The Consumer Financial Protection Bureau recently released a final rule that rescinds portions of its 2017 small-dollar lending rule, removing burdensome compliance requirements that would have had severe consequences for consumers and small businesses. The rule is a major step in ensuring that essential credit will continue to flow to individuals and communities across the country – which is more important than ever in these unprecedented and uncertain economic times.
The new rule rescinds some of the most egregious aspects of the bureau’s 2017 rule, which were intended to negatively impact the industry. It rolls back an unworkable ability-to-repay provision that imposed burdens on consumers and lenders in the form of unreasonable levels of documentation not even required of mortgages. The provisions set compliance requirements that many operators, especially small businesses, could never meet and imposed complex and costly regulations that, by design, would have put many lenders out of business altogether.
According to the bureau’s own simulations, the burdensome requirements of the now-eliminated ability-to-repay provision alone would have caused loan volume to decrease by 60 to 80 percent, severely restricting access to credit. A separate study found that the original rule would have forced 80 percent of small businesses in the industry to close, and even the Small Business Administration’s Office of Advocacy under the Obama administration expressed concerns about the rule’s harmful impact on small businesses.
Under the leadership of Director Kathy Kraninger, the bureau has recognized something that former Director Richard Cordray’s bureau and industry critics have never appreciated: Consumers want small-dollar loans; there is overwhelming demand for them; and demand will still exist if state licensed and regulated lenders are forced to close their doors.
Several banking regulators recently reaffirmed this unmistakable demand by issuing interagency guidance to encourage banks to offer small-dollar loans. Banks and other financial institutions have historically proved unable or unwilling to offer small-dollar loans, and the fact that their regulators are now recognizing the importance of providing these products validates what we have been saying for years. Without access to licensed and regulated small-dollar loans, consumers would be forced into choosing between dangerous alternatives such as illegal lenders or worse outcomes such as bounced checks, overdraft fees or late bill payments.
South Dakota provides a clear example of the consequences of restricting credit. The state implemented a rate cap in 2016 that effectively forced lenders to shut down, eliminating access to small-dollar loans. Since then, key financial indicators demonstrate consumers have been worse off. A National Financial Capability Study conducted by the Financial Industry Regulatory Authority found more South Dakotans reported overdue medical bills and only paying the minimum on their credit cards in 2018 than in 2015, before the rate cap took effect. South Dakota’s experience is consistent with a study from the Federal Reserve Bank of New York, which found that consumers in states that had banned small-dollar loans faced worse financial outcomes, such as higher rates of bounced checks and bankruptcies.
CFSA members are licensed and regulated in the states in which they operate, and we understand our customers and the issues they are facing on a deeply personal level. As customer needs evolve, consumer financial services providers are also constantly innovating to offer new products and services in more ways than ever before. Our customers are overwhelmingly satisfied and value their continued access to these products – despite what industry critics who likely have never taken out a small-dollar loan themselves may claim.
While the CFPB’s new rule is a positive development in preserving access to credit, there is still more work to do. The final rule leaves the payment provisions of the original rule intact, which were flawed, based on unsupported data and duplicative of existing state and federal regulations. It also does nothing to address the very real problem of unlicensed or illegal lenders operating in the shadows. The CFPB’s current leadership should address the issue of illegal lenders, as consumers remain vulnerable to bad actors and their unscrupulous lending practices, especially during the current economic uncertainty.
It is more important now than ever that leaders in Washington allow consumers to continue accessing licensed and regulated sources of credit. The bureau’s new approach, unlike that of the 2017 rule, actually takes the customer experience into account and reflects the voices of Americans seeking access to legal, licensed small-dollar loans. In doing so, it has guaranteed that small-dollar lenders will continue to provide customers with access to the credit products that fit their personal and unique credit needs for years to come.
Lynn DeVault is chairman of the Community Financial Services Association of America.
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