Advocacy Hears from Small Businesses on Proposed CFPB Rule: Too Complex for a Simple Product?

By Jennifer Smith, Assistant Chief Counsel  

Advocacy staff traveled to London, KY on September 14 and to Madison, WI on September 16 to perform small business outreach on the Consumer Financial Protection Bureau’s proposed rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans.

On July 22, the CFPB published in the Federal Register a proposed rule to establish regulations creating consumer protections for certain consumer credit products. The proposed regulations would cover payday, vehicle title, and certain high-cost installment loans. The CFPB’s proposal would apply to two types of covered loans.

First, it would apply to short-term loans that have terms of fewer than 45 days, including typical 14-day and 30-day payday loans, as well as short-term vehicle title loans that are usually made for 30-day terms.

Second, the proposal would apply to longer-term loans with terms of more than 45 days that have a total cost of credit that exceeds 36 percent; and either a lien or other security interest in a ‘‘leveraged payment mechanism’’ that gives the lender a right to initiate transfers from the consumer’s account or to obtain payment through a payroll deduction or other direct access to the consumer’s paycheck. Included among covered longer-term loans is a subcategory of loans with a balloon payment, which require the consumer to pay the entire principal in a single payment or make at least one payment that is more than twice as large as any other payment. The loans are less than $500.

Prior to publishing the proposed rule, the CFPB had convened a Small Business Regulatory Enforcement Fairness Act (SBREFA) panel on this issue. One of the Panel recommendations was to do outreach in rural areas to determine how the proposed rule may impact those communities.

The first roundtable discussion welcomed small businesses from many states including Kentucky, Missouri, Tennessee, Ohio, Louisiana, Florida and Georgia. The payday lenders told Advocacy about the detrimental impact that the CFPB’s rule would have on their businesses, their employees and their customers. Many voiced concerns about the rules putting them out of business, which would leave their customers with nowhere to go for funds. They were particularly concerned about the ability to repay, income verification requirements and the amount of time that it would take to issue a small dollar loan. They also voiced concerns about the 30-day cooling off period.

After the Kentucky roundtable, Advocacy staff traveled to Madison, WI, to meet with more small businesses. The small businesses in attendance voiced the same concerns. In addition, the credit union representatives and the small bankers said that the proposed regulations may cause them to stop offering small dollar loans to their customers.

Advocacy ended its roundtable series in Washington, D.C. There, the participants had similar concerns. Many felt that the proposed rule was too complex for a simple product. One participant asserted the steps to obtain a $500 loan were more complicated than the requirements for a $500,000 mortgage. A representative from a Native American tribe spoke about the negative impact that the proposal would have on economic development in tribal communities.

Overall, the roundtable series was very enlightening. It helped inform Advocacy about the potential effects of rulemaking. Advocacy filed comments on the proposed rule on October 7, 2016. A copy of Advocacy’s comments can be found at https://www.sba.gov/advocacy/10-07-2016-payday-vehicle-title-and-certain-high-cost-installment-loans.