Consumer Financial Protection Bureau issues statement regarding small loans, signals return to previous policy

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On March 23, 2021, the CFPB issued a brief statement outlining its position regarding “consumer harm in the small dollar lending market” and the likely future steps to reverse the previous CFPB administration’s policy regarding industry. The next day, the CFPB provided Congress with its annual consumer response report for 2020, which indicated that the volume of complaints for payday loans “had declined significantly in 2020” (down 24%) and personal loans. (listing of installment loans, personal lines of credit, and loans as “types” in this category) has remained relatively the same. Despite this overall decrease in the volume of consumer complaints for low dollar loans, the CFPB said in its statement that it was focusing its attention on low dollar lending activities. The CFPB has expressed “concern” for “the business model of any lender that depends on the inability of consumers to repay their loans,” citing previous research which the bureau says shows that small dollar loans frequently lead to losses. re-borrowing chains that end in default and result in harm to consumers. Finally, the statement alludes to the previous administration’s revocation of the “repayment capacity” requirement of the final rule on breakdown assistance, vehicle title and certain high-cost installment loans (“the small dollar rule ») And the dissatisfaction of the current administration with this decision. and confirms that the CFPB will vigorously pursue the ability to redeem the issue through other authorities provided by Congress.

Interestingly, the CFPB refers to “years of CFPB research” in its statement as to why the repayment capacity analysis should be required in the context of low value loans, even though the administration predecessor found this historical research to be flawed and a primary reason for the removal of the repayment capability element of the small dollar rule. The previous administration received numerous comments related to the dollar rule, including from industry participants, about why the research was flawed. Additionally, industry experts have long touted numerous studies that show that the vast majority of small borrowers can afford to repay their loans and are able to correctly predict their ability to repay a loan. For example, studies show that a consumer can take out a two-week payday loan, but understands that it would still take six weeks to fully pay off the loan. So, because the consumer refinances the loan multiple times, it is always a short term loan and it does not mean that the consumer has misjudged their ability to repay the loan or that the lender has cheated on the consumer.

Regarding the evolution of the position of the CFPB on its historical research, we agree with the position of the last administration. It is hard to imagine how a business model based on “inability to repay”, as the CFPB puts it, could succeed because a lender needs the consumer to repay the loan or not make money. A certain level of subscription is therefore required, especially when the loan is unsecured. As such, small dollar unsecured lenders generally take great care in securing their loans to ensure consumer identification and creditworthiness / repayment capacity to reduce the risk of default. Online lenders can be even more careful when taking out loans because an online consumer is arguably more difficult to verify than a traditional brick-and-mortar consumer. In fact, many businesses are largely successful through their underwriting model, but there are many smaller lenders who take out loans. differently. As a result, the repayment capacity initially proposed in the dollar rule could have crippled the industry and cut off access to credit for many consumers.

Industry arguments and studies aside, the CFPB initially issued strict standards in 2017 for the Small Dollar Rule. The new final rule in 2020 is slightly more favorable to the industry as it removed mandatory underwriting requirements from the 2017 rule. However, the rule’s hefty payment provisions which require notices with complicated subscription requirements. schedule and content and new obligations if a consumer receives two consecutive failed payment transfers (see previous blog) remain intact. This remains a great challenge for lenders in the low dollar industry and will dramatically increase compliance costs as well as bring additional risk to both consumer and lender. The 2020 Little Dollar Rule, however, remains in dispute in court as well as the suspension of the compliance date and its future is uncertain. Now that Washington’s policymaking pendulum has shifted in the other direction again, the CFPB is likely to revert to 2017 politics and will not broadly support the final rule released in 2020. On March 23, 2021, simply citing its “legal obligation to respond to the lawsuit”, the CFPB filed a motion in another action that was originally filed last October by a consumer advocacy group seeking to reinstate the 2017 version of the rule of the little dollar. This motion “addresses[ed] only the jurisdiction of the court to hear the case ”and the CFPB made it clear that the deposit“ should not be taken as an indication that the bureau is satisfied with the status quo ”in the low dollar lending market. The CFPB’s message is clear: it will strongly involve “monitoring, supervising[ing], and apply[ing]”The small dollar loan market.

Finally, a takeaway from the CFPB’s annual consumer response report for 2020 was the large number of small dollar consumer loan accounts that were settled or written off due to a consumer struggling to repay their loan. ready. This is a testament to the importance of customer relationships in this industry and shows that lenders worked with consumers during last year’s pandemic despite no legal obligation to do so under the CARES Act. The CFPB’s renewed focus on small dollar loans is inconsistent with the decline in consumer complaints about these loans from 2019 to 2020. It was one of three categories (out of 13 in total) in the 2020 annual report of the CFPB on the consumer response which has seen a decline during the pandemic.

Even if the 2020 Small Dollar Rule continues and the suspension is lifted, there is still a possibility that the CFPB will embark on new rules to broaden the regulatory landscape for small dollar lenders. Additionally, we are concerned that the CFPB could potentially use its UDAAP authority to try to classify a perceived ability or inability to reimburse as prejudicial to the consumer, particularly in light of the recently rescinded policy guidelines regarding the ‘abusive’ standard for UDAAP. Nonetheless, we will continue to monitor and monitor the deployment of its new program by CFPB with respect to small dollar loans.

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