WASHINGTON — The Consumer Financial Protection Bureau's proposed rules on small-dollar lending are designed to prevent consumers from becoming trapped in a cycle of debt, but regulators in some states fear that the rules could weaken existing consumer protections.
At issue is the CFPB's ability-to-repay test on loans with an annual percentage rate above 36%. Fifteen states and the District of Columbia ban loans made by payday lenders or limit annual percentage rates to 36% or less, and regulators are worried that the CFPB rule could wind up watering down their states' laws. In New York, for example, small-dollar consumer loans are capped at 25%, but lenders there may see an opening in the language of the CFPB rule to hike rates to 36%, observers said.
"The rule may impact provisions in state law that may actually be more favorable to the consumers," said Jim Cooper, senior vice president of policy at the Conference of State Bank Supervisors.
Under the CFPB proposal released in June, lenders making loans with an interest rate above a 36% APR would be required to do a payment test to determine if the borrower can afford the loan while also being able to cover essential living expenses and other major financial obligations. The ability-to-repay test can be a lengthy process and difficult to comply with, requiring lenders to verify a borrower's after-tax income and do a credit check to identify other outstanding loans and the required payments.
The proposal has received roughly 1 million comments to date, with many expressing concern that the rules could backfire and ultimately limit access to credit.
Attorneys general from 18 states said in a sent a letter last week that the proposal, as written, "will create regulatory confusion, impose countless costs on consumers and lenders [and] put approximately three-fourths of lenders out of business."
The AGs, all Republicans, also said they are concerned that the rule could tie their hands in enforcing state laws.
"As chief state legal officers, we are concerned that the proposed rule, if adopted, would irreconcilably conflict with, constrict, and otherwise unnecessarily interfere with existing state consumer protection laws, lending standards, and other state laws," said the letter, which was sent to the CFPB on Oct. 7.
Eight Democratic attorneys general sent a letter to the bureau commending the rule, but said it should be tightened up to prevent potential loopholes.
The preamble of the CFPB's proposal says that the proposal would create "a floor across the country," allowing states to impose stricter standards if they see fit, but the Democratic AGs said the language should be included in the final rule and not just the preamble.
"While our states support the bureau's efforts to adopt a set of rules that protect consumers from high-cost loans by attempting to ensure that loans are affordable, we are concerned that the Bureau's Proposed Rules, including the proposed exemptions from the ability-to-repay requirement, are weaker than our state laws and might encourage future efforts to eliminate stringent state usury caps," the Democratic attorneys general said.
The CSBS, which also sent a letter to the bureau commenting on the payday loan rule, requested that states have pre-emption in determining whether the CFPB or state requirements are more stringent.
"The Bureau should make clear that states have the authority to interpret how the rule will interact with state law," the group said in its letter. "States will need to navigate questions regarding conflict preemption and provide determinations to the industry regarding whether specific elements of state requirements are stricter than the Bureau's."
Opponents of the proposal said that the CFPB's legal woes could factor into the bureau's ability to regulate the industry. On Tuesday, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the bureau's single-director structure is unconstitutional.
Rather than disbanding the agency, the court determined that the CFPB director must serve at the pleasure of the president, making it easier for the president to remove the director.
"We are also profoundly concerned about the constitutional propriety of a rule that would restructure a substantial portion of the financial services sector being imposed by an agency headed by a single — politically unaccountable — individual," the Republican AGs said in their letter. "Such a decision would render the proposed rule — and any action tied to it — invalid."
The Republican AGs signing the letter opposing the proposal represent Arkansas, South Carolina, Alabama, Florida, Georgia, Indiana, Kansas, Louisiana, Nebraska, Nevada, North Dakota, Oklahoma, South Dakota, Tennessee, Texas, Utah, West Virginia and Wisconsin.
The Democratic AGs supporting the plan represent New York, Connecticut, the District of Columbia, Maryland, Massachusetts, New Hampshire, Pennsylvania and Vermont.
Daniel Schwartz, manager of policy development at the bank supervisor group, said state requirements often differ because they have to balance credit availability with consumer protection.
"State policy in this area is really informed by the fact that state regulators have this dual mandate to both ensure safety and soundness, but also promote local economic development within their communities and that is why you see such differing approaches determined by state legislatures given the unique circumstances that each state is dealing with," Schwartz said.
The CFPB's rule is expected to spur significant consolidation in the industry, but Schwartz said that as old players leave the market, new businesses will try to fill the gap.
"We have also heard from multiple states that they are dealing [with] certain segments of the industry putting pressure on their state legislature to loosen state usury law to allow for some high-cost installment products that are not currently allowed under state law, but would be permissible under the proposed rule," Schwartz said.