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Removing Barriers Blog

CUNA's First Look at the CFPB's Proposed Small-Dollar Rule
Posted June 02, 2016 by Chandler Schuette

Just as anticipated, the CFPB released its proposed rule for Payday and Small Dollar loans in conjunction with a field hearing in Kansas City, Missouri. The proposed rule includes some important reforms to predatory lending practices, but also unfortunately appears to sweep in consumer friendly credit union small dollar loans. In his prepared remarks, Director Cordray notes that the rule is not intended to disrupt credit union products offered in the small dollar loan market and notes that credit unions offer products in consumer friendly ways. He stated:

"Under all aspects of the proposal we are releasing, we recognize that consumers may need to borrow money to meet unexpected drops in income or unexpected expenses. We recognize too that some lenders serving this market are committed to making loans that consumers can in fact afford to repay. We do not intend to disrupt the basic underwriting approaches taken by many banks, credit unions, and traditional finance companies, as well as some newer entrants, which offer installment loans in ways designed to assure that consumers can afford to repay them. We believe these lenders will have little difficulty adhering to our proposed rule. In fact, many elements of our full-payment test are based on information these lenders have shared about their approaches." 

Despite this recognition, and similar statements made directly to CUNA in discussions with the CFPB, we remain concerned that certain credit union products could be limited if the rule moves forward as proposed. Accordingly, we plan to work closely with the CFPB to educate them about parts of the rule that could cause regulatory burdens for credit unions, and will continue to advocate for a complete exemption for credit unions. We believe they have grasped some of the credit union concerns, and this is reflected in some changes made from the SBREFA proposals released last March.

One step in a better direction is that in the proposed rule, the CFPB acknowledges that it has authority under Section 1022 of the Dodd-Frank Act, “to conditionally or unconditionally exempt any class of . . . consumer financial products or services.” CUNA has been actively urging the CFPB to use this authority in a more meaningful way to protect credit union products and services. Additionally, 329 Members of Congress expressed support for the CFPB’s use of this authority to exempt credit unions from certain rules that should be aimed at bad actors. While we think this authority could be used more effectively than what is found in this proposed rule, we appreciate that the CFPB now understands that it has this important tool in its toolbox to protect consumer-friendly participants in the financial services marketplace. 

PAL Loans 

While the CFPB nominally exempted the NCUA PAL program in its proposal, our early analysis indicates that it is not a complete exemption, and there may still be some additional burdens to those offering loans under the PAL program or similar loans. Nevertheless, the proposal does appear to take into consideration some of the concerns that we raised with the CFPB about adding additional burdens to the PAL program considered during the SBREFA process. Originally, the CFPB proposed limiting PALs to only four per year, as opposed to the six per year allowed by the NCUA. The proposed rule appears to now allow six loans in line with the current PAL program. The CFPB proposal also includes more reasonable additional underwriting standards than originally proposed, but does include new requirements for verification of income. 

Despite these improvements, the proposal does suggest adding other modifications to the PAL program including a change from a minimal loan of 30 days to 45 days, limitations on payment transfers, amortization requirements and debt collection requirements. Although, it appears that some of the additional requirements for notice to collect debt directly from a borrower’s account do not apply to loans offered under the exempted PAL model. 

Exemption for Loans with Low Default Rate 

The other option for an exemption from the full payment test for longer term loans would be to offer loans with an all-in cost of 36% or less (excluding a "reasonable" origination fee), a term that does not exceed two years, and payments that are roughly equal. A lender's projected default rate under the second option could not exceed 5%. If it does, the lender would be required to refund the origination fees any year that the default rates exceeds 5%. This replaces an exemption in the SBREFA proposal that focused on looking at 5% of gross monthly income, rather than default rates. We believe this could potentially be a better option for credit unions than what was found in the SBREFA proposal but need to further analyze the parameters of this exemption. 

Other Notable Aspects of the Proposal 

Despite these “exemptions”, and the conditions surrounding qualifying for them, we also believe that other credit union loans could be impacted by other parts of this rule. While we are still working through the more than 1300 pages, a few issues have jumped out at us and raised some initial concerns. 

  • The Bureau is proposing to use an all-in measure of the cost of credit, rather than the definition of APR under Regulation Z for proposing a broader definition of lender than Regulation Z uses in defining creditor. 
  • A brand new definition concerning credit - Proposed § 1041.2(3) would define closed-end credit as an extension of credit to a consumer that is not open-end credit under proposed § 1041.2(14). This term is used in various parts of the rule where the Bureau is proposing to tailor provisions specifically for closed-end and open-end credit in light of their different structures and durations. Most notably, proposed § 1041.2(18) would prescribe slightly different methods of calculating the total cost of credit of closed-end and open-end credit. 
  • New disclosures and ACH requirements for non-exempt loans 
  • New reporting requirements for covered loans not meeting an exception to the ability-to-repay requirements 

Going Forward 

As we mentioned, this is only a partial and very initial analysis of this extremely comprehensive rule. The complex nature and length of the rule concerns us, knowing that credit unions have already been subject to thousands of pages of new rules over the past several years. However, we appreciate that the CFPB specifically recognizes that the credit union small dollar products are the model product. Accordingly, we are hopeful that we can work closely with the CFPB to resolve any concerns or ambiguities credit unions have with the proposed rule. 

The CFPB will be accepting comments until September 14, 2016, and we will be seeking widespread feedback from credit unions to share with the Bureau. We will also be working closely with the Consumer Protection Subcommittee and the Advocacy Committee to determine our strategy to protect credit union consumer friendly loans. These groups will also be receiving a briefing about the rule next week. 

Lastly, we appreciate the service of Keith Sultemeier, President & CEO Kinecta Federal Credit Union, a CUNA member who testified on behalf of credit unions at the CFPB Field Hearing. He made some strong arguments against one-size fits all rulemaking, and noted the problems increased regulation could cause for credit unions participating in this market.