On January 19th, the Consumer Financial Protection Bureau (CFPB) published Short-Term, Small-Dollar Lending (STSD) Procedures – a field guide CFPB examiners will use to make sure payday lenders are following federal consumer financial laws. The procedures are applied to both banks and nonbanks that make payday loans.
This development is significant for two reasons:
- The payday lending market has not been largely unregulated. Now participants in the market will undergo a federal examination.
- The STSD procedures can be used by banks to build an internal review/audit program.
The STSD procedures use the terms “payday lending” and “short-term, small-dollar loans,” but never define either term. The procedures indicate that transaction testing is appropriate in certain circumstances; but how do you pull a sample of loans when you have not defined the loan type to be sampled.
Payday loans are typically marketed to bridge a cash flow shortage between pay or benefits checks. They generally have three features:
- The loans are small dollar amounts;
- Borrowers must repay the loan quickly; and
- They require that a borrower give lenders access to repayment through a claim on the borrower’s deposit account.
Most payday loans are for several hundred dollars and have finance charges of $15 or $20 for each $100 borrowed. For the two-week term typical of a payday loan, these fees equate to an Annual Percentage Rate ranging from 391 percent to 521 percent. Loan amounts and finance charges vary depending on state law. If the consumer does not repay the loan in full by the due date, the loan agreement typically permits the lender to cash the consumer’s check to obtain repayment.
Payday lenders have sprung up across the country over the past 20 years, beginning in storefront locations. With the advent of new media, payday loans now are offered through the Internet. Most recently, some banks began offering similar loan products.
The CFPB has the power to supervise not only bank payday lenders but also all nonbank payday lenders. The STSD Lending Procedures describe the types of information that the agency’s examiners will gather to evaluate payday lenders’ policies and procedures, assess whether lenders are in compliance with federal consumer financial laws, and identify risks to consumers throughout the lending process. The procedures track key payday lending activities, from initial advertisements and marketing to collection practices.
The Short-Term, Small-Dollar Lending Procedures are available at: https://www.consumerfinance.gov/wp-content/uploads/2012/01/Short-Term-Small-Dollar-Lending-Examination-Manual.pdf.