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Financial Services Law Insights and Observations

Senators seek protection against predatory lending practices during Covid-19 pandemic

Federal Issues U.S. Senate Predatory Lending Consumer Finance FDIC Federal Reserve OCC CFPB NCUA Covid-19

Federal Issues

On April 6, Senators Richard Durbin (D-IL) and Sherrod Brown (D-OH) sent a letter to the federal financial regulators (Federal Reserve Board, FDIC, OCC, CFPB, and NCUA), asking them to issue guidance and lending principles to help protect small businesses and consumers affected by Covid-19 from predatory lending practices. As previously covered by InfoBytes, last month, the agencies issued a joint statement recognizing that small-dollar lending can play an important role in meeting credit needs, and recommending that financial institutions offer loans “through a variety of structures including open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.” The Senators expressed concerns, however, that without clear guidance banning predatory lending practices, consumers “are at risk of being exploited because of a financial hardship created through no fault of their own.” The Senators propose several measures intended to ensure that loan products include strong consumer protections. These include: (i) capping interest rates—preferably at a maximum rate of 36 percent—for small dollar short-term loan products; (ii) ensuring that borrowers are able to meet clear ability-to-repay standards; (iii) “prohibit[ing] loan products with unpaid principal from automatically enrolling the borrower in a new loan product without their knowledge and consent”; and (iv) “eliminat[ing] the potential for one-time lump sum payments or balloon payments.”

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