	Introduction

Short-term, small-dollar loans are consumer loans with relatively low initial principal amounts (often less than $1,000) with short repayment periods (generally for a small number of weeks or months). Short-term, small-dollar loan products are frequently used to cover cash flow shortages that may occur due to unexpected expenses or periods of inadequate income. Small-dollar loans can be offered in various forms and by various types of lenders. Federally insured depository institutions (i.e., banks and credit unions) can make small-dollar loans via financial products such as credit cards, credit card cash advances, and checking account overdraft protection programs. Nonbank lenders, such as alternative financial service (AFS) providers (e.g., payday lenders, automobile title lenders), also provide small-dollar loans. The costs associated with small-dollar loans appear to be higher in comparison with longer-term, larger-dollar loans. Furthermore, borrowers may fall into debt traps . Debt traps are frequently discussed in the context of nonbank products such as payday loans; but they may occur when a consumer makes only the minimum payment (rather than paying off the entire balance at the end of each statement period) on a credit card, which is an example of a loan product provided by depositories. Policy initiatives to protect consumers from what may be considered expensive borrowing costs could result in less credit availability for financially distressed individuals, which may place them in worse financial situations (e.g., bankruptcy). 111-203 ), which created the Consumer Financial Protection Bureau (CFPB). A recent proposed rule by the CFPB, which would implement federal requirements that would act as a floor for state regulations, would, among other things, require lenders to underwrite small-dollar loans to ensure borrower affordability unless the loan meets certain conditions. The CFPB estimates that its proposal would result in a material decline in small-dollar offerings by AFS lenders. The CFPB proposal has been subject to debate. H.R. 10 , the Financial CHOICE Act of 2017, which was passed by the House of Representatives on June 8, 2017, would prevent the CFPB from exercising any rulemaking, enforcement, or any other authority with respect to payday loans, vehicle title loans, or other similar loans. This report provides an overview of the small-dollar consumer lending markets and related policy issues. The report also discusses current federal and state regulatory approaches to consumer protection in lending markets, followed by a summary of the recent CFPB proposal and policy implications. The degree of market competitiveness, which may be revealed by analyzing market price dynamics, may provide insights pertaining to affordability concerns as well as available options for users of certain small-dollar loan products. Given that small-dollar markets contain both competitive and noncompetitive price dynamics, determining whether borrowers pay "too much" for small-dollar loan products is challenging. The Appendix describes how to calculate the annual percentage rate (APR) and provides information about general loan pricing. Short-Term, Small-Dollar Product Descriptions and Selected Metrics

 Table 1 provides descriptions of various small-dollar and short-term lending products. Data are also collected from different years and sources. An understanding of price dynamics in the small-dollar lending markets may shed light on the degree of market competitiveness, which may in turn inform the policy debate about the affordability and available options for consumers who use these loan products. The small-dollar lending markets exhibit both competitive and noncompetitive market pricing dynamics; consequently, determining whether the prices borrowers pay for their loans are "too high" is challenging. Similarly, the ability of the credit union system to compete in the small-dollar loan market depends upon regulatory requirements.
Short-term, small-dollar loans are consumer loans with relatively low initial principal amounts (often less than $1,000) with relatively short repayment periods (generally for a small number of weeks or months). Short-term, small-dollar loan products are frequently used to cover cash-flow shortages that may occur due to unexpected expenses or periods of inadequate income. Small-dollar loans can be offered in various forms and by various types of lenders. Banks and credit unions (depositories) can make small-dollar loans through financial products such as credit cards, credit card cash advances, and checking account overdraft protection programs. Small-dollar loans can also be provided by nonbank lenders (alternative financial service [AFS] providers), such as payday lenders and automobile title lenders.
The extent that borrower financial situations would be made worse from the use of expensive credit or from limited access to credit is widely debated. Consumer groups often raise concerns regarding the affordability of small-dollar loans. Borrowers pay rates and fees for small-dollar loans that may be considered expensive. Borrowers may also fall into debt traps, situations where borrowers repeatedly roll over existing loans into new loans and subsequently incur more charges rather than completely paying off the loans. Although the vulnerabilities associated with debt traps are more frequently discussed in the context of nonbank products such as payday loans, borrowers may still find it difficult to repay outstanding balances and face additional charges on loans such as credit cards that are provided by depositories. Conversely, the lending industry often raises concerns regarding the reduced availability of small-dollar credit. Regulations aimed at reducing costs for borrowers may result in higher costs for lenders, possibly limiting or reducing credit availability for financially distressed individuals.
This report provides an overview of the small-dollar consumer lending markets and related policy issues. Descriptions of basic short-term, small-dollar cash advance products are presented. Current federal and state regulatory approaches to consumer protection in small-dollar lending markets are also explained, including a summary of a proposal by the Consumer Financial Protection Bureau (CFPB) to implement federal requirements that would act as a floor for state regulations. The CFPB estimates that its proposal would result in a material decline in small-dollar loans offered by AFS providers. The CFPB proposal has been subject to debate. H.R. 10, the Financial CHOICE Act of 2017, which was passed by the House of Representatives on June 8, 2017, would prevent the CFPB from exercising any rulemaking, enforcement, or any other authority with respect to payday loans, vehicle title loans, or other similar loans. After discussing the policy implications of the CFPB proposal, this report examines general pricing dynamics in the small-dollar credit market. The degree of market competitiveness, which may be revealed by analyzing market price dynamics, may provide insights concerning affordability and availability options for users of certain small-dollar loan products.
The small-dollar lending market exhibits both competitive and noncompetitive market pricing dynamics. Some industry financial data metrics are arguably consistent with competitive market pricing. Factors such as regulatory barriers and differences in product features, however, limit the ability of banks and credit unions to compete with AFS providers in the small-dollar market. Borrowers may prefer some loan product features offered by nonbanks, including how the products are delivered, in comparison to products offered by traditional financial institutions. Given the existence of both competitive and noncompetitive market dynamics, determining whether the prices borrowers pay for small-dollar loan products are "too high" is challenging. The Appendix discusses how to conduct meaningful price comparisons using the annual percentage rate (APR) as well as some general information about loan pricing.