CFPB nixes mandatory underwriting requirements for small-dollar lending, drawing criticism

July 7, 2020.

The U.S. Financial Protection Bureau on Tuesday rescinded underwriting requirements established to prevent lenders from issuing small-dollar loans to customers without first assessing their ability to repay.

The regulator’s final rule on small-dollar lending, which strikes down the mandatory underwriting provisions of its prior rule from 2017, was criticized by consumer advocates and industry groups alike.

The agency cited “insufficient legal and evidentiary bases” for the 2017 rule’s underwriting requirements, arguing that small-dollar loans made without ability-to-pay screening are neither unfair nor abusive. CFPB also claimed its decision will preserve borrowers’ access to needed loans at a difficult financial moment.

“Today’s action will help to ensure the continued availability of small dollar lending products for consumers who demand them, including those who may have a particular need for such products as a result of the current pandemic,” the CFPB said.

Leaving intact certain portions of the 2017 rule, the agency will still require lenders to give borrowers written notice before they attempt withdrawals from borrowers’ accounts. The agency will also continue to prohibit lenders from attempting withdrawals from an account after consecutive attempts have already failed unless the borrower consents.

Tuesday’s rule change sparked harsh criticism from consumer advocacy groups, which claim the CFPB’s decision enables precisely the kind of predatory lending the agency was created to fight. 

“The CFPB has turned its back on consumers by failing to address well-documented payday loan abuses that shackle borrowers in triple-digit debt,” said Consumer Reports Senior Policy Counsel Suzanne Martindale.

Martindale also challenged the agency’s rule as a response to consumer needs during the coronavirus pandemic. 

“Research shows that predatory lenders are heavily concentrated in black and brown neighborhoods, the same communities disproportionately reeling from the financial impacts of the coronavirus crisis,” Martindale said. “Now these communities are bearing the burden, once again, of insufficient consumer protection at a time when they need it most.”

Meanwhile, lending industry groups argued the CFPB’s ruling does not go far enough in rolling back regulations they have deemed burdensome.

“While overall today’s announcement is a positive development, we are very disappointed the CFPB chose to leave the payment provisions of the original rule intact,” said D. Lynn DeVault, chairman of short-term lender industry group Community Financial Services Association of America.

“The Bureau’s own evidence didn’t support its payment practices provisions, which were flawed and based on unsupported data, much like the ability-to-repay provisions.”