The Consumer Financial Protection Bureau provides a statement on Small Dollar Loans and Signals from Bradley Arant Boult Cummings LLP
On March 23, 2021, the CFPB issued a short explanation Highlighting its position on “Consumer Damage in the Small Dollar Loan Market” and likely future action to reverse industry policies by the previous CFPB administration. The next day, the CFPB posted their Consumer Response Annual Report for 2020 to Congress, which found that the volume of complaints for payday loans “decreased significantly in 2020” (minus 24%) and personal loans (listing installment loans, personal credit lines and pawns as “types” in this category) remained relatively the same. Despite this overall decline in consumer complaints related to small dollar lending, the CFPB stated in its statement that it is focusing its attention on small dollar lending activities. The CFPB expressed “concern” about “a lender’s business model that relies on consumers’ inability to repay their loans,” referring to previous research that the bureau said shows that small dollar borrowing often leads to new borrowing in default of payment and result ends in consumer damage. Finally, the statement alludes to the previous administration’s revocation of the repayment obligation for payday, vehicle title and certain high-cost installment loans (“Small Dollar Rule”) and the dissatisfaction of the current administration with this decision confirming that the CFPB is able to repay will vigorously pursue expenditure by other agencies provided by Congress. This system works through an open application form that’s displayed on the web site.
Interestingly, the CFPB, in its statement, refers to “Years of Research by the CFPB” as a justification for the need for the ability to conduct small dollar lending related analyzes, even though the prior administration deemed this historical research to be flawed and repayable A main reason for removing the ability to repay items from the small dollar rule. The previous administration received numerous comments related to the small dollar rule, including from industry participants, on the reasons the research was flawed. In addition, industry experts have long touted numerous Studies This shows that the vast majority of small borrowers can afford to pay back their loans and are able to correctly predict their ability to repay a loan. For example, Studies Show that a consumer might take out a two-week payday loan, but understand that it would be six more weeks for the loan to be paid off in full. Since the consumer refinances the loan multiple times, it is still a short term loan and this does not mean that the consumer misjudged their ability to repay the loan or that the lender misled the consumer.
Regarding the CFPB’s changing position on its historical research, we agree with the position of the last administration. It is difficult to imagine how a business model based on “inability to repay,” as the CFPB put it, could succeed when a lender is using the consumer to repay the loan or is not making money. Hence, a certain amount of underwriting is required, especially if the loan is unsecured. It is for this reason that unsecured small dollar lenders generally draw their loans with the utmost care to ensure consumer identification and creditworthiness / repayment ability to reduce the risk of default. Online lenders may be even more cautious when taking out loans as an online consumer is arguably more difficult to verify than a traditional brick and mortar consumer. In fact, many companies are successful in large part because of their underwriting model, but many small dollar lenders sign up for loans different. Therefore, the originally proposed ability to repay requirements in the small dollar rule could have crippled the industry and restricted many consumers’ access to credit.
Aside from arguments and industry studies, the CFPB was the first to issue tough standards in 2017 for the Small Dollar Rule. The new last rule in 2020 is slightly cheaper for the industry as the mandatory drawing requirements from the 2017 rule have been removed. The cumbersome payment terms of the rule, requiring notifications with complicated time and content requirements and new obligations when a consumer receives two consecutive failed payment transfers (see previous blog) remain intact. This remains a major challenge for lenders in the small dollar industry and will significantly increase compliance costs as well as additional risk for both the consumer and the lender. However, the 2020 small dollar rule remains challenged in court, as does its compliance date, and its future is uncertain. After the pendulum of policy making in Washington turns the other way again, the CFPB is likely to revert to 2017 policy and not broadly support the final 2020 rule. On March 23, 2021, only their “legal obligation to respond” is cited in the lawsuit. “The CFPB filed a motion in another lawsuit, originally filed last October by a consumer protection group, to revert to the 2017 version of the Small Dollar Rule to introduce. This application “address[ed] Only the Court’s Jurisdiction to Rule the Case ”and the CFPB made it clear that the filing“ should not be taken as an indication that the Office is satisfied with the status quo ”in the small dollar loan market. The message from the CFPB is clear: there will be a strong “monitor, monitor”[ing]and enforce[ing]”The small dollar credit market.
Finally, an excerpt from the CFPB’s 2020 Consumer Response Annual Report was the large number of consumer small loan accounts that were settled or written off due to a consumer struggling to pay their loan. This speaks to the importance of customer relationships in this industry and shows that lenders worked with consumers during the pandemic last year, despite not being a legal requirement under CARES law. The CFPB’s renewed focus on small-dollar loans does not coincide with the decline in consumer complaints about these loans from 2019 to 2020. It was one of only three categories (out of a total of 13) in the CFPB’s 2020 Consumer Response Annual Report that saw a decline over the course of the pandemic.
Even if the 2020 small dollar rule persists and residency is lifted, it is still possible that the CFPB could establish new rules to expand the regulatory landscape on small dollar lenders. Additionally, we fear that the CFPB could potentially use its UDAAP authority to attempt to classify a perceived ability or inability to repay as consumer harm, especially given the recently repealed guidelines regarding the “abusive” standard for UDAAP. Even so, we will continue to watch and monitor as the CFPB implements its new agenda on small dollar borrowing.