CSBS Issue Briefings - August 2020

Small Dollar Lending

CSBS Official Public Position

State regulators believe it is essential for community banks to be able to serve as sources of small dollar credit in the communities they serve. In the rulemaking process, state regulators have emphasized that federal rulemaking sets a floor for federal consumer protections in the small dollar lending market and does not prevent states from implementing laws that are stricter than the CFPB’s req uirements.

Summary

In July 2020, the CFPB issued a final rule rescinding the ability-to-repay provisions in its final payday/auto title/high-rate installment loan rule (Payday Rule). The initial version of the rule — drafted during the previous administration — had been finalized in 2017 but never went into effect because it had been stayed by a court order. When implemented, the rule will impose restrictions on the ability of bank or nonbank lenders to make repeated attempts to debit customer accounts for payment on covered small dollar loans. The CFPB’s final rule includes an exemption that would allow community banks to provide up to 2,500 “accommodation” style small dollar loans per year to their customers without having to comply with the rule’s requirement s. This exemption, combined with recent guidance issued by the banking agencies, should encourage banks to offer small dollar loans to their customers. As the CFPB worked to re-assess the small dollar rulemaking over the past several years, the federal banking agencies also took steps to alter their policies regarding bank small dollar lending. In 2017, the OCC rescinded their 2013 Deposit Advance Guidance in 2017 and the FDIC took similar action this spring. In May, the agencies for the first time issued joint guidance regarding their expectations for small-dollar lending. The guidance encourages banks to make “responsible small - dollar loans” and outlines high level risk management practices and controls that banks should put in place as they implement small dollar lending programs. Outside of small amounts of “accommodation” style lending, banks have not been particularly active in small dollar lending in recent years, largely due to regulatory uncertainty. Without access to small dollar loans at banks, consumers are often left with limited and expensive choices as they seek small dollar credit. State regulators believe that a robust market for consumer lending depends upon viable market alternatives. Bank participation in small dollar increases competition in the market and should lead to lower costs for consumers. Why it Matters to State Regulators

Talking Points

• Achieving consensus across the states on the topic of payday lending is difficult because legislatures in 15 states and the District of Columbia have set usury rates that do not permit payday lending; however, in 35 other states, the traditional payday loan product is available to consumers subject to stringent licensing and regulatory requirements. These state differences are integral to the fabric of our regulatory system.

FOR STATE REGULATOR USE ONLY