CFPB headquarters in Washington, D.C. (Source: Shutterstock)
On Tuesday, the CFPB rescinded the mandatory underwriting provisions of its 2017 small dollar lending rule. The decision, supported by credit union groups, is considered by consumer protection organizations as a move that could leave millions of Americans at high risk of becoming trapped in a cycle of debt.
According to a statement from the CFPB, after re-evaluating the rule, the agency determined the legal and evidentiary bases of the underwriting provisions to be insufficient. In 2017, then-CFPB Director Richard Cordray issued strict rules governing payday lending, contending that many lenders make predatory loans that lock borrowers into a cycle of debt.
That rule provided a safe harbor for loans modeled after the NCUA's Payday Alternative Loan program.
The CFPB had delayed the underwriting provisions of the strict payday lending rule that was issued by former Director Cordray, an Obama Administration appointee. When the Trump Administration took office and Cordray resigned, then-Acting Director Mick Mulvaney and subsequently Director Kathy Kraninger said they believed the rule was too restrictive.
Kathy Kraninger, director of the Consumer Financial Protection Bureau. Photographer: Andrew Harrer/Bloomberg In a statement, CFPB Director Kraninger defended the decision. "A vibrant and well-functioning financial marketplace is important for consumers to access the financial products they need and ensure they are protected. Our actions today ensure that consumers have access to credit from a competitive marketplace, have the best information to make informed financial decisions and retain key protections without hindering that access," Kraninger said.
In an email statement, NAFCU President/CEO Dan Berger said, "NAFCU supports the CFPB's removal of problematic ability to repay underwriting requirements from its final small dollar loan rule. Still, more must be done to ensure consumers have access to affordable loan options."
Alex Horowitz, senior research officer of the consumer finance project with The Pew Charitable Trusts, a nonpartisan public policy analytics group, called Tuesday's decision "a grave error that leaves the 12 million Americans who use payday loans every year exposed to unaffordable payments at annual interest rates that average nearly 400%."
He continued, "Despite the CFPB's abandonment of these critical consumer safeguards, banks, credit unions and responsible lenders should reject balloon payments and instead offer consumers installment loans on affordable terms."
Berger also said, "We firmly believe that community lenders, such as credit unions, must be allowed to serve consumers while the predatory practices of certain payday lenders must be stopped. NAFCU will continue to urge the CFPB to exclude all future payday alternative loans made by credit unions from is rul-emaking."
Last November, CU Times reported that the CFPB was in the process of reviewing roughly 190,000 comments on possible changes to the underwriting provisions.
At the time, the bureau had planned to issue the final rule by April 2020. By late March of this year the bureau had announced a number of rule-making and operational delays due to the coronavirus.
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Michael Ogden
Editor-in-Chief at CU Times. To connect, email at [email protected]. As Editor-in-Chief of CU Times since 2016, Michael Ogden has led the editorial team in all aspects of content strategy and execution, including the creation of the publication’s exclusive and proprietary research database of the credit union industry’s economic landscape. Under Michael’s leadership, CU Times has successfully shifted to an all-digital editorial product with new focuses on the payments, fraud, lending and regulatory beats. Most recently, he introduced a data-focused editorial product for subscribers that breaks down credit union issues into hard data, allowing for a deeper and more factual narrative for readers. In 2024, he launched the "Shared Accounts With CU Times" podcast, which offers a fresh, inside-the-newsroom perspective through interviews with leaders from the credit union industry and the regulatory world. He dives into pressing credit union issues, while revealing the personalities working behind-the-scenes to push the credit union world forward. His background includes years as a radio and TV anchor/reporter and a public relations and digital/social media manager, where he covered the food and music industries, as well as cooperatives and credit unions. Over the years, he has launched numerous exclusive video and podcast series, including a successful series of interactive backstage interviews with musicians at music festivals, showcasing his social media and live streaming production skills.
