role in this market, the proposal fails to do so in a meaningful way and will significantly limit the availability of small-dollar credit,” said ABA SVP Virginia O’Neill.

To demonstrate ability to repay, lenders would be required to verify income, customer debt obligations and housing costs; forecast basic living expenses; and project customers’ income, obligations and expenses over the term of the loan. Borrowers with one outstanding covered loan would be presumed unable to repay a new, second loan unless documented by the lender.

The bureau proposed a “safe harbor” from ability-to-repay calculations that includes a $500 cap on the first short-term loan and lower caps on subsequent loans. The bureau would also provide safe harbors for longer-term loans, one modeled on the credit union industry’s “payday alternative loan” model and another for longer-term loans with a maximum 36 percent APR, single origination fee of $50 or less or that is reasonably proportionate to the lender’s underwriting costs, and projected annual default rate of 5 percent or less for all loans made under the safe harbor.

The CFPB would also define as “abusive and unfair” making a third attempt to debit a customer’s account for a loan payment after two previous attempts had failed for insufficient funds. To continue making debits, the lender would have to seek new authorization to debit the account. Comments are due by Sept. 14. For more information, contact ABA’s Jonathan Thessin.