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Opinion

CFPB Must Take Principle-Based Approach to Rewriting Small Dollar Rule

It is welcome news to see the Consumer Financial Protection Bureau announce the intent to revisit its Small Dollar Loan Rule. This sustained focus on principle-based regulations from Director Kathy Kraninger is consistent with recent actions from the Office of the Comptroller of the Currency and Treasury and is in line with the administration’s commitment to streamlining regulations to make them more efficient and responsive to consumers and businesses.

As the first trade association in fintech, the Online Lenders Alliance has always been in favor of having in place a balanced small dollar rule that protects consumers’ access to credit. We also go to great lengths to provide our customers with the information they need to make informed decisions about ways to improve their financial health. And we are the leading industry cop on the beat, crawling hundreds of thousands of websites each year to detect fraud and deceptive advertising, sounding the alarm when we see firms violating our best practices.

We are committed to doing our part to make online lending safe for the millions of American consumers who chose it as an option to meet their credit needs, including the majority of those with less-than-perfect credit.  

As the bureau revisits the rule at the beginning of this year, we are hopeful that it will focus on several core areas.

First, the original rule was too prescriptive on ability to repay requirements. A better approach to crafting an ability to repay provision would be to make it more in line with the rules for credit cards, which allow lenders to determine the consumer’s ability to make payments based on income or assets and current obligations and self-reported income.

Ability to repay requirements are currently used and fundamental to successful lending, and trustworthy lenders have led innovations to ensure borrowers have the ability to repay in a way that is balanced, convenient and results-oriented. If borrowers don’t repay loans, lenders go out of business.  

The bureau should also revisit the Small Dollar Rule’s payments provisions as there are real-world, negative impacts on consumers and borrowers. Lenders must follow the National Automated Clearing House Association rules. Already in existence is a NACHA requirement that limits payment returns to 15 percent, which has solved the frequency of ACH and potential overdraft charges.

The 30-day cooling-off period requirement between loans should be eliminated because it discriminates against non-prime borrowers and those who need credit the most. Can you imagine a government-imposed, 30-day cooling-off period on credit card holders with unpaid balances? A better approach would be to align this provision with existing standards set by NACHA.

Finally, the CFPB must eliminate the de facto 36 percent annual percentage rate cap. There has been no research to prove this number is workable for risk-based lending, and the wealth of evidence suggests that imposing arbitrary rate caps on consumers limits access to credit. After interest rate caps were imposed and certain short-term loans were banned in Georgia and North Carolina, consumers “bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 bankruptcy at a higher rate,” according to the Federal Reserve.

Nonbank financial service providers must comply with 18 federal laws and rules, and if the CFPB Small Dollar Rule goes into effect this year, that number will increase to 19. We support rules that are fair to consumers who need access to credit as well as rules that do not favor certain providers over others.

Arbitrary interest rate caps and onerous ability to repay tests for consumer financial products threaten to deny access to the majority of Americans who are considered non-prime. The opportunity to provide safe, affordable access to credit is real, but the threat to undermine it is, as well, if we fail to take a principle-based approach to crafting consumer-lending policy.  

We look forward to working with both House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) and Kraninger in making sure we do not redline the majority of Americans who deserve access to credit.

 

Mary Jackson is the CEO of the Online Lenders Alliance.

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