After Arbitration, What Now for the Small Dollar Rule?

Following the publication of the Consumer Financial Protection Bureau’s (CFPB) final rule on arbitration, all eyes are turned toward another piece of unfinished business at the Bureau- the proposed rule on payday, vehicle title, and certain high cost installment loans. With the CFPB’s director, Richard Cordray, likely on his way to compete for the Democratic nomination for governor of Ohio, the proposed small dollar rule stands as potentially his last hurrah at the Bureau before taking the campaign trail. Director Cordray has already shown that even threats from Congress will not stop his agency agenda.

The proposed small dollar rule seeks to regulate certain short-term loans (less than 45 days) and loans greater than 45 days by applying an “ability-to-repay” standard. Announced as a way to eliminate the debt traps often proliferated by payday lending, the proposed rule quickly came under fire as the data did not add up. An independent study by Nonprime101 found that the CFPB’s 36% APR trigger for regulatory scrutiny was a poor standard-bearer to connote consumer harm. Their study showed that defaults did not vary much when APRs were more than double the CFPB’s 36% standard. The possible harm to the industry is equally well documented.

The Small Business Advisory Review Panel determined that the proposed small dollar rule would potentially cost lenders thousands of dollars in extra technology to comply and lead to a more than 50% decline in short-term loan volume, principal, and fees under the “ability-to-repay” standard. The Small Business Administration encouraged changes to the proposed rule because of the burden it would impose on small businesses. An economic impact study estimated an 82% drop on average in revenues for affected lenders. The Bureau received more than 1 million comments from borrowers urging the agency to reconsider its rule.

The practices of many payday lenders are unsustainable, and protections are needed to limit endless cycles of debt associated with that product. However, the small dollar rule proposed by the CFPB would capture more than bad actors and needlessly eliminate responsible small dollar lenders.