The CFPB's small-dollar lending rule has clearly backfired on consumers

Frank Gargano

Since the Consumer Financial Protection Bureau released its small-dollar lending rule in 2017, it has been the source of controversy and litigation. For an agency that's been criticized for pursuing political objectives over sound policy since its inception, the small-dollar lending rule might be the perfect example of this in practice.

The original rule, which seems to have been tailored to target the small-dollar loan industry and pick up where Operation Choke Point had left off, had two main components. First there was an overly prescriptive ability-to-repay regime, which was rescinded in 2020. Then there were unprecedented restrictions on payments, establishing a regulatory framework prohibiting lenders from making more than two consecutive unsuccessful payment attempts without obtaining reauthorization from the borrower, while also imposing various mandatory payment notices with confusing language and inflexible timing requirements.

These provisions were put on hold for several years due to litigation, and shortly before they were set to take effect earlier this year, the CFPB announced that it would not prioritize supervision or enforcement of the rule. Later, the bureau signaled that it will propose rulemaking to reconsider the remaining provisions.

As the bureau undertakes this process, the Online Lenders Alliance surveyed several of its member companies to determine the rule's real-world impact on lenders and borrowers during the first six months of 2025. The feedback and data we have received thus far highlights the negative impacts of the rule on consumers. 

The rule has resulted in higher delinquency rates, increased defaults and more loans sent to collections. One lender reported that charge-off rates had dramatically increased — not because customers couldn't pay, but because the rule made it operationally harder for them to do so.

To comply with the rule, lenders have adjusted their underwriting and loan structures to account for the risk and negative impacts of the rule, rather than the borrower's actual ability to repay, resulting in reduced credit access to the very consumers who need it the most. One lender said that the rule's requirements have resulted in tightening credit by 10%, which impacts the bottom scoring group of applicants — those least likely to have other options.

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Moreover, the rule's payment notification requirements are overly prescriptive, which has increased customer confusion and frustration, hindering successful loan repayment.

One lender said that they could no longer offer weekly payment options because of the rule's strict requirements on payments and notifications. But weekly payments are precisely what many gig workers, hourly employees and construction workers prefer because it allows them to sync payments with their compensation schedules.

With these results, it's obvious that the rule is out of step with today's market. Eight years ago, the bureau justified the rule by saying that consumers were harmed by bank fees from repeated representments. Since then, the bureau itself has published reports documenting the significant decline in those same fees, and the decline happened prior to the rule taking effect in March. 

The CFPB also pointed to consumer complaints around lenders debiting their accounts as another reason for the rule. However, the bureau's data shows these complaints have dramatically declined over the past eight years while the number of complaints on other financial products and services has increased significantly.

The CFPB's small-dollar lending rule was flawed from the beginning, and it has only gotten worse over time. It hinders flexibility between lenders and borrowers, and the result is higher delinquencies, increased defaults and less access to credit. It is time for it to go.