We find ourselves in a waiting period now—waiting on the CFPB to issue its Proposed Rule on Small Dollar Lending. The CFPB has been working on this proposal for most of its five year existence—at least for the last three years. The term “Small Dollar Lending” was originally applied to payday and title pledge loans. However, the term will probably be expanded to include all short term traditional installment consumer loans, and longer term consumer loans bearing interest at 36% “all in APR,” and that are secured by vehicles or paid through automatic debits. We are awaiting the Proposed Rule to know the exact reach and scope of what will be known as “covered loans.”
It is now an open secret that the CFPB plans to release the Proposed Rule in connection with a field hearing taking place on Thursday, June 2nd in Kansas City. The CFPB has become fond of the technique of releasing proposals concurrent with hearings, often at which Director Cordray speaks. This is what they did at the May 5th Albuquerque field hearing in connection with the Proposed Arbitration Regulation.
Once the Proposal is released, there will be a deluge of articles, blogs and other commentary that will follow. That is because this is a really big deal, for several reasons:
First, the shear number of consumer loans subject to this Rule is enormous. A large percentage of Americans have loans that will be directly affected by the Rule.
Second, the number of consumer finance companies making loans subject to the Rule is also extraordinarily large. And, these are businesses that until five years ago, were not regulated at the federal level at all. Rather, they were subject to regulation by the states in which they operated. There is a material difference between federal regulation, enforcement and supervision, and that which such businesses have historically encountered at the state level.
Third, the compliance regimen to which consumer finance companies will become subject, is very detailed. Every new regulation or rule requires businesses to expend considerable compliance resources. The minutia of this Proposal is expected to require more diligence than seen with prior CFPB rulemaking.
Finally, this Proposed Rule is likely to cause a “sea change” in consumer lending. We have already seen the enormous impact upon traditional installment lending as a result of the emphasis on compliance. We expect that this Proposal, when coupled with the changes that will be brought about by the new Arbitration Regulation, will usher consumer lending into a new era.
But until June 2nd, we wait…