Right now probably isn’t the best time to start a small-dollar lending business. On levels both state and federal, financial regulators are setting their sights on operations that offer consumers payday loans and other kinds of of short-term credit with high annual percentage rates.
Last year, as you may know, the Consumer Financial Protection Bureau released a proposed rule intended to reform the small-dollar lending industry. Critically, the CFPB’s proposal would compel consumers to prove that they could pay back certain loans before being able to obtain them, and limit the number of loans an individual could take out per year.
But that’s not all—not even half of it. In the tellingly-titled 2016 Small-Dollar Lending Update: An Obituary or a Re-Awakening?, an article recently published by a group of attorneys at Hudson Cook, the authors examine some of the terms the CFPB sets forth, and—spoiler alert—there’s a lot to comply with. Just take a look at some of the restrictions in the proposed “short-term principal payoff” option:
[T]he Proposal would prohibit, among other things, borrowing more than $500, using a vehicle as collateral, and successive re-borrowing, unless the consumer can pay off at least one-third of the principal with each extension. Consumers would be limited to no more than ninety days of such indebtedness or no more than six such loans in a rolling twelve-month period. Finally, consumers would be prohibited from obtaining such a loan if they already have outstanding short-term or balloon-payment loans.
The CFPB’s proposal is only one of several developments to rock the small-dollar loan industry last year. In a sweeping review of regulatory and legislative updates, the attorneys’ article describes recent federal and state enforcement actions and analyzes case decisions over the past year. Taken all together, the developments paint a picture of an industry in transition (to put it as mildly as possible).
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Catherine M. Brennan, Justin B. Hosie, K. Dailey Wilson, & Erica A.N. Kramer
Catherine Brennan is a partner in the Hanover, Maryland office of Hudson Cook, LLP. Justin Hosie is a partner, and K. Dailey Wilson and Erica Kramer are associates in the Ooltewah, Tennessee office of Hudson Cook, LLP.
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