Subprime Lenders, Beware: Why a Defunct CFPB Might Strike Harder Than You Think

Despite the CFPB’s sudden defunding and the current lull in regulatory enforcement, subprime lenders should view this as a brief reprieve rather than a permanent victory.

The Small Dollar Rule and its core consumer protection provisions could be reactivated at any time, either through a revived CFPB or another federal authority stepping into the void. Staying vigilant now will help you avoid scrambling later if (and when) the regulatory landscape shifts again. In other words, temporary relief doesn’t mean risk-free, and complacency in this environment could spell costly trouble down the line. Below is a concise action plan tailored to a subprime lender operating in multiple states (primarily Texas but appropriate in numerous states), offering loans greater than 36% APR, with no current compliance infrastructure in place.

While the CFPB is defunded and its website is down, you should still prepare for possible future federal or state-level regulations akin to the Small Dollar Rule. And yes, unfortunately, this will COST US TIME AND MONEY!

Monitoring & Intelligence Gathering

1. Track State Regulations: Closely monitor each state’s payday-lending rules. Texas has comparatively lax rules but states like California, New York, and others can impose stricter requirements.
2. Watch Federal Enforcement Shifts: Stay alert to signs that another federal agency (e.g., FTC, OCC) might step in or that the CFPB could regain funding.
3. Leverage Industry Associations: Join or stay active in organizations (e.g., Community Financial Services Association of America) to receive real-time regulatory and legislative change updates.

2. Evaluate & Update Payment Policies

3. Limited Payment Attempts: Although the CFPB’s “Two-Strike Rule” isn’t currently enforced, consider adopting a self-imposed cap on ACH retries (e.g., two or three attempts) to reduce the risk of consumer disputes and negative publicity.
4. Essential Disclosures: Even though not legally required at the moment, providing clear pre-withdrawal notices can help minimize consumer complaints and potential litigation under unfair or deceptive acts and practices (UDAP) rules.
5. Maintain Transaction Records: Store details of each withdrawal attempt and any communications with borrowers. This record-keeping will be invaluable if regulations return or if any disputes arise.
6. Build a Scalable Compliance Infrastructure

1. 1. System Upgrades: Invest in or develop a compliance tracking system that can:
      • Track the number of payment attempts.
      • Generate pre-withdrawal and post-failed-attempt notices.
      • Archive consumer communications and authorizations.
   2. Staff Training: Begin basic compliance training now so employees understand:
      • Current state-level obligations.
      • Potential future federal requirements (e.g., the now-in-limbo CFPB payment rules).
      • Best practices for transparent and fair lending/collection.
   3. Legal & Regulatory Counsel: Retain external compliance counsel or hire in-house expertise to:
      • Interpret evolving state laws and federal activity.
      • Guide system and process updates to align with potential future regulations.

4. Risk Management & Contingency Plans

1. 1. Contingency Funding: Set aside resources to adapt swiftly if the CFPB is revived or another agency introduces similar rules. Costs could include system updates, audits, and staff retraining.
   2. Litigation Preparedness: Because you operate at higher APR thresholds, ensure your loan agreements, disclosures, and collection practices are thoroughly vetted by legal counsel to minimize the risk of lawsuits (class actions, AG investigations, etc.).
   3. Reputation Management: High-APR lending naturally draws scrutiny. Maintain a fair and transparent lending culture—overly aggressive practices can lead to reputational harm and encourage regulatory attention, even without CFPB enforcement.

5. Product Strategy & Diversification

1. 1. Analyze Loan Structures: Review whether certain products could be restructured below 36% APR in some states or offered with different payment schedules to reduce your exposure to potential “small-dollar” rules.
   2. Explore New Markets: If feasible, consider expanding into lower-risk or longer-term installment products in states where high-APR, short-term lending might soon face stricter regulation.
   3. Pilot Programs: In your primary market (Texas), test adjusted products or new policies and gather data to refine them before rolling out in states with tighter restrictions.

6. Ongoing Implementation & Review

1. 1. Regular Internal Audits: Conduct quarterly or semi-annual audits of your lending and collection processes. Identify any compliance gaps before they become regulatory or legal issues.
   2. Employee Feedback Loop: Encourage staff to report borrower complaints or operational challenges so you can address potential regulatory red flags proactively.
   3. Adaptive Policy Revisions: If any new guidance or regulations emerge—whether state or federal—update your policy manuals and train employees promptly.

Key Takeaways

• Remain flexible in your processes. Even though the CFPB is defunded now, similar regulations could be imposed by a revived CFPB, another federal agency, or individual states.
• Proactive compliance can mitigate legal, reputational, and operational risks, especially with high-APR products that naturally invite more scrutiny.
• Scalable infrastructure for tracking payment attempts and providing notifications will allow you to quickly switch “on” or “off” compliance requirements as regulations evolve.

By implementing these steps, you can effectively manage current uncertainty while safeguarding against future regulatory shifts—ensuring the continuity of your high-APR lending products in multiple states.