CFPB Readies Rule on Small-Dollar Lending for June

The Consumer Financial Protection Bureau (CFPB) has scheduled a June 2 hearing on small-dollar lending, and is expected to release its long-awaited proposal on payday loans at the event.

The field hearing will be held in Kansas City, Mo., and feature remarks by CFPB Director Richard Cordray as well as testimony from consumer groups, industry representatives and members of the public.

The bureau announced the hearing May 18 and said in a separate blog that it expects in the next several weeks to release a notice of proposed rulemaking “to address consumer harms from practices related to payday loans, auto title loans, and other similar credit products, including failure to determine whether consumers have the ability to repay without default or reborrowing and certain payment collection practices.”

The short-term loans are blasted by critics for high, even astronomic, interest rates.

Major Rulemakings

Edward Mills, an analyst at FBR & Co., said the announcement of the hearing, as well as the release of the agency’s updated rulemaking agenda, likely indicates draft rules on payday lending will be released June 2. “The CFPB has often used field hearings as an opportunity to announce major rulemakings or reports,” Mills wrote in a report May 19.

The bureau published an outline in March 2015 of payday lending proposals under consideration in preparation for convening a review panel to gather feedback from small lenders (59 BBD, 3/27/15). The panel was convened under the Small Business Regulatory Enforcement Fairness Act (SBREFA). The proposals for consideration would cover loans requiring repayment within 45 days, as well as longer-term credit products. Over the past year, the CFPB said it has collected “extensive feedback” on those proposals from other stakeholders.

“The proposals were more onerous than expected, requiring upfront underwriting or limiting sustained usage and rollovers and changing debt collection practices,” Mills said. “We expect that the draft rules released by the CFPB in June will track closely with the 2015 proposals.”

Consistent With Past Proposals

Benjamin G. Diehl, special counsel at Stroock & Stroock & Lavan LLP in Los Angeles, also said the proposed rule is likely to follow the regulatory outline the CFPB released last year.

“Obviously, we need to see what the rule, in fact, says,” Diehl told Bloomberg BNA, adding that if the rule is consistent with what the bureau indicated it was considering at the time it convened the SBREFA panel, then the proposal “will have a big impact on the industry.”

Diehl said the CFPB has identified a borrower’s ability to repay as one of its concerns with products such as payday loans. He added that the proposed rule will likely address auto title loans, too.

Earlier May 18, the CFPB released a study showing that one in five borrowers who take out single-payment auto title loans have their vehicle seized by the lender for failing to repay the debt. Cordray said the agency is weighing the findings, as well as the results from previous studies on payday loans and deposit advance products, as it prepares new rules to address issues facing consumers in the marketplace for small-dollar loans.

Treatment of Different Products

Diehl said one concern is whether the proposed rule improperly conflates different products. “We’ll have to see what it says. Basically, there’s questions about whether auto title loans should be treated the same as payday loans and so on,” Diehl said, adding they are “different products with different circumstances.”

The single-payment vehicle title loans in the data of the CFPB’s latest study were originated at storefront locations and typically have 30-day terms, at which point the full amount of principal and associated fees is due. Those single-payment loans stand in contrast to loans repayable in installments.

“Those are very different products, and they ought to be evaluated differently,” Diehl said. “We’ll have to see the rule to see what’s in there. But it’s important to make sure the products are considered individually and aren’t improperly lumped together in terms of the proposed rules.”

Wide Need for Credit

Online search giant Google Inc. announced May 11 it will no longer allow advertisements for payday loans (92 BBD, 5/12/16). Starting July 13, Google will ban ads for such small, short-term loans, typically made with high interest rates, where repayment is due within 60 days of the date of issue. Google said it will also ban ads for loans with an annual percentage rate of 36 percent or higher.

While predatory lending practices must be addressed, a think-tank scholar argued in a paper May 19 that 135 million “non-prime” borrowers in the U.S. have “a real need for credit.”

Aaron Klein, a fellow in economic studies at The Brookings Institution, said a current standard for regulating small-dollar loans is the debt-to-income cap that holds loans at 4 percent of income. However, because people seeking small-dollar credit often don’t know their income, a better regulatory standard would be an ability to repay, Klein said.

In addition, he argued that a test should be whether the lender is dependent on the repayment of the borrower to make a profit.

“If the lender stands to make a profit regardless of whether the borrower will repay (or more than likely will profit), then you have a predatory product,” Klein wrote in his paper. “Regulators need to think along these lines and be willing to ban outright or functionally curtail these types of predatory products.”

Capitol Hill Efforts

In April, Sen. Jeff Merkley (D-Ore.) introduced a bill, S. 2760, that is meant to crack down on some of the worst abuses of the payday lending industry, particularly in online payday lending. Rep. Suzanne Bonamici (D-Ore.) introduced a companion measure, H.R. 5023, in the House later that month.

Some states have laws against predatory lending. Preemption and state sovereignty were explored at a hearing in February held by House Financial Services’ Financial Institutions and Consumer Credit Subcommittee (29 BBD, 2/12/16).

Nevertheless, critics of payday lending say it remains a problem online, with Internet sites operating both within the U.S. and offshore, subverting existing consumer laws.

“Payday lenders’ innovation in finding new ways to gouge vulnerable families is deplorable but, sadly, all too predictable,” Merkley said in a news release announcing his legislation. “In a rapidly evolving market, it’s critical that our laws and regulations keep up with new and predatory threats to consumers’ pocketbooks.”