ICBA Policy Resolution: CFPB Small Dollar Loan Rule

Position

  • ICBA strongly recommends that any regulatory action should clarify and enhance the ability of banks of all charter types and sizes to offer small-dollar loans tailored for the consumers with the greatest need.
  • ICBA strongly urges regulators to encourage community banks to offer responsible small-dollar loans by:
    • promoting community banks as model small-dollar lenders;
    • providing a presumption of CRA credit for originating small-dollar loans to encourage community banks to develop and/or expand prudently underwritten small-dollar loans;
    • easing fair lending examination scrutiny and establishing consistent and transparent fair lending examination standards for small-dollar lending;
    • clearly communicating support for innovation by promoting partnerships between community banks and fintech companies and providing flexible consideration for solutions created by these partnerships;
    • allowing flexibility for banks to develop and manage their own reasonable underwriting guidelines; and 
    • providing banks the flexibility to offer small-dollar credit products that exceed 36 APR.
  • ICBA strongly supports the exemption contained in the CFPB’s final rule on payday, vehicle title and certain high-cost installment loans, commonly known as small-dollar loans. Any lender that makes 2,500 or fewer covered short-term or balloon-payment small-dollar loans per year and derives no more than 10 percent of its revenue from such loans is excluded from the rule’s full-payment test or the principal-payoff option.

Background

Having strong ties to the customers and communities they serve well positions community banks to provide small-dollar loan services to customers with the greatest need. By their nature, community banks are in the business of serving their customers. Community banks work with customers to structure loans that ensure the customer is able to access safe and sustainable financing. Each community bank that makes small-dollar loans underwrites these loans in a way that works for them and their customers. The community bank business model does not include rolling over loans to generate fee income or steering consumers to unaffordable loan products.

Generally, community banks offer personal loans as a service to customers who have a financial history upon which to base a credit decision. These products are offered as a customer accommodation and are not typically advertised. The nature of these loans renders standardized underwriting and credit decision models ineffective or counterproductive to meeting the short-term financial needs of customers. Additionally, these loans are rarely profitable for community banks due to the small-dollar amounts and the associated overhead and servicing costs.

On October 5, 2017, the CFPB issued a final rule covering payday, vehicle title, and similar loans designed to curb abuses or “debt traps” such as repeat short-term borrowing, default, vehicle seizure, penalty fees, and closure of bank accounts. The rule requires lenders to determine whether a consumer has the ability to repay a loan before extending credit. The rule exempts thousands of community banks from the onerous full-payment test or the principal- payoff option, consistent with ICBA’s recommendation. Any lender that makes 2,500 or fewer covered short-term or balloon-payment small-dollar loans per year and derives no more than 10 percent of its revenue from such loans is excluded from these requirements.

On January 17, 2018, the CFPB announced its intent to engage in a new rulemaking to reconsider the final rule, extending the opportunity to further improve the rule for community bank lenders. 

Since the release of the rule, other agencies have signaled their support for banks involvement in small-dollar lending. On May 23, 2018, the OCC issued its core principles, policies, and practices for short-term, small-dollar installment lending to encourage banks to offer such loans responsibly to help meet the credit needs of consumers. On November 14, 2018, the FDIC issued a request for information soliciting input on steps it can take to enable and encourage FDIC-supervised institutions to offer small-dollar credit products that are structured prudently and responsibly.

On February 6, 2019, the CFPB announced its proposal to rescind certain provisions of its rule. Specifically, the CFPB proposes to drop the rule’s requirement that lenders make certain underwriting determinations before issuing small-dollar loans, which the Bureau said would reduce access to credit.

Staff Contacts: Rhonda Thomas-Whitley

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