If the Consumer Financial Protection Bureau finalizes its proposed rule on small-dollar lending, it will curtail community banks’ ability to make small-dollar loans, wrote Independent Community Bankers of America President/CEO Cam Fine.
Credit Union National Association President/CEO Jim Nussle joined Fine in signing the June 27 letter to CFPB Director Richard Cordray.
“While we believe predatory or abusive lending practices deserve increased scrutiny, credit unions and community banks have no history of bad behavior when offering small dollar loans,” they said. “Quite the opposite, they often offer consumer-friendly short-term credit as a service to consumers. These consumers may have a one-time or unexpected need, such as a new car transmission, medical expense or broken furnace. These loans are not one-size-fits-all; they are often tailored to meet the needs of a specific consumer.”
The CFPB’s proposal would disrupt community bank lending because of its “extremely complex and prescriptive nature,” Fine and Nussle said.
Payday loans typically have an annual percentage rate of around 390 percent or higher, and are most often due within two weeks. Single-payment auto-title loans, which require borrowers to use their vehicle title for collateral, are usually due in 30 days with a typical annual percentage rate of about 300 percent. Most consumers end up rolling over these short-term loans when they come due, which then results in more fees and interest each time. Some borrowers then enter a near constant cycle of borrowing to repay previous borrowing, known as a debt trap.
The bureau’s proposed rule, which was published on June 2, is meant to end debt traps by requiring lenders to do more to ensure consumers have the ability to repay small-dollar loans.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” Cordray said. “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”
The bureau’s attempt to eliminate debt traps includes numerous provisions for banks’ small-dollar loans. The proposed rule would require loans to pass a full-payment test. The borrower would need to be able to afford the full amount of each payment when due and still meet basic living expenses and major financial obligations. For short-term loans and installment loans with a balloon payment, the borrower must be able to afford the total loan amount and all the fees without borrowing again within thirty days.
The proposal permits lenders to offer two longer-term loan options with more flexible underwriting, but only if they pose less risk as defined by the CFPB. A bank can either offer a loan program where interest rates are capped at 28 percent and application fees are no more than $20, or it can offer loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less – excluding origination fees – and a projected default rate of 5 percent or less.
A bank would have to refund the origination fees any year that the default rate exceeds 5 percent. Lenders would be limited as to how many of either type of loan they could make per consumer per year.
The bureau also proposed numerous other standards, many with exemptions that apply in a narrow set of circumstances. (Read the rest here.)
The CFPB estimates that its rule would result in up to a 70 percent reduction in payday loan volumes. Fine and Nussle said the proposal also will limit credit availability from credit unions and community banks.
With its 1,334-page proposed rule on small-dollar lending, the bureau inappropriately lumped installment loans – a staple product of community banks for a century – in with payday loans and vehicle title loans, Fine and Nussle wrote. Installment loans usually have a rate of 100 percent or less, and have significantly different terms, much less than that of payday or auto- title lenders.
Fine and Nussle pointed to comments made by Cordray on keeping community institutions in the small-dollar loan business. “We are not intending to disrupt existing lending by community banks and credit unions that have found efficient and effective ways to make small-dollar loans,” Cordray said at a field hearing on the proposed rule in Kansas City on June 2. “Indeed, we want to encourage other lenders to follow their model.”
“We believe,” Fine and Nussle said, “that the proposed rule not only falls short of that goal but will almost certainly cause credit unions and community banks offering short term, small dollar loans and similar programs to exit the marketplace.”