Yesterday, I had the opportunity to participate as an advisor to a small entity representative (“SER”) at the small business review panel on payday, title and installment loans. (Jeremy Rosenblum has four posts—here, here, here and here—that analyze the rules being reviewed in detail.) The meeting was held in the Treasury Building’s Cash Room, an impressive, marble-walled room where President Grant held his inaugural reception. Present at the meeting were 27 SERs, 27 SER advisors and roughly 35 people from the CFPB, the Small Business Administration and the Office of Management and Budget. The SERs included online lenders, brick-and-mortar payday and title lenders, tribal lenders, credit unions and small banks.
Director Cordray opened the meeting by explaining that he was happy that Congress had given the CFPB the opportunity to hear from small businesses. He then described the rules at a high level, emphasized the need to ensure continued access to credit by consumers and acknowledged the importance of the meeting. A few moments after he spoke, Dir. Cordray left the room for the day.
The vast majority of the SERs stated that the contemplated rules, if adopted, would put them out of business. Many pointed to state laws (such as the one adopted in Colorado) that were less burdensome than the rule contemplated by the CFPB and that nevertheless put the industry out of business. (One of the most dramatic moments came at the end of the meeting when a SER asked every SER who believed that the rules would force him or her to stop lending to stand up. All but a couple of the SERs stood.)
A number of the SERs emphasized that the rules would impose underwriting and origination costs on small loans (due to the income and expense verification requirements) that would eclipse any interest revenues that might be derived from such loans. They criticized the CFPB for suggesting in its proposal that income verification and ability to repay analysis could be accomplished with credit reports that cost only a few dollars to pull. This analysis ignores the fact that lenders do not make a loan to every applicant. A lender may need to evaluate 10 credit applications (and pull bureaus in connection with the underwriting of these ten applications) to originate a single loan. At this ratio, the underwriting and credit report costs faced by such a lender on a single loan are 10 times higher than what the CFPB has forecasted.
SERs explained that the NCUA’s payday alternative program (capping rates at 28% and allowing a $20 fee), which the CFPB has proposed as a model for installment loans, would be a non-starter for their customers. First, SERs pointed out that credit unions have a significant tax and funding advantage that lower their overall business costs. Second, SERs explained that their cost of funds, acquisition costs and default costs on the installment loans they make would far exceed the minimal revenues associated with such loans. (One SER explained that it had hired a consulting firm to look the expense structure of eight small lenders should the rules be adopted. The consulting firm found that 86% of these lenders’ branches would become unprofitable and the profitability of the remaining 14% would decrease by two-thirds.)
A number of SERs took the CFPB to task for not having any research to support the various substantive provisions of the rule (such as the 60-day cool period); failing to contemplate how the rule would interact with state laws; not interviewing consumers or considering customer satisfaction with the loan products being regulated; assuming that lenders presently perform no analysis of consumers’ ability to repay and no underwriting; and generally being arbitrary and capricious in setting loan amount, APR and loan length requirements.
Those from the CFPB involved in the rulemaking answered some questions posed by SERs. In responding to these questions, the CFPB provided the following insights: the CFPB may not require a lender to provide three-day advance notice for payments made over the telephone; the rulemaking staff plans to spend more time in the coming weeks analyzing the rule’s interaction with state laws; it is likely that pulling a traditional Big Three bureau would be sufficient to verify a consumer’s major financial obligations; the CFPB would provide some guidance on what constitutes a “reasonable” ability to repay analysis but that it may conclude, in a post hoc analysis during an exam, that a lender’s analysis was unreasonable; and there may be an ESIGN Act issue with providing advance notice of an upcoming debit if the notice is provided by text message without proper consent.
A few SERs proposed some alternatives to the CFPB’s approaches. One suggested that income verification be done only on the small minority of consumers who have irregular or unusual forms of income. Another suggested modeling the installment loan rules on California’s Pilot Program for Affordable Credit Building Opportunities Program (see Cal. Fin. Code sec. 22365 et seq.), which permits a 36% per annum interest rate and an origination fee of up to the lesser of 7% or $90. Other suggestions included scaling back furnishing requirements from “all” credit bureaus to one or a handful of bureaus, eliminating the 60-day cooling off period between loans and allowing future loans (without a change in circumstances) if prior loans were paid in full. One SER suggested that the CFPB simply abandon its efforts to regulate the industry given current state regulations.
Overall, I think the SERs did a good job of explaining how the rule would impact their businesses, especially given the limited amount of time they had to prepare and the complex nature of the rules. It was clear that most of the SERs had spent weeks preparing for the meeting by gathering internal data, studying the 57-page outline and preparing speaking points. (One went so far as to interview his own customers about the rules. This SER then played a recording of one of the interviews for the panel during which a customer pleaded that the government not take payday loans away.) The SERs’ duties are not yet fully discharged. They now have the opportunity to prepare a written submission, which is due by May 13. The CFPB will then have 45 days to finalize a report on the SBREFA panel.
It is not clear what changes (if any) the CFPB might make to its rules as a result of the input of the SERs. Some SERs were encouraged by the body language of the SBA advocate who attended the meeting. She appeared quite engaged and sympathetic to the SERs’ comments. The SERs’ hope is that the SBA will intervene and support scaling back the CFPB’s proposal.