The Consumer Financial Protection Bureau should preserve and expand the role banks play in providing small-dollar credit to customers — not restrict banks from making these loans, ABA said in a comment letter on Friday in response to the bureau’s proposal to curtail short-term, small-dollar consumer loans. The proposed 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. ABA expressed its concern that the rule could drive many banks out of the small-dollar market, including those offering accommodation loans to meet the credit needs of their customers.
“ABA believes that the banking industry can and should continue to be a major participant in [the small-dollar credit] market, but the costs, complexity, and compliance risks presented by the proposed rule can restrict banks from making these loans,” said ABA SVP Virginia O’Neill. “The excessively prescriptive proposal also will stifle innovation in consumer lending, reduce consumer choice and directly harm the very borrowers the rule was intended to protect.”
To illustrate the ways that banks use small-dollar credit to assist customers, ABA included several customer testimonials in the letter. For example, a young Liscomb, Iowa, couple with no credit history accessed a small-dollar line of credit from a local community bank to build their credit in preparation for homeownership. “We were thankful that there was a bank loan…that could help us with this transition,” they said.
As proposed, the rule imposes prescriptive and excessive underwriting requirements on small-dollar loans — similar in detail to those applied to mortgages — mandating that lenders document, verify and project the borrower’s income, major financial obligations, housing costs and basic living expenses. Borrowers with one outstanding covered loan would be presumed unable to repay a new, second loan unless documented by the lender.
To help protect the ability of community banks to meet the needs of their customers, ABA urged the CFPB to exempt banks and other lenders that make no more than 2,500 loans over the course of a year that would otherwise be subject to the proposed rule, if the revenue from such loans comprises no more than 10 percent of the bank’s gross annual revenue. ABA also urged the bureau to develop comparatively proportionate exclusions to facilitate the ability of larger banks to serve the small-dollar credit needs of their customers.
A number of individual banks and state bankers associations also expressed significant concerns about the rule. Eight ABA member regional, midsize and community banks joined a number of community organizations in sending a joint letter that expressed concern that the proposed rule would impose “substantial barriers and costs” on banks that offer small-dollar loans. The letter urged the bureau to ensure that banks can continue offering small-dollar credit, including through a payment-to-income alternative compliance option.