On March 26, the Consumer Financial Protection Bureau (CFPB or Bureau) announced several proposals to regulate short-term and longer-term consumer loans. According to the Bureau, the proposals will likely have the effect of reducing the market for small-dollar loans by 60 percent, and others believe it will be 75 percent. An outline of the proposals under consideration was prepared prior to the convening of a Small Business Review Panel (under the Small Business Regulatory Enforcement Fairness Act [SBREFA]) to gather feedback from small lenders affected by the proposals. These proposals provide a road map for future rulemaking and a glimpse into the Bureau’s thinking as it relates to short-term and longer-term high-cost consumer loans. The Bureau’s hostility toward this $18 billion industry is quite clear from the proposals.
Authority to Issue the Proposals
Although the Bureau has specific authority to regulate “payday loans,” the proposals are issued under its unfair, deceptive or abusive acts and practices (UDAAP) authority. This raises some interesting questions about the scope and breadth of the proposals, and it is the first time that the Bureau has issued a regulation for an entire industry under its UDAAP authority. Prior to these proposals, the CFPB has relied on UDAAP authority to open investigations, initiate proceedings and enter into a number of broad-ranging consent orders requiring regulated entities to pay restitution and penalties. Until now, they have not issued rules to define or describe acts or practices deemed to be UDAAP, choosing instead to define UDAAP through enforcement. Whether the Bureau has the authority to regulate an entire industry in this manner, as opposed to specific restrictions it finds abusive, is a question that will be hotly debated and possibly litigated at some point.
What Is a Small Business Review Panel?
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the CFPB to organize a Small Business Review Panel when it is working on a rule that could have a substantial impact on a significant number of small entities (a SISNOSE), including small business organizations. Each Small Business Review Panel consists of small entity representatives (SERs) from companies with less than $35 million in revenues and representatives from the CFPB, the Small Business Administration Office of Advocacy and the Office of Management and Budget’s Office of Information and Regulatory Affairs. The panel holds an outreach meeting with the representative groups of SERs (usually 12–25 people) to discuss the potential rules it is considering. The CFPB has released a list of questions on which the Small Business Review Panel will seek input from the SERs.
The panel’s meetings are private, and, typically, there is no transcript of the proceedings. Within 60 days of the meeting, the panel must complete a report on the input it received from the SERs. The report may include any significant alternatives that would minimize the economic impact on small businesses. The panel’s report is published with a proposed rule as the next step in the rulemaking process. More information on the SBREFA process can be found on the CFPB's website and in our prior client alerts.
Which Types of Credit Products Are Covered by the Proposals?
The proposals cover short-term lending products, such as payday loans, deposit advance products, vehicle title loans, high-cost installment loans and open-end lines of credit. The Bureau’s proposals also cover longer-term loans, such as vehicle title loans, high-cost installment loans and open-end credit products of more than 45 days where the lender has access to repayment from the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in “military” annual percentage rate (APR) is more than 36 percent.
The Bureau has issued two sets of proposals by which lenders would be required to either engage in “preventive” measures at the outset of each loan or provide “protective” measures throughout the lending process.
The proposals under consideration would cover short-term credit products that require consumers to pay back the loan in full within 45 days, such as payday loans, deposit advance products, certain open-end lines of credit and some vehicle loans. Specifically, all lenders making covered short-term loans would have to adhere to either “preventive” or “protective” requirements.
The CFPB’s proposals would also apply to longer-term credit products of more than 45 days where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in “military APR” is more than 36 percent (including add-on charges). This includes longer-term vehicle title loans, certain installment loans and open-end lines of credit with account access or a security interest in a vehicle.
Similar to the requirements for short-term loans, the Bureau’s proposals require that lenders either engage “preventive” measures at the onset of the loan or provide “protective” measures throughout the lending process.
In addition, the Bureau’s proposals contain measures aimed at debt collection for small-dollar loans, including collection notification requirements and limits on unsuccessful attempts to make authorized payment withdrawals from consumer accounts.
The Future Timeline
The SBREFA panel is scheduled to meet on April 29, 2015. It is required to provide its report within 60 days of the meeting. We expect a proposed regulation to be issued sometime this fall, with an extensive comment period of at least 180 days. The final rule would likely not be issued until fall 2016 and would have a long implementation date, perhaps as long as a year. Therefore, the final rule is not likely to become effective until sometime in 2017.
Pepper Points: Based on how the Bureau dealt with previous SBREFA panels during the TILA-RESPA consolidation rule, mortgage servicing and loan origination standards, it is possible that a Notice of Proposed Rulemaking will follow shortly after the Small Business Review Panel is completed.
The proposals raise many troubling issues, such as the following:
- Does the Bureau have the authority to set a de facto national usury rate by making all loans in excess of the 36 percent military APR abusive when it was specifically prohibited by the Dodd-Frank Act from regulating rates?
- How the monitoring of the number of loans will be accomplished by either a national database or the use of credit reporting agencies
- How the ability to repay will be implemented in a way that makes underwriting loans affordable given their small size
- The proposal’s impact on traditional bank products, because the all-in military APR can bring many bank products, such as subprime auto loans, subprime instalment loans and some credit card products, as well as some marketplace lending products, such as those offered by Lending Club and Prosper, within the proposals’ coverage
- Congressional reaction to the substantial reduction in the amount of credit available to consumers — particularly those most in need, who may find obtaining credit difficult — will no doubt be a factor in the future of the proposals. We expect congressional hearings on these proposals in the very near future.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.