From the beginning of the comment letter:
The Center for Responsible Lending (CRL), National Consumer Law Center (on behalf of its low income clients) (NCLC), Americans for Financial Reform Education Fund, and Consumer Federation of America appreciate the opportunity to comment on the CDFI Fund (Fund) Small Dollar Loan (SDL) Program Application. The comments focus on aspects of the application aimed to ensure that the program is promoting affordable and responsible small dollar loan products.
CRL is an affiliate of Self-Help Credit Union, Self-Help Federal Credit Union, and Self-Help Ventures Fund, all CDFIs and, with CRL, part of the Center for Community Self-Help (Self-Help). Self-Help is a non-profit financial institution headquartered in Durham, North Carolina. As a national community development organization, Self-Help has more than 179,000 members and has delivered $10 billion in financing to help over 180,000 low-wealth borrowers buy homes, start and build businesses, and strengthen community resources, across the United States. SelfHelp Credit Union now has 35 branches, $1.6 billion in assets, and serves over 89,600 members through branches and offices in Florida, North Carolina, South Carolina, and Virginia. Its sister credit union, Self-Help Federal Credit Union, serves nearly 90,000 members through branches in California, Illinois, Wisconsin and Washington.
The Fund’s Notice of Funds Availability (NOFA) released in April 2021 clearly evidences the Fund’s thoughtful efforts to help ensure the SDL Program supports only affordable and responsible products, primarily through the Fund’s determination that certain practices will be prohibited for SDL Programs (“prohibited practices“). In addition, the Fund provides that certain practices will be prioritized in the consideration of award determinations (“prioritized practices”). We generally support this approach, have some suggestions for strengthening it, and urge that, at a minimum, these safeguards not be weakened.
Please see our September 2020 comments on the Request for Information on the SDL Program for a comprehensive discussion of our views on the practices generally addressed by the “prohibited” and “prioritized” lists the Fund provides, as well as the SDL Program more generally. We emphasize a few key points here.
We generally strongly support provision of these prohibited practices, in particular a clear interest rate limit of the lower of an all-inclusive 36% APR or the state interest rate limit. This structural safeguard will go a long way toward ensuring that these loans -- no more than $2,500 by statute -- will be responsibly designed. We continue to urge that this rate limit be tiered down to a fee-inclusive 31% for loans between $1,001 and $2,500, and that a grantee’s entire portfolio comply with these caps as well as a cap of a fee-inclusive 25% for loans above $2,500 (or in all cases, state interest rate limits if lower). These lower caps are generally consistent with median interest rate limits set by states, which tend to apply lower interest rate caps as loans get larger.
We also urge that an ability-to-repay determination that considers both income and expenses be elevated from a “prioritized practice” to one that is required (such that failure to do so be deemed a “prohibited practice”). Federal laws and guidances have long considered underwriting for ability to repay a key requirement of responsible lending.
We strongly support the additional prohibited practices, with suggestions for strengthening them in italics:
- Coerced automated repayments;
- Excessive refinancings, which the Fund defines as loans that allow refinancing before at least 80% of the principal has been repaid;
- Automatic loan insurance or credit card add-ons (the latter meaning the loan requires a borrower to accept or opt-out of a credit card), though we urge the Fund to prohibit add-ons whether they are automatic or not, as lenders are often able to ensure these are included even when they are nominally “voluntary”;
- Security interests in household goods, vehicles, or deposit accounts, with an exception for loans with a savings account component or credit builder loans;
- Excessive late fees on missed loan payments, defined as loans that charge more than one fee per late payment, though we urge that the Fund ensure any late fee is relatively low, for example, $5;
- Abusive overdraft practices, though we strongly urge the Fund to prohibit grantees from operating typical high-cost overdraft programs at all, and, at a minimum, prohibiting any overdraft fees in association with SDL Program loans in their entirety, rather than merely limiting them. While six overdraft fees in a year may be a meaningful overall limit for a consumer, six such fees associated with a single loan -- especially one explicitly intended to promote financially inclusion -- is extraordinarily expensive and punitive;
- Aggressive debt collection practices, meaning loans in which the lender does not offer workout programs; does not comply with the Fair Debt Collection Practices Act whether debt collection activities are conducted by the lender, a contract debt collector, or sold to a third party; or does not make certain disclosures to borrowers. We further urge prohibitions on the sale of defaulted SDL Program debt and on lawsuits to collect such debt.
- Forced arbitration clause or class action ban.
We also strongly support the Fund’s designation as “priority practices” loan terms of least 90 days and loans with a savings feature. Again, please see our September 2020 comments, attached, for further discussion.
We thank the Fund for its concerted efforts to ensure the SDL Program meets its statutory purpose of promoting financial inclusion.