Small Dollar Lending Guidelines from the CFPB

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This post originally appeared the Illinois Asset Building Group Blog. 

The Consumer Financial Protection Bureau (CFPB)  released “Examination Procedures: Short-term, Small Dollar Lending,” (pdf) which are guidelines for examining small dollar loan products. The guidelines are written for financial institution examiners, but offer insight into the CFPB’s expectations for five key areas affecting small dollar lending:

  1. Marketing
  2. Application and Origination of Loans
  3. Payment and Processing and Sustained Use
  4. Collection, Accounts in Default, and Consumer Reporting
  5. Third-Party Relationships

Publication of the guidelines accompanied a January 19, 2012 CFPB press release announcing the agency’s first-ever field hearing on the payday lending market. In that release, newly appointed CFPB Director Richard Cordray stated that the CFPB “will be giving payday lenders much more attention.”

The release states that the CFPB is authorized to regulate small dollar loans made by all institutions, including payday lenders. It says:

“The CFPB will be implementing its payday lending supervision program based on its assessment of risks to consumers, including consideration of factors such as the volume of business and the extent of state oversight. The CFPB also will be coordinating with federal and state partners to maximize supervisory capability and minimize regulatory burden. If a violation of a federal consumer financial law has occurred, the CFPB will determine whether supervisory or enforcement actions are appropriate.”

In Illinois, a state law passed in 2011 offers consumers certain protections against payday lenders. The law prohibits unlimited rollovers and requires loans are based on a borrower’s ability to pay. Even with these reforms, payday loans still are expensive. The APR on a payday loan can run as high as 400%.

Illinois consumers who can’t pay off a payday loan when it’s due are entitled to enter into an interest-free repayment plan after more than 35 days. It is against the law for lenders to issue a new payday loan if it would indebt a borrower for more than 45 days in a row.

The CFPB guidelines offer a comprehensive overview of all laws and regulations affecting small dollar lending. They also hint at practices within each topic the CFPB deems particularly important to examiners:

  • Marketing: Fair marketing methods, especially with respect to the use and compensation of lead generators.
  • Application and Origination of Loans: Electronic Fund Transfer (EFT) and Automated Clearing House (ACH) authorizations, fair and straightforward disclosure of loan terms, repayment terms, and consumers’ rights to dispute.
  • Payment Processing and Sustained Use: Traditional compliance with Regulations B and Z, with an eye toward lenders’ use of “rollovers” and other potentially unfair or deceptive practices that may encourage debt dependence. Regulation B prohibits lenders from discriminating against credit applicants, establishes guidelines for gathering and evaluating credit information, and requires written notification when credit is denied.Regulation Z requires uniform methods for disclosing credit terms and costs.
  • Collections, Accounts in Default, and Consumer Reporting: Compliance with existing Fair Debt Collection Practices Act, and use of 
”deceptive means” to collect debts.
  • Third-Party Relationships: Adherence to Gramm-Leach-Bliley privacy safeguards in place with both affiliate and third-party vendor agreements.

The Illinois Asset Building Group is currently developing a small dollar loan toolkit. The toolkit will offer guidelines as well as a profitability model, enabling mainstream financial institutions to add small dollar loans to their portfolios.

Learn more about the Illinois Asset Building Group, of which Chicago Appleseed is a partner.