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Financial Services Law Insights and Observations

ABA and Regional Members Lend Perspective on CFPB's Proposed Rule on Payday, Title, and Certain Other Installment Loans

Banking Consumer Finance CFPB Dodd-Frank Community Banks Miscellany Agency Rule-Making & Guidance

Consumer Finance

On October 7, the American Bankers Association (ABA) sent a comment letter to the CFPB regarding the agency’s proposed rule on payday, title, and certain other installment loans. Describing the proposal as “exceedingly and unnecessarily complex,” the ABA argues that the proposed rule imposes significant restrictions on the small-dollar credit industry by limiting financial institutions’ ability to make small-dollar loans to consumers in need of such credit. In addition to asserting that the proposal reflects an over-reach of the CFPB’s statutory authority to regulate unfair, deceptive or abusive acts or practices, the comment letter contends that, if adopted, the proposed rule would, among other things, (i) “stifle innovation in consumer lending, reduce consumer choice, and directly harm the very borrowers [it] was intended to protect”; (ii) impose an unlawful cap on interest rates; (iii) regulate insurance, thereby violating the Dodd-Frank Act; and (iv) levy substantial costs on consumers and lenders. Furthermore, the comment letter includes several testimonials to illustrate how receiving short-term credit helped consumers establish credit and overcome arduous financial conditions. In an effort to safeguard affordable financial services, the ABA urged the CFPB to “protect the ability of community banks to continue to meet small dollar lending needs.” In particular, the ABA sought to exempt entities that make no more than 2,500 loans subject to the proposed rule in the course of a year “if those loans comprise no more than 10% of the lender’s gross annual revenue.”

In addition to the ABA’s comment letter, various regional ABA members, such as individual banks and state bankers associations, sent a letter to CFPB Director Richard Cordray expressing concern about the “substantial barriers and costs” the proposed rule would impose if adopted. ABA members called on the CFPB to “restore its previously proposed ‘5 percent payment-to-income ratio’ alternative compliance option” so that banks may maintain their ability to offer small-dollar credit.