In the realm of unsurprising news, we bring you an update regarding the CFPB's small dollar rule. Just last week, we wrote about the CFPB's numerous delays in releasing the proposed regulation. And, reports now coming out of Washington are that the release of the rule is delayed yet again. We are hearing that the CFPB does not intend to issue their proposed rule until later in the spring—perhaps not until June. The CFPB has not explained the delay in issuing a rule that has been in the works for more than two years. We, however, think we know why the rule has yet to be proposed.
The original intent of the CFPB in drafting a regulation addressing small dollar lending was to reign in payday loans, title pledges and refund anticipation loans, in a fashion similar to what the U.S. Department of Defense did by regulation under the 2004 Military Lending Act. That is, the CFPB wanted to extend the protections afforded Servicemembers and their families from so called “predatory lending products” to all Americans. The CFPB envisioned that under its UDAAP authority, it could regulate and control these types of loans.
But, a funny thing happened since the CFPB started looking at these products. First, they noticed that lenders who had offered the proscribed loan products to Servicemembers, had begun to “tweak” those “covered loans” into a form of installment loans that were beyond the reach of the MLA regulations as then existed. (With the full support of the CFPB, the Department of Defense has now included all installment loans within their regulations—which we have discussed here).
In a pre-emptive strike, the CFPB initiated an effort to bring all “small dollar lending” within its rulemaking. This initiative—this grand stroke mirroring the MLA Regulation—has turned out to be a huge problem for the CFPB.
It is a huge problem because the universe of loans is vastly greater than those covered by the MLA. And, the consequences of cutting off or making more expensive small dollar credit to all Americans is concerning, even to the CFPB. The US economy runs on consumer credit. We think that the CFPB has caught a tiger by the tail and doesn't know what to do with it.
It didn't have to be this hard. The CFPB could have simply recognized that traditional installment lending is materially different from a payday and title pledge transaction. Traditional installment loans include true underwriting for the ability to repay, the right of prepayment without penalty, fully amortized payments of principal and interest without automatically debiting payments, and reporting experience to consumer reporting agencies. These are the defining characteristics. And, that is all that the CFPB should be concerned with. If the CFPB had accepted this common industry definition of an installment loan, and carved it out from its thinking, we would have a small dollar loan rule by now that could address true predatory loans.