The Consumer Financial Protection Bureau (CFPB) issued a final rule on July 7, 2020 rescinding the mandatory ability to repay underwriting provisions on small dollar loans that it had previously announced under 12 C.F.R. § 1041 (the Final Rule). The Final Rule has left the payments provisions intact.
The CFPB first finalized regulations governing small dollar lending – including vehicle title and payday loans – in November 2017 pursuant to the Dodd Frank Act (the 2017 Rule). The 2017 Rule imposed rules governing underwriting, and also established requirements and limitations with respect to attempts to withdraw payments on the loans from customers’ accounts.
The 2017 Rule made it an “unfair and abusive practice” for a lender to make small dollar loans without “reasonably determining” that consumers had the ability to repay the loan and imposed a series of underwriting requirements and exemptions to prevent this from occurring. It also required lenders to furnish disclosures to “registered information systems” and required certain practices in recordkeeping.
While the payment provisions of the 2017 Rule remain intact under the Final Rule, lenders are released from the mandatory underwriting provisions. The CFPB removed these restrictions in response to industry concerns that it would effectively eliminate most short- and long-term balloon payment loans and reduce consumer access to credit. The Bureau further noted in its publications that, contrary to the CFPB’s prior rulemaking announcement and the comments of consumer advocacy groups, it found little evidence that the mandatory underwriting provisions had much effect in protecting consumers.
The Final Rule will likely make it more palatable for certain financial institutions to engage in short term lending. It significantly lessens the threat that an institution could be held liable for committing an unfair and deceptive practice by failing to review a consumer’s ability to repay a loan before originating a short-term loan. Financial institutions that have reduced or eliminated small dollar lending after the implementation of the 2017 Rule may now find it advantageous to consider revitalizing their small dollar lending programs.