Removing Barriers Blog

House Financial Services Democrats Release State Small Dollar Lending Report
Posted June 18, 2016 by Chandler Schuette

Following up on CFPB’s recent small dollar lending rule, the House Financial Services Committee Democratic staff released a report reviewing the activities of small dollar lenders in five states, California, Colorado, Florida, Ohio and Texas. In Skirting the Law: Five Tactics Payday Lenders Use to Evade State Consumer Protection Laws, staff assert that small dollar lenders circumvent state regulations and put consumers at risk. 

As we indicated previously, small dollar lending laws and regulations vary widely in the states. According to the report, the states take one of the three following approaches to regulating the small dollar lending industry: (1) enable without restriction, (2) control through some set of product or servicing limitations, or (3) prohibits the practice entirely. A breakdown of each state’s small dollar lending requirements is included the report’s appendix. 

The report describes a variety of tactics lenders use to get around state small dollar lending laws including:  

  • Disguising themselves as a completely different kind of financial service provider; 
  • Establishing partnerships with Native American Tribes to claim tribal sovereign immunity; 
  • Offering cash advances under the mortgage lending statute; 
  • Using online lending to broker payday loans to consumers, without first obtaining a state business license or complying with state regulations on the loan’s terms; and 
  • Allowing consumers to take out multiple loans during the same pay period to avoid cool off periods.

Staff further note that CFPB’s rule is “a step in the right direction” and that the Dodd-Frank Act gives the CFPB authority to regulate the small dollar lending industry.  In the report, Staff suggest the rule be evaluated using the following five metrics:

  • Whether or not the definition of covered persons and covered products is broad enough to capture the various business designations or modified product features that lenders have previously used to skirt compliance with consumer protections; 
  • Whether the Bureau’s prohibitions are broad enough to cover both lenders and affiliated credit service organizations or credit access businesses; 
  • Whether the rule requires a meaningful cooling-off time between a consumer’s loans, in order to ensure that the debt concern raised by frequent rollovers is adequately addressed; 
  • Whether the rule provides a definition for covered entities that explicitly includes tribal-owned operators; and 
  • Whether funding for the CFPB’s enforcement efforts should be increased in order to allow the agency to effectively monitor the activities of online lenders and adequately enforce consumer protection laws. 

CUNA is reviewing this proposed rule, and appreciated efforts to curtail predatory pension practices. We will continue to monitor this at the state level.