Last week, we reported on the CFPB’s March 26th Proposal under consideration for rulemaking on the subject of short term, small dollar consumer loans. We pointed out some of the potential problems under the Proposal. The reality is that traditional consumer finance companies would not be economically able to make traditional smaller dollar installment loans if the same fall under the definition of “covered loans.”
The Proposal sets out “triggers” that capture “covered loans” under the Proposal. Once a loan is designated a “covered loan,” then difficult-to-determine concepts become applicable to the lending process. Consumer loans falling in this space will be very costly to make; and, this will have the practical effect of diminishing smaller dollar loans. Is this a good result? “Yes,” in the eyes of some consumer activists and perhaps the CFPB.
As currently proposed, triggers include taking payment by means of electronic debit (ACH) and taking as collateral a non-purchase money security interest in a vehicle. The Proposal has a difficult-to-determine process for addressing loans with an “all-in APR” in excess of 36% when these two triggers arise.
Economists understand that an APR in excess of 36% is not excessive for smaller dollar loans paid out on an installment basis. The cost of doing business in this segment of the consumer finance industry is the driver of interest rates. What the CFPB should not want to see is the availability of sound and solid installment loans dry-up. And, such would be the unintended consequence of this Proposal that “covers” otherwise solid consumer loans.
In our judgment, there are two key indicia of a sound consumer loan: full amortization, with no balloon payment. While there are valid exceptions, these are the two most prevalent indicia of a “good” consumer loan, and we urge the CFPB to adopt these elements as the triggers for covered loans. Further, a loan should not be considered a covered loan just because the consumer voluntarily and affirmatively chooses to make payments via electronic debit. And, we also suggest that a loan should not be considered “covered” just because the consumer offers his or her vehicle as collateral, so long as the loan term equals or exceeds six months.
So, in our judgment, these four elements — full amortization, no balloon payment, voluntary ACH payment, and an 180+ day term for vehicle secured lending — are qualities of sound consumer lending. Loans falling within this structure should not be covered by the CFPB’s Proposal.