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Washington Wrap — Big changes for small-dollar lending

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Washington Wrap — Big changes for small-dollar lending

The Washington Wrap is a weekly look at regulation, news and chatter from the Capitol. Send tips and ideas to brian.cheung@spglobal.com.

At the Regulators

The Consumer Financial Protection Bureau finalized a rule Oct. 5 that would enforce a "full-payment test" on many payday loans, auto title loans, deposit advance products and certain high-cost installment and open-end loans. The rule also freezes lenders from making loans if a consumer has already had more than six short-term loans or has been in debt for more than 90 days. Compared to the proposed rule, the final rule excludes traditional installment loans from underwriting requirements.

The rule prompted Acting Comptroller of the Currency Keith Noreika to rescind former guidance that discouraged deposit advance products, citing regulatory overlap with the CFPB's new rule. Noreika said banks should be more actively serving consumer needs for short-term and small-dollar credit. The move could open the door for banks to enter the small-dollar credit space and compete with nonbanks through the sale of deposit advance products.

The CFPB rule has been so contentious that an agency-record 1.4 million comments poured in after the consumer watchdog originally proposed it. After it was finalized, a number of lawmakers chimed in on the rule.

"Restricting the availability of short-term credit will not solve the financial problems facing so many American families, but rather, push them towards riskier or unregulated products," Rep. Blaine Luetkemeyer, R-Mo., said in a press release.

Senate Banking Committee Ranking Member Sherrod Brown, D-Ohio, said in a press release that the rule would rein in payday lenders that have "exploited loophole after loophole to trap working people in debt."

Republicans are expected to launch efforts to repeal the payday lending rule through the Congressional Review Act, but Compass Point analyst Isaac Boltansky noted that the odds are against reversal. Boltansky noted "CRA-fatigue" related to the Senate's failure to repeal the CFPB's prepaid accounts rule and current efforts to repeal a rule on forced arbitration. Boltansky also said tweaks to the final rule are likely to shrink Senate support to repeal it, adding that overall moderate Republicans are unlikely to risk being seen as anti-consumer.

In a note, Ed Groshans at Height Securities pointed out that the rule will not take effect for 21 months, giving the next CFPB director at least one full year to review and revise the rule even if Cordray stays to the end of his term in July of 2018.

There is still no confirmation on whether or not Cordray will step down to pursue a run at Ohio governor.


On Oct. 5, the Federal Reserve gained its first new board member in the era of President Donald Trump. In a 62-32 vote, the U.S. Senate confirmed former Treasury official Randal Quarles as the newest Fed governor since President Barack Obama nominated Lael Brainard in 2014. Quarles is expected to tackle regulatory issues as the Fed's vice chair of supervision, a position that was created by the Dodd-Frank Act regulatory bill.

Fourteen Democratic senators voted in favor of the nomination, including Senate Banking Committee members Joe Donnelly of Indiana, Heidi Heitkamp of North Dakota, Jon Tester of Montana, Chris Van Hollen of Maryland and Mark Warner of Virginia.


Looking back on his time as a Fed governor, former regulatory czar Daniel Tarullo said Oct. 4 that he remains concerned about efforts in Washington to roll back capital and liquidity standards that he helped install. Tarullo, who resigned in February, said provisions like a capital surcharge on the global systemically important banks are key to developing a strong backbone in the financial system, and could protect the economy from any serious stress event.

"Don't kid yourself that you've covered all the bases," Tarullo said.

Tarullo said the Treasury Department's review of financial regulations had suggestions that were somewhere "between a good idea and OK," adding that he was most worried about giving banks more information about the stress tests and efforts to breakdown U.S. gold-plating of international capital standards.

Tarullo added that he supports revising the Volcker rule and removing the qualitative portion of the Fed's Comprehensive Capital Analysis and Review.

On Capitol Hill

House Democrats introduced a bill that would pressure regulators to break up the largest banks if they exhibit repeated violations of consumer protection law. Aimed at curbing alleged misbehavior against consumers by the likes of Wells Fargo & Co., the bill would require the CFPB to define a level of consumer protection violations at which the banking regulators would have to penalize or dissolve a global systemically important bank.

Rep. Maxine Waters, D-Calif., said she "absolutely" believes that Wells Fargo, JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. should be broken up.


Speaking of Wells Fargo, CEO Tim Sloan took the hot seat in front of the Senate Banking Committee on Oct. 3 to apologize for a list of misdeeds at the bank since former CEO John Stumpf faced questioning about the unauthorized opening of 2 million credit card and deposit accounts.

Sloan admitted the company's actions were "stupid" and said he is fit to lead efforts to rebuild consumer trust.

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