The Consumer Financial Protection Bureau (CFPB) released a proposed rule relating to small-dollar lending on June 2, 2016. There was much anticipation of this ruling, as the CFPB had been considering this ruling for almost a year. Initially, comments related to the proposed rule are due to the CFPB by mid-September, and there may be a considerable amount of time after mid-September before the final rule is defined. Then, the final rule might not be effective until over a year after published in the Federal Register. With that in mind, the short term lending industry may have some time before it likely undergoes another shift.
Many states have enacted laws, in the past few years, regulating the activities of short-term lenders. The short term lending industry has changed its practices and altered its product sets to adjust to these laws. Given the shifts, these states have been proponents of the CFPB’s ruling, to attempt to protect consumers from predatory lending. When the final rule is set by the CFPB, the industry will be challenged to shift again.
The initial proposed ruling issued by the CFPB* covers short-term and longer-term lending. Short-term lending constitutes consumer loans with terms of less than or equal to 45 days, and longer-term lending relates to consumer loans with terms of greater than 45 days with interest rates in excess of 36% that are secured either by a car, by giving access to the consumer’s bank account, or giving authority to exact a payroll deduction. Generally, the rule covers payday loans, title loans, and other small-dollar advances.[i]
There are advocates and opponents of the recent proposed ruling issued by the CFPB. Advocates stand behind the position of CFPB Director Cordray, who stated, “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford…” “…our proposal would prevent lenders from succeeding by setting up borrowers to fail.” Opponents to the ruling cite that the regulation will eliminate the ability of low-income consumers to obtain critically-needed credit. Other opponents think the ruling is not stringent enough, therefore not yielding an opportunity for mainstream banks and credit unions to enter the industry profitably.
Director of the small-dollar loans project at Pew Charitable Trusts, Nick Bourke, contended that competitors would not likely enter the short-term lending market under those terms. “The rule also lacks the clear, simple guidance that would pave the way for better alternatives from banks and credit unions. Banks were preparing to offer loans at prices six times lower than payday lenders, but without the regulatory certainty of a clear product safety standard the CFPB’s proposal will stop that pro-consumer innovation in its tracks. As a result, the CFPB is missing an historic opportunity to save millions of borrowers billions of dollars.”[ii]
On June 9, 2016, a week after the initial ruling provided by the CFPB, the House approved a delay, so there is some degree of uncertainty with respect to the timetable. Once the ruling is final, the short-term lending industry will need to make adjustments, and given its past, it will likely do so successfully. The likely adjustments will involve restructuring loans by potentially increasing terms, limiting the number of outstanding loans for a given consumer, and increasing the rigor involved in assessing the consumer’s ability to pay. One consideration that will not result in an adjustment is the dependency on alternative data in the decisioning process.
Alternative data provides lenders with the ability to source information related to consumers that is not represented on the databases of the three national credit reporting agencies. Consumers that seek short-term lending products are more likely not to have a presence with Equifax, TransUnion, and Experian. In assessing the affordability of short-term loans, specifically the consumer’s ability to repay, lenders will continue to leverage various sources of alternative data within their respective decisioning strategies.