The Consumer Financial Protection Bureau (CFPB) issued a final rule on July 7, 2020 repealing the mandatory repayment capacity of underwriting provisions on small dollar loans that it had previously announced under 12 CFR § 1041 (the final rule ). The final rule left the payment provisions intact.
The CFPB first finalized regulations governing small loans – including vehicle title and payday loans – in November 2017 under the Dodd Frank Act (the rule of 2017). The 2017 Rule imposed underwriting rules and also established requirements and limitations on attempts to withdraw payments on loans from customer accounts.
The 2017 rule called an “unfair and abusive practice” for a lender to grant small dollar loans without “reasonably determining” that consumers had the capacity to repay the loan and imposed a series of underwriting and underwriting requirements. exemptions to prevent this from happening. It also required lenders to provide information to “registered information systems” and required certain record-keeping practices.
While the payment provisions of the 2017 Rule remain intact under the Final Rule, lenders are released from the mandatory underwriting provisions. The CFPB removed these restrictions in response to industry concerns that it would effectively eliminate most short- and long-term block repayments and reduce consumers’ access to credit. The Bureau also noted in its publications that, contrary to the previous CFPB announcement and comments from consumer groups, it found little evidence that the compulsory subscription provisions had much effect on consumer protection. .
The final rule will likely make it more acceptable for some financial institutions to engage in short-term loans. It dramatically reduces the threat that an institution could be held liable for committing an unfair and deceptive practice by failing to examine a consumer’s ability to repay a loan before taking out a short-term loan. Financial institutions that reduced or eliminated small loans after the implementation of the 2017 Rule may now find it beneficial to consider revitalizing their small loan programs.