CFPB Hits Payday Lenders with Small Dollar Rule, Continues Disregard for Tribal Sovereignty
Earlier today the Consumer Financial Protection Bureau (CFPB) announced its long-awaited rule on “Payday, Vehicle Title, and Certain High-Cost Installment Loans.” The new rule, informally referred to as the Small Dollar Rule, is expected to take effect 21 months from the date of publication in the Federal Register. Absent from today’s rule is sweeping regulation regarding small dollar installment loans. But statements by the agency regarding tribal sovereignty and the application of state law to tribal lending entities discredits the agency’s “common sense” approach to rulemaking and enforcement.
In releasing the agency’s latest consumer rule, CFPB Director Richard Cordray said:
“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country. Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”
The Small Dollar Rule announced this morning is a scaled down version of the Bureau’s original proposed rule from last year and mostly addresses payday and vehicle title loans. The proposed version of the rule garnered over 1 million comments from the public and the lending industry. Hoping to stem the cycles of debt that can befall payday borrowers, the CFPB’s Small Dollar Rule includes 3 key components – a full payment test, a principal payoff option, and a debit attempt cutoff. The rule also waives the full payment test and principal payoff option for less risky loans originated by credit unions and community banks if done in small volumes.
The full payment test applies an “ability to repay” standard for all payday and vehicle title loans. Lenders will be required to determine if a borrower can make the full payment on their loan (or most expensive payment if it is a balloon loan) and meet basic living expenses for the next 30 days before issuing a loan. This means the lender will need to verify the borrower’s income, identify major financial obligations, and estimate basic living expenses for a one-month period. The test requires a 30 day cooling off period after a borrower’s third covered loan in quick succession.
To avoid the full payment test, lenders can also structure the loan in a way in which the borrower can more gradually repay the credit, so long as the loan is for less than $500. The principal payoff option will be restricted to less risky loans with constraints based on previous indebtedness by the borrower. This option allows for two renewals of the loan as the borrower pays down the debt. Lenders electing to utilize the full payment test or the principal payoff option will be required to report loan data regularly to the CFPB.
The final major component of the rule is a penalty fee prevention measure that limits lenders to two unsuccessful account withdrawal attempts from the borrower for loans above 36% APR. Further debit attempts will require reauthorization by the borrower. The lender must provide written notice to the borrower of the timing, amount, and channel of the upcoming transfer.
CFPB’s rule, for the most part, does not impact small dollar installment lending. For example, the ability-to-repay and principal payoff options do not apply to traditional installment loans. The agency noted that it is “conducting further study to consider how the market for longer-term loans is evolving and the best ways to address concerns about existing and potential practices.” The account withdrawal restrictions will apply to installment loans with annual percentage rates greater than 36%, however.
Despite the rule having limited effect on installment lenders in general, the CFPB continued its attack on tribal sovereignty through expressions of its legal authority and dismissal of concerns during the tribal consultation process. Citing the controversial Ninth Circuit case involving the Bureau’s authority to issue civil investigative demands to tribal entities, the CFPB argued tribes were “misreading” the Dodd-Frank Act and Federal law regarding statutes of general applicability. That case was recently appealed to the U.S. Supreme Court, and NAFSA supplied a brief to the Supreme Court’s justices last month arguing against the circuit court’s interpretation.
The CFPB’s discouraging comments about tribal sovereignty and its application to tribal lending entities are more troubled statements by an agency intent on ignoring the Federal government’s trust responsibility to tribes and a modern Federal Indian policy that has been built around political and economic self-determination. The Bureau’s assertions that tribal sovereignty cannot be considered in the application of state consumer laws disregards centuries of Supreme Court precedent and federal, tribal, and state sovereign relations. Repeated statements by the CFPB in its rulemaking, consent orders, and litigation stand in direct conflict not only with the mission of NAFSA, but the sovereign status of 567 federally-recognized tribes.