House Committee Examines Need for Small-Dollar Lending

On Thursday, February, 11, 2016, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled: “Short-term, Small-dollar Lending: The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty.” Members of the Committee heard testimony from two panels of witnesses including CFPB Acting Deputy Director David Silberman, who received most of the questions. CBA sent a letter for the record, outlining the value of Deposit Advance Products (DAP), which effectively have been regulated out of business following 2013 guidance by the FDIC and OCC. CBA outlined the differences between DAP and other forms of short-term lending like payday, auto, and title loans and communicated its desire to work with the Committee and regulators to find practical and viable solutions for small-dollar credit products.

 

Mr. Silberman provided an overview of the Bureau’s 2013 White Paper on Payday Lending and Deposit Advance Products, stating, “The White Paper showed that making these short-term loans to low and moderate income consumers without any assessment of the consumer’s ability to repay put many consumers at risk of turning short-term, emergency loans into a long-term, expensive debt burden. Additionally, the Bureau found that payday loans and the deposit advance loans offered by a small but growing number of depository institutions were generally similar in structure, purpose, and the consumer protection concerns they raise.” He stated the proposed rule under consideration would require an institution to make a good faith effort to reasonably determine whether the consumer could repay the loan. This would include determining whether a borrower could meet major financial obligations and basic living expenses without the need to re-borrow in short order.  As an alternative, the proposal also contains protective provisions which would allow lenders to extend short-term loans without the ability to repay so long as the loan satisfies certain screening requirements and to ensure that the short-term loan does not become a long-term loan.

 

Rep. Denny Heck (D-WA) asked about alternatives to payday lending, including DAP, referencing CFPB Director Richard Cordray’s recent comments in which he encouraged banks and credit unions to make short-term loans.  Rep. Heck asked whether the CFPB has been coordinating with FDIC and OCC with regard to the Bureau’s small-dollar lending rules, and what changes, if any, CFPB contemplates in their approach to payday alternatives like DAP.  Mr. Silberman said the Bureau has had conversations with other regulators on payday alternative loans and said the proposal they are considering would allow any institution to make payday alternative loans within the parameters already set out by their prudential regulators.

 

Rep. David Scott (D-GA) asked why the CFPB is trying to destroy small-dollar loans when 75 percent of Americans are living paycheck-to-paycheck and need access to credit in times of an emergency. Mr. Silberman responded that there is a need to have underwriting standards on small-dollar lending products to ensure the consumer has an ability to repay. Without specifically defining what the “ability to repay” standard would require, Mr. Silberman did reference “traditional underwriting standards,” indicating the CFPB’s impending rule could prescribe such stringent standards as required for traditional long-term loans. Congressman Frank Guinta (R-NH) asked whether the CFPB would establish an APR limit under its impending small-dollar lending rule, raising concerns about a lack of options for those who are unbanked and underbanked.  In response, Mr. Silberman said the CFPB would not establish an APR limit for any small-dollar lending product.