Minifinance: CFPB Supervision of Short-Term, Small-Dollar Products and Services

Minifinance: CFPB Supervision of Short-Term, Small-Dollar Products and Services

By Valerie L. Hletko and John P. Kromer

What acts and practices related to short-term, small-dollar (minifinance) products and services are "abusive?" Until a clearer definition emerges and the Consumer Financial Protection Board's examination and enforcement agenda plays out, Valerie L. Hletko and John P. Kromer of BuckleySandler LLP set out the important steps minifinance providers should take to minimize the chances of being targeted for enforcement. They write:

     The Consumer Financial Protection Bureau ("CFPB") launched its nonbank supervision program on January 5, 2012, and immediately kicked off a payday lending component. Announcing its regulatory authority over payday lending, CFPB Director Richard Cordray promised to devote "much more attention" to the payday lending industry. As evidence of that, the CFPB devoted its first field hearing to payday lending issues and promptly issued examination guidelines for short-term, small-dollar loans. A month later, the CFPB announced a review of checking account overdraft programs through another highly publicized field hearing and seminar.

     These CFPB initiatives demonstrate that, for the first time, depository institutions and nonbank lenders are being examined under the same federal microscope. All providers of short-term, small-dollar financial products and services, which we call "minifinance," must be scrupulously attentive to emerging rules and standards. Minifinance products, which typically provide solutions for consumers' short-term financial needs, may become harder to access as a result of forthcoming regulation and an apparent regulatory distaste for the products themselves.

     The cornerstone of CFPB minifinance supervision will be enhanced supervisory attention of banks and non-banks and resulting enforcement actions based on "unfair, deceptive or abusive" acts or practices ("UDAAP"). This article reviews the guideposts already established by the CFPB and recommends industry practices for providers anticipating new rules and standards. We focus on the "abusive" prong of the new UDAAP standard, which bears on whether an act or practice:

• materially interferes with consumer ability to understand a term or condition of a product or service; or

• takes unreasonable advantage of

• a lack of consumer understanding of material risks, costs, or conditions of a product or service,

• consumer ability to protect interests in selecting or using a product or service, or

• reasonable reliance on a purveyor to act in the consumer's interest.

     Emerging UDAAP standards will complicate regulatory compliance efforts for minifinance providers. CFPB Director Cordray believes consumers will make "good decisions" when they "know the true, costs, benefits, and risks of competing products." But how will the agency ultimately regulate products it may never see as "good" despite its recognition that they are essential to a significant number of consumers?


Minifinance Best Practices

     The American Bankers Association has appropriately emphasized the need for both a "uniform set of supervisory expectations" among the CFPB and other federal banking agencies and a coherent set of regulatory expectations for minifinance products subject to overlapping supervisory jurisdiction. Projected legislation and CFPB examination modules appear to target the truly abusive efforts of dishonest and predatory actors seeking to mislead or defraud consumers. Although CFPB Director Cordray has stated his recognition of the need for emergency credit and has pledged to "balance the needs of consumers with the risks they face," much of the rhetoric among legislators and regulators has been more broadly critical of minifinance itself. Witness the language of consumer "risk" and "good" or "bad" decision-making. Indeed, even the CFPB examination procedures identify certain "risks to consumers" throughout the modules, and the CFPB has made clear that its payday lending supervision program will be risk-based. Director Cordray has frequently testified that the Bureau will not further define abusive practices by rule. Instead, it will address such practices based on "facts and circumstances" and through enforcement actions.

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