Written by: Eric Bank
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
With a two-for-one blow to federal regulation, the Consumer Financial Protection Bureau (CFPB) recently reversed a pair of regulations regarding high-risk lending, providing the subprime market with opportunity as well as uncertainty.
The first rule requires small business lenders to report loan applications as well as demographic information. The second is a long-stalled provision to ensure that lenders check the borrowers’ ability to repay.
The rollbacks are a short-term form of regulatory respite for lenders that serve financially strapped consumers as well as small business borrowers.
The retreat from robust underwriting and reporting requirements reduces the burden of compliance, particularly among smaller lenders as well as CDFIs with limited resources.
But retreat also breeds uncertainty. Lenders face a quilt of state statutes and pressure from consumer activists, yet must attempt to practice equitable lending in the absence of federal regulation.
CFPB observers forecast that scrutiny will persist under Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) standards as well as state-level enforcement, even as federal pressure relaxes.
Small Business Lending Rule Heads Back to the Drawing Board
The CFPB will revisit its small business lending regulation after the Fifth Circuit Court of Appeals halted its enforcement.
The 2023 regulation attempted to increase transparency, especially for women- and minority-owned businesses, by requiring lenders to report extensive application details. The regulation was met with opposition from industry associations on the ground of expensive compliance as well as privacy issues.
While lenders are welcoming the moratorium, it derails sustained planning and makes lenders unsure about how to achieve a risk-adjusted equilibrium with justice in a situation where the federal government has provided no guidelines.
Payday Lending Rules on Hold
The CFPB will also halt enforcement of the ability-to-repay provisions of its 2017 payday lending regulation, which forced lenders to determine a borrower’s income versus expenses before approving a loan. The requirement, intended to prevent debt traps, was contested by the industry from its outset.
While the Bureau will maintain restrictions on repeat debit attempts, it cited court orders and litigation as the reason for easing back on the underwriting mandate. In the short run, auto title lenders as well as payday lenders will be regulated at the state level.
“We’re watching the market very closely and are using tools to keep consumers safe from illegal conduct,” CFPB reported. State law, along with UDAAP provisions, gains added importance in the absence of federal regulation.
What This Implies for Subprime Strategy
These changes relieve pressure from the federal government, but they don’t give a free pass. The overturn of the small business exemption eliminates report requirements, yet many state regulators, along with advocacy groups, still insist on equal access to credit.
Relaxing underwriting standards to hasten payday loan originations can drive originations faster, but it exposes lenders to compliance risks in jurisdictions with tighter consumer protections. A few lenders may maintain more conservative underwriting to curtail exposure.
Subprime lenders will likely review their compliance models to examine how responsible lending and transparency can also provide a competitive advantage. Even as the CFPB takes a step back, the fair lending spotlight continues.
