Removing Barriers Blog

CFPB Small-Dollar Rule Impacts State Laws

As we continue to analyze the more than 1,300 page CFPB payday lending proposed rule, it is clear that the rule will have an impact on existing state payday lending laws. Thirty-six states have specific statutes that allow for payday lending, and the other 14 states and the District of Columbia either ban payday loans or have fee or interest rate caps that payday lenders apparently find too low to sustain their business models. This proposed rule, if finalized, would create a uniform standard for all US payday lenders for the first time in US history.  

Payday lending also differs in each of the states where it is permitted.  Loan sizes vary depending on state law limits, individual lender credit models, and borrower demand. Many states also regulate payday loan limit fees, the number of rollovers, and extended repayment plans.  

The CFPB proposed rule notes that state-chartered credit unions and banks are permitted under existing Federal law to charge interest on loans at the highest rate allowed by the laws of the state in which the lender is located (lender’s home state), and may charge the interest rate of its home state on loans it makes to borrowers in other states, without complying with the limits of the states in which it makes the loans (borrower’s home state).  

The CFPB acknowledges the existing state laws, and writes that the proposed rule would “coexist” with state payday lending laws and that any organizations subject to the proposed rule would be required to comply with both the rule and applicable state laws, except to the extent state laws are inconsistent with the rule. In the case of any inconsistency, the CFPB rule would preempt the state law or regulation. In response to state concerns that CFPB’s use of its authority to define unfair, deceptive or abusive acts to bring the rule, could affect or limit state provisions, the agency clarifies that the rule is not intended to limit state laws protecting consumers from unfair or deceptive acts or practices. 

Despite CFPB assurances, consumer advocates in states that have already prohibited payday lending are concerned that the rule legitimizes payday lending, and may lead to more legislative proposals to permit the practice in those states. Many advocates also note that because the CFPB is prohibited by law from setting a rate cap on short-term, small dollar loans, the rule does not do enough to make payday lending more affordable.