April 2, 2015
By Bob Coleman
Editor, OnLine Small Business Lending Report
One of the stories I am closing following the Consumer Financial Protection Bureau’s interest in with online small business lenders.
We know the target consumer payday lenders have on their back from a variety of regulators.
To date, regulators are largely ignoring alternative, or, online small business lenders.
However, as I have said in several public speaking engagements with these small business lenders I have used the Game of Thrones analogy and predicted, “Winter is Coming.”
Now that the CFPB has announced it is beginning the process for rulemaking for payday lenders, I am most be interested to see how extensive a proposed rule will extend small business lender with “open-end lines of credit and other loans that fall within the CFPB’s proposal under consideration, regardless of how they are name or marketed to consumers, would also be covered.”
As a recap, the CFPB is proposing:
Debt trap prevention requirements: This option would eliminate debt traps by requiring lenders to determine at the outset that the consumer can repay the loan when due – including interest, principal, and fees for add-on products – without defaulting or re-borrowing. For each loan, lenders would have to verify the consumer’s income, major financial obligations, and borrowing history to determine whether there is enough money left to repay the loan after covering other major financial obligations and living expenses. Lenders would generally have to adhere to a 60-day cooling off period between loans. To make a second or third loan within the two-month window, lenders would have to document that the borrower’s financial circumstances have improved enough to repay a new loan without re-borrowing. After three loans in a row, all lenders would be prohibited altogether from making a new short-term loan to the borrower for 60 days.
Debt trap protection requirements: These requirements would eliminate debt traps by requiring lenders to provide affordable repayment options and by limiting the number of loans a borrower could take out in a row and over the course of a year. Lenders could not keep consumers in debt on short-term loans for more than 90 days in a 12-month period. Rollovers would be capped at two – three loans total – followed by a mandatory 60-day cooling-off period. The second and third consecutive loans would be permitted only if the lender offers an affordable way out of debt. The Bureau is considering two options for this: either by requiring that the principal decrease with each loan, so that it is repaid after the third loan, or by requiring that the lender provide a no-cost “off-ramp” after the third loan, to allow the consumer to pay the loan off over time without further fees. For each loan under these requirements, the debt could not exceed $500, carry more than one finance charge, or require the consumer’s vehicle as collateral.
The CFPB will convene a Small Business Review Panel to hear from small businesses about the potential impacts of the rule.
Each Small Business Review Panel consists of representatives from the CFPB, SBA, and the OMB Within 60 days of meeting, the panel will complete a report on the input we received from the small business representatives. We’ll publish the panel’s report along with a proposed rule, which is the next step in the rulemaking process. We’ll keep seeking feedback from consumers, consumer advocates, other regulators, and industry representatives that were not part of the panel process as we develop a proposed rule.