[Federal Register Volume 82, Number 221 (Friday, November 17, 2017)]
[Rules and Regulations]
[Pages 54472-54921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21808]
[[Page 54471]]
Vol. 82
Friday,
No. 221
November 17, 2017
Part II
Book 2 of 2 Books
Pages 54471-55026
Bureau of Consumer Financial Protection
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12 CFR Part 1041
Payday, Vehicle Title, and Certain High-Cost Installment Loans; Final
Rule
Federal Register / Vol. 82 , No. 221 / Friday, November 17, 2017 /
Rules and Regulations
[[Page 54472]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1041
[Docket No. CFPB-2016-0025]
RIN 3170-AA40
Payday, Vehicle Title, and Certain High-Cost Installment Loans
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Final rule; official interpretations.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau or CFPB)
is issuing this final rule establishing regulations creating consumer
protections for certain consumer credit products and the official
interpretations to the rule. First, the rule identifies it as an unfair
and abusive practice for a lender to make covered short-term or longer-
term balloon-payment loans, including payday and vehicle title loans,
without reasonably determining that consumers have the ability to repay
the loans according to their terms. The rule exempts certain loans from
the underwriting criteria prescribed in the rule if they have specific
consumer protections. Second, for the same set of loans along with
certain other high-cost longer-term loans, the rule identifies it as an
unfair and abusive practice to make attempts to withdraw payment from
consumers' accounts after two consecutive payment attempts have failed,
unless the consumer provides a new and specific authorization to do so.
Finally, the rule prescribes notices to consumers before attempting to
withdraw payments from their account, as well as processes and criteria
for registration of information systems, for requirements to furnish
and obtain information from them, and for compliance programs and
record retention. The rule prohibits evasions and operates as a floor
leaving State and local jurisdictions to adopt further regulatory
measures (whether a usury limit or other protections) as appropriate to
protect consumers.
DATES:
Effective Date: This regulation is effective January 16, 2018.
Compliance Date: Sections 1041.2 through 1041.10, 1041.12, and 1041.13
have a compliance date of August 19, 2019.
Application Deadline: The deadline to submit an application for
preliminary approval for registration pursuant to Sec. 1041.11(c)(1)
is April 16, 2018.
FOR FURTHER INFORMATION CONTACT: Sarita Frattaroli, Counsel; Mark
Morelli, Michael G. Silver, Steve Wrone, Senior Counsels; Office of
Regulations; Consumer Financial Protection Bureau, at 202-435-7700 or
[email protected].
SUPPLEMENTARY INFORMATION:
I. Summary of the Final Rule
On June 2, 2016, the Bureau issued proposed consumer protections
for payday loans, vehicle title loans, and certain high-cost
installment loans. The proposal was published in the Federal Register
on July 22, 2016.\1\ Following a public comment period and review of
comments received, the Bureau is now issuing this final rule with
consumer protections governing the underwriting of covered short-term
and longer-term balloon-payment loans, including payday and vehicle
title loans. The rule also contains disclosure and payment withdrawal
attempt requirements for covered short-term loans, covered longer-term
balloon-payment loans, and certain high-cost covered longer-term loans.
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\1\ Payday, Vehicle Title, and Certain High-Cost Installment
Loans, 81 FR 47864 (July 22, 2016).
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Covered short-term loans are typically used by consumers who are
living paycheck to paycheck, have little to no access to other credit
products, and seek funds to meet recurring or one-time expenses. The
Bureau has conducted extensive research on these products, in addition
to several years of outreach and review of the available literature.
The Bureau issues these regulations primarily pursuant to its authority
under section 1031 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) to identify and prevent unfair,
deceptive, or abusive acts or practices.\2\ The Bureau is also using
authorities under section 1022 of the Dodd-Frank Act to prescribe rules
and make exemptions from such rules as is necessary or appropriate to
carry out the purposes and objectives of the Federal consumer financial
laws,\3\ section 1024 of the Dodd-Frank Act to facilitate supervision
of certain non-bank financial service providers,\4\ and section 1032 of
the Dodd-Frank Act to require disclosures to convey the costs,
benefits, and risks of particular consumer financial products or
services.\5\
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\2\ Public Law 111-203, section 1031(b), 124 Stat. 1376 (2010)
(hereinafter Dodd-Frank Act).
\3\ Dodd-Frank Act section 1022(b).
\4\ Dodd-Frank Act section 1024(b)(7).
\5\ Dodd-Frank Act section 1032(a).
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The Bureau is not, at this time, finalizing the ability-to-repay
determination requirements proposed for certain high-cost installment
loans, but it is finalizing those requirements as to covered short-term
and longer-term balloon-payment loans. The Bureau is also finalizing
certain disclosure, notice, and payment withdrawal attempt requirements
as applied to covered short-term loans, longer-term balloon-payment
loans, and high-cost longer-term loans at this time.
The Bureau is concerned that lenders that make covered short-term
loans have developed business models that deviate substantially from
the practices in other credit markets by failing to assess consumers'
ability to repay their loans according to their terms and by engaging
in harmful practices in the course of seeking to withdraw payments from
consumers' accounts. The Bureau has concluded that there is consumer
harm in connection with these practices because many consumers struggle
to repay unaffordable loans and in doing so suffer a variety of adverse
consequences. In particular, many consumers who take out these loans
appear to lack the ability to repay them and face one of three options
when an unaffordable loan payment is due: Take out additional covered
loans (``re-borrow''), default on the covered loan, or make the payment
on the covered loan and fail to meet basic living expenses or other
major financial obligations. As a result of these dynamics, a
substantial population of consumers ends up in extended loan sequences
of unaffordable loans. Longer-term balloon-payment loans, which are
less common in the marketplace today, raise similar risks.
In addition, many lenders may seek to obtain repayment of covered
loans directly from consumers' accounts. The Bureau is concerned that
consumers may be subject to multiple fees and other harms when lenders
make repeated unsuccessful attempts to withdraw funds from their
accounts. In these circumstances, further attempts to withdraw funds
from consumers' accounts are very unlikely to succeed, yet they clearly
result in further harms to consumers.
A. Scope of the Rule
The rule applies to two types of covered loans. First, it applies
to short-term loans that have terms of 45 days or less, including
typical 14-day and 30-day payday loans, as well as short-term vehicle
title loans that are usually made for 30-day terms, and longer-term
balloon-payment loans. The underwriting portion of the rule applies to
these loans. Second, certain parts of the rule apply to longer-term
loans with terms of more than 45 days that have (1) a cost of credit
that exceeds 36 percent per annum; and (2) a form of ``leveraged
[[Page 54473]]
payment mechanism'' that gives the lender a right to withdraw payments
from the consumer's account. The payments part of the rule applies to
both categories of loans. The Bureau had proposed parallel underwriting
requirements for high-cost covered longer-term loans. However, at this
time, the Bureau is not finalizing the ability-to-repay portions of the
rule as to covered longer-term loans other than those with balloon
payments.
The rule excludes or exempts several types of consumer credit,
including: (1) Loans extended solely to finance the purchase of a car
or other consumer good in which the good secures the loan; (2) home
mortgages and other loans secured by real property or a dwelling if
recorded or perfected; (3) credit cards; (4) student loans; (5) non-
recourse pawn loans; (6) overdraft services and lines of credit; (7)
wage advance programs; (8) no-cost advances; (9) alternative loans
(similar to loans made under the Payday Alternative Loan program
administered by the National Credit Union Administration); and (10)
accommodation loans.
B. Ability-to-Repay Requirements and Alternative Requirements for
Covered Short-Term Loans
The rule identifies it as an unfair and abusive practice for a
lender to make covered short-term or longer-term balloon-payment loans
without reasonably determining that the consumers will have the ability
to repay the loans according to their terms. The rule prescribes
requirements to prevent this practice and thus the specific harms to
consumers that the Bureau has identified as flowing from the practice,
including extended loan sequences for a substantial population of
consumers.
The first set of requirements addresses the underwriting of these
loans. A lender, before making a covered short-term or longer-term
balloon-payment loan, must make a reasonable determination that the
consumer would be able to make the payments on the loan and be able to
meet the consumer's basic living expenses and other major financial
obligations without needing to re-borrow over the ensuing 30 days.
Specifically, a lender is required to:
Verify the consumer's net monthly income using a reliable
record of income payment, unless a reliable record is not reasonably
available;
Verify the consumer's monthly debt obligations using a
national consumer report and a consumer report from a ``registered
information system'' as described below;
Verify the consumer's monthly housing costs using a
national consumer report if possible, or otherwise rely on the
consumer's written statement of monthly housing expenses;
Forecast a reasonable amount for basic living expenses,
other than debt obligations and housing costs; and
Determine the consumer's ability to repay the loan based
on the lender's projections of the consumer's residual income or debt-
to-income ratio.
Furthermore, a lender is prohibited from making a covered short-
term loan to a consumer who has already taken out three covered short-
term or longer-term balloon-payment loans within 30 days of each other,
for 30 days after the third loan is no longer outstanding.
Second, and in the alternative, a lender is allowed to make a
covered short-term loan without meeting all the specific underwriting
criteria set out above, as long as the loan satisfies certain
prescribed terms, the lender confirms that the consumer meets specified
borrowing history conditions, and the lender provides required
disclosures to the consumer. Among other conditions, under this
alternative approach, a lender is allowed to make up to three covered
short-term loans in short succession, provided that the first loan has
a principal amount no larger than $500, the second loan has a principal
amount at least one-third smaller than the principal amount on the
first loan, and the third loan has a principal amount at least two-
thirds smaller than the principal amount on the first loan. In
addition, a lender is not allowed to make a covered short-term loan
under the alternative requirements if it would result in the consumer
having more than six covered short-term loans during a consecutive 12-
month period or being in debt for more than 90 days on covered short-
term loans during a consecutive 12-month period. A lender is not
permitted to take vehicle security in connection with loans that are
made according to this alternative approach.
C. Payment Practices Rules
The rule identifies it as an unfair and abusive practice for a
lender to make attempts to withdraw payment from consumers' accounts in
connection with a short-term, longer-term balloon-payment, or high-cost
longer-term loan after the lender's second consecutive attempts to
withdraw payments from the accounts from which the prior attempts were
made have failed due to a lack of sufficient funds, unless the lender
obtains the consumers' new and specific authorization to make further
withdrawals from the accounts. The Bureau found that in these
circumstances, further attempted withdrawals are highly unlikely to
succeed, but clearly impose harms on consumers who are affected. This
prohibition on further withdrawal attempts applies whether the two
failed attempts are initiated through a single payment channel or
different channels, such as the automated clearinghouse system and the
check network. The rule requires that lenders must provide notice to
consumers when the prohibition has been triggered and follow certain
procedures in obtaining new authorizations.
In addition to the requirements related to the prohibition on
further payment withdrawal attempts, a lender is required to provide a
written notice, depending on means of delivery, a certain number of
days before its first attempt to withdraw payment for a covered loan
from a consumer's checking, savings, or prepaid account or before an
attempt to withdraw such payment in a different amount than the
regularly scheduled payment amount, on a date other than the regularly
scheduled payment date, by a different payment channel than the prior
payment, or to re-initiate a returned prior transfer. The notice must
contain key information about the upcoming payment attempt and, if
applicable, alert the consumer to unusual payment attempts. A lender is
permitted to provide electronic notices as long as the consumer
consents to electronic communications.
D. Additional Requirements
The rule requires lenders to furnish to provisionally registered
and registered information systems certain information concerning
covered short-term and longer-term balloon-payment loans at loan
consummation, during the period that the loan is an outstanding loan,
and when the loan ceases to be an outstanding loan. To be eligible to
become a provisionally registered or registered information system, an
entity must satisfy the eligibility criteria prescribed in the rule.
The rule provides for a registration process that will allow
information systems to be registered, and lenders to be ready to
furnish required information, at the time the furnishing obligation in
the rule takes effect. Consumer reports provided by registered
information systems will include a reasonably comprehensive record of a
consumer's recent and current use of covered short-term and longer-term
balloon-payment loans. Before making covered short-term and longer-term
balloon-payment loans, a lender is required to obtain and consider a
consumer report from a registered information system.
[[Page 54474]]
A lender is required to establish and follow a compliance program
and retain certain records. A lender is also required to develop and
follow written policies and procedures that are reasonably designed to
ensure compliance with the requirements in this rule. Furthermore, a
lender is required to retain the loan agreement and documentation
obtained for any covered loan or an image thereof, as well as
electronic records in tabular format regarding origination calculations
and determinations for a short-term or longer-term balloon-payment
loan, and regarding loan type and terms. The rule also includes an
anti-evasion clause to address the kinds of concerns the Bureau noted
in connection with the evasive actions that lenders in this market took
in response to the regulations originally adopted on loans made to
servicemembers under the Military Lending Act.
E. Effective and Compliance Dates/Application Deadline \6\
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\6\ The description of effective dates in this document differs
from the description of effective dates in the final rule as issued
on the Bureau's Web site on October 5, 2017, which provided that the
regulation would be effective 21 months after date of publication in
the Federal Register, except for Sec. 1041.11, which would be
effective 60 days after date of publication in the Federal Register.
The rule published in the Federal Register provides that, for
purposes of codification in the Code of Federal Regulations, this
regulation is effective 60 days after date of publication in the
Federal Register. Sections 1041.2 through 1041.10, 1041.12, and
1041.13 have a compliance date of 21 months after date of
publication in the Federal Register. This change is a technical
correction to allow for clear cross-references within sections in
the Code of Federal Regulations. It is not substantive and does not
affect the dates by which regulated entities must comply with
sections of the regulation.
Other minor technical corrections and clarifications have been
made to the final rule as issued on the Bureau's Web site on October
5, 2017. To the extent that section 553 of the Administrative
Procedure Act (APA), 5 U.S.C. 553, applies, there is good cause to
publish all of these changes without notice and comment. Under the
APA, notice and opportunity for public comment are not required if
the Bureau finds that notice and public procedure thereon are
impracticable, unnecessary, or contrary to the public interest. 5
U.S.C. 553(b)(B). The Bureau has determined that notice and comment
are unnecessary because the technical corrections in this final rule
allow for proper formatting in the Code of Federal Regulations,
correct inadvertent technical errors, and align and harmonize
provisions of the regulation. These changes are routine and
insignificant in nature and impact, and do not change the scope of
the rule or regulatory burden. Therefore, the technical corrections
are adopted in final form.
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The final rule will become effective January 16, 2018, 60 days
after publication of the final rule in the Federal Register. Compliance
with Sec. Sec. 1041.2 through 1041.10, 1041.12, and 1041.13 will be
required beginning August 19, 2019, 21 months after publication of the
final rule in the Federal Register. The deadline to submit an
application for preliminary approval for registration pursuant to Sec.
1041.11(c)(1) will be April 16, 2018, 150 days after publication of the
final rule in the Federal Register. The effective and compliance dates
and application deadline are structured to facilitate an orderly
implementation process.
II. Background
A. Introduction
For most consumers, credit provides a means of purchasing goods or
services and spreading the cost of repayment over time. This is true of
the three largest consumer credit markets: The market for mortgages
($10.3 trillion in outstanding balances), for student loans ($1.4
trillion), and for auto loans ($1.1 trillion). This is also one way in
which certain types of open-end credit--including home equity loans
($0.13 trillion) and lines of credit ($0.472 trillion)--and at least
some credit cards and revolving credit ($1.0 trillion)--can be used.\7\
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\7\ See Bd. of Governors of the Fed. Reserve Sys., ``Mortgage
Debt Outstanding (Table 1.54),'' (June 2017) (mortgages (one- to
four-family)), available at http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm; Bd. of Governors of
the Fed. Reserve Sys., ``Consumer Credit--G.19: July 2017,'' (Sept.
8, 2017) (student loans, auto loans, and revolving credit),
available at https://www.federalreserve.gov/releases/g19/current/default.htm; Experian-Oliver Wyman, ``2017 Q2 Market Intelligence
Report: Home Equity Loans Report,'' at 16 fig. 21 (2017) and
Experian-Oliver Wyman, ``2017 Q2 Market Intelligence Report: Home
Equity Lines Report,'' at 21 fig. 30 (2017) (home equity loans and
lines of credit outstanding estimates), available at http://www.marketintelligencereports.com.
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In addition to the credit markets described above, consumers living
paycheck to paycheck and with little to no savings have also used
credit as a means of coping with financial shortfalls. These shortfalls
may be due to mismatched timing between income and expenses, misaligned
cash flows, income volatility, unexpected expenses or income shocks, or
expenses that simply exceed income.\8\ According to a recent survey
conducted by the Board of Governors of the Federal Reserve System
(Federal Reserve Board), 44 percent of adults reported they would
either be unable to cover an emergency expense costing $400 or would
have to sell something or borrow money to cover it, and 30 percent
reported that they found it ``difficult to get by'' or were ``just
getting by'' financially.\9\ Whatever the cause of these financial
shortfalls, consumers in these situations sometimes seek what may
broadly be termed a ``liquidity loan.'' \10\ There are a variety of
loans and products that consumers use for these purposes including
credit cards, deposit account overdraft, pawn loans, payday loans,
vehicle title loans, and installment loans.
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\8\ See generally Rob Levy & Joshua Sledge, ``A Complex
Portrait: An Examination of Small-Dollar Credit Consumers'' (Ctr.
for Fin. Servs. Innovation, 2012), available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
\9\ Bd. of Governors of the Fed. Reserve Sys., ``Report on the
Economic Well-Being of U.S. Households in 2016,'' at 2, 8 (May
2017), available at https://www.federalreserve.gov/publications/files/2016-report-economic-well-being-us-households-201705.pdf.
\10\ If a consumer's expenses consistently exceed income, a
liquidity loan is not likely to be an appropriate solution to the
consumer's needs.
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Credit cards and deposit account overdraft services are each
already subject to specific Federal consumer protection regulations and
requirements. The Bureau generally considers these markets to be
outside the scope of this rulemaking as discussed further below. The
Bureau is also separately engaged in research and evaluation of
potential rulemaking actions on deposit account overdraft.\11\
[[Page 54475]]
Another liquidity option--pawn--generally involves non-recourse loans
made against the value of whatever item a consumer chooses to give the
lender in return for the funds.\12\ The consumer has the option to
either repay the loan or permit the pawnbroker to retain and sell the
pawned property at the end of the loan term, relieving the borrower
from any additional financial obligation. This feature distinguishes
pawn loans from most other types of liquidity loans. The Bureau is
excluding non-recourse possessory pawn loans, as described in proposed
Sec. 1041.3(e)(5), from the scope of this rulemaking.
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\11\ Credit cards and deposit overdraft services would have been
excluded from the proposed rule under proposed Sec. 1041.3(e)(3)
and (6) as discussed further below. On October 5, 2016, the Bureau
released a final rule on prepaid accounts. Among other things, the
rule regulates overdraft credit features offered in connection with
prepaid accounts, and generally covers under Regulation Z's credit
card rules any such credit feature that is offered by the prepaid
account issuer, its affiliate, or its business partner where credit
can be accessed in the course of a transaction conducted with a
prepaid card. 81 FR 83934 (Nov. 22, 2016). The Bureau later
published a final rule delaying the October 1, 2017, effective date
of that rule by six months, to April 1, 2018. 82 FR 18975 (Apr. 25,
2017). In preparation for a potential rulemaking regarding possible
consumer protection concerns with overdraft programs on checking
accounts, the Bureau issued the Notice and Request for Information
on the Impacts of Overdraft Programs on Consumers, 77 FR 12031 (Feb.
28, 2012); see Kelly Cochran, ``Spring 2017 Rulemaking Agenda,''
CFPB Blog (July 20, 2017), available at https://www.consumerfinance.gov/about-us/blog/spring-2017-rulemaking-agenda/. In 2015, banks with over $1 billion in assets reported
overdraft and NSF (nonsufficient funds) fee revenue of $11.16
billion. See Gary Stein, ``New Insights on Bank Overdraft Fees and 4
Ways to Avoid Them,'' CFPB Blog (Feb. 25, 2016), available at
https://www.consumerfinance.gov/about-us/blog/new-insights-on-bank-overdraft-fees-and-4-ways-to-avoid-them/. The $11.16 billion total
does not include credit union overdraft fee revenue and does not
separate out overdraft from NSF amounts but overall, overdraft fee
revenue accounts for about 72 percent of that amount. Bureau of
Consumer Fin. Prot., ``Data Point: Checking Account Overdraft,'' at
10 (2014), available at http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf. The Federal Reserve
Board has adopted a set of regulations of overdraft services. See
Electronic Fund Transfers, 75 FR 31665 (June 4, 2010). In addition,
the Bureau has published three research reports on overdraft. See
Bureau of Consumer Fin. Prot., ``Data Point: Frequent Overdrafters''
(2017), available at http://files.consumerfinance.gov/f/documents/201708_cfpb_data-point_frequent-overdrafters.pdf; Bureau of Consumer
Fin. Prot., ``Data Point: Checking Account Overdraft'' (2014),
available at http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf; Bureau of Consumer
Fin. Prot., ``CFPB Study of Overdraft Programs: A White Paper of
Initial Data Findings'' (2013), available at http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf (hereinafter ``CFPB Study of Overdraft Programs White
Paper'').
\12\ Pawn lending, also known as pledge lending, has existed for
centuries, with references to it in the Old Testament; pawn lending
in the U.S. began in the 17th century. See Susan Payne Carter,
``Payday Loan and Pawnshop Usage: The Impact of Allowing Payday Loan
Rollovers,'' at 5 (Jan. 15, 2012), available at https://my.vanderbilt.edu/susancarter/files/2011/07/Carter_Susan_JMP_Web
site2.pdf. The two largest pawn firms, EZCORP and FirstCash, account
for about 13 percent of approximately 13,000 pawn storefronts. The
remaining storefronts are operated by small, independent firms.
EZCORP, ``Investor Update: Business Transformation Delivering
Results,'' at 7 (Mar. 7, 2017), available at http://investors.ezcorp.com/download/Investor+Presentation_030717.pdf.
FirstCash, Inc., is the company resulting from the September 2016
merger of FirstCash Financial Services and Cash America. FirstCash
operates in 26 States. FirstCash, Inc., 2016 Annual Report (Form 10-
K), at 1 (Mar. 1, 2017). See generally, John P. Caskey, ``Fringe
Banking: Cash-Checking Outlets, Pawnshops, and the Poor,'' at
Chapter 2 (New York: Russell Sage Foundation 1994).
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This rulemaking is focused on two general categories of liquidity
loan products: (1) Short-term loans and longer-term balloon-payment
loans; and (2) with regard to payment practices, a broader set of
liquidity loan products that also includes certain higher-cost longer-
term installment loans. The largest category of short-term loans are
``payday loans,'' which are generally required to be repaid in a lump-
sum single-payment on receipt of the borrower's next income payment,
and short-term vehicle title loans, which are also almost always due in
a lump-sum single-payment, typically within 30 days after the loan is
made. The final rule's underwriting requirements also apply to
depository advance products and other loans of 45 days or less in
duration, as well as certain longer-term balloon-payment loans that
generally involve a series of small, often interest-only, payments
followed by a single final large lump sum payment. The final rule's
payment presentment requirements apply to short-term and longer-term
balloon-payment products, as well as to certain higher-cost longer-term
installment loans. That latter category includes what are often
referred to as ``payday installment loans''--that is, loans that are
repaid in multiple installments with each installment typically due on
the borrower's payday or regularly scheduled income payment and with
the lender having the ability to automatically collect payments from an
account into which the income payment is deposited. In addition, the
latter category includes certain high-cost installment loans made by
more traditional finance companies.
This rulemaking includes both closed-end loans and open-end lines
of credit.\13\ As described in the section-by-section analysis, the
Bureau has been studying these markets for liquidity loans for over
five years, gaining insights from a variety of sources. During this
time the Bureau has conducted supervisory examinations of a number of
payday lenders and enforcement investigations of a number of different
types of liquidity lenders, which have given the Bureau insights into
the business models and practices of such lenders. Through these
processes, and through market monitoring activities, the Bureau also
has obtained extensive loan-level data that the Bureau has studied to
better understand risks to consumers.\14\ The Bureau has published five
reports based upon these data.\15\ The Bureau has also carefully
reviewed the published literature with respect to small-dollar
liquidity loans and a number of outside researchers have presented
their research at seminars for Bureau staff. In addition, over the
course of the past five years the Bureau has engaged in extensive
outreach with a variety of stakeholders in both formal and informal
settings, including several Bureau field hearings across the country
specifically focused on the subject of small-dollar lending, meetings
with the Bureau's standing advisory groups, meetings with State and
Federal regulators, meetings with consumer advocates, religious groups,
and industry trade associations, Tribal consultations, and through a
Small Business Review Panel process as described further below. As
described in Summary of the Rulemaking Process, the Bureau received and
reviewed over one million comments on its proposal, mostly from lenders
and borrowers within the respective markets.
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\13\ The Dodd-Frank Act does not define ``payday loan,'' though
it refers to the term in section 1024(a)(1)(E), and the Bureau is
not proposing to define it in this rulemaking. The Bureau may do so
in a subsequent rulemaking or in another context. In addition, the
Bureau notes that various State, local, and Tribal jurisdictions may
define ``payday loans'' in ways that may be more or less coextensive
with the coverage of the Bureau's rule.
\14\ Information underlying this proposed rule is derived from a
variety of sources, including from market monitoring and outreach,
third-party studies and data, consumer complaints, the Bureau's
enforcement and supervisory work, and the Bureau's expertise
generally. In publicly discussing information, the Bureau has taken
steps not to disclose confidential information inappropriately and
to otherwise comply with applicable law and its own rules regarding
disclosure of records and information. See 12 CFR 1070.41(c).
\15\ See Bureau of Consumer Fin. Prot., ``Payday Loans and
Deposit Advance Products: A White Paper of Initial Data Findings''
(2013), available at http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf [hereinafter ``CFPB Payday
Loans and Deposit Advance Products White Paper'']; Bureau of
Consumer Fin. Prot., ``CFPB Data Point: Payday Lending'' (2014),
available at http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf [hereinafter ``CFPB Data
Point: Payday Lending'']; Bureau of Consumer Fin. Prot., ``Online
Payday Loan Payments'' (2016), available at http://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf [hereinafter CFPB Online Payday Loan Payments]; Bureau
of Consumer Fin. Prot., ``Single-Payment Vehicle Title Lending''
(2016), available at http://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf [hereinafter
``CFPB Single-Payment Vehicle Title Lending'']; Bureau of Consumer
Fin. Prot., ``Supplemental Findings on Payday, Payday Installment,
and Vehicle Title Loans, and Deposit Advance Products'' (2016),
available at https://www.consumerfinance.gov/data-research/research-reports/supplemental-findings-payday-payday-installment-and-vehicle-title-loans-and-deposit-advance-products/ (hereinafter ``CFPB Report
on Supplemental Findings'').
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This Background section provides a brief description of the major
components of the markets for short-term loans and longer-term balloon-
payment loans, describing the product parameters, industry size and
structure, lending practices, and business models of major market
segments. The Background section also provides a brief overview of the
additional markets for higher-cost longer-term installment loans that
are subject to the payment practices components of the final rule. This
section also describes recent State and Federal regulatory activity in
connection with these various product markets. Market Concerns--
Underwriting below, provides a more detailed description of consumer
experiences with short-term loans describing research about which
consumers use the products, why they use the products, and the outcomes
they experience as a result of the product structures and industry
practices. The Background section also includes an
[[Page 54476]]
extensive description of the methods by which lenders initiate payments
from consumers' accounts. Market Concerns--Payments, below, describes
consumer experiences and concerns with these payment practices. Most of
the comments received on the proposal's Background section agreed in
general terms with the descriptions of the markets and products
described below, although there may be slight differences in individual
lenders' loan products and business practices. Comments that provided
significantly different information are noted below.
B. Short-Term, Hybrid, and Balloon-Payment Loans
Providing short-term loans for liquidity needs has been a long-term
challenge in the consumer financial services market due to the fixed
costs associated with loan origination regardless of loan size. At the
beginning of the twentieth century, concern arose with respect to
companies that were responding to liquidity needs by offering to
``purchase'' a consumer's paycheck in advance of it being paid. These
companies charged fees that, if calculated as an annualized interest
rate, were as high as 400 percent.\16\ To address these concerns,
between 1914 and 1943, 34 States enacted a form of the Uniform Small
Loan Law, which was a model law developed by the Russell Sage
Foundation. That law provided for lender licensing and permitted
interest rates of between 2 and 4 percent per month, or 24 to 48
percent per year. Those rates were substantially higher than pre-
existing usury limits (which generally capped interest rates at between
6 and 8 percent per year) but were viewed by proponents as ``equitable
to both borrower and lender.'' \17\
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\16\ Salary advances were structured as wage assignments rather
than loans to evade much lower State usury caps of about 8 percent
per annum or less. John P. Caskey, ``Fringe Banking and the Rise of
Payday Lending,'' at 17, 23 (Patrick Bolton & Howard Rosenthal eds.,
New York: Russell Sage Foundation, 2005).
\17\ Elisabeth Anderson, ``Experts, Ideas, and Policy Change:
The Russell Sage Foundation and Small Loan Reform, 1909-1941,'' 37
Theory & Soc'y 271, 276, 283, 285 (2008), available at http://www.jstor.org/stable/40211037 (quoting Arthur Ham, Russell Sage
Foundation, Feb. 1911, Quarterly Report, Library of Congress Russell
Sage Foundation Archive, Box 55).
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New forms of short-term small-dollar lending appeared in several
States in the 1990s,\18\ starting with check cashing outlets that would
hold a customer's personal check for a period of time for a fee before
cashing it (``check holding'' or ``deferred presentment''). One of the
larger payday lenders began making payday loans in Kansas in 1992, and
that same year at least one State regulator issued an administrative
interpretation holding that deferred presentment activities were
consumer loans subject to that State's licensing and consumer lending
laws.\19\ One commenter described his role in developing and expanding
the deferred presentment lending industry in Tennessee in the early
1990s prior to any regulation in that State, while noting that those
same activities required lending licenses in two nearby States.
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\18\ See Pew Charitable Trusts, ``A Short History of Payday
Lending Law,'' (July 18, 2012), available at http://www.pewtrusts.org/en/research-and-analysis/analysis/2012/07/a-short-history-of-payday-lending-law.
\19\ QC Holdings, Inc., Registration Statement (Form S-1), at 1
(May 7, 2004);), see, e.g., Laura Udis, Adm'r Colo. Dep't of Law,
Unif. Consumer Credit Code, ``Check Cashing Entities Which Provide
Funds In Return For A Post-Dated Check Or Similar Deferred Payment
Arrangement And Which Impose A Check Cashing Charge Or Fee May Be
Consumer Lenders Subject To The Colorado Uniform Consumer Credit
Code,'' Administrative Interpretation No. 3.104-9201 (June 23, 1992)
(on file).
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Several market factors converged around the same time that spurred
the development of these new forms of short-term small-dollar lending.
Consumers were using credit cards more frequently for short-term
liquidity lending needs, a trend that continues today.\20\ Storefront
finance companies, described below in part II.C, that had provided
small loans changed their focus to larger, collateralized products,
including vehicle financing and real estate secured loans. At the same
time there was substantial consolidation in the storefront installment
lending industry. Depository institutions similarly moved away from
short-term small-dollar loans.
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\20\ Robert D. Manning, ``Credit Card Nation: The Consequences
of America's Addiction to Credit'' (Basic Books 2000); Amy Traub,
``Debt Disparity: What Drives Credit Card Debt in America,'' Demos
(2014), available at http://www.demos.org/sites/default/files/publications/DebtDisparity_1.pdf.
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Around the same time, a number of State legislatures amended their
usury laws to allow lending by a broader group of both depository and
non-depository lenders by increasing maximum allowable State interest
rates or eliminating State usury laws, while other States created usury
carve-outs or special rules for short-term loans.\21\ The confluence of
these trends has led to the development of markets offering what are
commonly referred to as payday loans (also known as cash advance loans,
deferred deposit, and deferred presentment loans depending on lender
and State law terminology), and short-term vehicle title loans that are
much shorter in duration than vehicle-secured loans that have
traditionally been offered by storefront installment lenders and
depository institutions. Although payday loans initially were
distributed through storefront retail outlets, they are now also widely
available on the Internet. Vehicle title loans are typically offered
exclusively at storefront retail outlets.
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\21\ See Pew Charitable Trusts, ``A Short History of Payday
Lending Law'' (July 18, 2012). This article notes that State
legislative changes were in part a response to the ability of
Federally- and State-chartered banks to lend without being subject
to the usury laws of the borrower's State.
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These markets as they have evolved over the last two decades are
not strictly segmented. There is substantial overlap between market
products and the borrowers who use them. For example, in a 2015 survey,
almost 14.8 percent of U.S. households that had used a payday loan in
the prior year had also used a vehicle title loan.\22\ There is also an
established trend away from ``monoline'' or single-product lending
companies. Thus, for example, a number of large payday lenders also
offer vehicle title and installment loans.\23\ The following discussion
nonetheless provides a description of major product types.
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\22\ Estimates by the Bureau's Office of Research are based on
data derived from FDIC. Fed. Deposit Ins. Corp., ``2015 FDIC
National Survey of Unbanked and Underbanked Households'' (Oct. 20,
2016), available at https://www.fdic.gov/householdsurvey/2015/2015report.pdf.
\23\ See, e.g., Advance America, ``Title Loan Services,''
available at https://www.advanceamerica.net/services/title-loans
(last visited Mar. 3, 2016); FirstCash, ``Own Your Car? Need Cash
Now? Drive Away with Cash in Minutes,'' available at http://ww2.firstcash.com/title-loans (last visited May 15, 2017); Check
Into Cash, ``Auto Title Loans,'' available at https://checkintocash.com/commercial/auto-title-loans/ (last visited Sept.
14, 2017); Community Choice Financial/CheckSmart ``Get Cash Fast,''
available at https://www.ccfi.com/checksmart/ (last visited Mar. 3,
2016); Speedy Cash, ``Title Loans,'' available at https://www.speedycash.com/title-loans/ (last visited Sept. 14, 2017); PLS
Financial Services, ``Title Loans,'' available at http://pls247.com/il/loans.html (last visited Mar. 3, 2016). Moneytree offers vehicle
title and installment loans in Idaho and Nevada. See, e.g., Money
Tree Inc., ``Title Loans (Idaho),'' available at https://www.moneytreeinc.com/loans/idaho/title-loans (last isited Mar. 3,
2016); Money Tree Inc., ``Title Loans (Nevada),'' available at
https://www.moneytreeinc.com/loans/nevada/title-loans (last visited
Mar. 3, 2016).
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Storefront Payday Loans
The market that has received the greatest attention among policy
makers, advocates, and researchers is the market for single-payment
payday loans. These payday loans are short-term small-dollar loans
generally repayable in a single payment due when the consumer is
scheduled to receive a paycheck or other inflow of income (e.g.,
government
[[Page 54477]]
benefits).\24\ For most borrowers, the loan is due in a single payment
on their payday, although State laws with minimum loan terms--seven
days for example--or lender practices may affect the loan duration in
individual cases. The Bureau refers to these short-term payday loans
available at retail locations as ``storefront payday loans,'' but the
requirements for borrowers taking online payday loans are generally
similar, as described below. There are now 35 States that either have
created a carve-out from their general usury cap for payday loans or
have no usury caps on consumer loans.\25\ The remaining 15 States and
the District of Columbia either ban payday loans or have fee or
interest rate caps that payday lenders apparently find too low to
sustain their business models. As discussed further below, several of
these States previously had authorized payday lending but subsequently
changed their laws.
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\24\ For convenience, this discussion refers to the next
scheduled inflow of income as the consumer's next ``payday'' and the
inflow itself as the consumer's ``paycheck'' even though these are
misnomers for consumers whose income comes from government benefits.
\25\ See Pew Charitable Trusts, ``State Payday Loan Regulation
and Usage Rates'' (Jan. 14, 2014), available at http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates (for a list of States). Other
reports reach slightly different totals of payday authorizing States
depending on their categorization methodology. See, e.g., Susanna
Montezemolo, ``The State of Lending in America & Its Impact on U.S.
Households: Payday Lending Abuses and Predatory Practices,'' at 32-
33 (Ctr. for Responsible Lending 2013), available at http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf; Consumer Fed'n of Am., ``Legal Status of Payday Loans by
State,'' available at http://www.paydayloaninfo.org/state-information (last visited Apr. 6, 2016) (lists 32 States as having
authorized or allowed payday lending). Since publication of these
reports, South Dakota enacted a 36 percent usury cap for consumer
loans. Press Release, S.D. Dep't of Labor and Reg., ``Initiated
Measure 21 Approved'' (Nov. 10, 2016), available at http://dlr.sd.gov/news/releases16/nr111016_initiated_measure_21.pdf.
Legislation in New Mexico prohibiting short-term payday and vehicle
title loans will go into effect on January 1, 2018. Regulatory
Alert, N.M. Reg. and Licensing Dep't, ``Small Loan Reforms,''
available at http://www.rld.state.nm.us/uploads/files/HB%20347%20Alert%20Final.pdf.
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Product definition and regulatory environment. As noted above,
payday loans are typically repayable in a single payment on the
borrower's next payday. In order to help ensure repayment, in the
storefront environment the lender generally holds the borrower's
personal check made out to the lender--usually post-dated to the loan
due date in the amount of the loan's principal and fees--or the
borrower's authorization to electronically debit the funds from her
checking account, commonly known as an automated clearing house (ACH)
transaction.\26\ Payment methods are described in more detail below in
part II.D.
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\26\ The Bureau is aware from market outreach that at a
storefront payday lender's Tennessee branch, almost 100 percent of
customers opted to provide ACH authorization rather than leave a
post-dated check for their loans. See also Speedy Cash, ``Can Anyone
Get a Payday Loan?,'' available at https://www.speedycash.com/faqs/payday-loans/ (last visited Feb. 4, 2016) (``If you choose to apply
in one of our payday loan locations, you will need to provide a
repayment source which can be a personal check or your bank routing
information.''); QC Holdings, Inc., 2014 Annual Report (Form 10-K),
at 3, 6 (Mar. 12, 2015); FirstCash, Inc., 2016 Annual Report (Form
10-K), at 21.
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Payday loan sizes vary depending on State law limits, individual
lender credit models, and borrower demand. Many States set a limit on
payday loan size; $500 is a common loan limit although the limits range
from $300 to $1,000.\27\ In 2013, the Bureau reported that the median
loan amount for storefront payday loans was $350, based on supervisory
data.\28\ This finding is broadly consistent with other studies using
data from one or more lenders as well as with self-reported information
in surveys of payday borrowers \29\ and State regulatory reports.\30\
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\27\ At least 19 States cap payday loan amounts between $500 and
$600 (Alabama, Alaska, Florida, Hawaii, Iowa, Kansas, Kentucky,
Michigan, Mississippi, Missouri, Nebraska, North Dakota, Ohio,
Oklahoma, Rhode Island, South Carolina, Tennessee, and Virginia),
California limits payday loans to $300 (including the fee), and
Delaware caps loans at $1,000. Ala. Code sec. 5-18A-12(a); Alaska
Stat. sec. 06.50.410; Cal. Fin. Code sec. 23035(a); Del. Code Ann.
tit. 5, sec. 2227(7); Fla. Stat. sec. 560.404(5); Haw. Rev. Stat.
sec. 480F-4(c); Iowa Code sec. 533D.10(1)(b); Kan. Stat. Ann. sec.
16a-2-404(1)(c); Ky. Rev. Stat. Ann. sec. 286.9-100(9); Mich. Comp.
Laws sec. 487.2153(1); Miss. Code Ann. sec. 75-67-519(2); Mo. Rev.
Stat. sec. 408.500(1); Neb. Rev. Stat. sec. 45-919(1)(b); N.D. Cent.
Code sec. 13-08-12(3); Ohio Rev. Code Ann. sec. 1321.39(A); Okla.
Stat. tit. 59, sec. 3106(7), R.I. Gen. Laws sec. 19-14.4-5.1(a);
S.C. Code Ann. sec. 34-39-180(B); Tenn. Code Ann. sec. 45-17-112(o);
Va. Code Ann. sec. 6.2-1816(5). States that limit the loan amount to
the lesser of a percent of the borrower's income or a fixed-dollar
amount include Idaho--25 percent or $1,000, Illinois--25 percent or
$1,000, Indiana--20 percent or $550, Washington--30 percent or $700,
and Wisconsin--35 percent or $1,500. At least two States cap the
maximum payday loan at 25 percent of the borrower's gross monthly
income (Nevada and New Mexico). A few States' laws are silent as to
the maximum loan amount (Utah and Wyoming). Idaho Code Ann. secs.
28-46-413(1), (2); 815 Ill. Comp. Stat. 122/2-5(e); Ind. Code secs.
24-4.5-7-402, 404; Nev. Rev. Stat. sec. 604A.425(1)(b); N.M. Stat.
Ann. sec. 58-15-32(A); Utah Code Ann. sec. 7-23-401; Wash. Rev. Code
sec. 31.45.073(2); Wis. Stat. sec. 138.14(12)(b); Wyo. Stat. Ann.
sec. 40-14-363. As noted above, the New Mexico statute will be
repealed on Jan. 1, 2018. See N.M. H.B. 347, 53d Leg., 1st Sess.
(N.M. 2017), available at https://www.nmlegis.gov/Sessions/17%20Regular/final/HB0347.pdf (hereinafter N.M. H.B. 347).
\28\ CFPB Payday Loans and Deposit Advance Products White Paper,
at 15.
\29\ Leslie Parrish & Uriah King, ``Phantom Demand: Short-term
Due Date Generates Need for Repeat Payday Loans, Accounting for 76%
of Total Volume,'' at 21 (Ctr. for Responsible Lending 2009),
available at http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf (reporting $350 as the
average loan size); Pew Charitable Trusts, ``Payday Lending in
America: Who Borrows, Where They Borrow, and Why,'' at 9 (Report 3,
2013), available at http://www.pewtrusts.org/~/media/legacy/
uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf
(reporting $375 as the average). Leslie Parrish & Uriah King, Ctr.
\30\ See, e.g., Ill. Dep't. of Fin. & Prof. Reg., ``Illinois
Trends Report All Consumer Loan Products Through December 2015,'' at
15 (Apr. 14, 2016), available at http://www.idfpr.com/DFI/CCD/pdfs/IL_Trends_Report%202015-%20FINAL.pdf?ActID=1204&ChapterID=20)
($355.85 is the average for Illinois); Idaho Dep't. of Fin., ``Idaho
Credit Code `Fast Facts','' at 5 (Fiscal and Annual Report Data as
of January 1, 2016), available at https://www.finance.idaho.gov/ConsumerFinance/Documents/Idaho-Credit-Code-Fast-Facts-With-Fiscal-Annual-Report-Data-01012016.pdf ($350 is the average for Idaho);
Wash. State Dep't. of Fin. Insts., ``2015 Payday Lending Report,''
at 6 (2015), available at http://www.dfi.wa.gov/sites/default/files/reports/2015-payday-lending-report.pdf ($387.35 is the average for
Washington). For example: $355.85 (Illinois average, see Ill.
---------------------------------------------------------------------------
The fee for a payday loan is generally structured as a percentage
or dollar amount per $100 borrowed, rather than a periodic interest
rate based on the amount of time the loan is outstanding. Many State
laws set a maximum amount for these fees, with 15 percent ($15 per $100
borrowed) being the most common limit.\31\ The median storefront payday
loan fee is $15 per $100; thus for a $350 loan, the borrower must repay
$52.50 in finance charges together with the $350 borrowed for a total
repayment amount of $402.50.\32\ The annual percentage rate (APR) on a
14-day loan with these terms is 391 percent.\33\ For payday borrowers
[[Page 54478]]
who receive monthly income and thus receive a 30-day or monthly payday
loan--many of whom are Social Security recipients \34\--a $15 per $100
charge on a $350 loan for a term of 30 days equates to an APR of about
180 percent. The Bureau has found the median loan term for a storefront
payday loan to be 14 days, with an average term of 18.3 days. The
longer average loan duration is due to State laws that require minimum
loan terms that may extend beyond the borrower's next pay date.\35\
Fees and loan amounts are higher for online loans, described in more
detail below.
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\31\ Of the States that expressly authorize payday lending,
Rhode Island has the lowest cap at 10 percent of the loan amount.
Florida has the same fee amount but also allows a flat $5
verification fee. Oregon's fees are $10 per $100 capped at $30 plus
36 percent interest. Some States have tiered caps depending on the
size of the loan. Generally, in these States the cap declines with
loan size. However, in Mississippi, the cap is $20 per $100 for
loans under $250 and $21.95 for larger loans (up to the State
maximum of $500). Six States do not cap fees on payday loans or are
silent on fees (Delaware, Idaho, Nevada, and Texas (no cap on credit
access business fees) and Utah and Wisconsin (silent on fees)).
Depending on State law, the fee may be referred to as a ``charge,''
``rate,'' ``interest,'' or other similar term. R.I. Gen. Laws sec.
19-14.4-4(4); Fla. Stat. sec. 560.404(6); Or. Rev. Stat. sec.
725A.064(1)-()-(2); Miss. Code Ann. sec. 75-67-519(4); Del. Code
Ann. tit. 5, sec. 2229; Idaho Code Ann. sec. 28-46-412(3); Tex. Fin.
Code Ann. sec. 393.602(b); Utah Code Ann. sec. 7-23-401; Wis. Stat.
sec. 138.14(10)(a).
\32\ ``CFPB Payday Loans and Deposit Advance Products White
Paper,'' at 15-17.
\33\ Throughout part II, APR refers to the annual percentage
rate calculated as required by the Truth in Lending Act, 15 U.S.C.
1601 et seq. and Regulation Z, 12 CFR part 1026, except where
otherwise specified.
\34\ ``CFPB Payday Loans and Deposit Advance Products White
Paper,'' at 16, 19 (33 percent of payday loans borrowers receive
income monthly; 18 percent of payday loan borrowers are public
benefits recipients, largely from Social Security including
Supplemental Security Income and Social Security Disability,
typically paid on a monthly basis).
\35\ For example, Washington requires the due date to be on or
after the borrower's next pay date but if the pay date is within
seven days of taking out the loan, the due date must be on the
second pay date after the loan is made. Wash. Rev. Code sec.
31.45.073(2). A number of States set minimum loan terms, some of
which are tied directly to the consumer's next payday.
---------------------------------------------------------------------------
On the loan's due date, the terms of the loan obligate the borrower
to repay the loan in full. Although the States that created exceptions
to their usury limits for payday lending generally did so on the theory
these were short-term loans to which the usual usury rules did not
easily apply, in 18 of the States that authorize payday lending the
lender is permitted to roll over the loan when it comes due. A rollover
occurs when, instead of repaying the loan in full at maturity, the
consumer pays only the fees due and the lender agrees to extend the due
date.\36\ By rolling over, the loan repayment of the principal is
extended for another period of time, usually equivalent to the original
loan term, in return for the consumer's agreement to pay a new set of
fees calculated in the same manner as the initial fees (e.g., 15
percent of the loan principal). The rollover fee is not applied to
reduce the loan principal or amortize the loan. As an example, if the
consumer borrows $300 with a fee of $45 (calculated as $15 per $100
borrowed), the consumer will owe $345 on the due date, typically 14
days later. On the due date, if the consumer cannot afford to repay the
entire $345 due or is otherwise offered the option to roll over the
loan, she will pay the lender $45 for another 14 days. On the 28th day,
the consumer will owe the original $345 and if she pays the loan in
full then, will have paid a total of $90 for the loan.
---------------------------------------------------------------------------
\36\ This rulemaking uses the term ``rollover'' but this
practice is sometimes described under State law or by lenders as a
``renewal'' or an ``extension.''
---------------------------------------------------------------------------
In some States in which rollovers are permitted they are subject to
certain limitations such as a cap on the number of rollovers or
requirements that the borrower amortize--repay part of the original
loan amount--on the rollover. Other States have no restrictions on
rollovers. Specially, 17 of the States that authorize single-payment
payday lending prohibit lenders from rolling over loans and 11 more
States impose some rollover limitations.\37\ However, in most States
where rollovers are prohibited or limited, there is no restriction on
the lender immediately making a new loan to the consumer (with new
fees) after the consumer has repaid the prior loan. New loans made the
same day, or ``back-to-back'' loans, effectively replicate a rollover
because the borrower remains in debt to the lender on the borrower's
next payday.\38\ Ten States have implemented a cooling-off period
before a lender may make a new loan. The most common cooling-off period
is one day, although some States have longer periods following a
specified number of rollovers or back-to-back loans.\39\
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\37\ States that prohibit rollovers include California, Florida,
Hawaii, Illinois, Indiana, Kentucky, Michigan, Minnesota,
Mississippi, Nebraska, New Mexico, Oklahoma, South Carolina,
Tennessee, Virginia, Washington, and Wyoming. Cal. Fin. Code sec.
23037(a); Fla. Stat. sec. 560.404(18); Haw. Rev. Stat. sec. 480F-
4(d); 815 Ill. Comp. Stat. 122/2-30; Ind. Code sec. 24-4.5-7-402(7);
Ky. Rev. Stat. Ann. sec. 286.9-100(14); Mich. Comp. Laws sec.
487.2155(1); Minn. Stat. sec. 47.60(2)(f); Miss. Code Ann. sec. 75-
67-519(5); Neb. Rev. Stat. sec. 45-919(1)(f); N.M. Stat. Ann. sec.
58-15-34(A) (to be repealed January 1, 2018 as noted above); Okla.
Stat. tit. 59, sec. 3109(A); S.C. Code Ann. sec. 34-39-180(F); Tenn.
Code Ann. sec. 45-17-112(q); Va. Code Ann. sec. 6.2-1816(6); Wash.
Rev. Code sec. 31.45.073(2); Wyo. Stat. Ann. sec. 40-14-364. Other
States such as Iowa and Kansas restrict a loan from being repaid
with the proceeds of another loan. Iowa Code sec. 533D.10(1)(e);
Kan. Stat. Ann. sec. 16a-2-404(6). Other States that permit some
degree of rollovers include: Alabama (one); Alaska (two); Delaware
(four); Idaho (three); Missouri (six if there is at least 5 percent
principal reduction on each rollover); Nevada (may extend loan up to
60 days after the end of the initial loan term); North Dakota (one);
Oregon (two); Rhode Island (one); Utah (allowed up to 10 weeks after
the execution of the first loan); and Wisconsin (one). Ala. Code
sec. 5-18A-12(b); Alaska Stat. sec. 06.50.470(b); Del. Code Ann.
tit. 5, sec. 2235A(a)(2); Idaho Code Ann. sec. 28-46-413(9); Mo.
Rev. Stat. sec. 408.500(6); Nev. Rev. Stat. sec. 604A.480(1); N.D.
Cent. Code sec. 13-08-12(12); Or. Rev. Stat. sec. 725A.064(6); R.I.
Gen. Laws sec. 19-14.4-5.1(g); Utah Code Ann. sec. 7-23-401(4)(b);
Wis. Stat. sec. 138.14 (12)(a).
\38\ See CFPB Payday Loans and Deposit Advance Products White
Paper, at 94; Julie A. Meade, Adm'r of the Colo. Unif. Consumer
Credit Code Unit, Colo. Dep't of Law, ``Payday Lending Demographic
and Statistical Information: July 2000 through December 2012,'' at
24 (Apr. 10, 2014), available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/DemoStatsInfo/ddlasummary2000-2012.pdf; Pew Charitable Trusts, ``Payday Lending in
America: Who Borrows, Where They Borrow, and Why,'' at 15 (Report 1,
2012), available at http://www.pewtrusts.org/~/media/legacy/
uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf; Leslie
Parrish & Uriah King, ``Phantom Demand: Short-term Due Date
Generates Need for Repeat Payday Loans, Accounting for 76% of Total
Volume,'' at 7 (Ctr. for Responsible Lending 2009), available at
http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf.
\39\ States with cooling-off periods include: Alabama (next
business day after a rollover is paid in full); Florida (24 hours);
Illinois (seven days after a consumer has had payday loans for more
than 45 days); Indiana (seven days after five consecutive loans);
New Mexico (10 days after completing an extended payment plan) (to
be repealed Jan. 1, 2018 as noted above); North Dakota (three
business days); Ohio (one day with a two loan limit in 90 days, four
per year); Oklahoma (two business days after fifth consecutive
loan); Oregon (seven days); South Carolina (one business day between
all loans and two business days after seventh loan in a calendar
year); Virginia (one day between all loans, 45 days after fifth loan
in a 180-day period, and 90 days after completion of an extended
payment plan or extended term loan); and Wisconsin (24 hour after
renewals). Ala. Code sec. 5-18A-12(b); Fla. Stat. sec. 560.404(19);
815 Ill. Comp. Stat. 122/2-5(b); Ind. Code sec. 24-4.5-7-401(2);
N.M. Stat. Ann. sec. 58-15-36; N.D. Cent. Code sec. 13-08-12(4);
Ohio Rev. Code Ann. sec. 1321.41(E), (N), (R); Okla. Stat. tit. 59,
sec. 3110; Or. Rev. Stat. sec. 725A.064(7); S.C. Code Ann. sec. 34-
39-270(A), (B); Va. Code Ann. sec. 6.2-1816(6); Wis. Stat. sec.
138.14(12)(a).
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At least 17 States have adopted laws that require payday lenders to
offer borrowers the option of taking an extended repayment plan when
they encounter difficulty in repaying payday loans.\40\ Details about
the extended repayment plans vary including: Borrower eligibility (in
some States only prior to the lender instituting collections or
litigation); how borrowers may elect to participate in repayment plans;
the number and timing of payments; the length of plans; permitted fees
for plans; requirements for credit counseling; requirements to report
plan payments to a statewide database; cooling-off or ``lock-out''
periods for new loans after completion of plans; and the consequences
of plan defaults.
[[Page 54479]]
Two States more generally allow lenders the discretion to offer
borrowers an extension of time to repay or enter into workout
agreements with borrowers having repayment difficulties.\41\ The
effects of these various restrictions are discussed further below in
Market Concerns--Underwriting.
---------------------------------------------------------------------------
\40\ States with statutory extended repayment plans include:
Alabama, Alaska, Florida, Idaho, Illinois, Indiana, Louisiana,
Michigan (fee permitted), Nevada, New Mexico (to be repealed Jan. 1,
2018 as noted above), Oklahoma (fee permitted), South Carolina,
Utah, Virginia, Washington, Wisconsin, and Wyoming. Florida also
requires that as a condition of providing a repayment plan (called a
grace period), borrowers make an appointment with a consumer credit
counseling agency and complete counseling by the end of the plan.
Ala. Code sec. 5-18A-12(c); Alaska Stat. sec. 06.50.550(a); Fla.
Stat. sec. 560.404(22)(a); Idaho Code Ann. sec. 28-46-414; 815 Ill.
Comp. Stat. 122/2-40; Ind. Code sec. 24-4.5-7-401(3); La. Rev. Stat.
Ann. sec. 9:3578.4.1; Mich. Comp. Laws sec. 487.2155(2); Nev. Rev.
Stat. sec. 604A.475(1); N.M. Stat. Ann. sec. 58-15-35; Okla. Stat.
tit. 59, sec. 3109(D); S.C. Code Ann. sec. 34-39-280; Utah Code Ann.
sec. 7-23-403; Va. Code Ann. sec. 6.2-1816(26); Wash. Rev. Code sec.
31.45.084(1); Wis. Stat. sec. 138.14(11)(g); Wyo. Stat. Ann. sec.
40-14-366(a).
\41\ California (no fees permitted) and Delaware are States that
permit payday lenders to extend the time for repayment of payday
loans. Cal. Fin. Code sec. 23036(b); Del. Code Ann. tit. 5, sec.
2235A(a)(2).
---------------------------------------------------------------------------
Industry size and structure. There are various estimates as to the
number of consumers who use payday loans on an annual basis. One survey
found that 2.5 million households (2 percent of U.S. households) used
payday loans in 2015.\42\ In another survey, 3.4 percent of households
reported taking out a payday loan in the past year.\43\ These surveys
referred to payday loans generally, and did not specify whether they
were referring to loans made online or at storefront locations. One
report estimated the number of individual borrowers, rather than
households, was higher at approximately 12 million annually and
included both storefront and online loans.\44\ See Market Concerns--
Underwriting for additional information on borrower characteristics.
---------------------------------------------------------------------------
\42\ Fed. Deposit Ins. Corp., ``2015 FDIC National Survey of
Unbanked and Underbanked Households,'' at 2, 34 (Oct. 20, 2016),
available at https://www.fdic.gov/householdsurvey/2015/2015report.pdf.
\43\ Jesse Bricker, et al., ``Changes in U.S. Family Finances
from 2013 to 2016: Evidence from the Survey of Consumer Finances,''
at 27 (Bd. of Governors of the Fed. Reserve Sys., 103 Fed. Reserve
Bulletin No. 3, 2017), available at https://www.federalreserve.gov/publications/files/scf17.pdf.
\44\ Pew Charitable Trusts, ``Payday Lending in America: Who
Borrows, Where They Borrow, and Why,'' at 4 (Report 3, 2013),
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/
pcs_assets/2012/pewpaydaylendingreportpdf.pdf.
---------------------------------------------------------------------------
There are several ways to gauge the size of the storefront payday
loan industry. Typically, the industry has been measured by counting
the total dollar value of each loan made during the course of a year,
counting each rollover, back-to-back loan or other re-borrowing as a
new loan that is added to the total. By this metric, one industry
analyst estimated that from 2009 to 2014, storefront payday lending
generated approximately $30 billion in new loans per year and that by
2015 the volume had declined to $23.6 billion,\45\ although these
numbers may include products other than single-payment loans. The
analyst's estimate for combined storefront and online payday loan
volume was $45.3 billion in 2014 and $39.5 billion in 2015, down from a
peak of about $50 billion in 2007.\46\
---------------------------------------------------------------------------
\45\ John Hecht, ``The State of Short-Term Credit Amid
Ambiguity, Evolution and Innovation'' (2016) (Jefferies LLC, slide
presentation) (on file); John Hecht, ``The State of Short-Term
Credit in a Constantly Changing Environment'' at 4 (2015) (Jeffries
LLC, slide presentation) (on file).
\46\ Hecht, ``Short-Term Credit Amid Ambiguity.''
---------------------------------------------------------------------------
Alternatively, the industry can be measured by calculating the
dollar amount of loan balances outstanding. Given the amount of payday
loan re-borrowing, which results in the same funds of the lender being
used to finance multiple loan originations to the same borrower, the
dollar amount of loan balances outstanding may provide a more nuanced
sense of the industry's scale. Using this metric, the Bureau estimates
that in 2012, storefront payday lenders held approximately $2 billion
in outstanding single-payment loans.\47\ In 2015, industry revenue
(fees paid on storefront payday loans) was an estimated $3.6 billion,
representing 15 percent of loan originations. Combined storefront and
online payday revenue was estimated at $8.7 billion in 2014 and $6.7
billion in 2015, down from a peak of over $9 billion in 2012.\48\
---------------------------------------------------------------------------
\47\ The Bureau's staff estimate is based on public company
financial information, confidential information gathered in the
course of statutory functions, and industry analysts' reports. The
estimate is derived from lenders' single-payment payday loans gross
receivables and gross revenue and industry analysts' reports on loan
volume and revenue. No calculations were done for 2013 to 2016, but
that estimate would be less than $2 billion due to changes in the
market as the industry has shifted away from single-payment payday
loans to products discussed below.
\48\ Hecht, ``Short-Term Credit Amid Ambiguity.''
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In the last several years, it has become increasingly difficult to
identify the largest payday lenders due to firm mergers,
diversification by many lenders into a range of products including
installment loans and retraction by others into pawn loans, and the
lack of available data because most firms are privately held. However,
there are at least 10 lenders with approximately 200 or more storefront
locations.\49\ Only a few of these firms are publicly traded
companies.\50\ Most large payday lenders are privately held,\51\ and
the remaining payday loan stores are owned by smaller regional or local
entities. The Bureau estimates there are about 2,400 storefront payday
lenders that are small entities as defined by the Small Business
Administration (SBA).\52\ Several industry commenters, an industry
trade association commenter, and a number of payday
[[Page 54480]]
lenders noted that they offer non-credit products and services at their
locations including check cashing, money transmission and bill
payments, sale of prepaid cards, and other services, some of which
require them to comply with other laws as ``money service businesses.''
---------------------------------------------------------------------------
\49\ These firms include: ACE Cash Express, Advance America,
Amscot Financial, Axcess Financial (CNG Financial, Check `n Go,
Allied Cash), Check Into Cash, Community Choice Financial
(Checksmart), CURO Financial Technologies (Speedy Cash/Rapid Cash),
DFC Global Corp (Money Mart), FirstCash, and QC Holdings. See Ace
Cash Express, ``Store Locator,'' available at https://www.acecashexpress.com/locations; Advance America, ``Find an Advance
America Store Location,'' available at https://www.advanceamerica.net/locations/find; Amscot Financial, Inc.,
``Amscot Locations,'' available at https://www.amscot.com/locations.aspx; Check `n Go, ``State Center,'' available at https://www.checkngo.com/resources/state-center; Allied Cash Advance,
``Allied Cash Advance Store Directory,'' available at https://locations.alliedcash.com/index.html; Check Into Cash, ``Payday Loan
Information By State,'' available at https://checkintocash.com/payday-loan-information-by-state; Community Choice Financial
(CheckSmart), ``Locations,'' available at https://www.ccfi.com/locations/; SpeedyCash, ``Speedy Cash Stores Near Me,'' available at
https://www.speedycash.com/find-a-store; DFC Global Corp., ``Home,''
available at http://www.dfcglobalcorp.com/index.html; FirstCash
Inc., ``Find a Location Near You,'' available at http://www.firstcash.com/; QC Holdings, Inc., ``Branch Locator,'' available
at https://www.qcholdings.com/branchlocator.aspx (all sites last
visited Jul. 26, 2017).
\50\ The publicly traded firms are Community Choice Financial
Inc./Cash Central/Checksmart (CCFI), EZCORP, Inc. (EZPW), FirstCash
Inc. (FCFS), and QC Holdings (QCCO). As noted above, in September
2016, FirstCash Financial Services merged with Cash America,
resulting in the company FirstCash Inc. Prior to the merger, in
November 2014, Cash America migrated its online loans to a spin-off
company, Enova. Cash America International, Inc., 2015 Annual Report
(Form 10-K), at 3 (Dec. 14, 2016). Both FCFS and Cash America had
been deemphasizing payday lending in the U.S., and shifting towards
pawn. In 2016, the new company, FirstCash, had only 45 stand-alone
consumer loan locations, in Texas, Ohio, and California, and 326
pawn locations that also offered consumer loans, compared to 1,085
pawn locations. Only 4 percent of its revenue was from non-pawn
consumer loans and credit services operations. (Credit services
organizations are described below.) FirstCash Inc., 2016 Annual
Report (Form 10-K), at 5, 7. In 2015, EZCORP exited payday,
installment, and auto title lending, focusing domestically on pawn
lending. EZCORP, Inc., 2016 Annual Report (Form 10-K), at 3 (Dec.
14, 2016). QC Holdings delisted from Nasdaq in February 2016 and is
traded over-the-counter. QC Holdings, Inc., Suspension of Duty to
File Reports Under Sections 13 and 15(d) (Form 15).
\51\ The larger privately held payday lending firms include
Advance America, ACE Cash Express, Axcess Financial (CNG Financial,
Check `n Go, Allied Cash), Check Into Cash, DFC Global (Money Mart),
PLS Financial Services, and Speedy Cash Holdings Corporation. See
Susanna Montezemolo, ``Payday Lending Abuses and Predatory
Practices: The State of Lending in America & Its Impact on U.S.
Households'' at 9-10 (Ctr. for Responsible Lending, 2013); John
Hecht, ``Alternative Financial Services: Innovating to Meet Customer
Needs in an Evolving Regulatory Framework'' (2014) (Stephens, Inc.,
slide presentation) (on file).
\52\ Bureau staff estimated the number of storefront payday
lenders using licensee information from State financial regulators,
firm revenue information from public filings and non-public sources,
and, for a small number of States, industry market research relying
on telephone directory listings from Steven Graves and Christopher
Peterson, available at http://www.csun.edu/~sg4002/research/data/
US_pdl_addr.xls. Based on these sources, there are approximately
2,503 storefront payday lenders, including those operating primarily
as loan arrangers or brokers, in the United States. Based on the
publicly-available revenue information, at least 56 of the firms
have revenue above the small entity threshold. Most of the remaining
firms operate a very small number of storefronts. Therefore, while
some of the firms without publicly available information may have
revenue above the small entity threshold, in the interest of being
inclusive they are all assumed to be small entities.
---------------------------------------------------------------------------
According to one industry analyst, there were an estimated 16,480
payday loan stores in 2015 in the United States, a decline from 19,000
stores in 2011 and down from the industry's 2007 peak of 24,043
storefronts.\53\
---------------------------------------------------------------------------
\53\ Hecht, ``Short-Term Credit Amid Ambiguity,'' at 7. Although
there is no estimate for 2016, the number of storefronts offering
payday loans is likely smaller due to the regulatory changes in
South Dakota, the exit of EZCORP from payday lending, and the merger
of First Cash Financial and Cash America, and its shift away from
payday lending. However, it is difficult to precisely measure the
number of stores that have shifted from payday to pawn lending,
rather than closing. By way of comparison, in 2015 there were 14,259
McDonald's fast food outlets in the United States. McDonald's Corp.,
2015 Annual Report (Form 10-K), at 23 (Feb. 25, 2016).
---------------------------------------------------------------------------
The average number of payday loan stores in a county with a payday
loan store is 6.32.\54\ The Bureau has analyzed payday loan store
locations in States which maintain lists of licensed lenders and found
that half of all stores are less than one-third of a mile from another
store, and three-quarters are less than a mile from the nearest
store.\55\ Even the 95th percentile of distances between neighboring
stores is only 4.3 miles. Stores tend to be closer together in counties
within metropolitan statistical areas (MSA).\56\ In non-MSA counties
the 75th percentile of distance to the nearest store is still less than
one mile, but the 95th percentile is 22.9 miles.
---------------------------------------------------------------------------
\54\ James R. Barth, et al., ``Do State Regulations Affect
Payday Lender Concentration?,'' at 12 (2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581622.
\55\ CFPB Report on Supplemental Findings, at 90.
\56\ An MSA is a geographic entity delineated by the Office of
Management and Budget. An MSA contains a core urban area of 50,000
or more in population. See U.S. Census Bureau, ``Metropolitan and
Micropolitan,'' available at http://www.census.gov/population/metro/
(last visited Apr. 7, 2016).
---------------------------------------------------------------------------
Research and the Bureau's own market outreach indicate that payday
loan stores tend to be relatively small with, on average, three full-
time equivalent employees.\57\ An analysis of loan data from 29 States
found that the average store made 3,541 advances in a year.\58\ Given
rollover and re-borrowing rates, a report estimated that the average
store served fewer than 500 customers per year.\59\
---------------------------------------------------------------------------
\57\ Mark Flannery & Katherine Samolyk, ``Payday Lending: Do the
Costs Justify the Price?,'' (FDIC Ctr. for Fin. Res., Working Paper
No. 2005-09, 2005), available at https://www.fdic.gov/bank/analytical/cfr/2005/wp2005/cfrwp_2005-09_flannery_samolyk.pdf.
\58\ Susanna Montezemolo, ``Payday Lending Abuses and Predatory
Practices: The State of Lending in America & Its Impact on U.S.
Households'' at 26 n.2 (Ctr. for Responsible Lending, 2013),
available at http://www.responsiblelending.org/state-of-lending/reports/10-Payday-Loans.pdf.
\59\ Pew Charitable Trusts, ``Payday Lending in America: Policy
Solutions,'' at 18 (Report 3, 2013), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/
pewpaydaypolicysolutionsoct2013pdf.pdf.
---------------------------------------------------------------------------
Marketing, underwriting, and collections practices. Payday loans
tend to be marketed as a short-term bridge to cover emergency expenses.
For example, one lender suggests that, for consumers who have
insufficient funds on hand to meet such an expense or to avoid a
penalty fee, late fee, or utility shut-off, a payday loan can ``come in
handy'' and ``help tide you over until your next payday.'' \60\ Some
lenders offer new borrowers their initial loans at no fee (``first loan
free'') to encourage consumers to try a payday loan.\61\ Stores are
typically located in high-traffic commuting corridors and near shopping
areas where consumers obtain groceries and other staples.\62\
---------------------------------------------------------------------------
\60\ Cash America Int'l Inc., ``Cash Advance/Short-term Loans,''
available at http://www.cashamerica.com/LoanOptions/CashAdvances.aspx (last visited Apr. 7, 2016).
\61\ See, e.g., Instant Cash Advance Corp., ``Instant PayDay,''
available at http://www.instantcashadvancecorp.com/free-loan-offer-VAL312.php (introductory offer of a free (no fee) cash advance of
$200) (storefront payday loans); Check N Title Loans, ``First Loan
Free,'' available at http://www.checkntitle.com/ (storefront payday
and title loans); AmeriTrust Financial LLC, ``1st Advance Free,''
available at http://www.americantrustcash.com/payday-loans
(storefront payday, title, and installment loans, first loan free on
payday loans) (all firm Web sites last visited on Dec. 21, 2015).
\62\ See FirstCash, Inc., 2016 Annual Report (Form 10-K), at 9;
QC Holdings, Inc., 2014 Annual Report (Form 10-K), at 11; Community
Choice Fin. Inc., 2016 Annual Report (Form 10-K), at 6.
---------------------------------------------------------------------------
The evidence of price competition among payday lenders is mixed. In
their financial reports, publicly traded payday lenders have reported
their key competitive factors to be non-price related. For instance,
they cite location, customer service, and convenience as some of the
primary factors on which payday lenders compete with one another, as
well as with other financial service providers.\63\ Academic studies
have found that, in States with rate caps, loans are almost always made
at the maximum rate permitted.\64\ Another study likewise found that in
States with rate caps, firms lent at the maximum permitted rate, and
that lenders operating in multiple States with varying rate caps raise
their fees to those caps rather than charging consistent fees company-
wide. The study found, however, that in States with no rate caps,
different lenders operating in those States charged different rates.
The study reviewed four lenders that operate in Texas \65\ and observed
differences in the cost to borrow $300 per two-week pay period: two
lenders charged $61 in fees, one charged $67, and another charged $91,
indicating some level of price variation between lenders (ranging from
about $20 to $32 per $100 borrowed).\66\ One industry commenter cited
the difference in average loan pricing between storefront (generally
lower) and online loans (generally higher), as evidence of price
competition but that is more likely due to the fact that state-licensed
lenders are generally constrained in the amount they can charge rather
than competitive strategies adopted by those lenders. That commenter
also notes as evidence of price competition that it sometimes discounts
its own loans from its advertised prices; the comment did not address
whether such discounts were offered to meet competition.
---------------------------------------------------------------------------
\63\ See QC Holdings, Inc., 2014 Annual Report (Form 10-K), at
12-13.
\64\ Robert DeYoung & Ronnie Phillips, ``Payday Loan Pricing,''
at 27-28, (Fed. Reserve Bank of Kan. City, Working Paper No. RWP 09-
07, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1066761 (studying rates on loans in Colorado
between 2000 and 2006); Mark Flannery & Katherine Samolyk, ``Payday
Lending: Do the Costs Justify the Price?,'' at 9-10 (FDIC Ctr. for
Fin. Res., Working Paper No. 2005-09, 2005), available at https://www.fdic.gov/bank/analytical/cfr/2005/wp2005/cfrwp_2005-09_flannery_samolyk.pdf.
\65\ In Texas, these lenders operate as credit services
organizations or loan arrangers with no fee caps, described in more
detail below. Pew Charitable Trusts, ``How State Rate Limits Affect
Payday Loan Prices,'' (Apr. 2014), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs/content-
level_pages/fact_sheets/stateratelimitsfactsheetpdf.pdf.
\66\ Pew Charitable Trusts, ``How State Rate Limits Affect
Payday Loan Prices,'' (Apr. 2014), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs/content-
level_pages/fact_sheets/stateratelimitsfactsheetpdf.pdf.
---------------------------------------------------------------------------
The application process for a payday loan is relatively simple. For
a storefront payday loan, a borrower must generally provide some
verification of income (typically a pay stub) and evidence of a
personal deposit account.\67\ Although a few States impose limited
requirements that lenders consider a borrower's ability to repay,\68\
storefront payday
[[Page 54481]]
lenders generally do not consider a borrower's other financial
obligations or require collateral (other than the check or electronic
debit authorization) for the loan. Most storefront payday lenders do
not consider traditional credit reports or credit scores when
determining loan eligibility, nor do they report any information about
payday loan borrowing history to the nationwide consumer reporting
agencies, TransUnion, Equifax, and Experian.\69\ From market outreach
activities and confidential information gathered in the course of
statutory functions, the Bureau is aware that a number of storefront
payday lenders obtain data from one or more specialty consumer
reporting agencies during the loan application process to check for
previous payday loan defaults, identify recent inquiries that suggest
an intention to not repay the loan, and perform other due diligence
such as identity and deposit account verification. Some storefront
payday lenders use analytical models and scoring that attempt to
predict likelihood of default.\70\ Through market outreach and
confidential information gathered in the course of statutory functions,
the Bureau is aware that many storefront payday lenders only conduct
their limited underwriting for first-time borrowers or those returning
after an absence.
---------------------------------------------------------------------------
\67\ See, e.g., Check Into Cash, ``Frequently Asked Questions
and Policies of Check into Cash,'' available at https://checkintocash.com/faqs/in-store-cash-advance/ (last visited Sept.
14, 2017) (process as described by one lender).
\68\ For example, Utah requires lenders to make an inquiry to
determine that the borrower has the ability to repay the loan, which
may include rollovers or extended payment plans. This determination
may be made through borrower affirmation of ability to repay, proof
of income, repayment history at the same lender, or information from
a consumer reporting agency. Utah Code sec. 7-23-401. Missouri
requires lenders to consider borrower financial ability to
reasonably repay under the terms of the loan contract, but does not
specify how lenders may satisfy this requirement. Mo. Rev. Stat sec.
408.500(7). Effective July 1, 2017, Nevada lenders must assess
borrowers' reasonable ability to repay by considering, to the extent
available, their current or expected income; current employment
status based on a pay stub, bank deposit, or other evidence; credit
history; original loan amount due, or for installment loans or
potential repayment plans, the monthly payment amount; and other
evidence relevant to ability to repay including bank statements and
borrowers' written representations. Other States prohibit loans that
exceed a certain percentage of the borrower's gross monthly income
(generally between 20 and 35 percent) as a proxy for ability to
repay as described above.
\69\ See, e.g., Neil Bhutta, et al., ``Payday Loan Choices and
Consequences,'' 47 J. of Money, Credit and Banking 223 (2015).
\70\ See, e.g., Advance America, ``FAQs on Payday Loans/Cash
Advances: Is my credit score checked before receiving an in-store
Payday Loan?,'' available at https://www.advanceamerica.net/questions/payday-loans-cash-advances (last visited May 10, 2017)
(the custom scoring model described by one lender).
---------------------------------------------------------------------------
From market outreach, the Bureau is aware that the specialty
consumer reporting agencies contractually require any lender that
obtains data to also report data to them, although compliance may vary.
Reporting usually occurs on a real-time or same-day basis. Separately,
14 States require lenders to check statewide databases before making
each loan in order to ensure that their loans comply with various State
restrictions.\71\ These States likewise require lenders to report
certain lending activity to the database, generally on a real-time or
same-day basis. As discussed in more detail above, these State
restrictions may include prohibitions on consumers having more than one
payday loan at a time, cooling-off periods, or restrictions on the
number of loans consumers may take out per year.
---------------------------------------------------------------------------
\71\ The States with databases are Alabama, Delaware, Florida,
Illinois Indiana, Kentucky, Michigan, New Mexico (to be repealed
Jan. 1, 2018 as noted above), North Dakota, Oklahoma, South
Carolina, Virginia, Washington, and Wisconsin. Illinois also
requires use of its database for payday installment loans, vehicle
title loans, and some installment loans. Some State laws allow
lenders to charge borrowers a fee to access the database that may be
set by statute. Ala. Code sec. 5-18A-13(o); Del. Code Ann. tit. 5,
sec. 2235B; Fla. Stat. sec. 560.404(23); 815 Ill. Comp. Stat. 122/2-
15; Ind. Code sec. 24-4.5-7-404(4); Ky. Rev. Stat. Ann. sec. 286.9-
100(19)(b); Mich. Comp. Laws sec. 487.2142; N.M. Stat. Ann. sec. 58-
15-37(B); N.D. Cent. Code sec. 13-08-12(4); Okla. Stat. tit. 59,
sec. 3109(B)(2)(b); S.C. Code Ann. sec. 34-39-175; Va. Code Ann.
sec. 6.2-1810; Wash. Rev. Code sec. 31.45.093; Wis. Stat. sec.
138.14(14).
---------------------------------------------------------------------------
Although a consumer is generally required when obtaining a loan to
provide a post-dated check or authorization for an electronic debit of
the consumer's account which could be presented to the consumer's
bank,\72\ consumers in practice generally return to the store when the
loan is due to ``redeem'' the check either by repaying the loan or by
paying the finance charges and rolling over the loan.\73\ For example,
a major payday lender with a predominantly storefront loan portfolio
reported that in 2014, over 90 percent of its payday loan volume was
repaid in cash at its branches by consumers either paying in full or by
paying the ``original loan fee'' (finance charges) and rolling over the
loan (signing a new promissory note and leaving a new check or payment
authorization).\74\
---------------------------------------------------------------------------
\72\ Payments may also be taken from the consumer's debit card.
See, e.g., All American Check Cashing, Inc., Miss. Dep't of Banking
and Consumer Fin., Administrative Order, Cause No. 2016-001, May 11,
2017, available at http://www.dbcf.ms.gov/documents/actions/consumerfin/aa0517.pdf.
\73\ According to the Bureau's market outreach, if borrowers
provided ACH authorization and return to pay the loan in cash, the
authorization may be returned to them or voided.
\74\ QC Holdings, 2014 Annual Report (Form 10-K), at 7.
---------------------------------------------------------------------------
An industry commenter stated that repayment in cash reflects
customers' preferences. However, borrowers are strongly encouraged and
in some cases required by lenders to return to the store when payment
is due. Some lenders give borrowers appointment cards with a date and
time to encourage them to return with cash. For example, one major
storefront payday lender explained that after loan origination ``the
customer then makes an appointment to return on a specified due date,
typically his or her next payday, to repay the cash advance . . . .
Payment is usually made in person, in cash at the center where the cash
advance was initiated . . . .'' \75\
---------------------------------------------------------------------------
\75\ Advance America, 2011 Annual Report (Form 10-K) at 45 (Mar.
15, 2012). See also Check Into Cash, ``Cash Advance Loan FAQs, What
is a cash advance?,'' available at https://checkintocash.com/faqs/in-store-cash-advance/ (last visited Feb. 4, 2016) (``We hold your
check until your next payday, at which time you can come in and pay
back the advance.'').
---------------------------------------------------------------------------
The Bureau is aware, from confidential information gathered in the
course of statutory functions and from market outreach, that lenders
routinely make reminder calls to borrowers a few days before loan due
dates to encourage borrowers to return to the store. One large lender
reported this practice in a public filing.\76\ Another storefront
payday lender requires its borrowers to return to the store to repay.
Its Web site states: ``All payday loans must be repaid with either cash
or money order. Upon payment, we will return your original check to
you.'' \77\
---------------------------------------------------------------------------
\76\ When Advance America was a publicly traded corporation, it
reported: ``The day before the due date, we generally call the
customer to confirm their payment due date.'' Advance America, 2011
Annual Report (Form 10-K), at 11.
\77\ Instant Cash Advance, ``How Cash Advances Work,'' available
at http://www.instantcashadvancecorp.com/services/payday-loans/
(last visited July 17, 2017).
---------------------------------------------------------------------------
The Bureau is also aware, from confidential information gathered in
the course of statutory functions, that one or more storefront payday
lenders have operating policies that specifically state that cash is
preferred because only half of their customers' checks would clear if
deposited on the loan due dates. Encouraging or requiring borrowers to
return to the store on the due date provides lenders an opportunity to
offer borrowers the option to roll over the loan or, where rollovers
are prohibited by State law, to re-borrow following repayment or after
the expiration of any cooling-off period. Most storefront lenders
examined by the Bureau employ monetary incentives that reward employees
and store managers for loan volumes, although one industry commenter
described the industry's incentives to employees as rewards for
increases in net revenue. Since as discussed below, a majority of loans
result from rollovers of existing loans or re-borrowing
contemporaneously with or shortly after loans have been repaid,
rollovers and re-borrowing contribute substantially to employees'
[[Page 54482]]
compensation. From confidential information gathered in the course of
statutory functions, the Bureau is aware that rollover and re-borrowing
offers are made when consumers log into their accounts online, during
``courtesy calls'' made to remind borrowers of upcoming due dates, and
when borrowers repay in person at storefront locations. In addition,
some lenders train their employees to offer rollovers during courtesy
calls when borrowers notified lenders that they had lost their jobs or
suffered pay reductions.
Store personnel often encourage borrowers to roll over their loans
or to re-borrow, even when consumers have demonstrated an inability to
repay their existing loans. In an enforcement action, the Bureau found
that one lender maintained training materials that actively directed
employees to encourage re-borrowing by struggling borrowers. It further
found that if a borrower did not repay or pay to roll over the loan on
time, store personnel would initiate collections. Store personnel or
collectors would then offer the option to take out a new loan to pay
off an existing loan, or refinance or extend the loan as a source of
relief from the potentially negative outcomes (e.g., lawsuits,
continued collections). This ``cycle of debt'' was depicted graphically
as part of ``The Loan Process'' in the company's new hire training
manual.\78\ In Mississippi, another lender employed a companywide
practice in which store personnel encouraged borrowers with monthly
income or benefits payments to use the proceeds of one loan to pay off
another loan, although State law prohibited these renewals or
rollovers.\79\
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\78\ Press Release, Bureau of Consumer Fin. Prot., ``CFPB Takes
Action Against ACE Cash Express for Pushing Payday Borrowers Into
Cycle of Debt,'' (July 10, 2014), available at http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.
\79\ All American Check Cashing, Inc., Miss. Dep't of Banking
and Consumer Fin., Administrative Order, Cause No. 2016-001, May 11,
2017, available at http://www.dbcf.ms.gov/documents/actions/consumerfin/aa0517.pdf. The lender also failed to refund consumer
overpayments. The State regulator ordered revocation of all of the
lender's 75 licenses, consumer refunds, civil penalties of over $1
million, and other relief. All American appealed the order and the
matter was settled with terms reducing the penalty to $889,350.
Agreed Order of Dismissal with Prejudice, All American Check Cashing
Inc. v. Miss. Dep't of Banking and Consumer Fin., No. G-2017-699 S/2
(Miss. 2017), available at http://www.dbcf.ms.gov/documents/aacc_agreed_060917.pdf.
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In addition, though some States require lenders to offer borrowers
the option of extended repayment plans and some trade associations have
designated provision of such plans as a best practice, individual
lenders may often be reluctant to offer them. In Colorado, for
instance, some payday lenders reported, prior to a regulatory change in
2010, that they had implemented practices to restrict borrowers from
obtaining the number of loans needed to be eligible for the State-
mandated extended payment plan option and that some lenders had banned
borrowers who had exercised their rights to elect payment plans from
taking new loans.\80\ The Bureau is also aware, from confidential
information gathered in the course of statutory functions, that one or
more lenders used training manuals that instructed employees not to
mention these plans until after employees first offered rollovers, and
then only if borrowers specifically asked about the plans. Indeed,
details on implementation of the repayment plans that have been
designated by two national trade associations for storefront payday
lenders as best practices are unclear, and in some cases place a number
of limitations on exactly how and when a borrower must request
assistance to qualify for these ``off-ramps.'' For instance, one trade
association representing more than half of all payday loan stores
states that as a condition of membership, members must offer an
``extended payment plan'' but that borrowers must request the plan at
least one day prior to the date on which the loan is due, generally in
person at the store where the loan was made or otherwise by the same
method used to originate the loan.\81\ Another trade association with
over 1,300 members, including both payday lenders and firms that offer
non-credit products such as check cashing and money transmission,
states that members will provide the option of extended payment plans
in the absence of State-mandated plans to customers unable to repay,
but details of the plans are not publicly available on its Web
site.\82\
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\80\ See State of Colo. Dep't of Law, Off. of Att'y Gen., ``2009
Deferred Deposit/Payday Lenders Annual Report,'' at 2, available at
http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/2009_ddl_composite.pdf. See also Market Concerns--Covered Loans
below for additional discussion of lenders' extended payment plan
practices.
\81\ Community Fin. Servs. Ass'n of America, ``About CFSA,''
available at http://cfsaa.com/about-cfsa.aspx (last visited Jan. 15,
2016); Community Fin. Servs. Ass'n of America, ``CFSA Member Best
Practices,'' available at http://cfsaa.com/cfsa-member-best-practices.aspx (last visited Sept. 15, 2017); Community Fin. Servs.
Ass'n of America, ``What Is an Extended Payment Plan?,'' available
at http://cfsaa.com/cfsa-member-best-practices/what-is-an-extended-payment-plan.aspx (last visited Jan. 15, 2016). Association
documents direct lenders to display a ``counter card'' describing
the association's best practices. Plans are to be offered in the
absence of State-mandated plans at no charge and payable in four
equal payments coinciding with paydays.
\82\ Fin. Serv. Ctrs. of America, ``Membership,'' http://www.fisca.org/AM/Template.cfm?Section=Membership (last visited Sept.
15, 2017); Joseph M. Doyle, ``Chairman's Message,'' Fin. Serv. Ctrs.
of America, http://www.fisca.org/AM/Template.cfm?Section=Chairman_s_Message&Template=/CM/HTMLDisplay.cfm&ContentID=19222 (last visited Jan. 15, 2016); Fin.
Serv. Ctrs. of America, ``FiSCA Best Practices,'' http://www.fisca.org/Content/NavigationMenu/AboutFISCA/CodesofConduct/default.htm (last visited Jan. 15, 2016).
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From confidential information gathered in the course of statutory
functions and market outreach, the Bureau is aware that if a borrower
fails to return to the store when a loan is due, the lender may attempt
to contact the consumer and urge the consumer to make a cash payment
before eventually depositing the post-dated check that the consumer had
provided at origination or electronically debiting the account. The
Bureau is also aware of some situations in which lenders have obtained
electronic payments from borrowers' bank accounts and also accepted
cash payments from borrowers at storefronts.\83\ The Bureau is aware,
from confidential information gathered in the course of its statutory
functions and from market outreach, that lenders may use various
methods to try to ensure that a payment will clear before presenting a
check or ACH. These efforts may range from storefront lenders calling
the borrower's bank to ask if a check of a particular size would clear
the account to the use of software offered by a number of vendors that
attempts to model likelihood of repayment (``predictive ACH'').\84\ If
[[Page 54483]]
these attempts are unsuccessful, store personnel at either the
storefront level or at a centralized location will then generally
engage in collection activity.
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\83\ See Bureau of Consumer Fin. Prot., ``Supervisory
Highlights,'' at 31-32 (Summer 2017), available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_Supervisory-Highlights_Issue-16.pdf. See also, Press
Release, Bureau of Consumer Fin. Prot., ``CFPB Takes Action Against
Check Cashing and Payday Lending Company for Tricking and Trapping
Consumers,'' (May 11, 2016), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-check-cashing-and-payday-lending-company-tricking-and-trapping-consumers/; All American Check Cashing, Inc., Miss. Dept. of Banking
and Consumer Fin., Administrative Order, No. 2016-001 (May 11,
2017), available at http://www.dbcf.ms.gov/documents/actions/consumerfin/aa0517.pdf (for a description of one lender's alleged
failure to refund overpayments resulting from these procedures and
an associated State agency's order against that lender.).
\84\ See, e.g., Press Release, Clarity Servs., ``ACH Presentment
Will Help Lenders Reduce Failed ACH Pulls,'' (Aug. 1, 2013),
available at https://www.clarityservices.com/clear-warning-ach-presentment-will-help-lenders-reduce-failed-ach-pulls/; Factor
Trust, ``Markets,'' http://ws.factortrust.com/products/ (last
visited Apr. 8, 2016); Microbilt, ``Bank Account Verify. More
Predictive. Better Performance. Lower Costs.,'' http://www.microbilt.com/bank-account-verification.aspx (last visited Apr.
8, 2016); DataX. Ltd., ``Know Your Customer,'' http://www.dataxltd.com/ancillary-services/successful-collections/ (last
visited Apr.8, 2016).
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Collection activity may involve further in-house attempts to
collect from the borrower's bank account.\85\ If the first attempt
fails, the lender may make subsequent attempts at presentment by
splitting payments into smaller amounts in hopes of increasing the
likelihood of obtaining at least some funds, a practice for which the
Bureau recently took enforcement action against a small-dollar
lender.\86\ Or, the lender may attempt to present the payment multiple
times, a practice that the Bureau has noted in supervisory
examinations.\87\ A more detailed discussion of payments practices is
provided in part D and Markets Concerns--Payments.
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\85\ For example, one payday lender stated in its public
documents that it ``subsequently collects a large percentage of
these bad debts by redepositing the customers' checks, ACH
collections or receiving subsequent cash repayments by the
customers.'' FirstCash Fin. Servs., 2014 Annual Report (Form 10-K),
at 5 (Feb. 12, 2015). As noted above, FirstCash has now largely
exited payday lending.
\86\ Press Release, Bureau of Consumer Fin. Prot., ``CFPB Orders
EZCORP to Pay $10 Million for Illegal Debt Collection Tactics,''
(Dec. 16, 2015), available at http://www.consumerfinance.gov/newsroom/cfpb-orders-ezcorp-to-pay-10-million-for-illegal-debt-collection-tactics/.
\87\ See Bureau of Consumer Fin. Prot., ``Supervisory
Highlights,'' at 20 (Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
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Eventually, the lender may attempt other means of collection. The
Bureau is aware of in-house debt collections activities, by both
storefront employees and employees at centralized collections
divisions, including calls, letters, and visits to consumers and their
workplaces,\88\ as well as the sale of debt to third-party
collectors.\89\ The Bureau recently conducted a survey of consumer debt
collection experiences; 11 percent of consumers contacted about a debt
in collection reported the collection activity was related to payday
loan debt.\90\ Further, the Bureau observed in its consumer complaint
data that from November 2013 through December 2016, more than 31,000
debt collection complaints had ``payday loan'' as the underlying debt.
In more than 11 percent of the complaints the Bureau handled about debt
collection, consumers selected ``payday loans'' as the underlying
debt.\91\
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\88\ Bureau of Consumer Fin. Prot., ``CFPB Compliance Bulletin
2015-07, In-Person Collection of Consumer Debt,'' (Dec. 16, 2015),
available at http://files.consumerfinance.gov/f/201512_cfpb_compliance-bulletin-in-person-collection-of-consumer-debt.pdf.
\89\ For example, prior to discontinuing its payday lending
operations, EZCorp indicated that it used a tiered structure of
collections on defaulted loans (storefront employees, centralized
collections, and then third-parties debt sales). EZCORP, Inc., 2014
Annual Report (Form 10-K), at 9 (Nov. 26, 2014). Advance America
utilized calls and letters to past-due consumers, as well as
attempts to convert the consumer's check into a cashier's check, as
methods of collection. Advance America, 2011 Annual Report (Form 10-
K), at 11. See ACE Cash Express, Inc., Consent Order, CFPB No. 2014-
CFPB-0008 (July 10, 2014), available at http://files.consumerfinance.gov/f/201407_cfpb_consent-order_ace-cash-express.pdf; EZCorp Inc., Consent Order, CFPB No. 2015-CFPB-0031
(Dec. 16, 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf. See also, Bureau of
Consumer Fin. Prot., Market Snapshot: Online Debt Sales,'' at 5, 7
(Jan. 2017), available at https://www.consumerfinance.gov/data-research/research-reports/market-snapshot-online-debt-sales/
(describing a significant share of payday loan portfolios on Web
sites with online debts for sale).
\90\ Bureau of Consumer Fin. Prot., ``Consumer Experiences with
Debt Collection: Findings from the CFPB's Survey of Consumer Views
on Debt,'' at 19 (Jan. 2017), available at https://www.consumerfinance.gov/documents/2251/201701_cfpb_Debt-Collection-Survey-Report.pdf.
\91\ Bureau of Consumer Fin. Prot., ``Monthly Complaint Report,
Vol. 18,'' at 12 (Dec. 2016), available at https://www.consumerfinance.gov/data-research/research-reports/monthly-complaint-report-vol-18/.
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In addition, in 2016, the Bureau handled approximately 4,400
complaints in which consumers reported ``payday loan'' as the complaint
product and about 26,600 complaints about credit cards.\92\ As noted
above, there are about 12 million payday loan borrowers annually, and
approximately 156 million consumers have one or more credit cards.\93\
Therefore, by way of comparison, for every 10,000 payday loan
borrowers, the Bureau handled about 3.7 complaints, while for every
10,000 credit card holders, the Bureau handled about 1.7 complaints.
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\92\ Bureau of Consumer Fin. Prot., ``Consumer Response Annual
Report, January 1-December 31, 2016,'' at 27, 33-35 (Mar. 2017),
available at https://www.consumerfinance.gov/documents/3368/201703_cfpb_Consumer-Response-Annual-Report-2016.PDF.
\93\ The Bureau's staff estimate is based on finding that 63
percent of American adults hold an open credit card and Census
population estimates. Bureau of Consumer Fin. Prot., ``The Consumer
Credit Card Market Report,'' at 36 (Dec. 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf; U.S. Census Bureau, ``Annual Estimates of Resident
Population for Selected Age Groups by Sex for the United States,
States, Counties, and Puerto Rico Commonwealth and Municipios: April
1, 2010 to July 1, 2016,'' (June 2017), available at https://factfinder.census.gov/bkmk/table/1.0/en/PEP/2016/PEPAGESEX. Other
estimates of the number of credit card holders have been higher,
meaning that 1.7 complaints per 10,000 credit card holders would be
a high estimate. The U.S. Census Bureau estimated there were 160
million credit card holders in 2012, and researchers at the Federal
Reserve Bank of Boston estimated that 72.1 percent of U.S. consumers
held at least one credit card in 2014. U.S. Census Bureau,
``Statistical Abstract of the United States: 2012,'' at 740 tbl.1188
(Aug. 2011), available at https://www.census.gov/library/publications/2011/compendia/statab/131ed.html; Claire Greene et al.,
``The 2014 Survey of Consumer Payment Choice: Summary Results,'' at
18 (Fed. Reserve Bank of Boston, No. 16-3, 2016), available at
https://www.bostonfed.org/-/media/Documents/researchdatareport/pdf/rdr1603.pdf. As noted above in the text, additional complaints
related to both credit cards and payday loans are submitted as debt
collection complaints with credit card or payday loan listed as the
type of debt.
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Some payday lenders sue borrowers who fail to repay their loans. A
study of small claims court cases filed in Utah from 2005 to 2010 found
that 38 percent of cases were attributable to payday loans.\94\ A
recent news report found that the majority of non-traffic civil cases
filed in 14 Utah justice courts are payday loan collection lawsuits,
and in one justice court, the percentage was as high as 98.8
percent.\95\ In 2013, the Bureau entered into a Consent Order with a
large national payday and installment lender based, in part, on the
filing of flawed court documents in about 14,000 debt collection
lawsuits.\96\ However, an industry trade association commenter states
that many payday lenders do not file lawsuits on defaulted debt.
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\94\ Coalition of Religious Communities, ``Payday Lenders and
Small Claims Court Cases in Utah,'' at 2 (2005-2010), available at
http://www.consumerfed.org/pdfs/PDL-UTAH-court-doc.pdf.
\95\ Lee Davidson, ``Payday Lenders Sued 7,927 Utahns Last
Year,'' The Salt Lake City Tribune, Aug. 2, 2016, http://www.sltrib.com/home/3325528-155/payday-lenders-sued-7927-utahns-last.
\96\ Press Release, Bureau of Consumer Fin. Prot., ``Consumer
Financial Protection Bureau Takes Action Against Payday Lender for
Robo-Signing,'' (Nov. 20, 2013), available at http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-takes-action-against-payday-lender-for-robo-signing/.
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Business model. As previously noted, the storefront payday industry
has built a distribution model that involves a large number of small
retail outlets, each serving a relatively small number of consumers.
That implies that the overhead cost on a per consumer basis is
relatively high.
Additionally, the loss rates on storefront payday loans--the
percentage or amounts of loans that are charged off by the lender as
uncollectible--are relatively high. Loss rates on payday loans often
are reported on a per-loan basis but, given the frequency of rollovers
and renewals, that metric understates the amount of principal lost to
borrower defaults. For example, if a lender makes a $100 loan that is
rolled over nine times, at which point the consumer defaults, the per-
loan default rate would be 10 percent whereas the lender would have in
fact lost 100
[[Page 54484]]
percent of the amount loaned. In this example, the lender would still
have received substantial revenue, as the lender would have collected
fees for each rollover prior to default. The Bureau estimates that
during the 2011-2012 time frame, charge-offs (i.e., uncollectible loans
defaulted on and never repaid) equaled nearly one-half of the average
amount of outstanding loans during the year. In other words, for every
$1.00 loaned, only $.50 in principal was eventually repaid.\97\ One
academic study found loss rates to be even higher.\98\
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\97\ The Bureau's staff estimate is based on public company
financial statements and confidential information gathered in the
course of the Bureau's statutory functions. Ratio of gross charged
off loans to average balances, where gross charge-offs represent
single-payment loan losses and average balance is the average of
beginning and end of year single-payment loan receivables.
\98\ Mark Flannery & Katherine Samolyk, ``Payday Lending: Do the
Costs Justify the Price?,'' at 16 (FDIC Ctr. for Fin. Res., Working
Paper No. 2005-09, 2005), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=771624 (estimating annual charge-offs on
storefront payday loans at 66.6 percent of outstanding loans).
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To sustain these significant costs, the payday lending business
model is dependent upon a large volume of re-borrowing--that is,
rollovers, back-to-back loans, and re-borrowing within a short period
of paying off a previous loan--by those borrowers who do not default on
their first loan. The Bureau's research found that over the course of a
year, 90 percent of all loan fees comes from consumers who borrowed
seven or more times and 75 percent comes from consumers who borrowed 10
or more times.\99\ Similarly, when the Bureau identified a cohort of
borrowers and tracked them over 10 months, the Bureau found that more
than two-thirds of all loans were in sequences of at least seven loans,
and that over half of all loans were in sequences of 10 or more
loans.\100\ The Bureau defines a sequence as an initial loan plus one
or more subsequent loans renewed within 30 days after repayment of the
prior loan; a sequence thus captures not only rollovers and back-to-
back loans but also re-borrowing that occurs within a short period of
time after repayment of a prior loan either at the point at which a
State-mandated cooling-off period ends or at the point at which the
consumer, having repaid the prior loan, runs out of money.\101\ A more
detailed discussion of sequence length is provided in the section-by-
section discussion of Sec. Sec. 1041.2(a)(14) and 1041.5 and in Market
Concerns--Underwriting.
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\99\ CFPB Payday Loans and Deposit Advance Products White Paper,
at 22.
\100\ CFPB Report on Supplemental Findings, at 129.
\101\ The Bureau's Report on Supplemental Findings analyzed
payday loan usage patterns with varying definitions of loan sequence
length, including 30-days. CFPB Report on Supplemental Findings, at
109-114. Other reports have proposed other definitions of sequence
length including 30 days. See Marc Anthony Fusaro & Patricia J.
Cirillo, Do Payday Loans Trap Consumers in a Cycle of Debt?, at 12
(2011), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776&download=yes; (sequences based on the
borrower's pay period); nonPrime 101, ``Report 7B: Searching for
Harm in Storefront Payday Lending, A Critical Analysis of the CFPB's
`Debt Trap' Data,'' at 4 n.9 (2016), available at https://www.nonprime101.com/wp-content/uploads/2016/02/Report-7-B-Searching-for-Harm-in-Storefront-Payday-Lending-nonPrime101.pdf. See Market
Concerns--Underwriting below for an additional discussion of these
alternative definitions.
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Other studies are broadly consistent. For example, a 2013 report
based on lender data from Florida, Kentucky, Oklahoma, and South
Carolina found that 85 percent of loans were made to borrowers with
seven or more loans per year, and 62 percent of loans were made to
borrowers with 12 or more loans per year. These four States have
restrictions on payday loans such as cooling-off periods and limits on
rollovers that are enforced by State-regulated databases, as well as
voluntary extended repayment plans.\102\ An updated report on Florida
payday loan usage derived from the State database noted this trend has
continued, with 83 percent of payday loans in 2015 made to borrowers
with seven or more loans and 57 percent of payday loans that same year
made to borrowers with 12 or more loans.\103\ In Alabama's first year
of tracking payday loans with a single database, it reported that
almost 50 percent of borrowers had seven or more payday loans and
almost 37 percent of borrowers had 10 or more payday loans.\104\ Other
reports have found that over 80 percent of total payday loans and loan
volume is due to repeat borrowing within 30 days of a prior loan.\105\
One trade association has acknowledged that ``[i]n any large, mature
payday loan portfolio, loans to repeat borrowers generally constitute
between 70 and 90 percent of the portfolio, and for some lenders, even
more.'' \106\ A recent report by a specialty consumer reporting agency
confirms that the industry's business model relies on repeat customers,
noting that over half of all loans are made to returning customers and
stating ``[t]his finding suggests that even though new customers are
critical, existing customers are the most productive.'' \107\ Market
Concerns--Underwriting below discusses the impact of these outcomes for
consumers who are unable to repay and either default or re-borrow.
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\102\ Susanna Montezemolo, ``The State of Lending in America &
Its Impact on U.S. Households: Payday Lending Abuses and Predatory
Practices,'' at 12 (Ctr. for Responsible Lending 2013), available at
http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf. For additional information on Florida loan use,
see Veritec Solutions, ``State of Florida Case Study: Deferred
Presentment Program,'' (Implemented 2002), available at http://www.veritecs.com/case-studies/floridas-deferred-presentation-database-and-program-solution/.
\103\ Brandon Coleman & Delvin Davis, ``Perfect Storm: Payday
Lenders Harm Florida Consumer Despite State Law,'' at 4 (Ctr. for
Responsible Lending, 2016), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
\104\ Veritec Solutions, ``State of Alabama Deferred Presentment
Services Program, Report on Alabama Deferred Presentment Loan
Activity, October 1, 2015 through September 30, 2016,'' available at
http://www.banking.alabama.gov/pdf/press%20release/InterimRptStatewideDatabase10_1_15to9_30_16.pdf.
\105\ Leslie Parrish & Uriah King, ``Phantom Demand: Short-term
Due Date Generates Need for Repeat Payday Loans, Accounting for 76%
of Total Volume,'' at 11-12 (Ctr. for Responsible Lending, 2009),
available at http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf.
\106\ Letter from Hilary B. Miller, on behalf of Community Fin.
Servs. Ass'n. of America to Bureau of Consumer Fin. Prot. (June 20,
2013), available at http://files.consumerfinance.gov/f/201308_cfpb_cfsa-information-quality-act-petition-to-CFPB.pdf
(Petition of Community Financial Services Association of America For
Retraction of Payday Loans and Deposit Advance Products: A White
Paper of Initial Data Findings, at 5.).
\107\ Clarity Services, Inc., ``2017 Subprime Lending Trends:
Insights into Consumers & the Industry,'' at 8 (2017), available at
https://www.clarityservices.com/wp-content/uploads/2017/03/Subprime-Lending-Report-2017-Clarity-Services-3.28.17.pdf. This finding does
not distinguish between storefront and online lenders, nor is it
expressly limited to single payment loans.
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Recent regulatory and related industry developments. A number of
Federal and State regulatory developments have occurred over the last
15 years as concerns about the effects of payday lending have spread.
Regulators have found that the industry has tended to shift to new
models and products in response.
Since 2000, it has been clear from commentary added to Regulation
Z, that payday loans constitute ``credit'' under the Truth in Lending
Act (TILA) and that cost of credit disclosures are required to be
provided in payday loan transactions, regardless of how State law
characterizes payday loan fees.\108\
---------------------------------------------------------------------------
\108\ 12 CFR part 1026, supplement I, comment 2(a)(14)-2.
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In 2006, Congress enacted the Military Lending Act (MLA) to address
concerns that servicemembers and their families were becoming over-
indebted in high-cost forms of credit.\109\ The MLA, as
[[Page 54485]]
implemented by the Department of Defense's regulation, imposes two
broad classes of requirements applicable to a creditor. First, the
creditor may not impose a military annual percentage rate (MAPR) \110\
greater than 36 percent in connection with an extension of consumer
credit to a covered borrower. Second, when extending consumer credit,
the creditor must satisfy certain other terms and conditions, such as
providing certain information, both orally and in a form the borrower
can keep, before or at the time the borrower becomes obligated on the
transaction or establishes the account; refraining from requiring the
borrower to submit to arbitration in the case of a dispute involving
the consumer credit; and refraining from charging a penalty fee if the
borrower prepays all or part of the consumer credit. In 2007, the
Department of Defense issued its initial regulation under the MLA,
limiting the Act's application to closed-end loans with a term of 91
days or less in which the amount financed did not exceed $2,000;
closed-end vehicle title loans with a term of 181 days or less; and
closed-end tax refund anticipation loans.\111\ However, the Department
found that evasions developed in the market as ``the extremely narrow
definition of `consumer credit' in the [then-existing rule] permits a
creditor to structure its credit products in order to reduce or avoid
altogether the obligations of the MLA.'' \112\
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\109\ The Military Lending Act, part of the John Warner National
Defense Authorization Act for Fiscal Year 2007, was signed into law
in October 2006. The interest rate cap took effect October 1, 2007.
See 10 U.S.C. 987.
\110\ The military annual percentage rate is an ``all-in'' APR
that includes a broader range of fees and charges than the APR that
must be disclosed under the Truth in Lending Act. See 32 CFR 232.4.
\111\ 72 FR 50580 (Aug. 31, 2007).
\112\ 80 FR 43560, 43567 n.78 (July 22, 2015).
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As a result, effective October 2015 the Department of Defense
expanded its definition of covered credit to include open-end credit
and longer-term loans so that the MLA protections generally apply to
all credit subject to the requirements of Regulation Z of the Truth in
Lending Act, other than certain products excluded by statute.\113\ In
general, creditors must comply with the new regulations for extensions
of credit after October 3, 2016; for credit card accounts, creditors
are required to comply with the new rule starting October 3, 2017.\114\
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\113\ 80 FR 43560 (July 22, 2015).
\114\ 80 FR 43560 (July 22, 2015).
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At the State level, the last States to enact legislation
authorizing payday lending--Alaska and Michigan--did so in 2005.\115\
At least 11 States and jurisdictions that previously had authorized
payday loans have taken steps to restrict or eliminate payday lending.
In 2001, North Carolina became the first State that had previously
permitted payday loans to adopt an effective ban by allowing the
authorizing statute to expire. In 2004, Georgia also enacted a law
banning payday lending.
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\115\ Alaska Stat. secs. 06.50.010-900; Mich. Comp. Laws secs.
487.2121-.2173.
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In 2008, the Ohio legislature adopted the Short Term Lender Act
with a 28 percent APR cap, including all fees and charges, for short-
term loans and repealed the existing Check-Cashing Lender Law that
authorized higher rates and fees.\116\ In a referendum later that year,
Ohioans voted against reinstating the Check-Cashing Lender Law, leaving
the 28 percent APR cap and the Short Term Lending Act in effect.\117\
After the vote, some payday lenders began offering vehicle title loans.
Other lenders continued to offer payday loans utilizing Ohio's Credit
Service Organization Act \118\ and the Mortgage Loan Act; \119\ the
latter practice was upheld by the State Supreme Court in 2014.\120\
Also in 2008, the District of Columbia banned payday lending which had
been a permissible activity under the District's check cashing law,
making the loans subject to the District's 24 percent per annum maximum
interest rate cap.\121\
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\116\ Ohio Rev. Code secs. 1321.35 and 1321.40.
\117\ See generally Ohio Neighborhood Fin., Inc. v. Scott, 139
Ohio St.3d 536, 13 N.E. 3d 1115 (2014).
\118\ Ohio Rev. Code sec. 4712.01.
\119\ Ohio Rev. Code sec. 1321.52(C).
\120\ Scott, 139 Ohio St.3d 536, 13 N.E. 3d 1115 (2014).
\121\ Payday Loan Consumer Protection Amendment Act of 2007, DC
Act 17-42 (2007); D.C. Official Code sec. 28-3301(a) (2011).
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In 2010, Colorado's legislature banned short-term single-payment
balloon loans in favor of longer-term, six-month loans. Colorado's
regulatory framework is described in more detail in the discussion of
payday installment lending below.
As of July 1, 2010, Arizona effectively prohibited payday lending
after the authorizing statute expired and a statewide referendum that
would have continued to permit payday lending failed to pass.\122\
However, small-dollar lending activity continues in the State. The
State financial regulator issued an alert in 2013, in response to
complaints about online unlicensed lending, advising consumers and
lenders that payday and consumer loans of $1,000 or less are generally
subject to a rate of 36 percent per annum and loans in violation of
those rates are void.\123\ In addition, vehicle title loans continue to
be made in Arizona as secondary motor vehicle finance
transactions.\124\ The number of licensed vehicle title lenders has
increased by about 300 percent since the payday lending law expired and
now exceeds the number of payday lenders that were licensed prior to
the ban.\125\
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\122\ Ariz. Rev. Stat. sec. 6-1263; Ariz. Sec'y of State,
``State of Arizona Official Canvass,'' at 15 (2008), available at
http://apps.azsos.gov/election/2008/General/Canvass2008GE.pdf; Ariz.
Att'y Gen. Off., ``Operation Sunset FAQ,'' available at https://www.azag.gov/sites/default/files/sites/all/docs/consumer/op-sunset-FAQ.pdf.
\123\ Ariz. Dep't of Fin. Insts., to Consumers, Financial
Institutions and Enterprises Conducting Business in Arizona,
available at http://www.azdfi.gov/LawsRulesPolicy/Forms/FE-AD-PO-Regulatory_and_Consumer_Alert_CL_CO_13_01%2002-06-2013.pdf.
\124\ Ariz. Rev. Stat. sec. 44-281 and 44-291; Arizona Dept. of
Fin. Insts., ``Frequently Asked Questions from Licensees, Question
#6 `What is a Title Loan','' http://www.azdfi.gov/Licensing/Licensing_FAQ.html#MVDSFC (last visited Apr. 20, 2016).
\125\ These include loans ``secured'' by borrowers'
registrations of encumbered vehicles. Jean Ann Fox et al., ``Wrong
Way: Wrecked by Debt, Auto Title Lending in America'' at 9 (Consumer
Fed'n of America, Ctr. for Econ. Integrity, 2016), available at
http://consumerfed.org/wp-content/uploads/2016/01/160126_wrongway_report_cfa-cei.pdf.
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In 2009, Virginia amended its payday lending law. It extended the
minimum loan term to the length of two income periods, added a 45-day
cooling-off period after substantial time in debt (the fifth loan in a
180-day period) and a 90-day cooling-off period after completing an
extended payment plan, and implemented a database to enforce limits on
loan amounts and frequency. The payday law applies to closed-end loans.
Virginia has no interest rate regulations or licensure requirements for
open-end credit.\126\ After the amendments, a number of lenders that
were previously licensed as payday lenders in Virginia, and that offer
closed-end payday loans in other States, switched to offering open-end
credit in Virginia without State licenses.\127\
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\126\ Va. Code Ann. sec. 6.2-312.
\127\ See, e.g., CashNetUSA, ``What We Offer'' https://www.cashnetusa.com/what-we-offer.html (last visited Sept. 16, 2017)
(CashNetUSA is part of Enova); Check Into Cash, ``Virginia Line of
Credit,'' https://checkintocash.com/virginia-line-of-credit/ (last
visited Sept. 16, 2017); Allied Cash Advance, ``Get the Cash You
Need Now'' https://www.alliedcash.com/ (last visited Sept. 16, 2017)
(``VA: Loans made through open-end credit account.''); First
Virginia Loans, ``Get Cash Fast'' https://www.ccfi.com/firstvirginialoans/ (last visited Sept. 16, 2017) (First Virginia is
part of Community Choice, see Community Choice Fin. Inc., 2016
Annual Report (Form 10-K), Exhibit 21.1). See also, Commonwealth of
Virginia State Corp. Comm'n, ``Payday Lender License Surrenders as
of January 1, 2012,'' available at https://www.scc.virginia.gov/SCC-INTERNET/bfi/reg_inst/sur/pay_sur_0112.pdf (for a list of payday
lender license surrenders and dates of surrender).
---------------------------------------------------------------------------
Washington and Delaware have restricted repeat borrowing by
imposing limits on the number of payday loans consumers may obtain. In
2009,
[[Page 54486]]
Washington made several changes to its payday lending law. These
changes, effective January 1, 2010, include a cap of eight loans per
borrower from all lenders in a rolling 12-month period where there had
been no previous limit on the number of total loans, an extended
repayment plan for any loan, and a database to which lenders are
required to report all payday loans.\128\ In 2013, Delaware, a State
with no fee restrictions for payday loans, implemented a cap of five
payday loans, including rollovers, in any 12-month period.\129\
Delaware defines payday loans as loans due within 60 days for amounts
up to $1,000. Some Delaware lenders have shifted from payday loans to
longer-term installment loans with interest-only payments followed by a
final balloon payment of the principal and an interest fee payment--
sometimes called a ``flexpay'' loan.\130\
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\128\ Wash. Dep't of Fin. Insts., ``2010 Payday Lending
Report,'' at 1-3, available at http://www.dfi.wa.gov/sites/default/files/reports/2010-payday-lending-report.pdf.
\129\ Del. Code Ann. 5 secs. 2227(7), 2235A(a)(1).
\130\ See, e.g., James v. National Financial, LLC, 132 A.3d 799,
837 (2016) (holding loan agreement unconscionable and invalid).
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In 2016, South Dakota voters approved a ballot measure instituting
a 36 percent APR limit for all consumer loans made by licensed
lenders.\131\ The measure passed with approximately 75 percent of
voters supporting it.\132\ Subsequently, a number of lenders previously
licensed to do business in the State either declined to renew their
licenses or indicated that they would not originate new loans that
would be subject to the cap.\133\
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\131\ Press Release, S.D., Dep't of Labor and Regulation,
``Initiated Measure 21 Approved,'' (Nov. 10, 2016), available at
http://dlr.sd.gov/news/releases16/nr111016_initiated_measure_21.pdf.
\132\ S.D., Sec'y of State, ``South Dakota Official Election
Returns and Registration Figures,'' at 39 (2016), available at
https://sdsos.gov/elections-voting/assets/ElectionReturns2016_Web.pdf.
\133\ Dana Ferguson, ``Payday Lenders Flee South Dakota After
Rate Cap,'' Argus Leader (Jan. 6, 2017), http://www.argusleader.com/story/news/politics/2017/01/06/payday-lenders-flee-sd-after-rate-cap/96103624/.
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New Mexico enacted legislation in 2017 that will effectively
prohibit single payment payday loans. It requires small-dollar loans to
have minimum loan terms of 120 days and be repaid in four or more
installments.\134\ The legislation will take effect on January 1,
2018.\135\ The legislation also sets a usury limit of 175 percent APR
and will apply to short-term vehicle title loans.
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\134\ N.M. H.B. 347.
\135\ N.M. H.B. 347.
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In 2017, several other States also passed legislation related to
payday lending. Arkansas passed a law clarifying that fees charged by
credit service organizations are interest under the State's
constitutional usury limit of 17 percent per annum.\136\ Utah amended
its existing law that prohibits rollovers of payday loans for more than
10 weeks by prohibiting lenders from originating new loans for
borrowers to repay prior ones.\137\
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\136\ 2017 Ark. S.B. 658, Arkansas 91st General Assembly, Title:
To Create the Credit Repair Services Organizations Act of 2017, and
to Repeal the Credit Services Repair Act of 1987.
\137\ 2017 Utah H.B. 40, Utah 62nd Legislature, 2017 General
Session, Title: Check Cashing and Deferred Deposit Lending
Amendments Sess.
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At least 41 Texas municipalities have adopted local ordinances
setting business regulations on payday lending (and vehicle title
lending).\138\ Some of the ordinances, such as those in Dallas, El
Paso, Houston, and San Antonio, include requirements such as limits on
loan amounts (no more than 20 percent of the borrower's gross annual
income for payday loans), limits on the number of rollovers, required
amortization of the principal loan amount on repeat loans--usually in
25 percent increments, record retention for at least three years, and a
registration requirement.\139\ On a statewide basis, there are no Texas
laws specifically governing payday lenders or payday loan terms; credit
access businesses that act as loan arrangers or broker payday loans
(and vehicle title loans) are regulated and subject to licensing,
reporting, and requirements to provide consumers with disclosures about
repayment and re-borrowing rates.\140\
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\138\ A description of the municipalities is available at Texas
Municipal League. An additional 16 Texas municipalities have adopted
land use ordinances on payday or vehicle title lending. Texas
Municipal League, ``City Regulation of Payday and Auto Title
Lenders,'' http://www.tml.org/payday-updates (last visited April 26,
2017).
\139\ Other municipalities have adopted similar ordinances. For
example, at least seven Oregon municipalities, including Portland
and Eugene, have enacted ordinances that include a 25 percent
amortization requirement on rollovers and a requirement that lenders
offer a no-cost payment plan after two rollovers. See Portland, Or.,
Code sec. 7.26.050; Eugene Or., Code sec. 3.556.
\140\ CABs must include a pictorial disclosure with the
percentage of borrowers who will repay the loan on the due date and
the percentage who will roll over (called renewals) various times.
See Texas Off. of Consumer Credit Commissioner, ``Credit Access
Businesses'' http://occc.texas.gov/industry/cab (last visited Sept.
16, 2017). The CABs, rather than the lenders, maintain storefront
locations, and qualify borrowers, service and collect the loans for
the lenders. CABs may also guaranty the loans. There is no cap on
CAB fees and when these fees are included in the loan finance
charges, the disclosed APRs for Texas payday and vehicle title loans
are similar to those in other States with deregulated rates. See Ann
Baddour, ``Why Texas' Small Dollar Lending Market Matter,'' (Fed.
Reserve Bank of Dallas, e-Perspectives Issue 2, 2012), available at
https://www.fedinprint.org/items/feddep/y2012n2x1.html. In 2004, a
Federal appellate court dismissed a putative class action related to
these practices. Lovick v. RiteMoney, Ltd., 378 F.3d 433 (5th Cir.
2004).
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Online Payday Lending
With the growth of the Internet, a significant online payday
lending industry has developed. Some storefront lenders use the
Internet as an additional method of originating payday loans in the
States in which they are licensed to do business. In addition, there
are now a number of lenders offering what are referred to as ``hybrid''
payday loans, through the Internet. Hybrid payday loans are structured
so that rollovers occur automatically unless the consumer takes
affirmative action to pay off the loan, thus effectively creating a
series of interest-only payments followed by a final balloon payment of
the principal amount and an additional fee.\141\ Hybrid loans
structured as single payment loans with automatic rollovers \142\ and
longer-term loans with a final balloon payment \143\ are covered by the
final rule's Ability-to-Repay
[[Page 54487]]
requirements as discussed more fully below.
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\141\ nonPrime101, ``Report 1: Profiling Internet Small Dollar
Lending--Basic Demographics and Loan Characteristics,'' at 2-3,
(2014), available at https://www.nonprime101.com/wp-content/uploads/2015/02/Profiling-Internet-Small-Dollar-Lending-Final.pdf. The
report refers to these automatic rollovers as ``renewals.''
\142\ Examples of hybrid payday loans requiring borrower
affirmative action to opt out of automatic rollovers are described
in recent litigation by the Bureau and the Federal Trade Commission.
Loans by Integrity Advance contained default terms that caused loans
to automatically roll over four times with charges added at each
rollover before any payments were applied to the principal. See
Press Release, Bureau of Consumer Fin. Prot., ``CFPB Takes Action
Against Online Lender for Deceiving Borrowers,'' (Nov.18, 2015),
available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-online-lender-for-deceiving-borrowers/.
Similarly, OneClickCash was an online lender that offered loans with
a TILA disclosure as a single repayment loan, but unless borrowers
satisfied certain pre-conditions they were automatically enrolled in
a 10 pay-period renewal plan with new finance charges accruing each
pay period and no payments applied to the principal balance until
the fifth payment. See Order, Fed. Trade Comm'n v. AMG Services,
Inc., No. 12-00536 (D. Nev. Mar. 07, 2014), ECF No. 559, available
at https://www.ftc.gov/system/files/documents/cases/140319amgorder.pdf. See also, Sierra Lending, ``FAQ, How do I
repay?,'' https://www.sierralending.com/Home/FAQ (last visited July
20, 2017) (consumer must call online payday lender at least three
business days prior to due date or lender will automatically
withdraw only the finance charge and loan will roll over).
\143\ The Bureau is aware of a number of examples of storefront
and online longer-term loans with final balloon payments. For
instance, a loan agreement for a $200 loan from National Financial
LLC d/b/a Loan Till Payday LLC required the borrower to pay 26 bi-
weekly payments of $60 with a final balloon payment of $260. See,
James v. National Financial, LLC, 132 A.3d 799, 837 (2016) (holding
loan agreement unconscionable and invalid). Additionally the Bureau
is aware of a Texas loan for $365.60, arranged through a credit
access business, to be repaid in five payments of $108 with a sixth,
final payment of $673.70.
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Industry size, structure, and products. The size of the online
payday market is difficult to measure for a number of reasons. First,
many online lenders offer a variety of products beyond single-payment
loans (what the Bureau refers to as payday loans) and hybrid loans
(which the Bureau views as a form of payday lending and falls within
the final rule's definition of short-term loans), including longer-term
installment loans; this poses challenges in sizing the portion of these
firms' business that is attributable to payday and hybrid loans.
Second, most online payday lenders are not publicly traded, which means
that minimal financial information is available about this market
segment. Third, many online payday lenders claim exemption from State
lending laws and licensing requirements on the basis that they are
located and operated from other jurisdictions. Consequently, these
lenders report less information publicly, whether individually or in
aggregate compilations, than lenders holding traditional State
licenses. Finally, storefront payday lenders who are also using the
online channel generally do not separately report their online
originations. Bureau staff's reviews of the largest storefront lenders'
Web sites indicate an increased focus in recent years on online loan
origination.
With these caveats, a frequently cited industry analyst has
estimated that by 2012, online payday loans had grown to generate
nearly an equivalent amount of fee revenue as storefront payday loans
on roughly 62 percent of the origination volume, about $19 billion, but
originations had then declined somewhat to roughly $15.9 billion by
2015.\144\ This trend appears consistent with storefront payday loans,
as discussed above, and is likely related at least in part to
increasing lender migration from short-term into longer-term products.
Online payday loan fee revenue has been estimated at $3.1 billion for
2015, or 19 percent of origination volume.\145\ However, these
estimates may be both over- and under-inclusive; they may not
differentiate precisely between online lenders' short-term and longer-
term loans, and they may not account for the online lending activities
by storefront payday lenders.
---------------------------------------------------------------------------
\144\ John Hecht, ``The State of Short-Term Credit Amid
Ambiguity, Evolution and Innovation'' (2016) (Jefferies LLC, slide
presentation) (on file); John Hecht, ``The State of Short-Term
Credit in a Constantly Changing Environment'' (2015) (Jeffries LLC,
slide presentation) (on file); Jessica Silver-Greenberg, ``Major
Banks Aid in Payday Loans Banned by States,'' N.Y. Times, Feb. 23,
2013, http://www.nytimes.com/2013/02/24/business/major-banks-aid-in-payday-loans-banned-by-states.html.
\145\ John Hecht, ``The State of Short-Term Credit Amid
Ambiguity, Evolution and Innovation'' (2016) (Jefferies LLC, slide
presentation) (on file).
---------------------------------------------------------------------------
Whatever the precise size, the online industry can broadly be
divided into two segments: online lenders licensed in the State in
which the borrower resides and lenders that are not licensed in the
borrower's State of residence.
The first segment consists largely of storefront lenders with an
online channel to complement their storefronts as a means of
originating loans, as well as a few online-only payday lenders who lend
to borrowers in States where they have obtained State lending licenses.
Because this segment of online lenders is State-licensed, State
administrative payday lending reports include these data but generally
do not differentiate loans originated online from those originated in
storefronts. Accordingly, this portion of the market is included in the
market estimates summarized above, and the lenders consider themselves
to be subject to, or generally follow, the relevant State laws
discussed above.
The second segment consists of lenders that claim exemption from
State lending laws. Some of these lenders claim exemption because their
loans are made from physical locations outside of the borrower's State
of residence, including from off-shore locations outside of the United
States.\146\ Other lenders claim exemption because they are lending
from Tribal lands, with such lenders claiming that they are regulated
by the sovereign laws of ``federally recognized Indian tribes.'' \147\
These lenders claim immunity from suit to enforce State or Federal
consumer protection laws on the basis of their sovereign status.\148\ A
Federal appellate court recently rejected claims of immunity from the
Bureau's civil investigative demands by several Tribal-related lenders,
finding that ``Congress did not expressly exclude tribes from the
Bureau's enforcement authority.'' \149\
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\146\ For example, in 2015 the Bureau filed a lawsuit in Federal
district court against NDG Enterprise, NDG Financial Corp., Northway
Broker, Ltd., and others alleging that defendants illegally
collected online payday loans that were void or that consumers had
no obligations to repay, and falsely threatened consumers with
lawsuits and imprisonment. Several defendants are Canadian
corporations and others are incorporated in Malta. The case is
pending. See Press Release, Bureau of Consumer Fin. Prot., ``CFPB
Sues Offshore Payday Lender'' (Aug. 4, 2015), available at http://www.consumerfinance.gov/newsroom/cfpb-sues-offshore-payday-lender/.
\147\ 12 U.S.C. 5481(27). According to a tribal trade
association representative, about 30 tribes are involved in the
payday lending industry. Julia Harte & Joanna Zuckerman Bernstein,
``Payday Nation, When Tribes Team Up with Payday Lenders, Who
Profits?,'' AlJazeera America, June 17, 2014, http://projects.aljazeera.com/2014/payday-nation/. The Bureau is unaware of
other public sources for an estimate of the number of tribal
lenders.
\148\ See First Amended Complaint, Consumer Fin. Prot. Bureau v.
CashCall, Inc., No. 13-13167 (D. Mass. Mar. 21, 2014), ECF No. 27,
available at http://files.consumerfinance.gov/f/201403_cfpb_amended-complaint_cashcall.pdf; Complaint for Permanent Injunction and Other
Relief, Consumer Fin. Prot. Bureau v. Golden Valley Lending Inc.,
No. 17-3155 (N.D. Ill. Apr. 27, 2017), ECF No. 1, available at
http://files.consumerfinance.gov/f/documents/201704_cfpb_Golden-Valley_Silver-Cloud_Majestic-Lake_complaint.pdf; Order, Fed. Trade
Comm'n v. AMG Services, Inc., No. 12-00536 (D. Nev. Mar. 07, 2014),
ECF No. 559, available at https://www.ftc.gov/system/files/documents/cases/140319amgorder.pdf; State ex rel. Suthers v. Cash
Advance & Preferred Cash Loans, 205 P.3d 389 (Colo. App. 2008),
aff'd sub nom; Cash Advance & Preferred Cash Loans v. State, 242
P.3d 1099 (Colo. 2010); California v. Miami Nation Enterprises, 166
Cal.Rptr.3d 800 (2014).
\149\ CFPB v. Great Plains Lending, LLC, 846 F.3d 1049, 1058
(9th Cir. 2017), reh'g denied (Apr. 5, 2017).
---------------------------------------------------------------------------
A frequently cited source of data on this segment of the market is
a series of reports using data from a specialty consumer reporting
agency serving certain online lenders, most of whom are
unlicensed.\150\ These data are not representative of the entire online
industry, but nonetheless cover a large enough sample (2.5 million
borrowers over a period of four years) to be significant. These reports
indicate the following concerning this market segment:
---------------------------------------------------------------------------
\150\ nonPrime101, ``Report 1: Profiling Internet Small Dollar
Lending--Basic Demographics and Loan Characteristics,'' at 9,
(2014), available at https://www.nonprime101.com/wp-content/uploads/2015/02/Profiling-Internet-Small-Dollar-Lending-Final.pdf.
Although the mean and median loan size among the payday
borrowers in this dataset are only slightly higher than the
information reported above for storefront payday loans,\151\ the
online payday lenders charge higher rates than storefront lenders.
As noted above, most of the online lenders reporting this data claim
exemption from State laws and do not comply with State rate caps.
The median loan fee in this dataset is $23.53 per $100 borrowed,
compared to $15 per $100 borrowed for storefront payday loans. The
mean fee amount is even higher at $26.60 per $100 borrowed.\152\
Another study based on a similar dataset from three online payday
lenders is generally consistent, putting the
[[Page 54488]]
range of online payday loan fees at between $18 and $25 per $100
borrowed.\153\
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\151\ The median online payday loan size is $400, compared to a
median loan size of $350 for storefront payday loans. nonPrime101,
``Report 1: Profiling Internet Small Dollar Lending--Basic
Demographics and Loan Characteristics,'' at 10, (2014), available at
https://www.nonprime101.com/wp-content/uploads/2015/02/Profiling-Internet-Small-Dollar-Lending-Final.pdf.
\152\ nonPrime101, ``Report 1: Profiling Internet Small Dollar
Lending--Basic Demographics and Loan Characteristics,'' at 10,
(2014), available at https://www.nonprime101.com/wp-content/uploads/2015/02/Profiling-Internet-Small-Dollar-Lending-Final.pdf.
\153\ G. Michael Flores, ``The State of Online Short-Term
Lending, Second Annual Statistical Analysis Report'' Bretton-Woods,
Inc., at 15 (Feb. 28, 2014), available at http://onlinelendersalliance.org/wp-content/uploads/2015/07/2015-Bretton-Woods-Online-Lending-Study-FINAL.pdf.
---------------------------------------------------------------------------
More than half of the payday loans made by these online
lenders are hybrid payday loans. As described above, a hybrid loan
involves automatic rollovers with payment of the loan fee until a
final balloon payment of the principal and fee.\154\ For the hybrid
payday loans, the most frequently reported payment amount is 30
percent of principal, implying a finance charge during each pay
period of $30 for each $100 borrowed.\155\
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\154\ nonPrime101, ``Report 5--Loan Product Structures and
Pricing in Internet Installment Lending, Similarities to and
Differences from Payday Lending and Implications for CFPB
Rulemaking,'' at 4 (May 15, 2015), available at https://www.nonprime101.com/wp-content/uploads/2015/05/Report-5-Loan-Product-Structures-1.3-5.21.15-Final3.pdf. As noted above, these
loans may also be called flexpay loans. Such loans would likely be
covered longer-term loans under this rule.
\155\ nonPrime101, ``Report 5--Loan Product Structures and
Pricing in Internet Installment Lending, Similarities to and
Differences from Payday Lending and Implications for CFPB
Rulemaking,'' at 6 (May 15, 2015), available at https://www.nonprime101.com/wp-content/uploads/2015/05/Report-5-Loan-Product-Structures-1.3-5.21.15-Final3.pdf.
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Unlike storefront payday loan borrowers who generally
return to the same store to re-borrow, the credit reporting data may
suggest that online borrowers tend to move from lender to lender. As
discussed further below, however, it is difficult to evaluate
whether some of this apparent effect is due to online lenders simply
not consistently reporting lending activity.\156\
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\156\ See generally nonPrime101, ``Report 7-A--How Persistent is
the Borrower-Lender Relationship in Payday Lending,'' (Sept. 10,
2015), available at https://www.nonprime101.com/wp-content/uploads/2015/10/Report-7A-How-Persistent-Is-the-Borrow-Lender-Relationship_1023151.pdf.
Marketing, underwriting, and collection practices. As with most
online lenders in other markets, online payday lenders have utilized
direct marketing, lead generators, and other forms of advertising for
customer acquisition. Lead generators, via Web sites advertising payday
loans usually in the form of banner advertisements or paid search
results (the advertisements that appear at the top of an Internet
search on Google, Bing, or other search engines) operated by
``publishers,'' collect consumers' personal and financial information
and electronically offer it to lenders that have expressed interest in
consumers meeting certain criteria.\157\ In July 2016, Google banned
ads for loans with APRs over 36 percent or with repayment due in 60
days or less.\158\ From the Bureau's market outreach activities it is
aware that the payday lending industry's use of lead generators has
decreased but that payday lenders may be using other forms of
advertising for customer acquisition and retention.
---------------------------------------------------------------------------
\157\ For more information about the use of lead generators in
the payday market, see Fed. Trade Comm'n, ``Follow the Lead
Workshop: Staff Perspective'' (Sept. 2016), available at https://www.ftc.gov/system/files/documents/reports/staff-perspective-follow-lead/staff_perspective_follow_the_lead_workshop.pdf.
\158\ Google announced that it was ``banning payday loans and
some related products from our ads systems,'' in an attempt to
``protect our users from deceptive or harmful financial products.''
The changes to Google's advertising service, AdWords, went into
effect on July 13, 2016, and on its face apply to lenders, lead
generators, and others. In the six months following the new policy's
introduction, Google reported removing five million payday loan ads
from its services. However, some observers have questioned the
effectiveness of Google's policy. See David Graff, ``An Update to
Our AdWords Policy on Lending Products,'' Google The Keyword Blog
(May 11, 2016), https://blog.google/topics/public-policy/an-update-to-our-adwords-policy-on/; Scott Spencer, ``How We Fought Bad Ads,
Sites and Scammers in 2016,'' Google The Keyword Blog (Jan. 25,
2017), https://blog.google/topics/ads/how-we-fought-bad-ads-sites-and-scammers-2016/; David Dayen, ``Google Said It Would Ban All
Payday Loan Ads. It Didn't'' The Intercept, Oct. 7, 2016, https://theintercept.com/2016/10/07/google-said-it-would-ban-all-payday-loan-ads-it-didnt/.
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Online lenders view fraud (i.e., consumers who mispresent their
identity) as a significant risk and also express concerns about ``bad
faith'' borrowing (i.e., consumers with verified identities who borrow
without the intent to repay).\159\ Consequently, online payday and
hybrid payday lenders attempt to verify the borrower's identity and the
existence of a bank account in good standing. Several specialty
consumer reporting agencies have evolved primarily to serve the online
payday lending market. The Bureau is aware from market outreach that
online lenders also generally report loan closure information on a
real-time or daily basis to the specialty consumer reporting agencies.
In addition, some online lenders report to the Bureau that they use
nationwide credit report information to evaluate both credit and
potential fraud risk associated with first-time borrowers, including
recent bankruptcy filings. However, there is evidence that online
lenders do not consistently utilize credit report data for every loan,
and instead typically check and report data only for new borrowers or
those returning after an extended absence from the lender's
records.\160\
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\159\ For example, Enova states that it uses its own analysis of
previous fraud incidences and third party data to determine if
applicant information submitted matches other indicators and whether
the applicant can authorize transactions from the submitted bank
account. In addition, it uses proprietary models to predict fraud.
Enova Int'l Inc., 2016 Annual Report (Form 10-K), at 8-9.
\160\ Based on the Bureau's market outreach with lenders and
specialty consumer reporting agencies.
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Typically, proceeds from online payday loans are disbursed
electronically into the consumer's bank account and the consumer
authorizes the lender to electronically debit her account to repay the
loan as payments are due. The Bureau is aware from market monitoring
that lenders employ various practices to encourage consumers to agree
to authorize electronic debits for repayment. Some lenders generally
will not disburse electronically if consumers do not agree to ACH
repayment, but instead will require the consumer to wait for a paper
loan proceeds check to arrive in the mail.\161\ Some online payday
lenders charge higher interest rates or fees to consumers who do not
commit to electronic debits.\162\ In addition, some online payday
lenders have adopted policies that may delay the crediting of non-ACH
payments.\163\
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\161\ See, e.g., Mobiloans, ``Line of Credit Terms and
Conditions,'' www.mobiloans.com/terms-and-conditions (last visited
Feb. 5, 2016) (``If you do not authorize electronic payments from
your Demand Deposit Account and instead elect to make payments by
mail, you will receive your Mobiloans Cash by check in the mail.'').
\162\ One online payday lender's Web site FAQs states: ``Q: Am I
only able to pay through ACH? A: Paying your cash advance via an
electronic funds transfer (EFT) or ACH is certainly the easiest,
most efficient, and least expensive method. However, should the need
for an alternative payment method arises [sic], we will be happy to
discuss that with you.'' National Payday, ``Frequently Asked
Questions,'' https://www.nationalpayday.com/faq/ (last visited July
20, 2017). LendUp's Web site states there may be a fee to make a
MoneyGram payment. LendUp, ``Frequently Asked Questions, Paying back
your LendUp Loan,'' https://www.lendup.com/faq#paying-loan (last
visited July 20, 2017).
Under the Electronic Fund Transfer Act (EFTA) and its
implementing regulation (Regulation E), lenders cannot condition the
granting of credit on a consumer's repayment by preauthorized
(recurring) electronic fund transfers, except for credit extended
under an overdraft credit plan or extended to maintain a specified
minimum balance in the consumer's account. 12 CFR 1005.10(e). The
summary in the text of current lender practices is intended to be
purely descriptive. The Bureau is not addressing in this rulemaking
the question of whether any of the practices described in text are
consistent with EFTA.
\163\ LendUp's Web site states payment by Moneygram or check may
involve ``processing times'' of ``1-2 business days'' to apply the
payment. LendUp, ``Frequently Asked Questions, Paying back your
LendUp Loan,'' https://www.lendup.com/faq#paying-loan (last visited
July 20, 2017). LendUp offers both single payment and installment
loans, depending on the borrower's State.
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As noted above, online lenders typically collect payday loans via
electronic debits. For a hybrid payday loan the lender seeks to collect
the finance charges a pre-set number of times and then eventually
collect the principal; for a true payday loan the lender will seek to
collect the principal and finance charges when the loan is due. Online
payday lenders, like their
[[Page 54489]]
storefront counterparts, use various models and software, described
above, to predict when an electronic debit is most likely to succeed in
withdrawing funds from a borrower's bank account. As discussed further
below, the Bureau has observed lenders seeking to collect multiple
payments on the same day. This pattern may be driven by a practice of
dividing the payment amount in half and presenting two debits at once,
presumably to reduce the risk of a larger payment being returned for
nonsufficient funds. Indeed, the Bureau found that about one-third of
presentments by online payday lenders occur on the same day as another
request by the same lender from the same account. The Bureau also found
that split presentments almost always result in either payment of all
presentments or return of all presentments (in which event the consumer
will likely incur multiple nonsufficient funds (NSF) fees from the
bank). The Bureau's study indicates that when an online payday lender's
first attempt to obtain a payment from the consumer's account is
unsuccessful, it will make a second attempt 75 percent of the time and
if that attempt fails the lender will make a third attempt 66 percent
of the time.\164\ As discussed further at part II.D, the success rate
on these subsequent attempts is relatively low, and the cost to
consumers may be correspondingly high.\165\
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\164\ See generally CFPB Online Payday Loan Payments, at 14.
\165\ Because these online lenders may offer single-payment
payday, hybrid, and installment loans, reviewing the debits does not
necessarily distinguish the type of loan involved. Storefront payday
lenders were not included. See CFPB Online Payday Loan Payments, at
7, 13.
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There is limited information on the extent to which online payday
lenders that are unable to collect payments through electronic debits
resort to other collection tactics.\166\ The available evidence
indicates, however, that online lenders sustain higher credit losses
and risk of fraud than storefront lenders. One lender with publicly
available financial information that originated both storefront and
online single-payment loans reported in 2014, a 49 percent and 71
percent charge-off rate, respectively, for these loans.\167\ Online
lenders generally classify as ``fraud'' both consumers who
misrepresented their identity in order to obtain a loan and consumers
whose identity is verified but default on the first payment due, which
is viewed as reflecting the intent not to repay.
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\166\ One publicly traded online-only lender that makes single-
payment payday loans as well as online installment loans and lines
of credit reports that its call center contacts borrowers by phone,
email, and in writing after a missed payment and periodically
thereafter and that it also may sell uncollectible charged off debt.
Enova Int'l Inc., 2016 Annual Report (Form, 10-K), at 9 (Feb. 24,
2017).
\167\ Net charge-offs over average balance based on data from
Cash America and Enova Forms 10-K. See Cash America Int'l, Inc.,
2014 Annual Report (Form 10-K), at 102 (Mar. 13, 2015); Enova Int'l
Inc., 2014 Annual Report (Form 10-K), at 95 (Mar. 20, 2015). Net
charge-offs represent single-payment loan losses less recoveries for
the year. Averages balance is the average of beginning and end of
year single-payment loan receivables. Prior to November 14, 2014,
Enova comprised the e-commerce division of Cash America. Using the
2014 Forms 10-K allows for a better comparison of payday loan
activity, than the 2015 Forms 10-K, as Cash America's payday loan
operations declined substantially after 2014.
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Business model. While online lenders tend to have fewer costs
relating to operation of physical facilities than do storefront
lenders, as discussed above, they face higher costs relating to lead
acquisition and marketing, loan origination screening to verify
applicant identity, and potentially larger losses due to what they
classify as ``fraud'' than their storefront competitors.
Accordingly, it is not surprising that online lenders--like their
storefront counterparts--are dependent upon repeated re-borrowing.
Indeed, even at a cost of $25 or $30 per $100 borrowed, a typical
single online payday loan would generate fee revenue of under $100,
which is not sufficient to cover the typical origination costs.
Consequently, as discussed above, hybrid loans that roll over
automatically in the absence of affirmative action by the consumer
account for a substantial percentage of online payday business. These
products, while nominally structured as single-payment products,
effectively build a number of rollovers into the loan. For example, the
Bureau has observed online payday lenders whose loan documents suggest
that they are offering a single-payment loan but whose business model
is to collect only the finance charges due, roll over the principal,
and require consumers to take affirmative steps to notify the lender if
consumers want to repay their loans in full rather than allowing them
to roll over. The Bureau recently initiated an action against an online
lender alleging that it engaged in deceptive practices in connection
with such products.\168\ In a recent survey conducted of online payday
borrowers, 31 percent reported that they had experienced loans with
automatic renewals.\169\
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\168\ Press Release, Bureau of Consumer Fin. Prot., ``CFPB Takes
Action Against Online Lender for Deceiving Borrowers'' (Nov. 18,
2015), available at http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-online-lender-for-deceiving-borrowers/. The FTC
raised and resolved similar claims against online payday lenders.
See Press Release, FTC, FTC Secures $4.4 Million From Online Payday
Lenders to Settle Deception Charges (Jan. 5, 2016), available at
https://www.ftc.gov/news-events/press-releases/2016/01/ftc-secures-44-million-online-payday-lenders-settle-deception.
\169\ Pew Charitable Trusts, ``Payday Lending in America Fraud
and Abuse Online: Harmful Practices in Internet Payday Lending, at 8
(Report 4, 2014), available at www.pewtrusts.org/~/media/Assets/
2014/10/Payday-Lending-Report/
Fraud_and_Abuse_Online_Harmful_Practices_in_Internet_Payday_Lending.p
df.
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As discussed above, a number of online payday lenders claim
exemption from State laws and the regulations and limitations
established under those laws. As reported by a specialty consumer
reporting agency with data from that market, more than half of the
payday loans for which information is furnished to it are hybrid payday
loans with the most common fee being $30 per $100 borrowed, twice the
median amount for storefront payday loans.\170\
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\170\ nonPrime101, ``Report 5--Loan Product Structures and
Pricing in Internet Installment Lending, Similarities to and
Differences from Payday Lending and Implications for CFPB
Rulemaking,'' at 4, 6 (May 15, 2015), available at https://www.nonprime101.com/wp-content/uploads/2015/05/Report-5-Loan-Product-Structures-1.3-5.21.15-Final3.pdf; CFPB Payday Loans and
Deposit Advance Products White Paper, at 16.
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Similar to associations representing storefront lenders as
discussed above, a national trade association representing online
lenders includes loan repayment plans as one of its best practices, but
does not provide many details in its public material.\171\ A trade
association that represents Tribal online lenders has adopted a set of
best practices, but the list does not address repayment plans.\172\
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\171\ Online Lenders Alliance, ``Best Practices,'' at 29 (May
2017), available at http://onlinelendersalliance.org/wp-content/uploads/2015/01/Best-Practices-2017.pdf. The materials state that
its members ``shall comply'' with any required State repayment
plans; otherwise, if a borrower is unable to repay a loan according
to the loan agreement, the trade association's members ``should
create'' repayment plans that ``provide flexibility based on the
customer's circumstances.''
\172\ Native American Fin. Servs. Ass'n, ``Best Practices,''
http://www.mynafsa.org/best-practices/ (last visited Apr. 20, 2016).
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Vehicle Title Loans, Including Short-Term Loans and Balloon-Payment
Products
Vehicle title loans--also known as ``automobile equity loans''--are
another form of liquidity lending permitted in certain States. In a
title loan transaction, the borrower must provide identification and
usually the title to the vehicle as evidence that the borrower owns the
vehicle ``free and clear.'' \173\
[[Page 54490]]
Unlike payday loans, there is generally no requirement that the
borrowers have a bank account, and some lenders do not require a copy
of a pay stub or other evidence of income.\174\ Rather than holding a
check or ACH authorization for repayment as with a payday loan, the
lender generally retains the vehicle title or some other form of
security interest that provides it with the right to repossess the
vehicle, which may then be sold with the proceeds used for
repayment.\175\
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\173\ Arizona also allows vehicle title loans to be made against
as secondary motor vehicle finance transactions. Ariz. Rev. Stat.
sec. 44-281, 44-291G; Arizona Dep.t of Fin. Inst., ``Frequently
Asked Questions from Licensees, Question #6 `What is a Title
Loan.'''
\174\ See Fast Cash Title Loans, ``FAQ,'' http://fastcashvirginia.com/faq/ (last visited Mar. 3, 2016) (``There is no
need to have a checking account to get a title loan.''); Title Max,
``How Title Loans Work,'' https://www.titlemax.com/how-it-works/
(last visited Jan. 15, 2016) (borrowers need a vehicle title and
government issued identification plus any additional requirements of
State law).
\175\ See Speedy Cash, ``Title Loans FAQs,'' https://www.speedycash.com/faqs/title-loans/ (last visited Mar. 29, 2016)
(title loans are helpful ``when you do not have a checking account
to secure your loan. . . . your car serves as collateral for your
loan.'').
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The lender retains the vehicle title or some other form of security
interest during the duration of the loan, while the borrower retains
physical possession of the vehicle. In some States either the lender
files a lien with State officials to record and perfect its interest in
the vehicle or charges a fee for non-filing insurance. In a few States,
a clear vehicle title is not required, and vehicle title loans may be
made as secondary liens against the title or against the borrower's
automobile registration.\176\ In some States, such as Georgia, vehicle
title loans are made under pawnbroker statutes that specifically permit
borrowers to pawn vehicle certificates of title.\177\ Almost all
vehicle title lending is conducted at storefront locations, although
some title lending does occur online.\178\
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\176\ See, for example, the discussion above about Arizona law
applicable to vehicle title lending.
\177\ Ga. Code sec. 44-12-131 (2015).
\178\ See, e.g., the Bureau's action involving Wilshire Consumer
Credit for illegal collection practices. Consumers primarily applied
for Wilshire's vehicle title loans online. Press Release, Bureau of
Consumer Fin. Prot., ``CFPB Orders Indirect Auto Finance Company to
Provide Consumers $44.1 Million in Relief for Illegal Debt
Collection Tactics'' (Oct. 1, 2015), available at http://www.consumerfinance.gov/newsroom/cfpb-orders-indirect-auto-finance-company-to-provide-consumers-44-1-million-in-relief-for-illegal-debt-collection-tactics/. See also State actions against
Liquidation, LLC d/b/a Sovereign Lending Solutions, LLC and other
names, purportedly organized in the Cook Islands, New Zealand. Press
Release, Oregon Dep't of Justice, ``AG Rosenblum and DCBS Sue
Predatory Title Loan Operator'' (Aug. 18, 2015), available at http://www.doj.state.or.us/releases/Pages/2015/rel081815.aspx; Press
Release, Michigan Attorney General, ``Schuette Stops Collections by
High Interest Auto Title Loan Company'' (Jan. 26, 2016), available
at http://www.michigan.gov/ag/0,4534,7-164-46849-374883-,00.html;
Press Release, Pennsylvania Dep't of Banking and Securities,
``Consumers Advised about Illegal Auto Title Loans Following Court
Decision'' (Feb. 3, 2016), available at http://www.media.pa.gov/pages/banking_details.aspx?newsid=89; Press Release, North Carolina
Dep't of Justice, ``Online Car Title Lender Banned from NC for
Unlawful Loans, AG Says'' (May 2, 2016), available at http://www.ncdoj.gov/Home/Search-Results.aspx?searchtext=Ace%20payday&searchmode=AnyWord&searchscope=SearchCurrentSection&page=82; Final Order: Director's Consideration,
Washington Dep't of Financial Institutions, Division of Consumer
Services v. Auto Loans, LLC a/k/a Car Loan, LLC a/k/a Liquidation,
LLC a/k/a Vehicle Liquidation, LLC a/k/a Sovereign Lending Solutions
a/k/a Title Loan America, and William McKibbin, Principal, (Apr. 22,
2016), available at http://dfi.wa.gov/sites/default/files/consumer-services/enforcement-actions/C-15-1804-16-FO02.pdf; Press Release,
Colo. Dep't of Law, ``AG Coffman Announces Significant Relief for
Victims of Illegal Auto Title Loan Scheme'' (Nov. 30, 2016),
available at https://coag.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/PressReleases/UCCC/rsfinancialsovereignlending11.30.16.pdf; Press Release, Att'y Gen.
of Mass., ``AG Obtains Judgment Voiding Hundreds of Illegal Loans to
Massachusetts Consumers in Case Against Online Auto Title Lender''
(May 25, 2017), available at http://www.mass.gov/ago/news-and-updates/press-releases/2017/2017-05-25-voiding-hundreds-of-illegal-loans.html. Consumers applied for the title loans online and sent
their vehicle titles to the lender. The lender used local agents for
repossession services.
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Product definition and regulatory environment. There are three
types of vehicle title loans: Single-payment loans, installment loans,
and in at least one State, balloon payment loans.\179\ Of the 24 States
that permit some form of vehicle title lending, six States permit only
single-payment title loans, 13 States allow the loans to be structured
as single-payment or installment loans, and five permit only title
installment loans.\180\ (The payment practices of installment title
loans are discussed briefly below.) All but three of the States that
permit some form of title lending (Arizona, Georgia, and New Hampshire)
also permit payday lending.
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\179\ The Bureau is aware of Texas vehicle title installment
loans structured as longer-term balloon payment loans. One vehicle
title loan for $433, arranged through a credit access business, was
to be repaid in five payments of $64.91 and a final balloon payment
of $519.15. Similarly, another vehicle title loan arranged through a
credit access business for $2,471.03 was scheduled to be repaid in
five payments for $514.80 with a final balloon payment of $2,985.83.
\180\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' at 4 (2015), available at
http://www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en. The report lists 25 States but post-
publication, as noted above, South Dakota effectively prohibited
vehicle title lending in November 2016 by adopting a 36 percent APR
rate cap. And, as of January 1, 2018, New Mexico vehicle title loans
will be required to have a 120-day minimum loan term.
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Single-payment vehicle title loans are typically due in 30 days and
operate much like payday loans: The consumer is charged a fixed price
per $100 borrowed, and when the loan is due the consumer is obligated
to repay the full amount of the loan plus the fee but is typically
given the opportunity to roll over or re-borrow.\181\ The Bureau
recently studied anonymized data from vehicle title lenders consisting
of nearly 3.5 million loans made to over 400,000 borrowers in 20
States. For single-payment vehicle title loans with a typical duration
of 30 days, the median loan amount was $694 with a median APR of 317
percent; the average loan amount was $959 and the average APR was 291
percent.\182\ Two other studies contain similar findings.\183\ Vehicle
title loans are therefore for substantially larger amounts than typical
payday loans, but carry similar APRs for similar terms. Some States
that authorize vehicle title loans limit the rates lenders may charge
to a percentage or dollar amount per $100 borrowed, similar to some
State payday lending pricing structures. A common fee limit is 25
percent of the loan amount per month, but roughly half of the
authorizing States have no restrictions on rates or fees.\184\ Some,
but not all, States limit the maximum amount that may be borrowed to a
fixed dollar amount, a percentage of the borrower's monthly income (50
percent of the borrower's gross monthly income in Illinois), or a
[[Page 54491]]
percentage of the vehicle's value.\185\ Some States limit the initial
loan term to one month but several States authorize rollovers
(including, in Idaho and Tennessee, automatic rollovers arranged at the
time of the original loan, resembling the hybrid payday structure
described above), with a few States requiring mandatory amortization in
amounts ranging from five to 20 percent on rollovers.\186\ Unlike
payday loan regulation, few States require cooling-off periods between
loans or optional extended repayment plans for borrowers who cannot
repay vehicle title loans.\187\
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\181\ See Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' (2015), available at http://
www.pewtrusts.org/~/media/Assets/2015/03/AutoTitleLoansReport
.pdf?la=en; see also Idaho Dep't of Fin., ``Idaho Credit Code `Fast
Facts' '', available at http://www.finance.idaho.gov/ConsumerFinance/Documents/Idaho-Credit-Code-Fast-Facts-With-Fiscal-Annual-Report-Data-01012016.pdf; Letter from Greg Gonzales, Comm'r,
Tenn. Dep't of Fin. Insts., to Hon. Bill Haslam, Governor and Hon.
Members of the 109th General Assembly, at 4 (Apr. 12, 2016) (Report
on the Title Pledge Industry), available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf.
\182\ CFPB Single-Payment Vehicle Title Lending, at 7.
\183\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' (2015), available at http://
www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en; Susanna Montezemolo, ``The State of
Lending in America & Its Impact on U.S. Households: Payday Lending
Abuses and Predatory Practices,'' at 3 (Ctr. for Responsible Lending
2013), available at http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf.
\184\ States with a 15 percent to 25 percent per month cap
include Alabama, Georgia (rate decreases after 90 days),
Mississippi, and New Hampshire; Tennessee limits interest rates to 2
percent per month, but also allows for a fee up to 20 percent of the
original principal amount. Virginia's fees are tiered at 22 percent
per month for amounts up to $700 and then decrease on larger loans.
Ala. Code sec. 5-19A-7(a); Ga. Code Ann. sec. 44-12-131(a)(4); Miss.
Code Ann. sec. 75-67-413(1); N.H. Rev. Stat. Ann. sec. 399-
A:18(I)(f); Tenn. Code Ann. sec. 45-15-111(a); Va. Code Ann. sec.
6.2-2216(A).
\185\ For example, some maximum vehicle title loan amounts are
$2,500 in Mississippi, New Mexico, and Tennessee, and $5,000 in
Missouri. Illinois limits the loan amount to $4,000 or 50 percent of
monthly income, Virginia and Wisconsin limit the loan amount to 50
percent of the vehicle's value and Wisconsin also has a $25,000
maximum loan amount. Examples of States with no limits on loan
amounts, limits of the amount of the value of the vehicle, or
statutes that are silent about loan amounts include Arizona, Idaho,
South Dakota, and Utah. Miss. Code Ann. sec. 75-67-415(f); N.M.
Stat. Ann. sec. 58-15-3(A); Tenn. Code Ann. sec. 45-15-115(3); Mo.
Rev. Stat. sec. 367.527(2); Ill. Admin. Code tit. 38; sec.
110.370(a); Va. Code Ann. sec. 6.2-2215(1)(d); Wis. Stat. sec.
138.16(1)(c); (2)(a); Ariz. Rev. Stat. Ann. sec. 44-291(A); Idaho
Code Ann. sec. 28-46-508(3); S.D. Codified Laws sec. 54-4-44; Utah
Code Ann. sec. 7-24-202(3)(c). As noted above, as of January 1,
2018, New Mexico vehicle title loans will be limited to $5,000, with
minimum loan terms of 120 days. N.M. H.B. 347.
\186\ States that permit rollovers include Delaware, Georgia,
Idaho, Illinois, Mississippi, Missouri, Nevada, New Hampshire,
Tennessee, and Utah. Idaho and Tennessee limit title loans to 30
days but allow automatic rollovers and require a principal reduction
of 10 percent and 5 percent respectively, starting with the third
rollover. Virginia prohibits rollovers and requires a minimum loan
term of at least 120 days. See Del. Code Ann. tit. 5 sec. 2254
(rollovers may not exceed 180 days from date of fund disbursement);
Ga. Code Ann. sec. 44-12-138(b)(4); Idaho Code Ann. sec. 28-46-
506(1) & (3); Ill. Admin. Code tit. 38; sec. 110.370(b)(1) (allowing
refinancing if principal is reduced by 20 percent); Miss. Code Ann.
sec. 75-67-413(3); Mo. Rev. Stat. sec. 367.512(4); Nev. Rev. Stat.
sec. 604A.445(2); N.H. Rev. Stat. Ann. sec. 399-A:19(II) (maximum of
10 rollovers); Tenn. Code Ann. sec. 45-15-113(a); Utah Code Ann.
sec. 7-24-202(3)(a); Va. Code Ann. sec. 6.2-2216(F).
\187\ Illinois requires 15 days between title loans. Delaware
requires title lenders to offer a workout agreement after default
but prior to repossession that repays at least 10 percent of the
outstanding balance each month. Delaware does not cap fees on title
loans and interest continues to accrue on workout agreements. Ill.
Admin. Code tit. 38; sec. 110.370(c); Del. Code Ann. 5 secs. 2255 &
2258 (2015).
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State vehicle title regulations also sometimes address default,
repossession and related fees; any cure periods prior to and after
repossession; whether the lender must refund any surplus after the
repossession and sale or disposition of the vehicle; and whether the
borrower is liable for any deficiency remaining after sale or
disposition.\188\ Of the States that expressly authorize vehicle title
lending, nine are ``non-recourse'' meaning that a lender's remedy upon
the borrower's default is limited to repossession of the vehicle unless
the borrower has impaired the vehicle by concealment, damage, or
fraud.\189\ Other vehicle title lending statutes are silent and do not
directly specify whether a lender has recourse against a borrower for
any deficiency balance remaining after repossessing the vehicle. An
industry trade association commenter stated that title lenders do not
sue borrowers or garnish their wages for deficiency balances.
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\188\ For example, Georgia allows repossession fees and storage
fees. Arizona, Delaware, Idaho, Missouri, South Dakota, Tennessee,
Utah, Virginia, and Wisconsin specify that any surplus must be
returned to the borrower. Mississippi requires that 85 percent of
any surplus be returned. Ga. Code Ann. sec. 44-12-131(a)(4)(C);
Ariz. Rev. Stat. Ann. sec. 47-9608(A)(4); Del. Code Ann. tit. 5,
sec. 2260; Idaho Code Ann. sec. 28-9-615(d); Mo. Rev. Stat. sec.
408.553; S.D. Codified Laws sec. 54-4-72; Tenn. Code Ann. sec. 45-
15-114(b)(2); Utah Code Ann. sec. 7-24-204(3); Va. Code Ann. sec.
6.2-2217(C); Wis. Stat. sec. 138.16(4)(e); Miss. Code Ann. sec. 75-
67-411(5).
\189\ The non-recourse States include Delaware, Florida (short-
term loans), Idaho (short-term loans), Nevada, South Carolina,
Tennessee (short-term loans), Utah, Virginia, and Wisconsin. Del.
Code 5-22-V sec. 2260; Fla. Stat. sec. 33.537.012 (5) (2016); Idaho
Code 28-46-508 (2); NRS 604A.455-2; S.C. Code of Laws sec. 37-2-
413(5); Tenn. Code Ann. sec. 45-15-115 (2); Utah Code Ann. sec.7-24-
204(1); Va. Code sec. 6.2-2217.A & E; and Wis. Stats. 138.16(4)(f).
Kentucky and South Dakota's title lending laws are also non-recourse
but those States also have low rate caps that effectively prohibit
title loans. Ky. Rev Stat 286.10-275 (2015); S.D. Codified Laws 54-
4-72. In addition, vehicle title loans are sometimes made under
State pawn lending laws that may provide that borrowers have no
personal liability to repay pawn loans or obligation to redeem
pledged items. See, e.g., O.C.G.A. 44-12-137(a)(7) (2010); La. Rev
Stat sec. 37:1803 (2016); Minn. Statutes 325J.08(6) (2016).
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Some States have enacted general requirements that vehicle title
lenders consider a borrower's ability to repay before making a title
loan. For example, both South Carolina and Utah require lenders to
consider borrower ability to repay, but this may be accomplished
through a borrower affirmation that she has provided accurate financial
information and has the ability to repay.\190\ Until July 1, 2017,
Nevada required title lenders to generally consider a borrower's
ability to repay and obtain an affirmation of this fact. Effective July
1st, an amendment to Nevada law requires vehicle title lenders (and
payday lenders, as noted above) to assess borrowers' reasonable ability
to repay by considering, to the extent available, their current or
expected income; current employment status based on a pay stub, bank
deposit, or other evidence; credit history; original loan amount due,
or for installment loans or potential repayment plans, the monthly
payment amount; and other evidence relevant to ability to repay
including bank statements and borrowers' written representations.\191\
Missouri requires that lenders consider a borrower's financial ability
to reasonably repay the loan under the loan's contract, but does not
specify how lenders may satisfy this requirement.\192\
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\190\ Utah Code Ann. sec. 7-24-202; S.C. Code Ann. sec. 37-3-
413(3).
\191\ Nev. Rev. Stat. sec. 640A.450(3); A.B. 163, 79th Sess.
(Nev. 2017).
\192\ Mo. Rev. Stat sec. 367.525(4).
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Industry size and structure. Information about the vehicle title
market is more limited than the storefront payday industry because
there are currently no publicly traded monoline vehicle title loan
companies, most payday lending companies that offer vehicle title loans
are not publicly traded, and less information is generally available
from State regulators and other sources.\193\ One national survey
conducted in June 2015 found that 1.7 million households reported
obtaining a vehicle title loan over the preceding 12 months.\194\
Another study extrapolating from State regulatory reports estimated
that about two million Americans used vehicle title loans
annually.\195\ In 2014, new vehicle title loan originations were
estimated at roughly $2 billion with revenue estimates of $3 to $5.6
billion.\196\ These estimates may not include the full extent of
rollovers, as well as vehicle title loan expansion by payday lenders.
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\193\ A trade association representing several larger title
lenders, the American Association of Responsible Auto Lenders, does
not have a public-facing Web site but has provided the Bureau with
some information about the industry.
\194\ FDIC, ``2016 Unbanked and Underbanked Survey,'' at 2, 34.
\195\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' at 1 (2015), available at
http://www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en. Pew's estimate includes borrowers of
single-payment and installment vehicle title loans. The FDIC's
survey question did not specify any particular type of title loan.
\196\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' at 1 (2015), available at
http://www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en; Jean Ann Fox et al., ``Driven to
Disaster: Car-Title Lending and Its Impact on Consumers,'' at 8
(Ctr. for Responsible Lending, 2013), available at, http://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/CRL-Car-Title-Report-FINAL.pdf.
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There are approximately 8,000 title loan storefront locations in
the United States, about half of which also offer payday loans.\197\ Of
those locations that
[[Page 54492]]
predominately offer vehicle title loans, three privately held firms
dominate the market and together account for about 3,000 stores in
about 20 States.\198\ These lenders are concentrated in the
southeastern and southwestern regions of the country.\199\ In addition
to the large title lenders, smaller vehicle title lenders are estimated
to have about 800 storefront locations,\200\ and as noted above several
companies offer both title loans and payday loans.\201\ The Bureau
understands that for some firms whose core business had been payday
loans, the volume of vehicle title loan originations now exceeds payday
loan originations.
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\197\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' at 1, 33 n.7 (2015),
available at http://www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf.
\198\ The largest vehicle title lender is TMX Finance, LLC
formerly known as Title Max Holdings, LLC with about 1,200 stores in
17 States. It was publicly traded until 2013 when it was taken
private. Its last 10-K reported annual revenue of $656.8 million.
TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 21 (Mar. 27, 2013).
See TMX Finance, ``Careers, We Believe in Creating Opportunity,''
https://www.tmxfinancefamily.com/careers/ (last visited Sept. 17,
2017) (for TMX Finance store counts); Community Loans of America
``About Us,'' https://clacorp.com/about-us (last visited Jun. 19,
2017) (states it has about 1,000 locations across 25 States); Fred
Schulte, ``Lawmakers protect title loan firms while borrowers pay
sky-high interest rates'' Public Integrity, (updated Sept. 13,
2016), http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates
(Select Management Resources has about 700 stores.).
\199\ Fred Schulte, ``Lawmakers protect title loan firms while
borrowers pay sky-high interest rates'' Public Integrity, (updated
Sept. 13, 2016), http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates.
\200\ State reports have been supplemented with estimates from
Center for Responsible Lending, revenue information from public
filings and from non-public sources. See Jean Ann Fox et al.,
``Driven to Disaster: Car-Title Lending and Its Impact on
Consumers,'' at 7 (Ctr. for Responsible Lending, 2013) available at
http://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/CRL-Car-Title-Report-FINAL.pdf.
\201\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' at 1 (2015), available at
http://www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en.
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State loan data also show an overall trend of vehicle title loan
growth. The number of borrowers in Illinois taking vehicle title loans
increased 77 percent from 2009 to 2013, and then declined 14 percent
from 2013 to 2015.\202\ The number of title loans taken out in
California increased 183 percent between 2011 and 2016.\203\ In
Virginia, from 2011 to 2013, the number of motor vehicle title loans
made increased by 38 percent from 128,446 to a peak of 177,775, and the
number of individual consumers taking title loans increased by 44
percent, from 105,542 to a peak of 152,002. By 2016, the number of
title loans in Virginia decreased to 155,996 and the number of
individual consumers taking title loans decreased to 114,042. The
average number of loans per borrower remained constant at 1.2 from 2011
to 2015; in 2016 the number of loans per borrower increased to
1.4.\204\ In addition to loans made under Virginia's vehicle title law,
a series of reports noted that some Virginia title lenders offered
``consumer finance'' installment loans without the corresponding
consumer protections of the vehicle title lending law and, accounted
for about ``a quarter of the money loaned in Virginia using automobile
titles as collateral.'' \205\ In Tennessee, the number of licensed
vehicle title (title pledge) locations at year-end has been measured
yearly since 2006. The number of Tennessee locations peaked in 2014 at
1,071, 52 percent higher than the 2006 levels. In 2015, the number of
locations declined to 965. However, in each year from 2013 to 2016, the
State regulator has reported more licensed locations than existed prior
to the State's title lending regulation, the Tennessee Title Pledge
Act.\206\
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\202\ Ill. Dep't. of Fin. & Prof. Reg., ``Illinois Trends Report
All Consumer Loan Products Through December 2015,'' at 6 (Apr. 14,
2016), available at http://www.idfpr.com/DFI/CCD/pdfs/IL_Trends_Report%202015-%20FINAL.pdf?ActID=1204&ChapterID=20).
\203\ Compare 38,148 vehicle title loans in CY 2011 to 108,080
in CY 2016. California Dep't of Corps., ``2011 Annual Report
Operation of Finance Companies Licensed under the California Finance
Lenders Law,'' at 12 (2012), available at http://www.dbo.ca.gov/Licensees/Finance_Lenders/pdf/CFL2011ARC.pdf; California Dep't of
Bus. Oversight, ``2016 Annual Report Operation of Finance Companies
Licensed Under the California Finance Lenders Law,'' at 13 (2017),
available at http://www.dbo.ca.gov/Licensees/Finance_Lenders/pdf/2016%20CFLL%20Annual%20Report%20FINAL%207-6-17.pdf.
\204\ Va. State Corp. Comm'n, ``The 2016 Annual Report of the
Bureau of Financial Institutions: Payday Lender Licensees, Check
Cashers, Motor Vehicle Title Lender Licensees Operating in Virginia
at the Close of Business December 31, 2016,'' at 67 (2017),
available at https://www.scc.virginia.gov/bfi/annual/ar04-16.pdf;
Va. State Corp. Comm'n, ``The 2013 Annual Report of the Bureau of
Financial Institutions, Payday Lender Licensees, Check Cashers,
Motor Vehicle Title Lender Licensees Operating in Virginia at the
Close of Business December 31, 2013,'' at 80 (2014), available at
https://www.scc.virginia.gov/bfi/annual/ar04-13.pdf. Because
Virginia vehicle title lenders are authorized by State law to make
vehicle title loans to residents of other States, the data reported
by licensed Virginia vehicle title lenders may include loans made to
out-of-State residents.
\205\ Michael Pope, ``How Virginia Became the Region's Hub For
High-Interest Loans,'' WAMU, Oct. 6, 2015, http://wamu.org/news/15/10/06/how_virginia_became_the_regional_leader_for_car_title_loans.
\206\ Letter from Greg Gonzales, Comm'r,Tennessee Dep't of Fin.
Insts., to Hon. Bill Haslam, Governor and Hon. Members of the 108th
General Assembly, at 1 (Mar. 31, 2014) (Report on the Title Pledge
Industry), available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2014.pdf; Letter from Greg
Gonzales, Comm'r,Tennessee Dep't of Fin. Insts., to Hon. Bill
Haslam, Governor and Hon. Members of the 109th General Assembly, at
2 (Apr. 12, 2016) (Report on the Title Pledge Industry), available
at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf.
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Vehicle title loan storefront locations serve a relatively small
number of customers. One study estimated that the average vehicle title
loan store made 218 loans per year, not including rollovers.\207\
Another study using data from four States and public filings from the
largest vehicle title lender estimated that the average vehicle title
loan store serves about 300 unique borrowers per year--or slightly more
than one unique borrower per business day.\208\ The same report
estimated that the largest vehicle title lender had 4.2 employees per
store.\209\ But, as mentioned, a number of large payday firms offer
both products from the same storefront and may use the same employees
to do so. In addition, small vehicle title lenders are likely to have
fewer employees per location than do larger title lenders.
---------------------------------------------------------------------------
\207\ Jean Ann Fox et al., ``Driven to Disaster: Car-Title
Lending and Its Impact on Consumers,'' at 7 (Ctr. for Responsible
Lending, 2013) available at http://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/CRL-Car-Title-Report-FINAL.pdf.
\208\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' at 5 (2015), available at
http://www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en. The four States were Mississippi,
Tennessee, Texas, and Virginia. The public filing was from TMX
Finance, the largest lender by store count. Id. at 35 n.37.
\209\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' at 22 (2015), available at
http://www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en. The estimate is based on TMX
Finance's total store and employee count reported in its Form 10-K
as of the end of 2012 (1,035 stores and 4,335 employees). TMX Fin.
LLC, 2012 Annual Report (Form 10-K), at 3, 6. The calculation does
not account for employees at centralized non-storefront locations.
---------------------------------------------------------------------------
Marketing, underwriting, and collections practices. Vehicle title
loans are marketed to appeal to borrowers with impaired credit who seek
immediate funds. The largest vehicle title lender described title loans
as a ``way for consumers to meet their liquidity needs'' and described
their customers as those who ``often . . . have a sudden and unexpected
need for cash due to common financial challenges.'' \210\
Advertisements for vehicle title loans suggest that title loans can be
used ``to cover unforeseen costs this month . . . [if] utilities are a
little higher than you expected,'' if consumers are ``in a bind,'' for
a ``short term cash
[[Page 54493]]
flow'' problem, or for ``fast cash to deal with an unexpected
expense.'' \211\ Vehicle title lenders advertise quick loan approval
``in as little as 15 minutes.'' \212\ Some lenders offer promotional
discounts for the initial loan and bonuses for referrals,\213\ for
example, a $100 prepaid card for referring friends for vehicle title
loans.\214\
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\210\ TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 4, 21.
\211\ See, e.g., Cash 1, ``Get an Instant Title Loan,'' https://www.cash1titleloans.com/apply-now/arizona.aspx?st-t=cash1titleloans_srch&gclid=Cj0KEQjwoM63BRDK_bf4_MeV3ZEBEiQAuQWqkU6O5gtz6kRjP8T3Al-BvylI-bIKksDT-r0NMPjEG4kaAqZe8P8HAQ; Speedy Cash,
``Title Loans,'' https://www.speedycash.com/title-loans/; Metro
Loans, ``FAQs,'' http://metroloans.com/title-loans-faqs/; Lending
Bear, ``How it Works,'' https://www.lendingbear.com/how-it-works/;
Fast Cash Title Loans, ``FAQ,'' http://fastcashvirginia.com/ (all
Web sites last visited Mar. 24, 2016).
\212\ Check Smart, ``Arizona Vehicle Title Loan,'' http://www.checksmartstores.com/arizona/title-loans/ (last visited Jan. 14,
2016); Fred Schulte, ``Lawmakers protect title loan firms while
borrowers pay sky-high interest rates'' Public Integrity, (updated
Sept. 13, 2016), http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates.
\213\ Ctr. for Responsible Lending, ``Car Title Lending:
Disregard for Borrowers' Ability to Repay,'' at 1, CRL Policy Brief
(May 12, 2014), available at http://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/Car-Title-Policy-Brief-Abilty-to-Repay-May-12-2014.pdf.
\214\ Check Smart, ``Special Offers,'' http://www.checksmartstores.com/arizona/special-offers/ last visited Mar.
29, 2016).
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The underwriting policies and practices that vehicle title lenders
use vary and may depend on such factors as State law requirements and
individual lender practices. As noted above, some vehicle title lenders
do not require borrowers to provide information about their income and
instead rely on the vehicle title and the underlying collateral that
may be repossessed and sold in the event the borrower defaults--a
practice known as asset-based lending.\215\ The largest vehicle title
lender stated in 2011 that its underwriting decisions were based
entirely on the wholesale value of the vehicle.\216\ Other title
lenders' Web sites state that proof of income is required,\217\
although it is unclear whether employment information is verified or
used for underwriting, whether it is used for collections and
communication purposes upon default, or for both purposes. The Bureau
is aware, from confidential information gathered in the course of its
statutory functions, that one or more vehicle title lenders regularly
exceed their maximum loan amount guidelines and instruct employees to
consider a vehicle's sentimental or use value to the borrower when
assessing the amount of funds they will lend.
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\215\ Advance America's Web site states ``[l]oan amount will be
based on the value of your car* (*requirements may vary by state).''
Advance America, ``Title Loans,'' https://www.advanceamerica.net/services/title-loans (last visited Mar. 3, 2016); Pew Charitable
Trusts, ``Auto Title Loans: Market Practices and Borrowers'
Experiences,'' at 1 (2015), available at http://www.pewtrusts.org/~/
media/Assets/2015/03/AutoTitleLoansReport.pdf?la=en; Fred Schulte,
``Lawmakers protect title loan firms while borrowers pay sky-high
interest rates'' Public Integrity, (updated Sept. 13, 2016), http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates.
\216\ TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 5.
\217\ See, e.g., Check Into Cash, ``Unlock The Cash In Your
Car,'' https://checkintocash.com/title-loans/ (last visited Mar. 3,
2016); Speedy Cash, ``Title Loans,'' https://www.speedycash.com/title-loans/ (last visited Mar. 3, 2016); ACE Cash Express, ``Title
Loans,'' https://www.acecashexpress.com/title-loans (last visited
Mar. 3, 2016); Fast Cash Title Loans, ``FAQ,'' http://fastcashvirginia.com/faq/ (last visited Mar. 3, 2016).
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As in the market for payday loans, there have been some studies
about the extent of price competition in the vehicle title lending
market. Vehicle title lending is almost exclusively a storefront
market, as discussed above. The evidence of price competition is mixed.
One large title lender stated that it competes on factors such as
location, customer service, and convenience, and also highlights its
pricing as a competitive factor.\218\ An academic study found evidence
of price competition in the vehicle title market, citing the abundance
of price-related advertising and evidence that in States with rate
caps, such as Tennessee, approximately half of the lenders charged the
maximum rate allowed by law, while the other half charged lower
rates.\219\ However, another report found that like payday lenders,
title lenders compete primarily on location, speed, and customer
service, gaining customers by increasing the number of locations rather
than underpricing their competition.\220\
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\218\ TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 6.
\219\ Jim Hawkins, ``Credit on Wheels: The Law and Business of
Auto-Title Lending,'' 69 Wash. & Lee L. Rev. 535, 558-559 (2012).
\220\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' at 5 (2015), available at
http://www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en.
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Loan amounts are typically for less than half the wholesale value
of the consumer's vehicle. Low loan-to-value ratios reduce a lender's
risk. A survey of title lenders in New Mexico found that the lenders
typically lend between 25 and 40 percent of a vehicle's wholesale
value.\221\ At one large title lender, the weighted average loan-to-
value ratio was found to be 26 percent of Black Book retail value.\222\
The same lender has two principal operating divisions; one division
requires that vehicles have a minimum appraised value greater than
$500, but the lender will lend against vehicles with a lower appraised
value through another brand.\223\
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\221\ Nathalie Martin & Ozymandias Adams, ``Grand Theft Auto
Loans: Repossession and Demographic Realities in Title Lending,'' 77
Mo. L. Rev. 41 (2012).
\222\ TMX Fin. LLC, 2011 Annual Report (Form 10-K), at 3 (Mar.
19, 2012).
\223\ TMX Fin. LLC, 2011 Annual Report (Form 10-K), at 5 (Mar.
19, 2012).
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When a borrower defaults on a vehicle title loan, the lender may
repossess the vehicle. The Bureau believes, based on market outreach,
that the decision whether to repossess a vehicle will depend on factors
such as the amount due, the age and resale value of the vehicle, the
costs to locate and repossess the vehicle, and State law requirements
to refund any surplus amount remaining after the sale proceeds have
been applied to the remaining loan balance.\224\ Available information
indicates that lenders are unlikely to repossess vehicles they do not
expect to sell. The largest vehicle title lender sold 83 percent of the
vehicles it repossessed but did not report overall repossession
rates.\225\ In 2012, its firm-wide gross charge-offs equaled 30 percent
of its average outstanding title loan balances.\226\ The Bureau is
aware of vehicle title lenders engaging in illegal debt collection
activities in order to collect amounts claimed to be due under title
loan agreements. These practices include altering caller ID information
on outgoing calls to borrowers to make it appear that calls were from
other businesses, falsely threatening to refer borrowers for criminal
investigation or prosecution, and unlawfully disclosing debt
information to borrowers' employers, friends, and family.\227\ In
[[Page 54494]]
addition, approximately 16 percent of consumer complaints handled by
the Bureau about vehicle title loans involved consumers reporting
concerns about repossession issues.\228\
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\224\ See also Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' at 13-14 (2015), available
at http://www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en.
\225\ Missouri sales of repossessed vehicles calculated from
data linked to St. Louis Post-Dispatch. Walter Moskop, ``Title Max
is Thriving in Missouri--and Repossessing Thousands of Cars in the
Process,'' St. Louis Post-Dispatch, Sept. 21, 2015, available at
http://www.stltoday.com/business/local/titlemax-is-thriving-in-missouri-and-repossessing-thousands-of-cars/article_d8ea72b3-f687-5be4-8172-9d537ac94123.html.
\226\ Bureau estimates based on publicly available financial
statements by TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 22,
43.
\227\ Press Release, Bureau of Consumer Fin. Prot., ``CFPB
Orders Relief for Illegal Debt Collection Tactics,'' (Oct. 1, 2015),
available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-indirect-auto-finance-company-to-provide-consumers-44-1-million-in-relief-for-illegal-debt-collection-tactics/. In September
2016, the CFPB took action against TMX Finance, alleging that
employees made in-person visits to borrowers' references and places
of employment, and disclosed the existence of borrowers' past due
debts to these third-parties. Consent Order, TMX Finance LLC, CFPB
No. 2016-CFPB-0022, (Sept. 26, 2016), available at https://www.consumerfinance.gov/documents/1011/092016_cfpb_TitleMaxConsentOrder.pdf.
\228\ This represents complaints received between November 2013
and December 2016.
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Some vehicle title lenders have installed electronic devices on the
vehicles, known as starter interrupt devices, automated collection
technology, or more colloquially as ``kill switches,'' that can be
programmed to transmit audible sounds in the vehicle before or at the
payment due date. The devices may also be programmed to prevent the
vehicle from starting when the borrower is in default on the loan,
although they may allow a one-time re-start upon the borrower's call to
obtain a code.\229\ One of the starter interrupt providers states that
``[a]ssuming proper installation, the device will not shut off the
vehicle while driving.'' \230\ Due to concerns about consumer harm, a
State Attorney General issued a consumer alert about the use of starter
interrupt devices specific to vehicle title loans.\231\ The alert also
noted that some title lenders require consumers to provide an extra key
to their vehicles. In an attempt to avoid illegal repossessions,
Wisconsin's vehicle title law prohibits lenders from requiring
borrowers to provide the lender with an extra key to the vehicle.\232\
The Bureau has received several complaints about starter interrupt
devices.
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\229\ See, e.g., Eric L. Johnson & Corinne Kirkendall, ``Starter
Interrupt and GPS Devices: Best Practices,'' PassTime InTouch, Jan.
14, 2016, available at https://passtimegps.com/starter-interrupt-and-gps-devices-best-practices/. These products may be used in
conjunction with GPS devices and are also marketed for subprime
automobile financing and insurance.
\230\ Eric L. Johnson & Corinne Kirkendall, ``Starter Interrupt
and GPS Devices: Best Practices,'' PassTime InTouch, Jan. 14, 2016,
available at https://passtimegps.com/starter-interrupt-and-gps-devices-best-practices/.
\231\ The alert also noted that vehicle title loans are illegal
in Michigan. Bill Schuette, Mich. Att'y Gen., ``Consumer Alert: Auto
Title Loans,'' available at http://www.michigan.gov/ag/0,4534,7-164-17337_20942-371738-,00.html.
\232\ Wis. Stat. sec. 138.16(4)(b).
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Business model. As noted above, short-term vehicle title lenders
appear to have overhead costs relatively similar to those of storefront
payday lenders. Default rates on vehicle title loans and lender
reliance on re-borrowing activity appear to be even greater than that
of storefront payday lenders.
Based on data analyzed by the Bureau, the default rate on single-
payment vehicle title loans is six percent and the sequence-level
default rate is 33 percent, compared with a 20 percent sequence-level
default rate for storefront payday loans. One-in-five single-payment
vehicle title loan borrowers have their vehicle repossessed by the
lender.\233\ One industry trade association commenter stated that 15 to
25 percent of repossessed vehicles are subsequently redeemed by
borrowers after paying off the deficiency balance owed (along with
repossession costs).
---------------------------------------------------------------------------
\233\ CFPB Single-Payment Vehicle Title Lending, at 23; CFPB
Report on Supplemental Findings, at 112.
---------------------------------------------------------------------------
Similarly, the rate of vehicle title re-borrowing appears high. In
the Bureau's data analysis, more than half--56 percent--of single-
payment vehicle title loan sequences stretched for at least four loans;
over a third--36 percent--were seven or more loans; and 23 percent of
loan sequences consisted of 10 or more loans. While other sources on
vehicle title lending are more limited than for payday lending, the
Tennessee Department of Financial Institutions publishes a biennial
report on vehicle title lending. Like the single-payment vehicle title
loans the Bureau has analyzed, the vehicle title loans in Tennessee are
30-day single-payment loans. The most recent report shows similar
patterns to those the Bureau found in its research, with a substantial
number of consumers rolling over their loans multiple times. According
to the report, of the total number of loan agreements made in 2014,
about 15 percent were paid in full after 30 days without rolling over.
Of those loans that are rolled over, about 65 percent were at least in
their fourth rollover, about 44 percent were at least in their seventh
rollover, and about 29 percent were at least in their tenth, up to a
maximum of 22 rollovers.\234\
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\234\ Letter from Greg Gonzales, Comm'r,Tennessee Dep't of Fin.
Insts., to Hon. Bill Haslam, Governor and Hon. Members of the 109th
General Assembly, at 8 (Apr. 12, 2016) (Report on the Title Pledge
Industry), available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf. See Tenn. Code
Ann. sec. 45-17-112(q).
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The impact of these outcomes for consumers who are unable to repay
and either default or re-borrow is discussed in Market Concerns--
Underwriting.
Short-Term Lending by Depository Institutions
As noted above, within the banking system, consumers with liquidity
needs rely primarily on credit cards and overdraft services. Some
depository institutions, particularly community banks and credit
unions, provide occasional small loans on an accommodation basis to
their customers.\235\ The Bureau's market monitoring indicates that a
number of the banks and credit unions offering these accommodation
loans are located in small towns and rural areas and that it is not
uncommon for borrowers to be in non-traditional employment or have
seasonal or variable income. In addition, some depository institutions
have experimented with short-term payday-like products or partnered
with payday lenders, but such experiments have had mixed results and in
several cases have prompted prudential regulators to take action
discouraging certain types of activity. For a period of time, a handful
of banks also offered a deposit advance product as discussed below;
that product also prompted prudential regulators to issue guidance that
effectively discouraged the offering of the product.
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\235\ A trade association representing community banks conducted
a survey of its members and found 39 percent of respondents offered
short-term personal loans of $1,000 (term of 45 day or less).
However, among respondents, personal loan portfolios (including
longer-term loans, open-end lines of credit, and deposit advance
loans) accounted for less than 3 percent of the dollar volume of
their total lending portfolios. Further, the survey noted that these
loans are not actively advertised to consumers. Ryan Hadley, ``2015
ICBA Community Bank Personal Small Dollar Loan Survey,'' at 4 (Oct.
29, 2015) (on file).
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National banks, most State-chartered banks, and State credit unions
are permitted under existing Federal laws to charge interest on loans
at the highest rate allowed by the laws of the State in which the
lender is located (lender's home State).\236\ The bank or State-
chartered credit union may then charge the interest rate of its home
State on loans it makes to borrowers in other States without needing to
comply with the usury limits of the States in which it makes the loans
(borrower's home State). Federal credit unions generally must not
charge more than an 18 percent interest rate. However, the National
Credit Union Administration
[[Page 54495]]
(NCUA) has taken some steps to encourage federally chartered credit
unions to offer ``payday alternative loans,'' which generally have a
longer term than traditional payday products. Federal credit unions are
authorized to make these small-dollar loans at rates up to 28 percent
interest plus an application fee. This program is discussed in more
detail below.
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\236\ See generally 12 U.S.C. 85 (governing national banks); 12
U.S.C. 1463(g) (governing savings associations); 12 U.S.C. 1785(g)
(governing credit unions); 12 U.S.C. 1831d (governing State banks).
Alternatively, these lenders may charge a rate that is no more than
1 percent above the 90-day commercial paper rate in effect at the
Federal Reserve Bank in the Federal Reserve district in which the
lender is located (whichever is higher). Id.
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Agreements between depository institutions and payday lenders. In
2000, the Office of the Comptroller of the Currency (OCC) issued an
advisory letter alerting national banks that the OCC had significant
safety and soundness, compliance, and consumer protection concerns with
banks entering into contractual arrangements with vendors seeking to
avoid certain State lending and consumer protection laws. The OCC noted
it had learned of nonbank vendors approaching federally chartered banks
urging them to enter into agreements to fund payday and title loans.
The OCC also expressed concern about unlimited renewals (what the
Bureau refers to as rollovers or re-borrowing), and multiple renewals
without principal reduction.\237\ The agency subsequently took
enforcement actions against two national banks for activities relating
to payday lending partnerships.\238\
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\237\ Advisory Letter: AL 2000-10 to Chief Executive Officers of
All Nat'l Banks, Dep't and Div. Heads, and All Examing Personnel
from OCC (Nov. 27, 2000) (Payday Lending), available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2000/advisory-letter-2000-10.pdf.
\238\ See OCC consent orders involving Peoples National Bank and
First National Bank in Brookings. Press Release, OCC Admin of Nat'l
Banks, NR 2003-06, ``Peoples National Bank to Pay $175,000 Civil
Money Penalty And End Payday Lending Relationship with Advance
America'' (Jan. 31, 2003), available at http://www.occ.gov/static/news-issuances/news-releases/2003/nr-occ-2003-6.pdf; Consent Order,
First National Bank in Brookings, OCC No. 2003-1 (Jan. 17, 2003),
available at http://www.occ.gov/static/enforcement-actions/ea2003-1.pdf. In December 2016, the OCC released a plan to offer limited
special purpose bank charters to fintech companies. In response to
criticism that such a charter might enable payday lenders to
circumvent some States' attempts to ban payday lending, the OCC
stated it had virtually eliminated abusive payday lending in the
federal banking system in the early 2000s, and had ``no intention of
allowing these practices to return.'' Lalita Clozel, ``OCC Fintech
Charter Opens `henhouse' to Payday Lenders: Consumer Groups,''
American Banker, Jan. 13, 2016, available at https://www.americanbanker.com/news/occ-fintech-charter-opens-hen-house-to-payday-lenders-consumer-groups. See ``Comptroller's Licensing Manual
Draft Supplement: OCC, Evaluating Charter Application From Financial
Technology Companies,'' (Mar. 2017), available at https://www.occ.gov/publications/publications-by-type/licensing-manuals/file-pub-lm-fintech-licensing-manual-supplement.pdf.
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The Federal Deposit Insurance Corporation (FDIC) has also expressed
concerns with similar agreements between payday lenders and the
depositories under its purview. In 2003, the FDIC issued Guidelines for
Payday Lending applicable to State-chartered FDIC-insured banks and
savings associations; the guidelines were revised in 2005 and most
recently in 2015. The guidelines focus on third-party relationships
between the chartered institutions and other parties, and specifically
address rollover limitations. They also indicate that banks should
ensure borrowers exhibit both a willingness and ability to repay when
rolling over a loan. Among other things, the guidelines indicate that
institutions should: (1) Ensure that payday loans are not provided to
customers who had payday loans outstanding at any lender for a total of
three months during the previous 12 months; (2) establish appropriate
cooling-off periods between loans; and (3) provide that no more than
one payday loan is outstanding with the bank at a time to any one
borrower.\239\ In 2007, the FDIC issued guidelines encouraging banks to
offer affordable small-dollar loan alternatives with APRs of 36 percent
or less, reasonable and limited fees, amortizing payments, underwriting
focused on a borrower's ability to repay but allowing flexible
documentation, and to avoid excessive renewals.\240\
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\239\ FDIC, ``Financial Institution Letters: Guidelines for
Payday Lending,'' (Revised Nov. 2015), available at https://www.fdic.gov/news/news/financial/2005/fil1405a.html.
\240\ FDIC, ``Financial Institution Letters: Affordable Small-
Dollar Loan Products Final Guidelines,'' FIL 50-2007 (June 19,
2007), available at https://www.fdic.gov/news/news/financial/2007/fil07050.html.
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Deposit advance product lending. As the payday lending industry
grew, a handful of banks decided to offer their deposit customers a
similar product termed a deposit advance product (DAP). While one bank
started offering deposit advances in the mid-1990s, the product began
to spread more rapidly in the late 2000s and early 2010s. DAP could be
structured a number of ways but generally involved a line of credit
offered by depository institutions as a feature of an existing consumer
deposit account with repayment automatically deducted from the
consumer's next qualifying deposit. Deposit advance products were
available to consumers who received recurring electronic deposits if
they had an account in good standing and, for some banks, several
months of account tenure, such as six months. When an advance was
requested, funds were deposited into the consumer's account. Advances
were automatically repaid when the next qualifying electronic deposit,
whether recurring or one-time, was made to the consumer's account
rather than on a fixed repayment date. If an outstanding advance was
not fully repaid by an incoming electronic deposit within about 35
days, the consumer's account was debited for the amount due and could
result in a negative balance on the account.
The Bureau estimates that at the product's peak from mid-2013 to
mid-2014, banks originated roughly $6.5 billion of advances, which
represents about 22 percent of the volume of storefront payday loans
issued in 2013. The Bureau estimates that at least 1.5 million unique
borrowers took out one or more DAP loans during that same period.\241\
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\241\ CFPB staff analysis based on confidential information
gathered in the course of statutory functions. Estimates made by
summing aggregated data across a number of DAP-issuing institutions.
See John Hecht, ``Alternative Financial Services: Innovating to Meet
Customer Needs in an Evolving Regulatory Framework,'' at 7 (2014)
(Stephens, Inc., slide presentation) (on file) (for payday industry
size).
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DAP fees, like payday loan fees, did not vary with the amount of
time that the advance was outstanding but rather were set as dollars
per amount advanced. A typical fee was $2 per $20 borrowed, the
equivalent of $10 per $100. Research undertaken by the Bureau using a
supervisory dataset found that the median duration of an episode of DAP
usage was 12 days, yielding an effective APR of 304 percent.\242\
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\242\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 27-28.
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The Bureau further found that while the median draw on a DAP was
$180, users typically took more than one draw before the advance was
repaid. The multiple draws resulted in a median average daily DAP
balance of $343, which is similar to the size of a typical payday loan.
With the typical DAP fee of $2 per $20 advanced, the fees for $343 in
advances equate to about $34.30. The median DAP user was indebted for
112 days over the course of a year and took advances in seven months.
Fourteen percent of borrowers took advances totaling over $9,000 over
the course of the year; these borrowers had a median number of days in
debt of 254.\243\
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\243\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 33 fig. 11, 37 fig. 14.
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In 2010, the Office of Thrift Supervision (OTS) issued a
supervisory directive ordering one bank to terminate its DAP program,
which the bank offered in connection with prepaid accounts, after
determining the bank engaged in unfair or deceptive acts or
[[Page 54496]]
practices and violated the OTS' Advertising Regulation.\244\
Consequently, in 2011, pursuant to a cease and desist order, the bank
agreed to remunerate its DAP consumers nearly $5 million and pay a
civil monetary penalty of $400,000.\245\
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\244\ Meta Fin. Grp., Inc., 2010 Annual Report (Form 10-K), at
59 (Dec. 13, 2010).
\245\ Meta Fin. Grp., Inc., Quarter Report (Form 10-Q) at 31
(Aug. 5, 2011). The OTS was merged with the OCC effective July 21,
2011. See OCC, ``OTS Integration,'' http://www.occ.treas.gov/about/who-we-are/occ-for-you/bankers/ots-integration.html (last visited
Apr. 27, 2016).
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In November 2013, the FDIC and OCC issued final supervisory
guidance on DAP.\246\ This guidance stated that banks offering DAP
should adjust their programs in a number of ways, including applying
more scrutiny in underwriting DAP loans and discouraging repetitive
borrowing. Specifically, the OCC and FDIC stated that banks should
ensure that the customer relationship is of sufficient duration to
provide the bank with adequate information regarding the customer's
recurring deposits and expenses, and that the agencies would consider
sufficient duration to be no less than six months. In addition, the
guidance said that banks should conduct a more stringent financial
capacity assessment of a consumer's ability to repay the DAP advance
according to its terms without repeated re-borrowing, while meeting
typical recurring and other necessary expenses, as well as outstanding
debt obligations. In particular, the guidance stated that banks should
analyze a consumer's account for recurring inflows and outflows at the
end, at least, of each of the preceding six months before determining
the appropriateness of a DAP advance. Additionally, the guidance noted
that in order to avoid re-borrowing, a cooling-off period of at least
one monthly statement cycle after the repayment of a DAP advance should
be completed before another advance could be extended. Finally, the
guidance stated that banks should not increase DAP limits automatically
and without a fully underwritten reassessment of a consumer's ability
to repay, and banks should reevaluate a consumer's eligibility and
capacity for DAP at least every six months.\247\
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\246\ Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Products, 78 FR 70624 (Nov. 26, 2013);
Guidance on Supervisory Concerns and Expectations Regarding Deposit
Advance Products, 78 FR 70552 (Nov. 26, 2013).
\247\ Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Products, 78 FR 70624 (Nov. 26, 2013);
Guidance on Supervisory Concerns and Expectations Regarding Deposit
Advance Products, 78 FR 70552 (Nov. 26, 2013).
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Following the issuance of the FDIC and OCC guidance, banks
supervised by the FDIC and OCC ceased offering DAP. Of two DAP-issuing
banks supervised by the Federal Reserve Board and therefore not subject
to either the FDIC or OCC guidance, one eliminated its DAP program
while another continues to offer a modified version of DAP to its
existing DAP borrowers.\248\ Today, with the exception of some short-
term lending within the NCUA's Payday Alternative Loan (PAL) program,
described in detail below, relatively few banks or credit unions offer
large-scale formal loan programs of this type.
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\248\ The Federal Reserve Board issued a statement to its member
banks on DAP. Bd. of Governors of the Fed. Reserve Sys., ``Statement
on Deposit Advance Products,'' (Apr. 25, 2013), available at https://www.federalreserve.gov/supervisionreg/caletters/CA13-07attachment.pdf.
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Federal credit union payday alternative loans. As noted above,
Federal credit unions may not charge more than 18 percent interest.
However, in 2010, the NCUA adopted an exception to the interest rate
limit under the Federal Credit Union Act that permitted Federal credit
unions to make PALs at an interest rate of up to 28 percent plus an
application fee, ``that reflects the actual costs associated with
processing the application'' up to $20.\249\ PALs may be made in
amounts of $200 to $1,000 to borrowers who have been members of the
credit union for at least one month. PAL terms range from one to six
months, PALs may not be rolled over, and borrowers are limited to one
PAL at a time and no more than three PALs from the same credit union in
a rolling six-month period. PALs must fully amortize and the credit
union must establish underwriting guidelines such as verifying
borrowers' employment from at least two recent pay stubs.\250\
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\249\ 12 CFR 701.21(c)(7)(iii). Application fees charged to all
applicants for credit are not part of the finance charge that must
be disclosed under Regulation Z. See 12 CFR 1026.4(c).
\250\ 12 CFR 701.21(c)(7)(iii).
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In 2016, about 650 Federal credit unions (nearly 20 percent of all
Federal credit unions) offered PALs, with originations at $134.7
million, representing a 9.7 percent increase from 2015.\251\ In 2015,
the average PAL amount was about $700 and carried a median interest
rate of 25 percent; in 2016, the average PAL loan amount increased to
about $720 with a similar median interest rate of 25 percent.\252\
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\251\ Nat'l Credit Union Admin., ``5300 Call Report Aggregate
Financial Performance Reports (FPRs),'' (Dec. 2016), available at
https://www.ncua.gov/analysis/Pages/call-report-data/aggregate-financial-performance-reports.aspx.
\252\ Bureau staff estimates are based on NCUA Call Report data.
Nat'l Credit Union Admin., ``Credit Union and Corporate Call Report
Data,'' available at https://www.ncua.gov/analysis/Pages/call-report-data.aspx.
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C. Longer-Term, High-Cost Loans
In addition to short-term loans, certain longer-term, high-cost
loans will be covered by the payments protections provisions of this
rule. These are longer-term, high-cost loans with a leveraged payment
mechanism, as described in more detail in part II.D and Markets
Concerns--Payments. The category of longer-term high-cost loans most
directly impacted by the payments protections in this rule are payday
installment loans.
Payday Installment Loans
Product definition and regulatory environment. The term ``payday
installment loan'' refers to a high-cost loan repaid in multiple
installments, with each installment typically due at the consumer's
payday and with the lender generally having the ability to collect the
payment from the consumer's bank account as money is deposited or
directly from the consumer's paycheck.\253\
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\253\ Lenders described in part II.C as payday installment
lenders may not use this terminology.
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Two States, Colorado and Illinois, have authorized payday
installment loans.\254\ Through 2010 amendments to its payday loan law,
Colorado no longer permits short-term single-payment payday loans.
Instead, in order to charge fees in excess of the 36 percent APR cap
for most other consumer loans, the minimum loan term must be six months
and lenders are permitted to take a series of post-dated checks or
payment authorizations to cover each payment under the loan, providing
lenders with the same access to borrower's accounts as a single-payment
payday loan.\255\ In Illinois, lenders have been permitted to make
payday installment loans since 2011. These loans must be fully-
amortizing for terms of 112 to 180 days and the loan amounts are
limited to the
[[Page 54497]]
lesser of $1,000 or 22.5 percent of gross monthly income.\256\
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\254\ As noted above, as of January 1, 2018, New Mexico payday
loans (and vehicle title loans) must be payable in four
substantially equal payments over at least 120 days with an APR of
175 percent or less.
\255\ Colo. Rev. Stat. sec. 5-3.1-103. Although loans may be
structured in multiple installments of substantially equal payments
or a single installment, almost all lenders contract for repayment
in monthly or bi-weekly installments. 4 Colo. Code Regs. sec. 902-1,
Rule 17(B); Adm'r of the Colo. Consumer Credit Unit, ``Colorado
Payday Lending--July Demographic and Statistical Information: July
2000 through December 2012,'' at 15-16, available at https://coag.gov/uccc/info/ar.
\256\ 815 Ill. Comp. Stat. sec. 122/2-5.
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A number of other States have adopted usury laws that some payday
lenders use to offer payday installment loans in lieu of, or in
addition to, more traditional payday loans. Since July 2016,
Mississippi lenders can make ``credit availability loans''--closed-end
fully-amortizing installment loans with loan terms of four to 12
months, whether secured by personal property or unsecured.\257\ The
maximum loan amount on a credit availability loan is limited to $2,500,
and lenders may charge a monthly handling fee of up to 25 percent of
the outstanding principal balance plus an origination fee of the
greater of 1 percent of the amount disbursed or $5.\258\
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\257\ Miss. Code Ann. sec. 75-67-603(e) (2017).
\258\ Miss. Code Ann. sec. 75-67-619 (2017)
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As of 2015, Tennessee lenders may offer ``flex loans''--open-end
lines of credit that need not have a fixed maturity date and that may
be secured by personal property or unsecured.\259\ The maximum
outstanding balance on a flex loan may not exceed $4,000, with an
interest rate of up to 24 percent per annum and ``customary fees'' for
underwriting and other purposes not to exceed a daily rate of 0.7
percent of the average daily principal balance.\260\ At least one
lender offering flex loans states that loan payments are ``aligned with
your payday.'' \261\ Similar legislation has been unsuccessful in other
States. For example, in May 2017 the Governor of Oklahoma vetoed
legislation that would have authorized high-cost installment loans with
interest rates of up to 17 percent per month, or 204 percent APR.\262\
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\259\ Tenn. Code Ann. sec. 45-12-102(6) (2017).
\260\ Tenn. Code Ann. sec. 45-12-111(2017).
\261\ Advance Financial Flex Loan, ``Online Tennessee Flex
Loans,'' https://www.af247.com/tennessee-flex-loans last visited May
17, 2017).
\262\ Okla. H.B. 1913, 56th Leg., 1st Sess. (Okla. 2017). http://www.oklegislature.gov/BillInfo.aspx?Bill=HB1913&Session=1700.
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None of these laws authorizing payday installment loans, credit
access loans, or flex loans appear to limit the use of electronic
repayment or ACH options for repayment.
In addition to States that authorize a specific form of payday
installment loan, credit access loan, or flex loan, several other
States provide room within their usury laws for high-cost installment
products. A recent report found that seven States have no rate or fee
limits for closed-end loans of $500 and that 10 States have no rate or
fee limits for closed-end loans of $2,000.\263\ The same report noted
that for open-end credit, 13 States do not limit rates for a $500
advance and 15 States do not limit them for a $2,000 advance.\264\
Another recent study of the Web sites of five payday lenders that
operate both online and at storefront locations found that these five
lenders offered payday installment loans in at least 17 States.\265\
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\263\ Nat'l. Consumer Law Ctr., ``Predatory Installment Lending
in 2017, States Battle to Restrain High-Cost Loans,'' at 14 map 1,
15 map 2 (Aug. 2017), available athttps://www.nclc.org/images/pdf/pr-reports/installment-loans/report-installment-loans.pdf. Roughly
half of the States with no set limits do prohibit unconscionable
interest rates. As of January 1, 2008, New Mexico's status will
change from a State with no rate caps for loans of $500 or $2,000 to
a State that caps rates at 175 percent APR.
\264\ Nat'l. Consumer Law Ctr., ``Predatory Installment Lending
in 2017, States Battle to Restrain High-Cost Loans,'' at 18 map 3,
19 map 4 (Aug. 2017), available at https://www.nclc.org/images/pdf/pr-reports/installment-loans/report-installment-loans.pdf.
\265\ Diane Standaert, ``Payday and Car Title Lenders' Migration
to Unsafe Installment Loans,'' at 7 tbl.1 (Ctr. for Responsible
Lending, 2015), available at http://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/crl_brief_cartitle_lenders_migrate_to_installmentloans.pdf. CRL
surveyed the Web sites for: Cash America, Enova International (d/b/a
CashNetUSA and d/b/a NetCredit), Axcess Financial (d/b/a Check `N
Go), and ACE Cash Express. Id. at 10 n.52.
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In addition, as discussed above, a substantial segment of the
online payday industry operates outside of the constraints of State
law, and this segment, too, has migrated towards payday installment
loans. For example, a study commissioned by a trade association for
online lenders surveyed seven lenders and concluded that, while single-
payment loans are still a significant portion of these lenders' volume,
they are on the decline while installment loans are growing. Several of
the lenders represented in the report had either eliminated single-
payment products or were migrating to installment products while still
offering single-payment loans.\266\ For the practical reasons
associated with having no retail locations, online lenders prefer
repayment by electronic methods and use various approaches to secure
consumers' authorization for payments electronically through ACH
debits.
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\266\ G. Michael Flores, ``The State of Online Short-Term
Lending, Second Annual Statistical Analysis Report,'' Bretton-Woods,
Inc., at 3 (Feb. 28, 2014), available at http://onlinelendersalliance.org/wp-content/uploads/2015/07/2015-Bretton-Woods-Online-Lending-Study-FINAL.pdf. The report does not address
the State licensing status of the study participants but based on
its market outreach activities, the Bureau believes that some of the
loans included in the study were not made subject to the licensing
laws of the borrowers' States of residence. See also nonPrime101,
``Report 1: Profiling Internet Small Dollar Lending--Basic
Demographics and Loan Characteristics,'' at 9, 11, (2014), available
at https://www.nonprime101.com/wp-content/uploads/2013/10/Clarity-Services-Profiling-Internet-Small-Dollar-Lending.pdf.
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As with payday loans, and as noted above, as authorized or
permitted by some State laws, payday installment lenders often hold
borrowers' checks or obtain their authorization for ACH repayment. Some
borrowers may prefer ACH repayment methods for convenience. The Bureau
is aware of certain practices used by payday installment lenders to
secure repayment through consumers' accounts including longer waits for
distribution of loan proceeds and higher fees for non-electronic
payment methods, described above in the Online Payday Loans section,
and discussed in more detail in part II.D and Markets Concerns--
Payments. To the extent that longer-term payday installment loans meet
the cost of credit threshold and include leveraged payment mechanisms,
they are subject to this rule's payments protections.\267\
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\267\ Installment vehicle title loans are title loans that are
contracted to be repaid in multiple installments rather than in a
single payment. Vehicle title lending almost exclusively occurs at
retail storefront locations and consequently, borrowers often repay
both in cash at the lender's location. However, some installment
vehicle title lenders allow repayment by ACH from the borrower's
account or by debit card, a practice common to payday installment
loans. See, e.g., Auto Loan Store, ``Auto Title Loan FAQ,'' https://www.autotitlelending.com/faq/ (last visited June 20, 2017); TFC
Title Loans, ``How Are Title Loans Paid Back?,'' TFC Title Loans
Blog, https://www.tfctitleloans.com/blog/how-are-title-loans-paid-back/ (last visited Sept. 17, 2017); Presto Title Loans, ``You Can
Make Payments Online!,'' http://prestoautoloans.com/pay-online/!/
(last visited June 20, 2017). To the extent that longer-term
installment vehicle title loans meet the cost of credit threshold
and the lender obtains a leveraged payment mechanism, the loans are
subject to this rule's protections for payment presentments.
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Finance Company Installment Loans
Product definition and regulatory environment. Before the advent of
single-payment payday loans or online lending, and before widespread
availability of credit cards, ``personal loans'' or ``personal
installment loans'' were offered by storefront nonbank installment
lenders, often referred to as ``finance companies.'' Personal loans are
typically unsecured loans used for any variety of purposes and
distinguished from loans where the lender generally requires the funds
be used for a specific intended purpose, such as automobile purchase
loans, student loans, and mortgage loans. As discussed below, these
finance companies (and their newer online counterparts) have a
different business model than payday installment lenders. Some of these
finance companies limit the APRs on their loans to 36 percent or less,
[[Page 54498]]
whether required by State law or as a matter of company policy.
However, there are other finance companies and installment lenders that
offer loans that fall within the rule's definition of ``covered longer-
term loan,'' as they carry a cost of credit that exceeds 36 percent APR
and include repayment through a leveraged payment mechanism--access to
the borrower's account.
According to a report from a consulting firm using data derived
from a nationwide consumer reporting agency, in 2016 finance companies
originated 8.6 million personal loans (unsecured installment loans)
totaling $41.7 billion in originations; approximately 6.9 million of
these loans worth $25.8 billion, with an average loan size of about
$3,727, were made to nonprime consumers (categorized as near prime,
subprime, and deep subprime, with VantageScores of 660 and below).\268\
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\268\ Experian-Oliver Wyman, ``2016 Q4 Market Intelligence
Report: Personal Loans Report,'' at 11-13 figs. 9, 10, 12 & 13
(2017), available at http://www.marketintelligencereports.com;
Experian-Oliver Wyman, ``2016 Q3 Market Intelligence Report:
Personal Loans Report,'' at 11-13 figs. 9, 10, 12 & 13 (2016),
available at http://www.marketintelligencereports.com; Experian-
Oliver Wyman, ``2016 Q2 Market Intelligence Report: Personal Loans
Report,'' at 11-13 figs. 9, 10, 12 & 13 (2016), available at http://www.marketintelligencereports.com; Experian-Oliver Wyman, ``2016 Q1
Market Intelligence Report: Personal Loans Report,'' at 11-13, figs.
9, 10, 12 & 13 (2016), available at http://www.marketintelligencereports.com. These finance company personal
loans are not segmented by cost and likely include some loans with a
cost of credit of 36 percent APR or less that would not be covered
by the Bureau's rule.
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APRs at storefront locations in States that do not cap rates on
installment loans can be 50 to 90 percent for subprime and deep
subprime borrowers; APRs in States with rate caps are 24 to 36 percent
APR for near prime and subprime borrowers.\269\ A survey of finance
companies conducted in conjunction with a national trade association
reported that 80 percent of loans were for $2,000 or less and 85
percent of loans had durations of 24 months or less (60 percent of
loans had durations of one year or less).\270\ The survey did not
report an average loan amount. Almost half of the loans had APRs
between 49 and 99 percent; 9 percent of loans of $501 or less had APRs
between 100 and 199 percent, but there was substantial rate variation
among States.\271\ Except for loans subject to the Military Loan Act
described above, APR calculations under Regulation Z include
origination fees, but lenders generally are not required to include
within the APR costs such as application fees and add-on services such
as optional credit insurance and guaranteed automobile protection.\272\
A wider range and number of such up-front fees and add-on products and
services appear to be charged by the storefront lenders than by their
newer online counterparts.
---------------------------------------------------------------------------
\269\ See John Hecht, ``Alternative Financial Services:
Innovating to Meet Customer Needs in an Evolving Regulatory
Framework,'' at 11 (2014) (Stephens, Inc., slide presentation) (on
file) (for listing of typical rates and credit scores for licensed
installment lenders).
\270\ Thomas A. Durkin et al., ``Findings from the AFSA Member
Survey of Installment Lending,'' at 24 tbl. 3 (2014), available at
http://www.masonlec.org/site/rte_uploads;/files;/Manne;/
11.21.14%20;JLEP%20Consumer%20Credit%20;and%20the;%20American%20Econo
my;/
Findings%20;from%20the;%20AFSA%20Member;%20Survey;%20of%20Installment
;%20Lending.pdf. It appears that lenders made loans in at least 27
States, but the majority of loans were from 10 States. Id. at 28
tbl. 9.
\271\ Thomas A. Durkin et al., ``Findings from the AFSA Member
Survey of Installment Lending,'' at 24 tbl. 3 (2014), available at
http://www.masonlec.org/site/rte_uploads/files/Manne/11.21.14%20JLEP%20Consumer%20Credit%20and%20the%20American%20Economy/Findings%20from%20the%20AFSA%20Member%20Survey%20of%20Installment%20Lending.pdf. It appears that lenders made loans in at least 27
States, but the majority of loans were from 10 States. Id. at 28
tbl. 9 & n.1.
\272\ 12 CFR 1026.4(a) through (d).
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Finance companies typically engage in underwriting that includes a
monthly net income and expense budget, a review of the consumer's
credit report, and an assessment of monthly cash flow.\273\ One trade
association representing traditional finance companies has described
the underwriting process as evaluating the borrower's ``stability,
ability, and willingness'' to repay the loan.\274\ Many finance
companies report loan payment history to one or more of the nationwide
consumer reporting agencies,\275\ and the Bureau believes from market
outreach that these lenders generally furnish payment information on a
monthly basis.
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\273\ See American Fin. Servs. Ass'n, ``Traditional Installment
Loans, Still the Safest and Most Affordable Small Dollar Credit,''
available at https://www.afsaonline.org/Portals/0/Federal/White%20Papers/Small%20Dollar%20Credit%20TP.pdf; Sun Loan Company,
``Loan FAQs,'' http://www.sunloan.com/faq/ (last visited Sept. 23,
2017) (``Yes, we do check your credit report when you complete an
application for a Sun Loan Company, but we do not base our approval
on your score. Your ability, stability and willingness to repay the
loan are the most important things we check when making a
decision.'').
\274\ Nat'l Installment Lenders Ass'n, ``Best Practices,''
http://nilaonline.org/best-practices/ (last visited Apr. 29, 2016).
\275\ American Fin. Servs. Ass'n, ``Traditional Installment
Loans, Still the Safest and Most Affordable Small Dollar Credit,''
available at https://www.afsaonline.org/Portals/0/Federal/White%20Papers/Small%20Dollar%20Credit%20TP.pdf.
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With regard to newer online counterparts, the Bureau is aware from
its market monitoring activities that some online installment lenders
in this market offer products that resemble the types of loans made by
finance companies. Many of these online installment lenders engage in
highly-automated underwriting that involves substantial use of
analytics and technology. The APRs on the loans are over 36 percent and
can reach the triple digits.\276\
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\276\ APRs on Elevate's Rise loans can reach 299 percent, APRs
on LendUp's loans can reach about 256 percent, and APRs on Enova's
loans originated through its NetCredit platform can reach 179
percent. Rise, ``What it Costs,'' https://www.risecredit.com/how-online-loans-work#WhatItCosts (last visited Sept. 17, 2017); LendUp,
``Rates & Notices,'' https://www.lendup.com/rates-and-notices (last
visited Sept. 17, 2017); Enova, ``Investor Presentation,'' at 7 (May
8, 2017), available at http://ir.enova.com/download/Enova+Investor+Presentation+v5+%28as+of+May+5+2017%29.pdf.
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Finance companies and online installment lenders offer various
methods for consumers to repay their loans. Particularly for online
loans, repayment through ACH is common.\277\ Some online installment
lenders also allow other repayment methods, such as check, debit or
credit card, MoneyGram, or Western Union, but may require advance
notice for some of these payment methods.\278\ From its market
monitoring functions, the Bureau is aware that finance companies with
storefront locations tend to offer a wider array of repayment options.
Some finance companies will accept ACH payments in person, set up
either during the loan closing process or at a later date, or by
phone.\279\ Finance companies also traditionally take payments in-
store, generally by cash or check, or by mail. Some finance companies
charge consumers a fee to use certain payment methods.\280\
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\277\ See, e.g., Elevate, 2017 S-1, at 22; Rise, ``Frequently
Asked Questions About Rise Loans,'' https://www.risecredit.com/frequently-asked-questions (last visited Sept. 23, 2017); Enova,
2016 Annual Report (10-K), at 25.
\278\ See, e.g., NetCredit, ``Frequently Asked Questions: How
Can I Repay My Personal Loan,'' https://www.netcredit.com/faq (last
visited Sept. 17, 2017); Rise, ``Frequently Asked Questions About
Rise Loans,'' https://www.risecredit.com/frequently-asked-questions
(last visited Sept. 17, 2017).
\279\ See Republic Finance, ``Payments,'' http://republicfinance.com/payment (last visited Sept. 17, 2017).
\280\ See One lender's Web site notes (``Republic Finance has
arrangements with a payment processor, PaymentVision, to accept
payments from our customers either by phone or online as further
described below. By using this service, you contract directly with
the payment processor, PaymentVision. If permitted by State law, the
payment processor charges a fee for their service. Republic Finance
does not receive any portion of that fee.''). Republic Finance,
``Payments by Phone (Interactive Voice Response) or Online Payments
through Payment Processor,'' http://republicfinance.com/payment
(last visited Sept. 17, 2017).
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[[Page 54499]]
D. Initiating Payment From Consumers' Accounts
As discussed above, payday and payday installment lenders nearly
universally obtain at origination one or more authorizations to
initiate withdrawal of payment from the consumer's account. There are a
variety of payment options or channels that they use to accomplish this
goal, and lenders frequently obtain authorizations for multiple types.
Different payment channels are subject to different laws and, in some
cases, private network rules, leaving lenders with broad control over
the parameters of how a particular payment will be pulled from a
consumer's account, including the date, amount, and payment method.
Obtaining Payment Authorization
A variety of payment methods enable lenders to use a previously-
obtained authorization to initiate a withdrawal from a consumer's
account without further action from the consumer. These methods include
paper signature checks, remotely created checks (RCCs) and remotely
created payment orders (RCPOs),\281\ and electronic payments like ACH
\282\ and debit and prepaid card transactions. Payday and payday
installment lenders--both online and in storefronts--typically obtain a
post-dated check or electronic payment authorization from consumers for
repayments of loans.\283\ For storefront payday loans, lenders
typically obtain a post-dated check (or, where payday installment
products are authorized, a series of postdated checks) that they can
use to initiate a check or ACH transaction from a consumer's account.
For an online loan, a consumer often provides bank account information
to receive the loan funds, and the lender often uses that bank account
information to obtain payment from the consumer.\284\ This account
information can be used to initiate an ACH payment from a consumer's
account. Typically, online lenders require consumers to authorize
payments from their account as part of their agreement to receive the
loan proceeds electronically.\285\ Some traditional installment lenders
also obtain an electronic payment authorization from their customers.
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\281\ A RCC or RCPO is a type of check that is created by the
payee--in this case, it would be created by the lender--and
processed through the check clearing system. Given that the check is
created by the lender, it does not bear the consumer's signature.
See Regulation CC, 12 CFR 229.2(fff) (defining remotely created
check); Telemarketing Sales Rule, 16 CFR 310.2(cc) (defining
``remotely created payment order'' as a payment instrument that
includes remotely created checks).
\282\ In order to initiate an ACH payment from a consumer's
account, a lender must send a request (also known as an ``entry'')
through an originating depository financial institution (ODFI). An
ODFI is a bank or other financial institution with which the lender
or the lender's payment processor has a relationship. ODFIs
aggregate and submit batches of entries for all of their originators
to an ACH operator. The ACH operators sort the ACH entries and send
them to the receiving depository financial institutions (RDFI) that
hold the individual consumer accounts. The RDFI then decides whether
to debit the consumer's account or to send it back unpaid. ACH debit
transactions generally clear and settle in one business day after
the payment is initiated by the lender. The private operating rules
for the ACH network are administered by the National Automated
Clearinghouse Association (NACHA), an industry trade organization.
\283\ See, e.g., QC Holdings, Inc., 2014 Annual Report (Form 10-
K), at 6 (Mar. 12, 2015) (``Upon completion of a loan application,
the customer signs a promissory note with a maturity of generally
two to three weeks. The loan is collateralized by a check (for the
principal amount of the loan plus a specified fee), ACH
authorization or a debit card.''); Advance America, 2011 Annual
Report (Form 10-K) at 45 (Mar. 15, 2012) (``After the required
documents presented by the customer have been reviewed for
completeness and accuracy, copied for record-keeping purposes, and
the cash advance has been approved, the customer enters into an
agreement governing the terms of the cash advance. The customer then
provides a personal check or an Automated Clearing House (``ACH'')
authorization, which enables electronic payment from the customer's
account, to cover the amount of the cash advance and charges for
applicable fees and interest of the balance due under the
agreement.''); ENOVA Int'l, Inc., 2014 Annual Report (Form 10-K), at
6 (Mar. 20, 2015)) (``When a customer takes out a new loan, loan
proceeds are promptly deposited in the customer's bank account or
onto a debit card in exchange for a preauthorized debit for
repayment of the loan from the customer's account.'').
\284\ See, e.g., Great Plains Lending d/b/a Cash Advance Now
``Frequently Asked Questions (FAQs),'' https://www.cashadvancenow.com/FAQ.aspx (last visited May 16, 2016) (``If we
extend credit to a consumer, we will consider the bank account
information provided by the consumer as eligible for us to process
payments against. In addition, as part of our information collection
process, we may detect additional bank accounts under the ownership
of the consumer. We will consider these additional accounts to be
part of the application process.'').
\285\ See, e.g., Notice of Motion and Motion to Compel
Arbitration at exhibit 1, 38, 55, Labajo v. First Int'l Bank &
Trust, No. 14-00627 (C.D. Cal. May 23, 2014), ECF No. 26-3.
---------------------------------------------------------------------------
Payday and payday installment lenders often take authorization for
multiple payment methods, such as taking a post-dated check along with
the consumer's debit card information.\286\ Consumers usually provide
the payment authorization as part of the loan origination process.\287\
---------------------------------------------------------------------------
\286\ See, e.g., Memorandum of Law in Support of Motion to
Dismiss for Failure to State a Claim at exhibit A, Parm v. BMO
Harris Bank, N.A., No. 13-03326 (N.D. Ga. Dec. 23, 2013), ECF No.
60-1 (``You may revoke this authorization by contacting us in
writing at [email protected] or by phone at 1-888-945-2727. You
must contact us at least three (3) business days prior to when you
wish the authorization to terminate. If you revoke your
authorization, you authorize us to make your payments by remotely-
created checks as set forth below.''); Declaration re: Motion to
Compel Arbitration at exhibit 5, Booth v. BMO Harris Bank, N.A., No.
13-5968 (E.D. Pa. Dec. 13, 2013), ECF No. 41-8 (stating that in the
event that the consumer terminates an ACH authorization, the lender
would be authorized to initiated payment by remotely created check);
Notice of Motion and Motion to Compel Arbitration at exhibit A,
Labajo v. First Int'l Bank & Trust, No. 14-00627 (C.D. Cal. May 23,
2014), ECF No. 25-1 (taking ACH and remotely created check
authorization).
\287\ See, e.g., Advance America, 2011 Annual Report (Form 10-
K), at 10 (``To obtain a cash advance, a customer typically . . .
enters into an agreement governing the terms of the cash advance,
including the customer's agreement to repay the amount advanced in
full on or before a specified due date (usually the customer's next
payday), and our agreement to defer the presentment or deposit of
the customer's check or ACH authorization until the due date.'').
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For storefront payday loans, providing a post-dated check is
typically a requirement to obtain a loan. Under the Electronic Fund
Transfer Act (EFTA) lenders cannot condition credit on obtaining an
authorization from the consumer for ``preauthorized'' (recurring)
electronic fund transfers,\288\ but in practice online payday and
payday installment lenders are able to obtain such authorizations from
consumers for almost all loans. The EFTA provision concerning
compulsory use does not apply to paper checks and one-time electronic
fund transfers. Moreover, even for loans subject to the EFTA compulsory
use provision, lenders use various methods to obtain electronic
authorizations. For example, although some payday and payday
installment lenders provide consumers with alternative methods to repay
loans, these options may be burdensome and may significantly change the
terms of the loan. For example, one lender increases its APR by an
additional 61 percent or 260 percent, depending on the length of the
loan, if a consumer elects a cash-only payment option for its
installment loan product, resulting in a total APR of 462 percent (210
day loan) to 780 percent (140 day loan).\289\ Other lenders change the
origination process if consumers do not immediately provide account
access. For example, some online payday lenders require prospective
customers to contact them by phone if they do not want to provide a
payment authorization and wish to
[[Page 54500]]
pay by money order or check at a later time. Other lenders delay the
disbursement of the loan proceeds if the consumer does not immediately
provide a payment authorization.\290\
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\288\ EFTA and its implementing regulation, Regulation E,
prohibit the conditioning of credit on an authorization for a
preauthorized recurring electronic fund transfer. See 12 CFR
1005.10(e)(1) (``No financial institution or other person may
condition an extension of credit to a consumer on the consumer's
repayment by preauthorized electronic fund transfers, except for
credit extended under an overdraft credit plan or extended to
maintain a specified minimum balance in the consumer's account.'').
\289\ Cash Store, ``Installment Loans: Fee Schedule Examples,''
https://www.cashstore.com/-/media/cashstore/files/pdfs/nm%20ins%20552014.pdf (last visited May 16, 2016).
\290\ See, e.g., Mobiloans, ``Line of Credit Terms and
Conditions,'' www.mobiloans.com/terms-and-conditions (last visited
Feb. 5, 2016) (``If you do not authorize electronic payments from
your Demand Deposit Account and instead elect to make payments by
mail, you will receive your Mobiloans Cash by check in the mail.'').
---------------------------------------------------------------------------
Banks and credit unions have additional payment channel options
when they lend to consumers who have a deposit account at the same
institution. As a condition of certain types of loans, many financial
institutions require consumers to have a deposit account at that same
institution.\291\ The loan contract often authorizes the financial
institution to pull payment directly from the consumer's account. Since
these payments can be processed through an internal transfer within the
bank or credit union, these institutions do not typically use external
payment channels to complete an internal payment transfer.
---------------------------------------------------------------------------
\291\ See, e.g., Fifth Third Bank, ``Ways to Borrow Money for
Your Unique Needs,'' https://www.53.com/content/fifth-third/en/personal-banking/borrowing-basics/personal-loans.html (last visited
May 17, 2016), at 3 (last visited May 17, 2016), available at
https://www.53.com/doc/pe/pe-eax-tc.pdf (providing eligibility
requirements including that the consumer ``must have a Fifth Third
Bank checking deposit account that has been open for the past 90
(ninety) days and is in good standing'').
---------------------------------------------------------------------------
Exercising Payment Authorizations
For different types of loans that will be covered under the rule,
lenders use their authorizations to collect payment differently. As
discussed above, most storefront lenders encourage or require consumers
to return to their stores to pay in cash, roll over, or otherwise renew
their loans. The lender often will deposit a post-dated check or
initiate an electronic fund transfer only where the lender considers
the consumer to be in ``default'' under the contract or where the
consumer has not responded to the lender's communications.\292\ Bureau
examiners have cited one or more payday lenders for threatening to
initiate payments from consumer accounts that were contrary to the
agreement, and that the lenders did not intend to initiate.\293\
---------------------------------------------------------------------------
\292\ Payday and payday installment lenders may contact
consumers a few days before the payment is due to remind them of
their upcoming payment. This is a common practice, with many lenders
calling the consumer 1 to 3 days before the payment is due, and some
providing reminders through text or email.
\293\ Bureau of Consumer Fin. Prot., ``Supervisory Highlights,''
at 20 (Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
---------------------------------------------------------------------------
In contrast, online lenders typically use the authorization to
collect all payments, not just those initiated after there has been
some indication of distress from the consumer. Moreover, as discussed
above, online lenders offering ``hybrid'' payday loan products
structure them so that the lender is authorized to collect a series of
interest-only payments--the functional equivalent of paying finance
charges to roll over the loan--before full payment or amortizing
payments are due.\294\ The Bureau also is aware that some online
lenders, although structuring their product as nominally a two-week
loan, automatically roll over the loan every two weeks unless the
consumer takes affirmative action to make full payment.\295\ The
payments processed in such cases are for the cost of the rollover
rather than the full balance due.
---------------------------------------------------------------------------
\294\ See, e.g., Notice of Charges Seeking Restitution,
Digorgement, Other Equitable Relief, and Civil Money Penalties, In
the Matter of: Integrity Advance, LLC, No. 2015-CFPB-0029, at 5
(Nov. 18, 2015), available at http://files.consumerfinance.gov/f/201511_cfpb_notice-of-charges-integrity-advance-llc-james-r-carnes.pdf (providing lender contract for loan beginning with four
automatic interest-only rollover payments before converting to a
series of amortizing payments).
\295\ See, e.g., Motion to Compel Arbitration, Motion to Stay
Litigation at exhibit A, Riley v. BMO Harris Bank, N.A., No. 13-1677
(D.D.C. Jan. 10, 2014), ECF No. 33-2 (interpreting silence from
consumer before the payment due date as a request for a loan
extension; contract was for a 14-day single-payment loan, loan
amount financed was $700 for a total payment due of $875).
---------------------------------------------------------------------------
As a result of these distinctions, storefront and online lenders
have different success rates in exercising such payment authorizations.
Some large storefront lenders report that they initiate payment
attempts in less than 10 percent of cases, and that 60 to 80 percent of
those attempts are returned for non-sufficient funds.\296\ Bureau
analysis of ACH payments by online payday and payday installment
lenders, which typically collect all payments by initiating a transfer
from consumers' accounts, indicates that for any given payment only
about 6 percent fail on the first try. However, over an eighteen-month
observation period, 50% of online borrowers were found to experience at
least one payment attempt that failed or caused an overdraft and one-
third of the borrowers experienced more than one such incident.
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\296\ One major lender with a predominantly storefront loan
portfolio, QC Holdings, notes that in 2014, 91.5 percent of its
payday and installment loans were repaid or renewed in cash. QC
Holdings 2014 Annual Report (Form 10-K), at 7. For the remaining 8.5
percent of loans for which QC Holdings initiated a payment attempt,
78.5 percent were returned due to non-sufficient funds. Id. Advance
America, which offers mostly storefront payday and installment
loans, initiated check or ACH payments on approximately 6.7 and 6.5
percent, respectively, of its loans in 2011; approximately 63 and 64
percent, respectively, of those attempts failed. Advance America
2011 Annual Report (Form 10-K), at 27.
---------------------------------------------------------------------------
Lenders typically charge fees for these returned payments,
sometimes charging both a returned payment fee and a late fee.\297\
These fees are in addition to fees, such as NSF fees, that may be
charged by the financial institution that holds the consumer's account.
---------------------------------------------------------------------------
\297\ See Advance America 2011 Annual Report (Form 10-K), at 8
(``We may charge and collect fees for returned checks, late fees,
and other fees as permitted by applicable law. Fees for returned
checks or electronic debits that are declined for non-sufficient
funds (``NSF'') vary by State and range up to $30, and late fees
vary by State and range up to $50. For each of the years ended
December 31, 2011 and 2010, total NSF fees collected were
approximately $2.9 million and total late fees collected were
approximately $1 million and $0.9 million, respectively.'');
Mypaydayloan.com, ``Frequently Asked Questions,'' https://www.mypaydayloan.com/faq#loancost (last visited May 17, 2016) (``If
your payment is returned due to NSF (or Account Frozen or Account
Closed), our collections department will contact you to arrange a
second attempt to debit the payment. A return item fee of $25 and a
late fee of $50 will also be collected with the next debit.'').
---------------------------------------------------------------------------
The Bureau found that if an electronic payment attempt failed,
online lenders try again three-quarters of the time. However, after an
initial failure the lender's likelihood of failure jumps to 70 percent
for the second attempt and 73 percent for the third. Of those that
succeed, roughly one-third result in an overdraft.
Both storefront and online lenders also frequently change the ways
in which they attempt to exercise authorizations after one attempt has
failed. For example, many typically make additional attempts to collect
initial payment due.\298\ Some lenders attempt to collect the entire
payment
[[Page 54501]]
amount once or twice within a few weeks of the initial failure. The
Bureau, however, is aware of online and storefront lenders that use
more aggressive and unpredictable payment collection practices,
including breaking payments into multiple smaller payments and
attempting to collect payment multiple times in one day or over a short
period of time.\299\ The cost to lenders to repeatedly attempt payment
depends on their contracts with payment processors and commercial
banks, but is generally nominal; the Bureau estimates the cost is in a
range of 5 to 15 cents for an ACH transaction.\300\ These practices are
discussed in more detail in Market Concerns--Payments.
---------------------------------------------------------------------------
\298\ See Bureau of Consumer Fin. Prot., ``Supervisory
Highlights,'' at 20 (Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf (``Upon a borrower's default, payday lenders
frequently will initiate one or more preauthorized ACH transactions
pursuant to the loan agreement for repayment from the borrower's
checking account.''); FirstCash Fin. Servs., Inc. 2014 Annual Report
(Form10-K) at 5 (Feb. 12, 2015) (``Banks return a significant number
of ACH transactions and customer checks deposited into the
Independent Lender's account due to insufficient funds in the
customers' accounts. The Company subsequently collects a large
percentage of these bad debts by redepositing the customers' checks,
ACH collections or receiving subsequent cash repayments by the
customers.''); Advance America, ``FAQs on Payday Loans/Cash
Advances,'' https://www.advanceamerica.net/questions/payday-loans-cash-advances (last visited Sept. 17, 2017) (``Once we present your
bank with your ACH authorization for payment, your bank will send
the specified amount to CashNetUSA. If the payment is returned
because of insufficient funds, CashNetUSA can and will re-present
the ACH Authorization to your bank.'').
\299\ See generally CFPB Online Payday Loan Payments.
\300\ The Bureau reviewed publicly available litigation
documents and fee schedules posted online by originating depository
institutions to compile these estimates. However, because of the
limited availability of private contracts and variability of
commercial bank fees, these estimates are tentative. Originators
typically also pay their commercial bank or payment processor fees
for returned ACH and check payments. These fees appear to range
widely, from 5 cents to several dollars.
---------------------------------------------------------------------------
As noted above, banks and credit unions that lend to their account
holders can use their internal system to transfer funds from the
consumer accounts and do not need to utilize the payment networks.
Deposit advance products and their payment structures are discussed
further in part II.B. The Bureau believes that many small-dollar loans
with depository institutions are paid through internal transfers.
Due to the fact that lenders obtain authorizations to use multiple
payment channels and benefit from flexibility in the underlying payment
systems, lenders generally enjoy broad discretion over the parameters
of how a particular payment will be pulled from a consumer's account,
including the date, amount, and payment method. For example, although a
check specifies a date, lenders may not present the check on that date.
Under UCC section 4-401, merchants can present checks for payment even
if the check specifies a later date.\301\ Lenders sometimes attempt to
collect payment on a different date from the one stated on a check or
original authorization. They may shift the attempt date in order to
maximize the likelihood that funds will be in the account; some use
their own models to determine when to collect, while others use
predictive payment products provided by third parties that estimate
when funds are most likely to be in the account.\302\
---------------------------------------------------------------------------
\301\ UCC section 4-401(c) (``A bank may charge against the
account of a customer a check that is otherwise properly payable
from the account, even though payment was made before the date of
the check, unless the customer has given notice to the bank of the
postdating describing the check with reasonable certainty.'').
\302\ See, e.g., Press Release, Clarity Servs., Inc., ``ACH
Presentment Will Help Lenders Reduce Failed ACH Pulls'' (Aug. 1,
2013), available at https://www.clarityservices.com/clear-warning-ach-presentment-will-help-lenders-reduce-failed-ach-pulls/;
FactorTrust, ``Service Offerings,'' http://ws.factortrust.com/products/ (last visited May 4, 2016); Microbilt, ``Bank Account
Verify,'' http://www.microbilt.com/bank-account-verification.aspx
(last visited May 4, 2016); DataX, ``Credit Risk Mitigation,''
http://www.dataxltd.com/ancillary-services/successful-collections/
(last visited May 4, 2016).
---------------------------------------------------------------------------
Moreover, the checks provided by consumers during origination often
are not processed as checks. Rather than sending these payments through
the check clearing network, lenders often process these payments
through the ACH network. They are able to use the consumer account
number and routing number on a check to initiate an ACH transaction.
When lenders use the ACH network in a first attempt to collect payment,
the lender has used the check as a source document and the payment is
considered an electronic fund transfer under EFTA and Regulation
E,\303\ which generally provide additional consumer protections--such
as error resolution rights--beyond those applicable to checks. However,
if a transaction is initially processed through the check system and
then processed through the ACH network because the first attempt failed
for insufficient funds, the subsequent ACH attempt is not considered an
electronic fund transfer under current Regulation E.\304\ Similarly,
consumers may provide their account and routing number to lenders for
the purposes of an ACH payment, but the lender may use that information
to initiate a remotely created check that is processed through the
check system and thus may not receive Regulation E protections.\305\
---------------------------------------------------------------------------
\303\ 12 CFR 1005.3(b)(2)(i) (``This part applies where a check,
draft, or similar paper instrument is used as a source of
information to initiate a one-time electronic fund transfer from a
consumer's account. The consumer must authorize the transfer.'').
\304\ Supplement I, Official Staff Interpretations, 12 CFR part
1005, comment 3(c)(1) (``The electronic re-presentment of a returned
check is not covered by Regulation E because the transaction
originated by check.'').
\305\ Remotely created checks are particularly risky for
consumers because they have been considered to fall outside of
protections for electronic fund transfers under Regulation E. Also,
unlike signature paper checks, they are created by the entity
seeking payment (in this case, the lender)--making such payments
particularly difficult to track and reverse in cases of error or
fraud. Due to concerns about remotely created checks and remotely
created payment orders, the FTC recently banned the use of these
payment methods by telemarketers. See FTC Final Amendments to
Telemarketing Sales Rule, 80 FR 77520 (Dec. 14, 2015).
---------------------------------------------------------------------------
Payment System Regulation and Private Network Requirements
Different payment mechanisms are subject to different laws and, in
some cases, private network rules that affect how lenders can exercise
their rights to initiate withdrawals from consumers' accounts and how
consumers may attempt to limit or stop certain withdrawal activity
after granting an initial authorization. Because ACH payments and post-
dated checks are the most common authorization mechanisms used by
payday and payday installment lenders, this section briefly outlines
applicable Federal laws and National Automated Clearinghouse
Association (NACHA) rules concerning stop-payment rights, prohibitions
on unauthorized payments, notices where payment amounts vary, and rules
governing failed withdrawal attempts.
NACHA recently adopted several changes to the ACH network rules in
response to complaints about problematic behavior by payday and payday
installment lenders, including a rule that allows it to more closely
scrutinize originators who have a high rate of returned payments.\306\
Issues around monitoring and enforcing those rules and their
application to problems in the market for covered loans are discussed
in more detail in Market Concerns--Payments. But it should be noted
here at the outset that the NACHA rules only apply to payment attempts
through ACH and are not enforceable by the Bureau.
---------------------------------------------------------------------------
\306\ See NACHA, ``ACH Network Risk and Enforcement Topics,''
https://www.nacha.org/rules/ach-network-risk-and-enforcement-topics
(last visited Sept. 23, 2017) (providing an overview of changes to
the NACHA Rules); NACHA, ``ACH Operations Bulletin #1-2014:
Questionable ACH Debit Origination: Roles and Responsibilities of
ODFIs and RDFIs'' (Sept. 30, 2014), available at https://www.nacha.org/news/ach-operations-bulletin-1-2014-questionable-ach-debit-origination-roles-and-responsibilities (``During 2013, the ACH
Network and its financial institution participants came under
scrutiny as a result of the origination practices of certain
businesses, such as online payday lenders, in using the ACH Network
to debit consumers' accounts.'').
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Stop-payment rights. For preauthorized (recurring) electronic fund
transfers,\307\ EFTA grants consumers a right to stop paym ent by
issuing a stop-payment order through their depository institution.\308\
The
[[Page 54502]]
NACHA private rules adopt this EFTA provision along with additional
stop-payment rights. In contrast to EFTA, NACHA provides consumers with
a stop-payment right for both one-time and preauthorized
transfers.\309\ Specifically, for recurring transfers, NACHA Rules
require financial institutions to honor a stop-payment order as long as
the consumer notifies the bank at least 3 banking days before the
scheduled debit.\310\ For one-time transfers, NACHA Rules require
financial institutions to honor the stop-payment order as long as the
notification provides them with a ``reasonable opportunity to act upon
the order.'' \311\ Consumers may notify the bank or credit union
verbally or in writing, but if the consumer does not provide written
confirmation the oral stop-payment order may not be binding beyond 14
days. If a consumer wishes to stop all future payments from an
originator, NACHA Rules allow a bank or credit union to require the
consumer to confirm in writing that she has revoked authorization from
the originator.
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\307\ A preauthorized transfer is ``an electronic fund transfer
authorized in advance to recur at substantially regular intervals.
EFTA, 15 U.S.C. 1693a(10); Regulation E, 12 CFR 1005.2(k).
\308\ ``A consumer may stop payment of a preauthorized
electronic fund transfer by notifying the financial institution
orally or in writing at any time up to three business days preceding
the scheduled date of such transfer.'' EFTA, 15 U.S.C. 1693e(a);
Regulation E, 12 CFR 1005.10(c).
\309\ See NACHA Rule 3.7.1.2, RDFI Obligation to Stop Payment of
Single Entries (``An RDFI must honor a stop-payment order provided
by a Receiver, either verbally or in writing, to the RDFI at such
time and in such manner as to allow the RDFI a reasonable
opportunity to act upon the order prior to acting on an ARC, BOC,
POP, or RCK Entry, or a Single Entry IAT, PPD, TEL, or WEB Entry to
a Consumer Account.'').
\310\ NACHA Rule 3.7.1.1.
\311\ NACHA Rule 3.7.1.2.
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Checks are also subject to a stop-payment right under the Uniform
Commercial Code (UCC).\312\ Consumers have a right to stop payment on
any check by providing the bank with oral (valid for 14 days) or
written (valid for 6 months) notice. To be effective, the stop-payment
notice must describe the check ``with reasonable certainty'' and give
the bank enough information to find the check under the technology then
existing.\313\ The stop-payment notice also must be given at a time
that affords the bank a reasonable opportunity to act on it before the
bank becomes liable for the check under U.C.C. 4-303.
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\312\ U.C.C. 4-403.
\313\ U.C.C. 4-403 cmt. 5.
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Although EFTA, the UCC, and NACHA Rules provide consumers with
stop-payment rights, financial institutions typically charge a fee of
approximately $32 for consumers to exercise those rights.\314\ Further,
both lenders and financial institutions often impose a variety of
requirements that make the process for stopping payments confusing and
burdensome for consumers. See the discussion of these requirements in
Market Concerns--Payments.
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\314\ Median stop-payment fee for an individual stop-payment
order charged by the 50 largest financial institutions in 2015 based
on information in the Informa Research Database. See Research Srvs,
Inc., ``Informa Research Database,'' www.informars.com (last visited
Mar. 2016). Although information has been obtained from the various
financial institutions, the accuracy cannot be guaranteed.
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Protection from unauthorized payments. Regulation E and NACHA Rules
both provide protections with respect to payments by a consumer's
financial institution if the electronic transfer is unauthorized.\315\
Payments originally authorized by the consumer can become unauthorized
under EFTA if the consumer notifies his or her financial institution
that the originator's authorization has been revoked.\316\ NACHA has a
specific threshold for unauthorized returns, which involve transactions
that originally collected funds from a consumer's account but that the
consumer is disputing as unauthorized. Under NACHA Rules, originators
are required to operate with an unauthorized return rate below 0.5
percent or they risk fines and loss of access to the ACH network.\317\
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\315\ NACHA Rule 2.3.1, General Rule, Originator Must Obtain
Authorization from Receiver.
\316\ EFTA, 15 U.S.C. 1693a(12) (providing that the term
``unauthorized electronic fund transfer'' means an electronic fund
transfer from a consumer's account initiated by a person other than
the consumer without actual authority to initiate such transfer and
from which the consumer receives no benefit, but that the term does
not include, among other things, any electronic fund transfer
initiated by a person other than the consumer who was furnished with
the card, code, or other means of access to such consumer's account
by such consumer, unless the consumer has notified the financial
institution involved that transfers by such other person are no
longer authorized). Regulation E implements this provision at 12 CFR
1005.2(m).
\317\ NACHA Rule 2.17.2.
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Notice of variable amounts. Regulation E and the NACHA Rules both
provide that if the debit amount for a preauthorized transfer changes
from the previous transfer or from the preauthorized amount, consumers
must receive a notice 10 calendar days prior to the debit.\318\
However, both of these rules have an exception from this requirement if
consumers have agreed to a range of debit amounts and the payment does
not fall outside that range.\319\
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\318\ 12 CFR 1005.10(d)(1) (providing that when a preauthorized
electronic fund transfer from the consumer's account will vary in
amount from the previous transfer under the same authorization or
from the preauthorized amount, the designated payee or the financial
institution shall send the consumer written notice of the amount and
date of the transfer at least 10 days before the scheduled date of
transfer); NACHA Rule 2.3.2.6(a).
\319\ 12 CFR 1005.10(d)(2) (providing that the designated payee
or the institution shall inform the consumer of the right to receive
notice of all varying transfers, but may give the consumer the
option of receiving notice only when a transfer falls outside a
specified range of amounts or only when a transfer differs from the
most recent transfer by more than an agreed-upon amount); NACHA Rule
2.3.2.6(b).
---------------------------------------------------------------------------
Based on outreach and market research, the Bureau does not believe
that most payday and payday installment lenders making loans that will
be covered under the rule are providing a notice of transfers varying
in amount. However, the Bureau is aware that many of these lenders take
authorizations for a range of amounts. As a result, lenders use these
broad authorizations rather than fall under the Regulation E
requirement to send a notice of transfers varying in amount even when
collecting for an irregular amount (for example, by adding fees or a
past due amount to a regularly scheduled payment). Some of these
contracts provide that the consumer is authorizing the lender to
initiate payment for any amount up to the full amount due on the
loan.\320\
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\320\ For example, a 2013 One Click Cash Loan Contract states:
The range of ACH debit entries will be from the amount applied to
finance charge for the payment due on the payment date as detailed
in the repayment schedule in your loan agreement to an amount equal
to the entire balance due and payable if you default on your loan
agreement, plus a return item fee you may owe as explained in your
loan agreement. You further authorize us to vary the amount of any
ACH debit entry we may initiate to your account as needed to pay the
payment due on the payment date as detailed in the repayment
schedule in your loan agreement as modified by any prepayment
arrangements you may make, any modifications you and we agree to
regarding your loan agreement, or to pay any return item fee you may
owe as explained in your loan agreement.''); Notice of Motion and
Motion to Compel Arbitration at exhibit 1, 38, 55, Labajo v. First
Int'l Bank & Trust, No. 14-00627 (C.D. Cal. May 23, 2014), ECF No.
26-3. (SFS Inc., d/b/a One Click Cash, Authorization to Initiate ACH
Debit and Credit Entries).
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Reinitiation Cap. After a payment attempt has failed, NACHA Rules
allow an originator--in this case, the lender that is trying to collect
payment--to attempt to collect that same payment no more than two
additional times through the ACH network.\321\ NACHA Rules also require
the ACH files \322\ for the two additional attempts to be labeled as
``reinitiated'' transactions. Because the rule applies on a per-payment
basis, for lenders with recurring payment
[[Page 54503]]
authorizations, the count resets to zero when the next scheduled
payment comes due.
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\321\ NACHA Rule 2.12.4.
\322\ ACH transactions are transferred in a standardized
electronic file format between financial institutions and ACH
network operators. These files contain information about the payment
itself along with routing information for the applicable consumer
account, originator (or in this case, the lender) account, and
financial institution.
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III. Summary of the Rulemaking Process
As described in more detail below, the Bureau has conducted broad
outreach with a multitude of stakeholders on a consistent basis over
more than five years to learn more about the market for small-dollar
loans of various kinds. This outreach has comprised many public events,
including field hearings, and hundreds of meetings with both consumer
and industry stakeholders on the issues raised by small-dollar lending.
In addition to meeting with lenders and other market participants,
trade associations, consumer groups, community groups, and others, the
Bureau has engaged with individual faith leaders and coalitions of
faith leaders from around the country to gain their perspective on how
these loans affect their communities and the people they serve. And the
Bureau has met frequently with Federal, State, and Tribal officials to
consult and share information about these kinds of loans and their
consequences for consumers.
The Bureau's understanding of these loans, and how they affect
consumers, has also been furthered by its ongoing supervisory activity,
which involves exercising its legally mandated authority to conduct
formal examinations of companies who make such loans and of debt
collectors who collect on such loans. These examinations have canvassed
the operations, marketing, underwriting, collections, and compliance
management systems at such lenders and continue to do so on an ongoing
basis. In addition, the Bureau has investigated and taken enforcement
actions against a number of small-dollar lenders, which has provided
further insight into various aspects of their operations and the
practical effects of their business models on consumers.
The Bureau has also undertaken extensive research and analysis over
several years to develop the factual foundation for issuance of this
final rule. That research and analysis has included multiple white
papers and data points on millions of such loans,\323\ as well as
careful review of studies and reports prepared by others and the
relevant academic literature.\324\ The Bureau has analyzed its own data
on consumer complaints about the issues raised by small-dollar loans
and the collections efforts made by lenders and debt collectors on such
loans. And the Bureau has consistently engaged in market monitoring
activities to gain insights into developing trends in the market for
small-dollar loans.
---------------------------------------------------------------------------
\323\ Bureau of Consumer Fin. Prot., ``Payday Loans, Auto Title
Loans, and High-Cost Installment Loans: Highlights from CFPB
Research,'' (June 2, 2016), available at http://files.consumerfinance.gov/f/documents/Payday_Loans_Highlights_From_CFPB_Research.pdf (summary of the
CFPB's independent research).
\324\ See part VII and the Section 1022(b)(2) Analysis for more
on the relevant academic literature.
---------------------------------------------------------------------------
All of the input and feedback the Bureau has received from its
outreach over the years, its extensive experience of examining and
investigating small-dollar lenders, and its research and analysis of
the marketplace, have assisted the Bureau in developing and issuing
this final rule. The material presented in this section summarizes the
Bureau's work relating to the rule in three categories:
The Bureau's background and processes in developing the
rule;
the key elements of the notice of proposed rulemaking; and
the receipt and consideration of feedback prior to
finalizing the rule.
A. Bureau Outreach to Stakeholders
Birmingham Field Hearing. The Bureau's formal outreach efforts on
this subject began in January 2012, when it held its first public field
hearing in Birmingham, Alabama, focused on small-dollar lending. At the
field hearing, the Bureau heard testimony and received input from
consumers, civil rights groups, consumer advocates, religious leaders,
industry and trade association representatives, academics, and elected
representatives and other governmental officials about consumers'
experiences with small-dollar loan products. At the same time, the
Bureau announced the launch of its program to conduct supervisory
examinations of payday lenders pursuant to the Bureau's authority under
section 1024 of the Dodd-Frank Act. As part of this initiative, the
Bureau put in place a process to obtain loan-level records from a
number of large payday lenders to assist in analyzing the nature and
effects of such loans.
The Bureau transcribed the field hearing and posted the transcript
on its Web site.\325\ Concurrently, the Bureau placed a notice in the
Federal Register inviting public comment on the issues discussed in the
field hearing. The Bureau received 664 public comments in response to
that request, which were reviewed and analyzed.
---------------------------------------------------------------------------
\325\ Bureau of Consumer Fin. Prot., ``In the Matter Of: A Field
Hearing on Payday Lending, Hearing Transcript,'' (Jan. 19, 2012),
available at http://files.consumerfinance.gov/f/201201_cfpb_transcript_payday-lending-field-hearing-alabama.pdf.
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Nashville Field Hearing. In March 2014, the Bureau held a field
hearing in Nashville, Tennessee to gather further input from a broad
range of stakeholders.\326\ The Bureau heard testimony from consumer
groups, industry representatives, academics, and members of the public,
including consumers of payday loans. The field hearing was held in
conjunction with issuing the second of two research reports on findings
by Bureau staff using the supervisory data that it had collected from a
number of large payday lenders. In the Director's opening remarks, he
noted three concerns associated with covered loans that had been
identified in recent Bureau research: That a significant population of
consumers were ending up in extended loan sequences; that some lenders
use the electronic payments system in ways that pose risks to
consumers; and that a troubling number of companies engage in
collection activities that may be unfair or deceptive in one or more
ways. While the Bureau was working on these reports and in the period
following their release, the Bureau held numerous meetings with
stakeholders on small-dollar lending in general and to hear their views
on potential policy approaches.
---------------------------------------------------------------------------
\326\ Bureau of Consumer Fin. Prot., ``Live from Nashville--
Field Hearing on Payday Loans,'' CFPB Blog (Mar. 25, 2014),
available at https://www.consumerfinance.gov/about-us/blog/live-from-nashville/.
---------------------------------------------------------------------------
Richmond Field Hearing. In March 2015, the Bureau held another
field hearing in Richmond, Virginia to gather further input from a
broad range of stakeholders.\327\ The focus of this field hearing was
the announcement the Bureau simultaneously made of the rulemaking
proposals it had under consideration that would require lenders to take
steps to make sure consumers can repay their loans and would restrict
certain methods of collecting payments from consumers' bank accounts in
ways that lead to substantial penalty fees. The Bureau heard testimony
from consumer groups, industry representatives, faith leaders, and
members of the public, including consumers of payday loans. In addition
to the field hearing, the Bureau held separate roundtable discussions
with consumer advocates and with industry
[[Page 54504]]
members and trade associations to hear feedback on the rulemaking
proposals under consideration.
---------------------------------------------------------------------------
\327\ Bureau of Consumer Fin. Prot., ``Field Hearing on Payday
Loans in Richmond, VA,'' Archive of Past Events (Mar. 26, 2015),
available at https://www.consumerfinance.gov/about-us/events/archive-past-events/field-hearing-on-payday-lending/.
---------------------------------------------------------------------------
A summary of the rulemaking proposals under consideration was
released at the time of the Richmond field hearing. This marked the
first stage in the process the Bureau is required to follow under the
Small Business Regulatory Enforcement and Fairness Act (SBREFA),\328\
which is discussed in more detail below. The summary was formally known
as the Small Business Review Panel Outline. In addition to the
discussions that occurred at the time of the Richmond field hearing,
the Bureau has met on a number of other occasions with industry members
and trade associations, including those representing storefront payday
lenders, to discuss their feedback on the issues presented in the
Outline.
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\328\ Public Law 104-1.21, 110 Stat. 847 (1996).
---------------------------------------------------------------------------
Omaha Meeting and Other Events. At the Bureau's Consumer Advisory
Board (CAB) meeting in June 2015 in Omaha, Nebraska, a number of
meetings and field events were held about payday, vehicle title, and
similar loans. The CAB advises and consults with the Bureau in the
exercise of its functions under the Federal consumer financial laws,
and provides information on emerging practices in the consumer
financial products and services industry, including regional trends,
concerns, and other relevant information. The CAB members over several
years have included, among others, a payday lending executive and
consumer advocates on payday lending. The Omaha events included a visit
to a payday loan store to learn more about its operations first-hand
and a day-long public session that focused on the Bureau's proposals in
the Small Business Review Panel Outline and trends in payday and
vehicle title lending. The CAB also held six subcommittee discussions
on the Outline in the spring and summer of 2015, and three more
subcommittee discussions on the proposed rule in the summer of 2016.
Kansas City Field Hearing. In June 2016, the Bureau held a field
hearing in Kansas City, Missouri to gather further input on the issues
surrounding potential new Federal regulations of small-dollar
lending.\329\ The focus of this field hearing was the announcement that
the Bureau simultaneously made of the release of its notice of proposed
rulemaking on payday, vehicle title, and certain high-cost installment
loans. The proposed rule would require lenders to take steps to make a
reasonable determination that consumers can afford to repay their loans
and would restrict certain methods of collecting payments from
consumers' bank accounts in ways that can lead to substantial penalty
fees. The Bureau heard testimony on the proposed rule from consumer
groups, industry representatives, and members of the public, including
consumers of payday loans.
---------------------------------------------------------------------------
\329\ Bureau of Consumer Fin. Prot., ``Field Hearing on Small
Dollar Lending in Kansas City, MO,'' Archive of Past Events (June 2,
2016), available at https://www.consumerfinance.gov/about-us/events/archive-past-events/field-hearing-small-dollar-lending-kansas-city-mo/.
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The release of the notice of proposed rulemaking commenced the
formal notice-and-comment process under the Administrative Procedure
Act. In the notice of proposed rulemaking, the Bureau stated that
comments on the proposed rule would have to be received on or before
October 7, 2016 to be considered by the Bureau. The notice of proposed
rulemaking further specified the details of the methods by which
comments would be received, which included email, electronic, mail, and
hand delivery/courier. The Bureau also noted that all comments
submitted would become part of the public record and would be subject
to public disclosure.
Little Rock Meeting and Other Events. In June 2016, just a week
after the field hearing in Kansas City announcing the public release of
the proposed rule, the CAB held another public meeting on this topic in
Little Rock, Arkansas. Among other things, Bureau officials gave a
public briefing on the proposed rule to the CAB members, and the Bureau
heard testimony from the general public on the subject.
Two of the Bureau's other advisory bodies have also provided input
and feedback on the Bureau's work to develop appropriate provisions to
regulate small-dollar loans. The Community Bank Advisory Council (CBAC)
held two subcommittee discussions of the proposals contained in the
Small Business Review Panel Outline in March 2015 and November 2015, a
Council discussion on the proposed rule in July 2016, and two more
subcommittee discussions of the proposed rule in the summer of 2016. In
addition, the Bureau's Credit Union Advisory Council (CUAC) held two
subcommittee discussions of the proposals in April 2015 and October
2015, discussed the Outline in its full meeting in March 2016, and held
two subcommittee discussions of the proposed rule during the summer of
2016.
Faith Leaders. The Bureau has taken part in a large number of
meetings with faith leaders, and coalitions of faith leaders, of all
denominations to hear their perspective on how small-dollar loans
affect their communities and the people they serve. In April 2016, the
White House convened a meeting of national faith leaders for this
purpose, which included the Bureau's director. The Bureau has also
engaged in outreach to local and national leaders from churches,
synagogues, mosques, and temples--both in Washington, DC and in many
locations around the country. In these sessions, the Bureau has heard
from faith leaders about the challenges some of them have faced in
seeking to develop alternatives to payday loans that would mitigate
what they perceive to be the harms caused to consumers.
General Outreach. Various Bureau leaders, including its director,
and Bureau staff have participated in and spoken at dozens of events
and conferences throughout the country, which have provided further
opportunities to gather insight and recommendations from both industry
and consumer groups about how to approach the issue of whether and how
to regulate small-dollar loans. In addition to gathering information
from meetings with lenders and trade associations and through regular
supervisory and enforcement activities, Bureau staff made fact-finding
visits to at least 12 non-depository payday and vehicle title lenders.
Inter-Agency Consultation. As discussed in connection with section
1022 of the Dodd-Frank Act below, the Bureau has consulted with other
Federal consumer protection and prudential regulators about these
issues and the approaches that the other regulators have taken to
small-dollar lending over the years. The Bureau has provided other
regulators with information about the proposals under consideration,
sought their input, and received feedback that has assisted the Bureau
in preparing this final rule. In addition, the Bureau was involved,
along with its fellow Federal regulatory agencies, in meetings and
other efforts to assist the U.S. Department of Defense as it developed
and adopted regulations to implement updates to the Military Lending
Act. That statute governs small-dollar loans in addition to various
other loan products, and the Bureau developed insights from this work
that have been germane to this rulemaking, especially in how to address
the potential for lenders to find ways to evade or circumvent its
provisions.
Consultation with State and Local Officials. The Bureau's outreach
also has included a large number of meetings
[[Page 54505]]
and calls with State Attorneys General, State financial regulators, and
municipal governments, along with the organizations representing the
officials charged with enforcing applicable Federal, State, and local
laws on small-dollar loans. These discussions have occurred with
officials from States that effectively disallow such loans by imposing
strict usury caps, as well as with officials from States that allow
such loans and regulate them through various frameworks with different
substantive approaches. The issues discussed have involved both
storefront and online loans. In particular, as the Bureau has worked to
develop the proposed registered information system requirements, it has
consulted with State agencies from those States that require lenders to
provide information about certain small-dollar loans to statewide
databases. A group of State Attorneys General submitted a comment
claiming that the extent to which the Bureau consulted State and local
officials was insufficient. Some other State officials submitted
similar comments. Although it is true that the Bureau did not meet with
every attorney general or interested official from every State to
discuss issues involving the regulation of small-dollar loans, it did
meet with many of them, some on multiple occasions. In addition, the
Bureau did receive public comments from groups of State Attorneys
General and other officials, including both regulators and legislators,
and has carefully considered the issues they discussed, which presented
many conflicting points of view.
Several State Attorneys General requested that the Bureau commit to
consulting with State officials before enforcing this regulation. The
Bureau will coordinate and consult with State regulators and
enforcement officials in the same manner that it does in other
enforcement and supervisory matters.
Tribal Consultations. The Bureau has engaged in consultation with
Indian tribes about this rulemaking. The Bureau's Policy for
Consultation with Tribal Governments provides that the Bureau ``is
committed to regular and meaningful consultation and collaboration with
tribal officials, leading to meaningful dialogue with Indian tribes on
Bureau policies that would be expressly directed to tribal governments
or tribal members or that would have direct implications for Indian
tribes.'' \330\ To date, the Bureau has held three formal consultation
sessions related to this rulemaking. The first was held on October 27,
2014, at the National Congress of American Indians 71st Annual
Convention and Marketplace in Atlanta, Georgia and before the release
of the Bureau's small-dollar lending SBREFA materials. The timing of
the consultation gave Tribal leaders an opportunity to speak directly
with the small-dollar lending team about Tribal lender and/or consumer
experiences prior to the drafting of proposals that would become the
Small Business Review Panel Outline. A second consultation was held on
June 15, 2015, at the Bureau's headquarters. At that consultation,
Tribal leaders responded to the proposals under consideration set forth
in the Outline that had recently been released. A third consultation
was held on August 17, 2016, at the Sandra Day O'Connor College of Law
in Phoenix, Arizona, after the release of the proposed rule. All
Federally recognized Indian tribes were invited to attend these
consultations, which generated frank and valuable input from Tribal
leaders to Bureau senior leadership and staff about the effects such a
rulemaking could have on Tribal nations and lenders. In addition, the
Bureau has met individually with Tribal leaders, Tribal lenders, and
Tribal lending associations in an effort to further inform its small-
dollar lending work. A Tribal trade association dealing with financial
services issues informed the Bureau that it believed these
consultations were inadequate.
---------------------------------------------------------------------------
\330\ Bureau of Consumer Fin. Prot., ``Consumer Financial
Protection Bureau Policy for Consultation with Tribal Governments,''
at 1, available at http://files.consumerfinance.gov/f/201304_cfpb_consultations.pdf.
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B. Supervisory and Enforcement Activity
In addition to these many channels of outreach, the Bureau has
developed a broader understanding of small-dollar lending through its
supervisory and enforcement work. This work is part of the foundation
of the Bureau's expertise and experience with this market, which is
informed by frequent contact with certain small-dollar lenders and the
opportunity to scrutinize their operations and practices up close
through supervisory examinations and enforcement investigations. Some
illustrative details of this work are related below.
The Bureau's Supervisory Work. The Bureau has been performing
supervisory examinations of small-dollar lenders for more than five
years. During this time, the Bureau has written and published its
guidelines on performing such examinations, which its exam teams have
applied and refined further over time.\331\ All of this work has
provided the Bureau with a quite comprehensive vantage point on the
operations of payday and other small-dollar lenders and the nature and
effects of their loan products for consumers.
---------------------------------------------------------------------------
\331\ See Bureau of Consumer Fin. Prot., ``CFPB Examination
Procedures, Short-term, Small-Dollar Lending,'' available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201309_cfpb_payday_manual_revisions.pdf.
---------------------------------------------------------------------------
In its regular published reports known as Supervisory Highlights,
the Bureau has summarized, while maintaining confidentiality of
supervised entities, the types of issues and concerns that arise in its
examinations of non-bank financial companies in general, and of small-
dollar lenders in particular. In its Summer 2013 edition, for example,
the Bureau emphasized its general finding that ``nonbanks are more
likely to lack a robust [Compliance Management System] as their
consumer compliance-related activities have not been subject to
examinations at the federal level for compliance with the Federal
consumer financial laws prior to the Bureau's existence.'' \332\ The
Bureau noted that it had identified ``one or more instances of nonbanks
that lack formal policies and procedures, have not developed a consumer
compliance program, or do not conduct independent consumer compliance
audits. Lack of an effective CMS has, in a number of instances,
resulted in violations of Federal consumer financial laws.'' \333\
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\332\ Bureau of Consumer Fin. Prot., ``Supervisory Highlights,''
at 6 (Summer 2013), available at http://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf.
\333\ Bureau of Consumer Fin. Prot., ``Supervisory Highlights,''
at 6 (Summer 2013), available at http://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf.
---------------------------------------------------------------------------
In the Spring 2014 edition, the Bureau addressed its supervisory
approach to short-term, small-dollar lending in more detail. At that
time, the Bureau noted that its exercise of supervisory authority
marked the first time any of these lenders had been subject to Federal
compliance examinations. The Bureau described a number of shortcomings
it had found and addressed with the compliance management systems
implemented by small-dollar lenders, including lack of oversight,
inadequate complaint management, lack of written policies and
procedures, failure to train staff adequately, lack of effective
compliance audit programs, and more generally a pervasive lack of
accountability within the compliance program. It also catalogued many
different violations and abuses in the collection methods these lenders
used with their customers. Finally, the report noted that Bureau
examinations found
[[Page 54506]]
deceptive practices in the use of preauthorized ACH withdrawals from
borrower checking accounts.\334\
---------------------------------------------------------------------------
\334\ Bureau of Consumer Fin. Prot., ``Supervisory Highlights,''
at 14-20 (Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
---------------------------------------------------------------------------
The Summer 2016 edition included a discussion of debt collection
issues, which are relevant to many payday lenders, and also included a
section explicitly dedicated to small-dollar lending and issues
associated with compliance with the Electronic Fund Transfer Act. The
Bureau's examiners found that the ``loan agreements of one or more
entities failed to set out an acceptable range of amounts to be
debited, in lieu of providing individual notice of transfers of varying
amounts. These ranges could not be anticipated by the consumer because
they contained ambiguous or undefined terms in their descriptions of
the upper and lower limits of the range.'' \335\ And the Spring 2017
edition expressed concerns about production incentives relevant to many
providers of financial services, noting that ``many supervised entities
choose to implement incentive programs to achieve business objectives.
These production incentives can lead to significant consumer harm if
not properly managed.'' \336\
---------------------------------------------------------------------------
\335\ Bureau of Consumer Fin. Prot., ``Supervisory Highlights,''
at 13 (Summer 2016), available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_12.pdf.
\336\ Bureau of Consumer Fin. Prot., ``Supervisory Highlights,''
at 27 (Spring 2017), available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201704_cfpb_Supervisory-Highlights_Issue-15.pdf.
---------------------------------------------------------------------------
In the most recent Summer 2017 edition, the Bureau again described
problems that it had addressed with short-term, small-dollar lending,
including payday and vehicle title loans. Among them were a variety of
collections issues, along with misrepresentations that several lenders
had made in the marketing of such loans. Examiners reported that
lenders had promised consumers that they could obtain such a loan
without a credit check, yet this turned out to be untrue and, in some
instances, to lead to loan denials based on the information obtained
from the consumers' credit reports. They also found that certain
lenders advertised products and services in their outdoor signage that
they did not, in fact, offer. And some lenders advertised their
products by making unsubstantiated claims about how they compared with
those of competing lenders. These practices were found to be deceptive
and changes were ordered to be made.\337\
---------------------------------------------------------------------------
\337\ Bureau of Consumer Fin. Prot., ``Supervisory Highlights,''
at 28-30 (Summer 2017), available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_Supervisory-Highlights_Issue-16.pdf.
---------------------------------------------------------------------------
The Bureau further found that some lenders misrepresented their
processes to apply for a loan online, and others misused references
provided by loan applicants on applications for origination purposes by
marketing products to the persons listed. Finally, examiners observed
that one or more lenders mishandled the payment process by debiting
accounts automatically for payments that had already been made, leading
to unauthorized charges and overpayments. The entities also failed to
implement adequate processes to accurately and promptly identify and
refund borrowers who paid more than they owed, who were unable to avoid
the injury.\338\
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\338\ See Bureau of Consumer Fin. Prot., ``Supervisory
Highlights,'' at 31-32 (Summer 2017), available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_Supervisory-Highlights_Issue-16.pdf.
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The Bureau's Enforcement Work. The Bureau also has developed
expertise and experience in this market over time by pursuing public
enforcement actions against more than 20 small-dollar lenders,
including brick-and-mortar storefront lenders, online lenders, and
vehicle title lenders (as well as pawn lenders, which are not covered
under the rule). A number of these actions have been resolved, but some
remain pending in the courts at this time. In every instance, however,
before the enforcement action was brought, it was preceded by a
thorough investigation of the underlying facts in order to determine
whether legal violations had occurred. The issues raised in these
actions include engaging in misleading and deceptive marketing
practices, making improper disclosures, training employees to hide or
obfuscate fees, pushing customers into a cycle of debt by pressuring
them to take out additional loans they could not afford, making false
statements about whether and how transactions can be canceled or
reversed, taking unauthorized and improper electronic withdrawals from
customer accounts, and engaging in collections efforts that generate
wide-ranging problems.\339\ The Bureau has determined many of these
practices to be violations of the prohibition against unfair,
deceptive, or abusive acts or practices. The information and insights
that the Bureau has gleaned from these investigations and enforcement
actions has further advanced its understanding of this market and of
the factual foundations for the policy interventions contained in this
final rule.
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\339\ See, e.g., Press Release, Bureau of Consumer Fin. Prot.,
``CFPB Takes Acton Against Check Cashing and Payday Lending Company
for Tricking and Trapping Consumers'' (May 11, 2016), available at
https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-check-cashing-and-payday-lending-company-tricking-and-trapping-consumers/; Press Release, Bureau of Consumer Fin. Prot.,
``CFPB Fines Titlemax Parent Company $9 Million for Luring Consumers
Into More Costly Loans'' (Sept. 26, 2016), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-fines-titlemax-parent-company-9-million-luring-consumers-more-costly-loans/; Press
Release, Bureau of Consumer Fin. Prot., ``CFPB Sues Five Arizona
Title Lenders for Failing to Disclose Loan Annual Percentage Rate to
Consumers'' (Sept. 21, 2016), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-five-arizona-title-lenders-failing-disclose-loan-annual-percentage-rate-consumers/; Press Release, Bureau of Consumer Fin. Prot., ``CFPB
Sues Offshore Payday Lender'' (Aug. 5, 2015), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-offshore-payday-lender/; Press Release, Bureau of Consumer Fin. Prot., ``Consumer
Financial Protection Bureau Takes Action Against Payday Lender for
Robo-Signing'' (Nov. 20, 2013), available at https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-takes-action-against-payday-lender-for-robo-signing/.
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For example, in 2013 the Bureau resolved a public enforcement
action against Cash America, Inc. that arose out of an examination of
this large national payday lender. The Bureau cited Cash America for
committing three distinct unfair and deceptive practices: Robo-signing
court documents in debt collection lawsuits; violating the Military
Lending Act by overcharging servicemembers and their families; and
improperly destroying records in advance of the Bureau's examination.
Cash America was ordered to pay $14 million in refunds to consumers and
to pay a civil penalty of $5 million for these violations.\340\
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\340\ See Press Release, Bureau of Consumer Fin. Prot.,
``Consumer Financial Protection Bureau Takes Action Against Payday
Lender for Robo-Signing'' (Nov. 20, 2013), available at https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-takes-action-against-payday-lender-for-robo-signing/.
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In 2014, the Bureau filed a public enforcement action against Ace
Cash Express that developed out of the Bureau's prior exam work. The
Bureau found through its examination and subsequent investigation that
ACE had engaged in unfair, deceptive, and abusive practices by using
illegal debt collection tactics to pressure overdue borrowers into
taking out additional loans they could not afford. In fact, ACE's own
training manual for its employees had a graphic illustrating this cycle
of debt. According to the graphic, consumers begin by applying to ACE
for a loan, which ACE approved.
[[Page 54507]]
Next, if the consumer ``exhausts the cash and does not have the ability
to pay,'' ACE ``contacts the customer for payment or offers the option
to refinance or extend the loan.'' Then, when the consumer ``does not
make a payment and the account enters collections,'' the cycle starts
all over again--with the formerly overdue borrower applying for another
payday loan.\341\
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\341\ See Press Release, Bureau of Consumer Fin. Prot., ``CFPB
Takes Action Against Ace Cash Express for Pushing Payday Borrowers
Into Cycle of Debt'' (July 10, 2014), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.
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The Bureau's examination of ACE was conducted in coordination with
the Texas Office of Consumer Credit Commissioner and resulted in an
order imposing $5 million in consumer refunds and a $5 million civil
penalty. The enforcement action was partially based on ACE's creation
of a false sense of urgency to get delinquent borrowers to take out
more payday loans--all while charging new fees each time.\342\
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\342\ See Press Release, Bureau of Consumer Fin. Prot., ``CFPB
Takes Action Against Ace Cash Express for Pushing Payday Borrowers
Into Cycle of Debt'' (July 10, 2014), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.
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In September 2015, the Bureau took action against Westlake
Services, an indirect auto finance company, and Wilshire Consumer
Credit, its auto title lending subsidiary, which offered auto title
loans directly to consumers, largely via the Internet, and serviced
those loans; Wilshire also purchased and serviced auto title loans made
by others. The Bureau concluded that Westlake and Wilshire had
committed unfair and deceptive acts or practices by pressuring
borrowers through the use of illegal debt collection tactics. The
tactics included illegally deceiving consumers by using phony caller ID
information (sometimes masquerading as pizza delivery services or
flower shops), falsely threatening to refer borrowers for investigation
or criminal prosecution, calling under false pretenses, and improperly
disclosing information about debts to borrowers' employers, friends,
and family. Wilshire also gave consumers incomplete information about
the true cost of the loans it offered. The consent order resolving the
matter required the companies to overhaul their debt collection
practices and to cease advertising or marketing their products
untruthfully. The companies were also ordered to provide consumers with
$44.1 million in cash relief and balance reductions, and to pay a civil
penalty of $4.25 million.
In December 2015, the Bureau resolved another enforcement action
with EZCORP, Inc., a short-term, small-dollar lender. The action was
initially generated from a supervisory exam that had exposed
significant and illegal debt collection practices. These included in-
person collection visits at consumers' homes or workplaces (which
risked disclosing the consumer's debt to unauthorized third parties),
falsely threatening consumers with litigation for not paying their
debts, misrepresenting consumers' rights, and unfairly making multiple
electronic withdrawal attempts from consumer accounts that caused
mounting bank fees. These practices were found to be unfair and
deceptive and to violate the Electronic Fund Transfer Act; as a result,
the Bureau ordered EZCORP to refund $7.5 million to 93,000 consumers
and pay a $3 million civil penalty, while halting collection of
remaining payday and installment loan debts associated with roughly
130,000 consumers. That action also prompted the Bureau to issue an
industry-wide warning about potentially unlawful conduct during in-
person collections at homes or workplaces.\343\
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\343\ See Press Release, Bureau of Consumer Fin. Prot., ``CFPB
Orders EZCORP to Pay $10 million for Illegal Debt Collection
Tactics,'' (Dec. 16, 2015), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-ezcorp-to-pay-10-million-for-illegal-debt-collection-tactics/.
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In September 2016, the Bureau took action against TitleMax's parent
company TMX Finance, one of the country's largest auto title lenders,
for luring consumers into costly loan renewals by presenting them with
misleading information about the terms and costs of the deals. The
Bureau's investigation found that store employees, as part of their
sales pitch for the 30-day loans, offered consumers a ``monthly
option'' for making loan payments using a written guide that did not
explain the true cost of the loan if the consumer renewed it multiple
times, though TMX personnel were well aware of these true costs. In
fact, the guide and sales pitch distracted consumers from the fact that
repeatedly renewing the loan, as encouraged by TMX Finance employees,
would dramatically increase the loan's cost, while making it difficult,
if not impossible, for a consumer to compare costs for renewing the
loan over a given period. The company then followed up with those who
failed to repay by making intrusive visits to homes and workplaces that
put consumers' personal information at risk. TMX Finance was ordered to
stop its unlawful practices and pay a $9 million penalty.\344\
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\344\ See Press Release, Bureau of Consumer Fin. Prot., ``CFPB
Fines Titlemax Parent Company $9 Million for Luring Consumers into
More Costly Loans,'' (Sept. 26, 2016), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-fines-titlemax-parent-company-9-million-luring-consumers-more-costly-loans/.
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Likewise, in December 2016 the Bureau filed a public enforcement
action against Moneytree, which offers payday loans and check-cashing
services, for misleading consumers with deceptive online advertisements
and collections letters. The company was ordered to cease its illegal
conduct, refund $255,000 to consumers, and pay a civil penalty of
$250,000. In addition to the deceptive advertising, the company was
found to have deceptively told consumers that their vehicles could be
repossessed when it had no right or ability to do so, and to have
improperly withdrawn money from consumers' accounts without
authorization to do so.\345\
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\345\ See Press Release, Bureau of Consumer Fin. Prot., ``CFPB
Takes Action Against Moneytree for Deceptive Advertising and
Collection Practices,'' (Dec. 16, 2016), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-moneytree-deceptive-advertising-and-collection-practices/.
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From the Bureau's experience of carrying out investigations of
these kinds of illegal practices and halting them through its
enforcement efforts, the Bureau has become much more aware of the
nature and likelihood of unfair, deceptive, or abusive practices in
this market. And though the Bureau generally has devoted less attention
in its supervisory and enforcement programs to issues that it has long
intended to address separately, as here, through its rulemaking
authority, the Bureau nonetheless has gained valuable experience and
expertise from all of this work that it now brings to this rulemaking
process. Since the inception of its supervision and enforcement
program, the Bureau has worked continually to maximize compliance with
the Federal consumer financial laws as they apply to payday and other
types of small-dollar lenders. Sustained attention to compliance
through the Bureau's supervision and enforcement work is an important
adjunct to this rulemaking, but is not a sufficient substitute for it.
C. Research and Analysis of Small-Dollar Loans
Bureau White Papers. In April 2013, the Bureau issued a white paper
on payday loans and deposit advance products, including findings by
Bureau staff. For each of these loan products,
[[Page 54508]]
the Bureau examined loan characteristics, borrower characteristics,
intensity of use, and sustained use of the product. These findings were
based largely on the data the Bureau had collected from some of the
larger payday lenders under its supervisory authority, and covered
approximately 15 million loans generated in 33 States and on
approximately 15,000 deposit advance product transactions. The report
took a snapshot of borrowers at the beginning of the study period and
traced their usage of these products over the course of the study
period. The report demonstrated that though some consumers use payday
loans and deposit advances at relatively low to moderate levels, a
sizable share of users conduct transactions on a long-term basis,
suggesting they are unable to fully repay the loan and pay other
expenses without taking out a new loan shortly thereafter.\346\
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\346\ CFPB Payday Loans and Deposit Advance Products White
Paper.
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In March 2014, the Bureau issued another white paper on payday
lending. This report was based on the supervisory data the Bureau had
received from larger payday lenders, truncated somewhat to cover 12-
month windows into borrowing patterns. These limitations yielded a
dataset of over 12 million loans in 30 States. Responding to criticisms
of the Bureau's white paper, this report focused on ``fresh
borrowers,'' i.e., those who did not have a payday loan in the first
month of the Bureau's data and whose usage began in the second month.
After reviewing this data, the report yielded several key findings.
First, of the loans taken out by these borrowers over a period of
eleven months over 80 percent are rolled over or followed by another
loan within 14 days. Half of all loans are made as part of a sequence
that is at least ten loans long, and few borrowers amortize, meaning
their principal amounts are not reduced between the first and last loan
of a sequence. Monthly borrowers (the majority of whom are receiving
government benefits) are disproportionately likely to stay in debt for
eleven months or longer. And most borrowing involves multiple renewals
following an initial loan, rather than multiple distinct borrowing
episodes separated by more than fourteen days.\347\
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\347\ See CFPB Data Point: Payday Lending.
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Both before and after the release of these white papers, the Bureau
held numerous meetings with stakeholders to obtain their perspectives
and comments on the methodology and contents of this research. As is
also noted below, the Bureau also hosted individual scholars in the
field for research presentations
Additional Research Reports. In April and May of 2016, the Bureau
published two additional research reports on small-dollar loans. In
conducting this research, the Bureau used not only the data obtained
from the supervisory examinations previously described but also data
obtained through orders the Bureau had issued pursuant to section
1022(c)(4) of the Dodd-Frank Act, data obtained through civil
investigative demands made by the Bureau pursuant to section 1052 of
the Dodd-Frank Act, and data voluntarily supplied to the Bureau by
several lenders.
The first report addressed how online payday and payday installment
lenders use access to consumers' bank accounts to collect loan
payments. It found that after a failed ACH payment request made by an
online lender, subsequent payment requests to the same account are
unlikely to succeed, though lenders often continue to present them,
with many online lenders submitting multiple payment requests on the
same day. The resulting harm to consumers is shown by the fact that
accounts of borrowers who use loans from online lenders and experience
a payment that is returned for insufficient funds are more likely to be
closed by the end of the sample period than accounts experiencing a
returned payment for products other than payday or payday installment
loans.\348\
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\348\ See CFPB Online Payday Loan Payments.
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The other report addressed consumer usage and default patterns on
short-term vehicle title loans. Similar to payday loans, the report
determined that single-payment vehicle title lenders rely on borrowers
who take out repeated loans, with borrowers stuck in debt for seven
months or more supplying two-thirds of the title loan business. In over
half the instances where the borrower takes out such a loan, they end
up taking out four or more consecutive loans, which becomes an
unaffordable, long-term debt load for borrowers who are already
struggling with their financial situations. In addition to high rates
of default, the Bureau found that these loans carried a further adverse
consequence for many consumers, as one out of every five loan sequences
ends up with the borrower having their vehicle seized by the lender in
repossession for failure to repay.\349\
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\349\ See CFPB Single-Payment Vehicle Title Lending.
---------------------------------------------------------------------------
In June 2016, the Bureau issued a supplemental report on payday,
payday installment, vehicle title loan, and deposit advance products
that addressed a wide range of subjects pertinent to the proposed rule.
The report studied consumers' usage and default patterns for title and
payday installment loans; analyzed whether deposit advance consumers
overdrew accounts or took out payday loans more frequently after banks
stopped offering deposit advance products; examined the impact of State
laws on payday lending; compared payday re-borrowing rates across
States with different renewal and cooling-off period laws; provided
findings on payday borrowing and default patterns, using three
different loan sequence definitions; and simulated effects of certain
lending and collection restrictions on payday and vehicle title loan
markets.\350\
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\350\ See CFPB Report on Supplemental Findings.
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Consumer Complaint Information. The Bureau also has conducted
analysis on its own consumer complaint information. Specifically, the
Bureau had received, as of April 1, 2017, approximately 51,000 consumer
complaints relating to payday and other small-dollar loan products. Of
these complaints, about one-third were submitted by consumers as payday
or other small-dollar loan complaints and two-thirds as debt collection
complaints where the source of the debt was a payday loan.\351\
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\351\ The Bureau took a phased approach to accepting complaints
from consumers. The Bureau began accepting payday loan complaints in
November of 2013, and vehicle title loan complaints in July of 2014,
which means that the complaint data it has accumulated on these
markets does not cover the same periods as the complaint data it has
collected, for example, on the mortgage or credit card markets.
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Industry representatives have frequently expressed the view that
consumers seem to be satisfied with payday and other covered short-term
loan products, as shown by low numbers of complaints and the submission
of positive stories about them to the ``Tell Your Story'' function on
the Bureau's Web site. Yet, the Bureau has observed from its consumer
complaint data that from November 2013 through December 2016,
approximately 31,000 debt collection complaints cited payday loans as
the underlying debt, and over 11 percent of the complaints the Bureau
has handled about debt collection stemmed directly from payday
loans.\352\
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\352\ Bureau of Consumer Fin. Prot., ``Monthly Complaint Report,
Vol. 9,'' at 12 fig. 3 (Mar. 2016), available at http://files.consumerfinance.gov/f/201603_cfpb_monthly-complaint-report-vol-9.pdf.
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In fact, when complaints about payday loans are normalized in
comparison to other credit products, the numbers do not turn out to be
low at all. For example, in 2016, the Bureau
[[Page 54509]]
received about 4,400 complaints in which consumers reported ``payday
loan'' as the complaint product and about 26,600 complaints about
credit cards.\353\ Yet there are only about 12 million payday loan
borrowers annually, and about 156 million consumers have one or more
credit cards.\354\ Therefore, by way of comparison, for every 10,000
payday loan borrowers, the Bureau received about 3.7 complaints, while
for every 10,000 credit cardholders, the Bureau received about 1.7
complaints. In addition, the substance of some of the consumer
complaints about payday loans as catalogued by the Bureau mirrored many
of the concerns that constitute the justification for this rule
here.\355\
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\353\ Bureau of Consumer Fin. Prot., ``Consumer Response Annual
Report, January 1-December 31, 2016,'' at 27, 34 (Mar. 2017),
available at https://www.consumerfinance.gov/documents/3368/
201703_cfpb_Consumer-Response-Annual-Report-2016.pdf.
\354\ Bureau staff estimate based on finding that 63 percent of
American adults hold an open credit card and Census population
estimates. See Bureau of Consumer Fin. Prot., ``The Consumer Credit
Card Market Report,'' at 36 (Dec. 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf; U.S. Census Bureau, ``Annual Estimates of Resident
Population for Selected Age Groups by Sex for the United States,
States, Counties, and Puerto Rico Commonwealth and Municipios: April
1, 2010 to July 1, 2016,'' (June 2017), available at https://factfinder.census.gov/bkmk/table/1.0/en/PEP/2016/PEPAGESEX. Other
estimates of the number of credit card holders have been higher,
meaning that 1.7 complaints per 10,000 credit card holders would be
a high estimate. The U.S. Census Bureau estimated there were 160
million credit card holders in 2012, U.S. Census Bureau,
``Statistical Abstract of the United States: 2012,'' at 740 tbl.1188
(Aug. 2011), available at https://www.census.gov/library/publications/2011/compendia/statab/131ed.html, and researchers at
the Federal Reserve Bank of Boston estimated that 72.1 percent of
U.S. consumers held at least one credit card in 2014, Claire Greene
et al., ``The 2014 Survey of Consumer Payment Choice: Summary
Results,'' at 18 (Fed. Reserve Bank of Boston, No. 16-3, 2016),
available at https://www.bostonfed.org/-/media/Documents/researchdatareport/pdf/rdr1603.pdf. As noted above in the text,
additional complaints related to both payday loans and credit cards
are submitted as debt collection complaints with ``payday loan'' or
``credit card'' listed as the type of debt.
\355\ ``Consumer confusion relating to repayment terms was
frequently expressed. These consumers complained of the lack of
clarity about repayment of the loan using automatic withdrawal
features on a bank card, on a prepaid card, or by direct deposit.
Consumers with multiple advances stated their difficulty managing a
short repayment period and more often rolled-over the loan,
resulting in an inflated total cost of the loan.'' Bureau of
Consumer Fin. Prot., ``Consumer Response 2016 Annual Report, January
1-December 31, 2016,'' (Mar. 2017), available at https://
www.consumerfinance.gov/documents/3368/201703_cfpb_Consumer-
Response-Annual-Report-2016.pdf.
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Moreover, faith leaders and faith groups of many denominations from
around the country collected and submitted comments indicating that
many borrowers may direct their personal complaints or dissatisfactions
with their experiences elsewhere than to government officials.
Market Monitoring. The Bureau has also continuously engaged in
market monitoring for the small-dollar loan market, just as it does for
the other markets within its jurisdiction. This work involves regular
outreach to industry members and trade associations, as well as other
stakeholders in this marketplace. It also involves constant attention
to news, research, trends, and developments in the market for small-
dollar loans, including regulatory changes that may be proposed and
adopted by the States and localities around the country. The Bureau has
also carefully reviewed the published academic literature on small-
dollar liquidity loans, along with research conducted or sponsored by
stakeholder groups. In addition, a number of outside researchers have
presented their own research at seminars for Bureau staff.
D. Small Business Review Panel
Small Business Regulatory Enforcement Fairness Act (SBREFA)
Process. In April 2015, in accordance with SBREFA, the Bureau convened
a Small Business Review Panel with the Chief Counsel for Advocacy of
the SBA and the Administrator of the Office of Information and
Regulatory Affairs within the Office of Management and Budget
(OMB).\356\ As part of this process, the Bureau prepared an outline of
the proposals then under consideration and the alternatives considered
(the Small Business Review Panel Outline), which it posted on its Web
site for review and comment by the general public as well as the small
entities participating in the panel process.\357\
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\356\ The Small Business Regulatory Enforcement Fairness Act of
1996 (SBREFA), as amended by section 1100G(a) of the Dodd-Frank Act,
requires the Bureau to convene a Small Business Review Panel before
proposing a rule that may have a substantial economic impact on a
significant number of small entities. See Public Law 104-121, tit.
II, 110 Stat. 847, 857 (1996) as amended by Public Law 110-28, sec.
8302 (2007), and Public Law 111-203, sec. 1100G (2010).
\357\ Bureau of Consumer Fin. Prot., ``Small Business Advisory
Review Panel for Potential Rulemakings for Payday, Vehicle Title,
And Similar Loans: Outline of Proposals under Consideration and
Alternatives Considered,'' (Mar. 26, 2015), available at http://files.consumerfinance.gov/f/201503_cfpb_outline-of-the-proposals-from-small-business-review-panel.pdf.
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Before formally convening, the Panel took part in teleconferences
with small groups of the small entity representatives (SERs) to
introduce the Outline and get feedback on the Outline, as well as a
series of questions about their business operations and other issues.
The Panel gathered information from representatives of 27 small
entities, including small payday lenders, vehicle title lenders,
installment lenders, banks, and credit unions. The meeting participants
represented storefront and online lenders, State-licensed lenders, and
lenders affiliated with Indian tribes. The Panel held a full-day
meeting on April 29, 2015, to discuss the Small Business Review Panel
Outline. The 27 small entities also were invited to submit written
feedback, and 24 of them did so. The Panel considered input from the
small entities about the potential compliance costs and other impacts
on those entities and about impacts on access to credit for small
businesses and made recommendations about potential options for
addressing those costs and impacts. These recommendations are set forth
in the Small Business Review Panel Report, which is made part of the
administrative record in this rulemaking.\358\ The Bureau carefully
considered these findings and recommendations in preparing the proposed
rule and completing this final rule, as detailed below in the section-
by-section analysis of various provisions and in parts VII and VIII.
The Bureau also continued its outreach and engagement with stakeholders
on all sides since the SBREFA process concluded.
---------------------------------------------------------------------------
\358\ Bureau of Consumer Fin Prot., U.S. Small Bus. Admin., &
Office of Mgmt. & Budget, ``Final Report of the Small Business
Review Panel on CFPB's Rulemaking on Payday, Vehicle Title, and
Similar Loans'' (June 25, 2015), available at http://files.consumerfinance.gov/f/documents/3a_-_SBREFA_Panel_-_CFPB_Payday_Rulemaking_-_Report.pdf (hereinafter Small Business
Review Panel Report).
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Comments Regarding the Bureau's SBREFA Process. Following the
release of the proposed rule, a number of commenters criticized the
SBREFA process. Some of these commenters were third parties such as
trade associations who were familiar with the SBREFA process. Others
were the SERs themselves. Some commenters argued that the Bureau failed
to adequately consider the concerns raised and alternatives suggested
by the SERs. Some commenters also expressed concerns about the SBREFA
procedures.
Some commenters objected that in developing the proposed rule the
Bureau did not consider policy suggestions made by SERs or
recommendations made by the SBREFA Panel. For example, some commenters
argued that the Bureau failed to consider whether, as some SERs
contended, disclosures could prevent
[[Page 54510]]
the consumer injury the Bureau is seeking to address in this
rulemaking. Some commenters also suggested that the Bureau failed to
adequately consider alternative approaches employed by various States.
Some commenters criticized the Bureau for ignoring the Panel's
recommendations in developing the proposal, including, for example, the
recommendation that the Bureau consider whether the rule should permit
loan sequences of more than three short-term loans. Other SER
commenters argued that the Bureau should adopt the requirements imposed
by certain States (like Illinois or Michigan or Utah) or should require
lenders to offer off-ramps instead of the requirements herein. Some
commenters indicated that they believed the Bureau ultimately ignored
or underestimated the rule's potential impact on small businesses and
inadequately considered the rule's potential impact on rural
communities. Some commenters argued that the Bureau did not adequately
address issues around the cost of credit to small entities. One
commenter noted that some credit unions offer certain short-term loan
products and that the Bureau did not consider the impact of the rule on
credit union products and small credit unions.
The SBA Office of Advocacy submitted comments of its own on the
proposed rule and on how it responded to the SBREFA process. Although
Advocacy had no complaints about the procedures used or the input
received in the process, it did present its views on whether the
proposed rule sufficiently reflected the discussions and debates that
had occurred during the Panel discussions and the SBREFA process as a
whole. To begin with, Advocacy agreed with the Bureau that the proposed
rule would have a significant economic impact on small entities, which
it found to be a matter of concern and felt had been underestimated by
the Bureau. It stated that the ability-to-repay requirements in the
proposed rule would be burdensome, and the cooling-off periods in
particular would harm small businesses. It encouraged the Bureau to
exempt from the rule small businesses that operate in States that
currently have payday lending laws and to mitigate its impact on credit
unions, Indian tribes, and small communities. Advocacy also commented
that the proposed rule would restrict access to credit for consumers
and for certain small businesses, and suggested that an exception be
made for situations where such a loan may be necessary to address an
emergency.
The procedural objections to the SBREFA process raised by other
commenters included concerns about the make-up of the SBREFA panel and
whether it was representative of the small entities who would be most
affected by the proposal; the timing of SBREFA meetings; the
administration and management of SBREFA-related phone calls; the
overall ``sufficiency'' of the process; and unheeded requests to
convene additional Panel sessions or to conduct additional research on
specific topics. One trade group commenter incorporated portions of a
comment letter from a SER that was sent to the Bureau during the SBREFA
process, which raised a number of procedural objections. Another stated
the panel excluded open-end lenders. Some expressed concern that the
process did not provide them adequate time to realize the full
ramifications of the proposed rule and the effects it would have on
their business activity. Others suggested that the process was flawed
because the Bureau's analysis allegedly ignored the rule's potential
costs. One commenter also suggested that the SBREFA process was tainted
by the Bureau Director's public comments regarding small-dollar lending
in the years preceding the rulemaking.
Some commenters noted that the SBREFA process had been effective in
considering and responding to certain concerns, including input
regarding PAL loans and checking customer borrowing history.
Responses to Comments. The Bureau disagrees with commenters arguing
that the Bureau did not adequately consider the suggestions of SERs and
the Panel. In the proposed rule, the Bureau modified certain aspects of
the approach in the Small Business Review Panel Outline in response to
feedback from SERs (and others). For example, the Outline included a
60-day cooling-off period after sequences of three short-term loans,
but the proposed rule included a 30-day cooling-off period, and that
change is retained in the final rule. In addition, the Bureau followed
the Panel's recommendation to request comment on numerous specific
issues. The feedback received by the Bureau also informed its decision
to revise various aspects of the rule. For example, as discussed below,
the Bureau revised the ability-to-repay requirements in a number of
ways to provide greater flexibility and reduce the compliance burden,
such as by not requiring income verification if evidence is not
reasonably available. In addition, the rule no longer requires lenders
to verify or develop estimates of rental housing expenses based on
statistical data. And the Bureau considered all of the alternatives
posited by the SERs, as noted where applicable throughout part V and in
part VIII. More generally, the Bureau considered and made appropriate
modifications to the rule based upon feedback received during the
SBREFA process and in response to other feedback provided by the small
business community. The Bureau obtained important input through the
SBREFA process and all articulated viewpoints were understood--and
considered--prior to the promulgation of the final rule.
The Bureau disagrees with commenters that it did not consider
alternative approaches. For example, in the proposal, the Bureau
explained why it believed that disclosures would not be sufficient to
address the identified harms and why the approaches of various States
also appeared to be insufficient to address those harms. The Bureau
likewise explains in this final rule its conclusions about why those
approaches would not be sufficient.
The Bureau both agrees and disagrees with various comments from
Advocacy, and a fuller treatment of these issues is presented below in
part VII, which addresses the potential benefits, costs, and impacts of
the final rule, including reductions in access to financial products
and services and impacts on rural issues, and in part VIII, which
addresses among other things the economic impact of the final rule on
small entities, including small businesses. But more briefly here, the
Bureau would note that it has made many changes in the final rule to
reduce the burdens of the specific underwriting criteria in the
ability-to-repay requirements; that Advocacy has stated that it
appreciates the modification of the 60-day cooling-off period presented
in the SBREFA Panel Outline to the 30-day cooling-off period in the
proposed rule and now in the final rule; that Advocacy thanked the
Bureau for clarifying that the proposed rule (and now the final rule)
will not apply to business loans; that adoption of the conditional
exemption from the final rule for alternative loans mitigates its
impact on credit unions; that the Bureau did engage in another formal
Tribal consultation after release of the proposed rule as Advocacy had
urged; that the Bureau had consulted further with a range of State
officials prior to finalizing the rule; and that the Bureau has
extended the implementation period of the final rule.
The Bureau also disagrees with commenters who criticized procedural
aspects of the SBREFA process. With respect to the composition of the
SERs that participated in the SBREFA process, the Bureau followed legal
[[Page 54511]]
requirements for categorizing which entities qualified as small
entities. The Bureau collaborated with the SBA Office of Advocacy so
that the SERs included a variety of different types of lenders that
could be affected by the rulemaking, ensuring that participants
included a geographically diverse group of storefront payday lenders,
online lenders, vehicle title lenders, installment lenders, and banks
and credit unions. As noted above, to help ensure that the formal Panel
meeting would allow for efficient and effective discussion of
substantive issues, the Panel convened several telephone conferences
before the formal meeting to provide information about the Outline and
to obtain information from the SERs.
The Bureau disagrees, further, with the comments raising more
specific procedural objections about the teleconferences and the Panel
meeting. The Bureau provided agendas in advance of the calls and
extended the length of the calls as needed to ensure that SERs were
able to participate and provide feedback. While the Bureau appreciates
that some SERs may have desired additional time to consider and provide
feedback on the Outline, the Bureau notes that the Panel is required by
law to report on the SERs' comments and advice within 60 days after the
Panel is convened. The Bureau conducted the process diligently and in
accordance with its obligations under the Regulatory Flexibility Act
and consistent with prior SBREFA processes.
With respect to comments suggesting that the Bureau failed to
adequately consider the costs and impact on small businesses and in
rural areas, the Bureau notes that the costs and impacts were addressed
in the notice of proposed rulemaking, and, for the final rule, are
addressed in parts VII and VIII.
E. Consumer Testing
In developing the disclosures for this rule, the Bureau engaged a
third-party vendor, Fors Marsh Group (FMG), to coordinate qualitative
consumer testing for the disclosures that were being considered. The
Bureau developed several prototype disclosure forms and tested them
with participants in one-on-one interviews. Three categories of forms
were developed and tested: (1) Origination disclosures that informed
consumers about limitations on their ability to receive additional
short-term loans; (2) upcoming payment notices that alerted consumers
about lenders' future attempts to withdraw money from consumers'
accounts; and (3) expired authorization notices that alerted consumers
that lenders would no longer be able to attempt to withdraw money from
the consumers' accounts. Observations and feedback from the testing
were incorporated into the model forms developed by the Bureau.
Through this testing, the Bureau sought to observe how consumers
would interact with and understand prototype forms developed by the
Bureau. In late 2015, FMG facilitated two rounds of one-on-one
interviews, each lasting 60 minutes. The first round was conducted in
September 2015 in New Orleans, Louisiana, and the second round was
conducted in October 2015 in Kansas City, Missouri. At the same time
the Bureau released the proposed rule, it also made available a report
that FMG had prepared on the consumer testing.\359\ The testing and
focus groups were conducted in accordance with OMB Control Number 3170-
0022. A total of 28 individuals participated in the interviews. Of
these 28 participants, 20 self-identified as having used a small-dollar
loan within the past two years.
---------------------------------------------------------------------------
\359\ See Fors Marsh Group, ``Qualitative Testing of Small
Dollar Loan Disclosures, Prepared for the Consumer Financial
Protection Bureau,'' (Apr. 2016) available at http://files.consumerfinance.gov/f/documents/Disclosure_Testing_Report.pdf
(for a detailed discussion of the Bureau's consumer testing)
(hereinafter FMG Report).
---------------------------------------------------------------------------
Highlights from Interview Findings. FMG asked participants
questions to assess how well they understood the information on the
forms.
For the origination forms, the questions focused on whether
participants understood that their ability to roll this loan over or
take out additional loans may be limited. Each participant reviewed one
of two different prototype forms: Either one for loans that would
require an ability-to-repay determination (ATR Form) or one for loans
that would be offered under the conditional exemption for covered
short-term loans (Alternative Loan Form). During Round 1, many
participants for both form types recognized and valued information
about the loan amount and due date; accordingly, that information was
moved to the beginning of all the origination forms for Round 2. For
the ATR Forms, few participants in Round 1 understood that the ``30
days'' language was describing a period when future borrowing may be
restricted. Instead, several read the language as describing the loan
term. In contrast, nearly all participants reviewing the Alternative
Loan Form understood that it was attempting to convey that each
successive loan they took out after the first in this series had to be
smaller than the previous loan, and that after taking out three loans
they would not be able to take out another for 30 days. Some
participants also reviewed a version of this Alternative Loan Form for
when consumers are taking out their third loan in a sequence. The
majority of participants who viewed this notice understood it,
acknowledging that they would have to wait until 30 days after the
third loan was paid off to be considered for another similar loan.
During Round 2, participants reviewed two new versions of the ATR
Form. One adjusted the ``30 days'' phrasing and the other completely
removed the ``30 days'' language, replacing it with the phrase
``shortly after this one.'' The Alternative Loan Form was updated with
similar rephrasing of the ``30 days'' language. In order to simplify
the table, the ``loan date'' column was removed.
The results in Round 2 were similar to Round 1. Participants
reviewing the ATR forms focused on the language notifying them they
should not take out this loan if they are unable to pay the full
balance by the due date. Information about restrictions on future loans
went largely unnoticed. The edits appeared to have a positive impact on
comprehension since no participants interpreted either form as
providing information on their loan term. There did not seem to be a
difference in comprehension between the group with the ``30 days''
version and the group with the ``shortly'' version. As in Round 1,
participants who reviewed the Alternative Loan Form noticed and
understood the schedule detailing maximum borrowable amounts. These
participants understood that the purpose of the Alternative Loan Form
was to inform them that any subsequent loans must be smaller.
Questions for the payment notices focused on participants' ability
to identify and understand information about the upcoming payment.
Participants reviewed one of two payment notices: An Upcoming
Withdrawal Notice or an Unusual Withdrawal Notice. Both forms provided
details about the upcoming payment attempt and a payment breakdown
table. The Unusual Withdrawal Notice also indicated that the withdrawal
was unusual because the payment was higher than the previous withdrawal
amount. To obtain feedback on participants' likelihood to open notices
delivered in an electronic manner, these notices were presented as a
sequence to simulate an email message.
In Round 1, all participants, based on seeing the subject line in
the email
[[Page 54512]]
inbox, said that they would open the Upcoming Withdrawal email and read
it. Nearly all participants said they would consider the email
legitimate. They reported having no concerns about the email because
they would have recognized the company name, and because it included
details specific to their account along with the lender contact
information. When shown the full Upcoming Withdrawal Notice,
participants understood that the lender would be withdrawing $40 from
their account on a particular date. Several participants also pointed
out that the notice described an interest-only payment. Round 1 results
were similar for the Unusual Withdrawal Notice; all participants who
viewed this notice said they would open the email, and all but one
participant--who was deterred due to concerns with the appearance of
the link's URL--would click on the link leading to additional details.
The majority of participants indicated that they would want to read the
email right away, because the words ``alert'' and ``unusual'' would
catch their attention, and would make them want to determine what was
going on and why a different amount was being withdrawn.
For Round 2, the payment amount was increased because some
participants found it too low and would not directly answer questions
about what they would do if they could not afford payment. The payment
breakdown tables were also adjusted to address feedback about
distinguishing between principal, finance charges, and loan balance.
The results for both the Upcoming Payment and Unusual Payment Notices
were similar to Round 1 in that the majority of participants would open
the email, thought it was legitimate and from the lender, and
understood the purpose.
For the consumer rights notice (referred to an ``expired
authorization notice'' in the report), FMG asked questions about
participant reactions to the notice, participant understanding of why
the notice was being sent, and what participants might do in response
to the notice information. As with the payment notices, these notices
were presented as a sequence to simulate an email message.
In Round 1, participants generally understood that the lender had
tried twice to withdraw money from their account and would not be able
to make any additional attempts to withdraw payment. Most participants
expressed disappointment with themselves for being in a position where
they had two failed payments and interpreted the notice to be a
reprimand from the lender.
For Round 2, the notice was edited to clarify that the lender was
prohibited by Federal law from making additional withdrawals. For
example, the email subject line was changed from ``Willow Lending can
no longer withdraw loan payments from your account'' to ``Willow
Lending is no longer permitted to withdraw loan payments from your
account.'' Instead of simply saying ``federal law prohibits us from
trying to withdraw payment again,'' language was added to both the
email message and the full notice saying, ``In order to protect your
account, federal law prohibits us from trying to withdraw payment
again.'' More information about consumer rights and the CFPB was also
added. Some participants in Round 2 still reacted negatively to this
notice and viewed it as reflective of something they did wrong.
However, several reacted more positively to this prototype and viewed
the notice as protection.
To obtain feedback about consumer preferences on receiving notices
through text message, participants were also presented with an image of
a text of the consumer rights notice and asked how they would feel
about getting this notice by text. Overall, the majority of
participants in Round 1 (8 of 13) disliked the idea of receiving
notices via text. One of the main concerns was privacy; many mentioned
that they would be embarrassed if a text about their loan situation
displayed on their phone screen while they were in a social setting. In
Round 2, the text image was updated to match the new subject line of
the consumer rights notice. The majority (10 of the 14) of participants
had a negative reaction to the notification delivered via text message.
Despite this, the majority of participants said that they would still
open the text message and view the link.
Most participants (25 out of 28) also listened to a mock voice
message of a lender contacting the participant to obtain renewed
payment authorization after two payment attempts had failed. In Round
1, most participants reported feeling somewhat intimidated by the
voicemail message and were inclined to reauthorize payments or call
back based on what they heard. Participants had a similar reaction to
the voicemail message in Round 2.
F. The Bureau's Proposal
Overview. In June 2016, the Bureau released for public comment a
notice of proposed rulemaking on payday, vehicle title, and certain
high-cost installment loans, which were referred to as ``covered
loans.'' The proposal was published in the Federal Register in July
2016.\360\
---------------------------------------------------------------------------
\360\ 81 FR 47864 (July 22, 2016).
---------------------------------------------------------------------------
Pursuant to its authority under the Dodd-Frank Act,\361\ the Bureau
proposed to establish new regulatory provisions to create consumer
protections for certain consumer credit products. The proposed rule was
primarily grounded on the Bureau's authority to identify and prevent
unfair, deceptive, or abusive acts or practices,\362\ but also drew on
the Bureau's authority to prescribe rules and make exemptions from such
rules as is necessary or appropriate to carry out the purposes and
objectives of the Federal consumer financial laws,\363\ its authority
to facilitate supervision of certain non-bank financial service
providers (including payday lenders),\364\ and its authority to require
disclosures to convey the costs, benefits, and risks of particular
consumer financial products or services.\365\
---------------------------------------------------------------------------
\361\ Public Law 111-203, 124 Stat. 1376 (2010).
\362\ Dodd-Frank Act section 1031(b).
\363\ Dodd-Frank Act section 1022(b).
\364\ Dodd-Frank Act section 1024(b)(7).
\365\ 12 U.S.C. 5532.
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In the proposal, the Bureau stated its concern that lenders that
make covered loans have developed business models that deviate
substantially from the practices in other credit markets by failing to
assess consumers' ability to repay their loans and by engaging in
harmful practices in the course of seeking to withdraw payments from
consumers' accounts. The Bureau preliminarily concluded that there may
be a high likelihood of consumer harm in connection with these covered
loans because a substantial population of consumers struggles to repay
their loans and find themselves ending up in extended loan sequences.
In particular, these consumers who take out covered loans appear to
lack the ability to repay them and face one of three options when an
unaffordable loan payment is due: Take out additional covered loans,
default on the covered loan, or make the payment on the covered loan
and fail to meet other major financial obligations or basic living
expenses. Many lenders may seek to obtain repayment of covered loans
directly from consumers' accounts. The Bureau stated its concern that
consumers may be subject to multiple fees and other harms when lenders
make repeated unsuccessful attempts to withdraw funds from consumers'
accounts.
Scope of the Proposed Rule. The Bureau's proposal would have
applied to two types of covered loans. First, it would have applied to
short-term loans
[[Page 54513]]
that have terms of 45 days or less, including typical 14-day and 30-day
payday loans, as well as single-payment vehicle title loans that are
usually made for 30-day terms. Second, the proposal would have applied
to longer-term loans with terms of more than 45 days that have (1) a
total cost of credit that exceeds 36 percent; and (2) either a lien or
other security interest in the consumer's vehicle or a form of
``leveraged payment mechanism'' that gives the lender a right to
initiate transfers from the consumer's account or to obtain payment
through a payroll deduction or other direct access to the consumer's
paycheck. Included among covered longer-term loans was a subcategory of
loans with a balloon payment, which require the consumer to pay all of
the principal in a single payment or make at least one payment that is
more than twice as large as any other payment.
The Bureau proposed to exclude several types of consumer credit
from the scope of the proposal, including: (1) Loans extended solely to
finance the purchase of a car or other consumer good in which the good
secures the loan; (2) home mortgages and other loans secured by real
property or a dwelling if recorded or perfected; (3) credit cards; (4)
student loans; (5) non-recourse pawn loans; and (6) overdraft services
and lines of credit.
Underwriting Requirements for Covered Short-Term Loans. The
proposed rule preliminarily identified it as an unfair and abusive
practice for a lender to make a covered short-term loan without
reasonably determining that the consumer will have the ability to repay
the loan, and would have prescribed requirements to prevent the
practice. Before making a covered short-term loan, a lender would first
be required to make a reasonable determination that the consumer would
be able to make the payments on the loan and be able to meet the
consumer's other major financial obligations and basic living expenses
without needing to re-borrow over the ensuing 30 days. Specifically, a
lender would have to:
Verify the consumer's net income;
verify the consumer's debt obligations using a national
consumer report and, if available, a consumer report from a
``registered information system'' as described below;
verify the consumer's housing costs or use a reliable
method of estimating a consumer's housing expense based on the
housing expenses of similarly situated consumers;
estimate a reasonable amount of basic living expenses for
the consumer--expenditures (other than debt obligations and housing
costs) necessary for a consumer to maintain the consumer's health,
welfare, and ability to produce income;
project the amount and timing of the consumer's net income,
debt obligations, and housing costs for a period of time based on
the term of the loan; and
determine the consumer's ability to repay the loan and
continue paying other obligations and basic living expenses for a
period of thirty days thereafter based on the lender's projections
of the consumer's income, debt obligations, and housing costs and
estimate of basic living expenses for the consumer.
Under certain circumstances, a lender would be required to make
further assumptions or presumptions when evaluating a consumer's
ability to repay a covered short-term loan. The proposal specified
certain assumptions for determining the consumer's ability to repay a
line of credit that is a covered short-term loan. In addition, if a
consumer were to seek a covered short-term loan within 30 days of a
covered short-term or longer-term balloon-payment loan, a lender
generally would be required to presume that the consumer is not able to
afford the new loan. A lender could overcome the presumption of
unaffordability for a new covered short-term loan only if it could
document a sufficient improvement in the consumer's financial capacity.
Furthermore, a lender would have been prohibited for a period of 30
days from making a covered short-term loan to a consumer who has
already taken out three covered short-term loans within 30 days of each
other.
Under the proposal, a lender would also have been allowed to make a
covered short-term loan without complying with all the underwriting
criteria just specified, as long as the conditionally exempt loan
satisfied certain prescribed terms to prevent and mitigate the risks
and harms of unaffordable loans leading to extended loan sequences, and
the lender confirmed that the consumer met specified borrowing history
conditions and provided required disclosures to the consumer. Among
other conditions, a lender would have been allowed to make up to three
covered short-term loans in short succession, provided that the first
loan had a principal amount no larger than $500, the second loan had a
principal amount at least one-third smaller than the principal amount
on the first loan, and the third loan had a principal amount at least
two-thirds smaller than the principal amount on the first loan. In
addition, a lender would not have been allowed to make a covered short-
term loan under the alternative requirements if it would result in the
consumer having more than six covered short-term loans during a
consecutive 12-month period or being in debt for more than 90 days on
covered short-term loans during a consecutive 12-month period. Under
the proposal, a lender would not be permitted to take vehicle security
in connection with these loans.
Underwriting Requirements for Covered Longer-Term Loans. The
proposed rule would have identified it as an unfair and abusive
practice for a lender to make certain covered longer-term loans without
reasonably determining that the consumer will have the ability to repay
the loan. The coverage would have been limited to high-cost loans of
this type and for which the lender took a leveraged payment mechanism,
including vehicle security. The proposed rule would have prescribed
requirements to prevent the practice for these loans, subject to
certain exemptions and conditions. Before making a covered longer-term
loan, a lender would have had to make a reasonable determination that
the consumer has the ability to make all required payments as
scheduled. This determination was to be made by focusing on the month
in which the payments under the loan would be the highest. The proposed
ability-to-repay requirements for covered longer-term loans closely
tracked the proposed requirements for covered short-term loans with an
added requirement that the lender, in assessing the consumer's ability
to repay a longer-term loan, must reasonably account for the
possibility of volatility in the consumer's income, obligations, or
basic living expenses during the term of the loan.
The Bureau has determined not to finalize this aspect of the
proposal at this time (other than for covered longer-term balloon-
payment loans), and will take any appropriate further action on this
subject after the issuance of this final rule.
Payments Practices Related to Small-Dollar Loans. The proposed rule
would have identified it as an unfair and abusive practice for a lender
to attempt to withdraw payment from a consumer's account in connection
with a covered loan after the lender's second consecutive attempt to
withdraw payment from the account has failed due to a lack of
sufficient funds, unless the lender obtains from the consumer a new and
specific authorization to make further withdrawals from the account.
This prohibition on further withdrawal attempts would have applied
whether the two failed attempts are initiated through a single payment
channel or different channels, such as the
[[Page 54514]]
automated clearinghouse system and the check network. The proposed rule
would have required that lenders provide notice to consumers when the
prohibition has been triggered and follow certain procedures in
obtaining new authorizations.
In addition to the requirements related to the prohibition on
further payment withdrawal attempts, the proposed rule would require a
lender to provide a written notice at least three business days before
each attempt to withdraw payment for a covered loan from a consumer's
checking, savings, or prepaid account. The notice would have contained
key information about the upcoming payment attempt, and, if applicable,
alerted the consumer to unusual payment attempts. A lender could
provide electronic notices as long as the consumer consented to
electronic communications.
Additional Requirements. The Bureau also proposed to require
lenders to furnish to provisionally registered and registered
information systems certain information concerning covered loans at
loan consummation, any updates to that information over the life of the
loan, and certain information when the loan ceases to be outstanding.
To be eligible to become a provisionally registered or registered
information system, an entity would have to satisfy the eligibility
criteria prescribed in the proposed rule. The Bureau proposed a
sequential process to allow information systems to be registered and
lenders to be ready to furnish at the time the furnishing obligation in
the proposed rule would take effect. For most covered loans, registered
information systems would provide a reasonably comprehensive record of
a consumer's recent and current borrowing. Before making most covered
loans, a lender would have been required to obtain and consider a
consumer report from a registered information system.
The proposal would require a lender to establish and follow a
compliance program and retain certain records, which included
developing and following written policies and procedures that are
reasonably designed to ensure compliance with the proposed
requirements. A lender would also be required to retain the loan
agreement and documentation obtained for a covered loan, and electronic
records in tabular format regarding origination calculations and
determinations for a covered loan, for a consumer who qualifies for an
exception to or overcomes a presumption of unaffordability for a
covered loan, and regarding loan type, terms, payment history, and loan
performance. The proposed rule also included an anti-evasion clause and
a severability clause.
Effective Date. The Bureau proposed that, in general, the final
rule would become effective 15 months after publication of the final
rule in the Federal Register. It also proposed that certain provisions
necessary to implement the consumer reporting components of the
proposal would become effective 60 days after publication of the final
rule in the Federal Register to facilitate an orderly implementation
process.
G. Public Comments on the Proposed Rule
Overview. Reflecting the broad public interest in this subject, the
Bureau received more than 1.4 million comments on the proposed
rulemaking. This is the largest comment volume associated with any
rulemaking in the Bureau's history. Comments were received from
consumers and consumer advocacy groups, national and regional industry
trade associations, industry participants, banks, credit unions,
nonpartisan research and advocacy organizations, members of Congress,
program managers, payment networks, payment processors, fintech
companies, Tribal leaders, faith leaders and coalitions of faith
leaders, and State and local government officials and agencies. The
Bureau received well over 1 million comments from individuals regarding
the proposed rule, often describing their own circumstances or those of
others known to them in order to illustrate their views, including
their perceptions of how the proposed rule might affect their personal
financial situations. Some individuals submitted multiple separate
comments.
The Bureau has not attempted to tabulate precise results for how to
tally the comments on both sides of the rule. Nor would it be easy to
do so in any practical way, and of course some of the comments did not
appear to take a side in advocating for or against the rule, though
only a small number would fall in this category. Nonetheless, it was
possible to achieve a rough approximation that broke down the universe
of comments in this manner and the Bureau made some effort to do so. As
an approximation, of the total comments submitted, more than 300,000
comments generally approved of the Bureau's proposal or suggested that
the Bureau should adopt a rule that is more restrictive of these kinds
of loans in some way or other. Over one million comments generally
opposed the proposed rule and took the view that its provisions would
be too restrictive of these kinds of loans.
The Bureau received numerous submissions generated through mass
mail campaigns and other organized efforts, including signatures on a
petition or multiple letters, postcards, emails, or web comments. These
campaigns were conducted by opponents and supporters of the proposed
rule. The Bureau also received stand-alone comments submitted by a
single commenter, individual, or organization.
Of the approximately 1.4 million comments submitted, a substantial
majority were generated by mass-mail campaigns or other organized
efforts. In many cases, these submissions contained the same or similar
wording. Of those 1.4 million comments, approximately 300,000 were
handwritten and often had either the same or similar content or
advanced substantially similar themes and arguments. These comments
were posted as attachments to the electronic docket at
www.regulations.gov.
For many of the comments that were submitted as part of mass mail
campaigns or other organized efforts, a sample comment was posted to
the electronic docket at www.regulations.gov, with the total number of
such comments received reflected in the docket entries. Accordingly,
these comments, whose content is represented on the electronic docket
via the sample comment, were not individually posted to the electronic
docket at www.regulations.gov.
In addition, the 1.4 million comments included more than 100,000
signatures or comments contained on petitions, with some petitions
containing tens of thousands of signatures. These petitions were posted
as attachments to the electronic docket at www.regulations.gov.
Whenever relevant to the rulemaking, these submissions and comments
were considered in the development of the final rule.
Form of Submission. As detailed in the proposed rule,\366\ the
Bureau accepted comments through four methods: Email, electronic,\367\
regular mail, and hand delivery or courier (including delivery services
like FedEx). Approximately 800,000 comments, or roughly 60% of the
total, were paper comments received by mail or couriers, while
approximately 600,000 (or about 40%) were submitted electronically,
either directly to the electronic docket at www.regulations.gov or by
email. The electronic submissions included
[[Page 54515]]
approximately 100,000 scanned paper comments sent as PDF attachments to
thousands of emails.
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\366\ See 81 FR 47863 (July 22, 2016).
\367\ Electronic submissions were made via http://www.regulations.gov.
---------------------------------------------------------------------------
In addition, the Bureau also processed and considered comments that
were received after the comment period had closed, as well as more than
50 ex parte submissions. The ex parte materials were generally
presentations and summary memoranda relevant to the rulemaking that
were provided to Bureau personnel in the normal course of their work,
but outside the procedures for submitting written comments to the
rulemaking docket referenced above. They were considered in accordance
with the Bureau's established rulemaking procedures governing ex parte
materials.
Materials on the record, including ex parte submissions and
summaries of ex parte meetings and telephone conferences, are publicly
available at www.regulations.gov. Other relevant information is
discussed below as appropriate. In the end, the Bureau considered all
of the comments it received about the proposed rule prior to finalizing
the rule.
Stand-Alone Comments. Tens of thousands appear to have been
``stand-alone'' comments--comments that did not appear to have been
submitted as part of a mass mail campaign or other organized effort.
Nevertheless, many of these stand-alone comments contained language and
phrasing that were highly similar to other comments. In addition, pre-
printed postcards or other form comments with identical language
submitted as part of an organized effort sometimes also included
additional notations, such as ``we need this product'' or ``don't take
this away.'' Some comment submissions also attached material, including
copies of news articles, loan applications, loan advertisements, and
even personal financial documents.
Many of the comments from lenders, trade associations, consumer
advocacy groups, research and advocacy organizations, and government
officials included specific discussion about particular provisions of
the proposed rule, and the substantive issues raised in those comments
are discussed in connection with those provisions. However, as noted
above, a high volume of comments were received from individuals, rather
than from such entities (or their official representatives). Many of
these individual comments focused on personal experiences rather than
legal or financial analysis of the details of the provisions of the
proposed rule. The discussion below summarizes what the commenters--
more than a million in total--had to say to the Bureau about the
proposed rule. The comments can be broken into three general
categories: (1) Individual comments made about the rule that were more
factual in nature regarding the uses and benefits of covered short-term
loans; (2) individual comments stating or explaining the grounds on
which the commenters opposed the rule, both generally and in more
specific respects; and (3) individual comments stating or explaining
the grounds on which the commenters supported the rule, again both
generally and in more specific respects. The individual comments as so
categorized are set forth below, and they have helped inform the
Bureau's consideration of the issues involved in deciding whether and
how to finalize various aspects of the proposed rule.
Comments Not Specifically Supporting or Opposing the Rule. Many
commenters noted, as a factual matter, the uses they make of covered
short-term loans. These uses include: Rent, childcare, food, vacation,
school supplies, car payments, power/utility bills, cell phone bills,
credit card bills, groceries, medical bills, insurance premiums,
student educational costs, daily living costs, gaps between paychecks,
money to send back to a home country, necessary credit, to ``make ends
meet,'' ``hard times,'' and ``bills.'' In considering these types of
comments, the Bureau generally interpreted them as critical of the rule
for going too far to regulate covered short-term loans.
Some individual commenters talked about how they would cover
various costs and expenses if the rule caused previously available
payday loans to become less available or unavailable. Among the
alternatives they cited were credit cards, borrowing from family or
friends, incurring NSF or overdraft charges, or seeking bank loans.
The comments included many suggestions about the consumer financial
marketplace that reached beyond the scope of the proposed rule. Some of
these comments suggested that the Bureau should regulate interest rates
or limit the amounts that could be charged for such loans by imposing a
nationwide usury cap.
Comments Opposing the Proposed Rule. The nature of criticism varied
substantially. Some commenters were broadly opposed to the rule without
further explanation, while others objected to the government's
participation in regulating the activity affected by the rule. Some
objected to the means by which the rule was being considered or enacted
while others objected to various substantive aspects of the rule. Some
commenters combined these various types of criticisms. Unexplained
opposition included some very brief comments like ``No'' or ``Are you
crazy?''
Others based their opposition on general anti-government
sentiments. Some objected simply to the fact of the rulemaking. These
objections included comments like ``I'm against Washington stopping me
from getting a loan.'' More specific comments stated that the
government should not be in the business of limiting how much people
can borrow and that consumers can manage their own funds. Others
contended that similar regulatory efforts in other countries had been
unsuccessful. Some were opposed on the ground that the proposed rule
was too complicated, with a few objecting simply to its length and
complexity or its reliance on dated evidence.
A considerable number of commenters, including some State and local
governmental officials, opined that existing State laws and regulations
adequately addressed any regulatory need in this area. Some suggested
that any regulation of covered short-term loans should be left to the
States or that the Bureau should ``work with state governments.'' Some
suggested that the Bureau had not adequately consulted with State
officials before proposing the rule. And though the specific intent of
the comments was not always made clear, some suggested that, either in
promulgating or implementing the rule, the Bureau should consult State
law and compare different rates and requirements in different States.
Some comments were implicitly critical of the proposal, even if not
expressly so, when they proposed alternative approaches like the
suggestion that the Bureau ``should follow the Florida Model.''
Many comments were from individuals who indicated they were users
of payday loans, were able to reliably pay them back, and objected to
new restrictions. Some of those comments came with notations that they
had been specifically asked by loan providers to submit such comments.
Many opposed the rule in whole or in part. Some supported some parts of
the rule and opposed other parts.
Hundreds of thousands of individuals submitted comments generally
supporting the availability of small-dollar loans that would have been
covered by the proposed rule. Many but not all were submitted by
consumers of these loans, who mentioned their need for access to small
loans to address financial issues they faced with paying bills or
dealing with unexpected expenses. Certain consumers stated that
[[Page 54516]]
they could not access other forms of credit and favored the convenience
and simplicity of these loans. Many expressed their opposition to caps
or limits on the number of times they would be able to borrow money on
such loans.
As noted above, many commenters simply indicated that they like and
use payday loans. The Bureau generally understood these comments as
expressions of concerns that the proposed rule might or would restrict
their access to covered loans. In contending for greater availability
of such loans, commenters specifically noted their use of payday loans
for a substantial range of financial needs and reasons. They explained
that these loans are used to cover, among other financial needs,
overdraft fees, the last piece of tuition rather than losing
enrollment, a portion of rent so as not to incur a rent penalty,
various bills so as to avoid incurring late fees, utilities so they
would not be turned off, college student necessities not covered by
student loans, and funds to cover a gap in available resources before
the next paycheck. Several commenters specifically noted that payday
loan costs were cheaper than bank overdraft fees that would otherwise
be incurred. Some indicated they had no alternative to payday products
because they lacked credit for credit cards and could not borrow from
family or friends or relatives.
Some commenters focused on the favorable environment they
experienced in using payday loans, often in juxtaposition to their less
welcoming experience with banks. A number of loan providers commented
that low-income, non-English speaking immigrants are treated well by
those who make these loans to them. Various borrowers related that they
have been treated well at payday storefronts and that employees are
helpful with their loan applications.
Others indicated that local communities support local payday
lenders and the loans they provide and these lenders in turn are
leading small businesspersons in their communities. Others noted that
payday lenders often provide other services like check cashing, bill
paying, and loading of pre-paid cards, sometimes with no fees. Still
others echoed that payday lenders do more than other lenders to help
their individual customers, and are all about ``finding a solution''
for the customer. Some commented that payday lenders do not pressure
customers to take out loans whereas banks do.
One commenter noted that even with substantial income, payday loans
still provided convenience due to a favorable ongoing relationship with
the lender. Others commented more generally that the loans are
convenient because they require no application and no credit check,
they are easy to get and easy to renew, and they are provided at
locations where it is convenient to get a check cashed. One expressly
noted that despite the recognized expense of such loans, their
availability and convenience made them worth it.
Various commenters noted that small loans were difficult or
impossible to obtain from banks. Others objected that banks require too
much personal information when lending funds, like credit checks and
references. Some noted that they had a poor credit history or
insufficient credit history and therefore could not get loans from
banks or credit cards. Some indicated that small-dollar loans may be
necessary for assuring available cash flow at some small businesses.
These commenters indicated that payday loans are often critical when
bank loans have been denied, the business is awaiting customer
payments, and funds are needed to make payroll. Some said that
alternatives were unsafe or unable to meet their needs. Others claimed
that pawn shops have a bad reputation, that loan sharks might be an
available option but for the possible ``outcome,'' and foreign and
``underground'' lenders were not viable options.
Some merely signed their name to the contents of printed text.
Others sometimes added related messages in filling out such forms.
Other forms provided space for and encouraged individualized messages
and explanations rather than simply presenting uniform prepared text.
Some comments opposing the proposed rule were submitted by lender
employees, and those comments also ranged fairly widely in the extent
of their individualized content; some referred to their fears of losing
their jobs if the proposed rule were to become effective in its current
form.
Some of these commenters indicated that payday loan proceeds were
used to pay bills for which non-payment would result in penalties or
late fees or suspension of vital services; many of them expressed, or
seemed implicitly to suggest, concern that the rule would restrict
their access to funds for meeting these needs.
Some commenters discussed general or specific concerns about their
understanding of the effect the rule would have without expressly
indicating support for or opposition to the rule, though a fair reading
of their comments showed them to be expressing concern that the
proposed rule would, or might restrict their access to covered loans
and thus appeared to be critical of the proposed rule. For example,
specific concerns about the perceived negative effects of the rule
included its potential effect on the cost of covered loans, including
fees and interest rates, restrictions on product availability because
of re-borrowing limits, and lack of clarity about what products would
replace those made unavailable by the rule. A number of comments
expressed concern or confusion about the alternative lending options
they would have following the enactment of the rule, and whether these
alternatives would be acceptable options.
Some had very specific concerns about the potential effects of the
rule, including a potential lack of liquidity in the market, and
expressed a general concern that the rule might lead to increased
consumer fraud. Others were concerned about the security of the
personal financial information they would have to provide to get a
loan. Some expressed concern that the new requirements would lead to
loan denials that would hurt their credit scores. Many employees of the
lenders affected by the proposed rule were concerned about their
continued employment status if the rule were to be adopted.
Some commenters proposed exclusions from the effects of the rule,
either directly or indirectly, indicating, for example, the auto title
or credit union loans should be unaffected by the final rule. It was
also suggested that there should be a safe harbor if lenders do their
own underwriting or engage in income verification. Others suggested
that various types of lenders should be excluded from the rule. These
included credit unions, on the ground that they make ``responsible''
loans that use the ability to repay as an eligibility screen already,
and ``flex loans'' because they are like lines of credit. At least one
commenter suggested that the Bureau should exempt FDIC-regulated banks
from any coverage under the rule.
In addition to more general criticisms of the rule, individual
commenters also offered objections and concerns about the substantive
provisions of the proposed rule. Some were general, like the suggestion
that repayment should be more flexible. Others were more focused on
specific features of the rule, including claims that the proposed rule
would violate existing laws in unspecified ways.
Many commenters were concerned about the burdens and length of the
``30-day waiting period'' or cooling-off period, noting that they would
be
[[Page 54517]]
unable to access such loans during those periods even if they had an
urgent need for funds. Others similarly commented that the various
requirements and restrictions would result in loan denials and impede
their ability to access needed funds easily and quickly. Many
specifically noted the need for funds for unexpected emergencies, like
car repairs. Some simply declared these limits ``unwarranted,'' saying
that they understood the risks associated with these loans and
appreciated their availability nonetheless.
Some commenters focused on the procedural difficulties of obtaining
covered loans under the rule. They objected to the length and detail of
the loan application process when funds were needed quickly and easily
to cope with emergencies, with car repairs cited frequently. They
stated that the process for getting a small-dollar loan should be short
and easy and that otherwise it was not worth the effort. Others felt
that the proposed rule would require them to disclose too much
information about their income and expenses, which would invade their
privacy. Some stated that credit checks should not be required for
small-dollar loans. Still others expressed concern that the government
should not be able to demand such information or require that borrowers
provide it.
A few commenters noted that it would be hard for lenders to comply
with the rule, which would impose additional compliance costs. A few
specifically suggested that the Bureau should consider having lenders
use the State databases that lenders must currently use rather than the
approach laid out in the proposed rule.
Finally, though the vast majority of critical comments opposed the
proposed rule and the restrictions it would impose, a substantial
number of individual commenters were critical because they did not
believe the rule went far enough or imposed enough restrictions. These
included views that allowing consumers to receive as many as six loans
a year or more would sink them into further debt, that ``big banks''
would benefit from the rule, or that the rule should ``go after big
banks'' rather than smaller payday lenders. Many critics of the
proposed rule stated that it should more directly impose a cap on
interest rates, as many States have done and as has proved effective in
limiting the making of these kinds of loans. Others suggested that the
proposed rule could have ``unintended consequences,'' though without
clearly explaining what those consequences might be, and that more
should be done to prevent them.
Comments Supporting the Proposed Rule. Many individuals submitted
comments that either supported the thrust of the proposed rule or
argued that it needed to be strengthened in particular ways to
accomplish its purposes. Some were submitted by consumers of these
loans, and others were submitted through groups such as nonprofit
organizations or coalitions of faith leaders who organized the
presentation of their individual stories. Many were submitted as part
of campaigns organized by consumer advocacy groups and a variety of
nonprofit organizations concerned about the dangers they perceived to
flow from these types of loans. These comments tended to dwell on the
risks and financial harms that many consumers incur from small-dollar
loans. These accounts consistently centered on those borrowers who find
themselves ending up in extended loan sequences and bearing the
negative collateral consequences of re-borrowing, delinquency, and
default, especially the inability to keep up with their other major
financial obligations and the loss of control over their budgetary
decisions. Many of these commenters cited the special risks posed by
loans that are extended without a reasonable determination of the
consumer's ability to repay the loan without re-borrowing. Some went
further and urged that such loans be outlawed altogether based on their
predatory nature and the extremely high costs to consumers of most of
these loan products.
Some of these comments described their first-hand experiences with
extended loan sequences and the financial harms that had resulted
either to themselves or to friends or family members. Some colored
their accounts with considerable anger and frustration about these
experiences, how they were treated, and the effects that these loans
had in undermining or ruining their financial situations.
Many comments were generated or collected by faith leaders and
faith groups, with individuals often presenting their views in terms of
moral considerations, as well as financial effects. Some of these
comments cited scripture and offered religiously based objections to
covered loan activity, with particular opposition to the high interest
rates associated with covered loans. Others, without necessarily
grounding their concerns in a specific religious orientation, noted
that current covered loans harm certain financially vulnerable
populations, including the elderly, low-income consumers, and single
mothers. They also recounted efforts they and others had made to
develop so-called ``rescue'' products to extricate members of their
congregations from the cumulative harms of extended loan sequences.
Some employees of lenders, especially credit unions, offered views in
favor of the proposed rule based on what they had seen of the negative
experiences that their customers had encountered with these types of
loans.
Many commenters who favored the proposed rule dwelled on their
concerns about the risks posed by the types of covered loans that are
currently available to consumers. Overall, these comments tended to
focus on the risks and financial harms that many consumers incur when
using short-term small-dollar loans. They expressed concerns about
borrowers who find themselves in extended loan sequences and bearing
increasingly negative effects as a result. Commenters often stressed
that these situations left consumers unable to keep up with other major
financial obligations and that they lost control over their personal
budgetary decisions.
Like the favorable comments regarding current payday loan
activity--which the Bureau understood to be critical of the proposed
rule--critics of current covered loan practices did not always specify
their views about the proposed rule. Nonetheless, absent specific
indications to the contrary, comments that were critical of current
payday lending activity were understood to be supportive of the
proposed rule as an effective potential response to those concerns.
Some comments simply indicated a general policy view that there was
a need to ``stop the debt trap'' or that rollover loans were ``out of
hand.'' Others objected to the perception that covered loans are
``geared to people with fixed incomes.'' Many opposed what they viewed
as the common situation that these loans were unaffordable and put
people in a position in which they are unable to pay off the principal
and must roll over the loans to avoid default.
Some comments focused on the specific consumer protective nature of
the proposed rule, indicating that the rule was needed because current
lenders do not care about people's ability to repay the loans, knowing
that they can profit from continuing re-borrowing. A handful of
comments from current or former employees of such lenders said they
supported the proposed rule because of the negative experiences they
had seen their customers encounter with these types of loans. One
commenter opined that even NSF fees were less damaging to consumers
than
[[Page 54518]]
the cumulative effects of these loans, with the fees they imposed and
frequency with which they landed many consumers in continued debt
traps.
Many others commenting on these types of loans indicated that their
``debt trap'' nature was reinforced in the context of vehicle loans,
since repossession of a vehicle could dramatically deepen the downward
debt spiral. Still, one commenter argued that even the repossession of
the borrower's vehicle might not be as bad as the continuing
predicament of self-perpetuating loan sequences with their escalating
fees and loan balances.
Some indicated that other loans were better alternatives to payday
loans, sometimes citing PAL loans in this regard. And some were
concerned about the character of the lenders associated with covered
loans, with one comment relating that a recent payday lender had been
indicted for illegal conduct associated with payday lending.
Some individual commenters indicated that they were representatives
of or otherwise affiliated with national consumer organizations, and
other national organizations, and were supportive of the rule. Some
commenters noted that they were current payday loan borrowers working
to pay off their loans and were supportive of the rule. Others
supported the rule based on their own generally negative personal
experiences with covered loans, with some specifying that they only
supported the rule as applied to lenders that made loans without
determining whether borrowers had the ability to repay them.
Many individual commenters indicated support for time limits on
these loans and the proposed ``cooling-off period'' because they
believed it would ultimately help consumers better manage their funds.
Some thought that the rule would have the effect of lowering interest
rates.
Some individual commenters who identified themselves as State
officials, including individual legislators, commented that the rule
would favorably supplement existing statutes that dealt with covered
loans in their respective States. Individuals affiliated with some
industry groups indicated their general support for the rule, but
expressed concern that, in unexplained ways, the rule may go ``too
far.'' In contrast, others recommended that the standards in the
proposed rule should be applied in the context of all consumer lending
rather than just in this market.
The Bureau's Consideration of Individual Comments. Although the
specific treatment of discrete issues is addressed more fully in part V
below, which presents the section-by-section analysis explaining the
components of the final rule, it may be useful here to provide some of
the uses that the Bureau made of the individual comments. First, it is
a notable and commendable fact that over a million individual
commenters would take the time and effort to respond to the Bureau with
their thoughts and reactions, both pro and con, to this proposed rule.
Public comments are not just an obligatory part of the rulemaking
process required by the Administrative Procedure Act, they are welcome
as a means of providing insight and perspective in fashioning such
rules. Perhaps needless to say, that inviting solicitation was put to
the test here.
As noted earlier, many of the individual comments turned out to be
duplicative and redundant of one another. In part, that was because
both the industry groups, on the one side, and the consumer and
community groups, on the other side, employed campaigns to solicit
large numbers of individual comments. The Bureau does not view any of
those efforts as improper or illegitimate, and it has not discounted
any comments on their merits as a result of their apparent origins. It
did create challenges, however, for figuring out how to manage this
large volume of comments--how to receive and process them, how to
handle and organize them, and how to review and consider them. In the
end, the Bureau proceeded as laid out in its earlier discussion in this
section, and though the process took many months and considerable
effort, it was eventually completed in a satisfactory way.
The Bureau also does not view the repetition and redundancy among
many of the comments as being immaterial. The Bureau considered not
only what views the public has, but how intensely they are felt and
maintained. The Bureau has frequently noted, in its handling of
consumer complaints, that when the same concern arises more frequently,
it may reflect an emerging pattern and be worthy of more attention than
if the same concern arises only once or twice and thus appears to
reflect a more isolated set of circumstances. The same may be true
here, with the caveat that, depending on the circumstances, comments
generated primarily through campaigns may or may not truly reflect any
widespread or deeply felt convictions, depending on the level of the
individual's actual involvement.
Having said that, the processes that Congress has created for
Federal administrative rulemaking, both in the Administrative Procedure
Act generally and here in the Dodd-Frank Act in particular, were not
designed or intended to be governed by some rough assessment of
majority vote or even majority sentiment. While rough estimates of pro
and con submissions are provided above, the Bureau has simply sought to
understand the consumer experiences reported in these comments and
address the substance of these comments on their merits.
As a general matter, the individual comments have helped inform the
Bureau's understanding of factual matters surrounding the circumstances
and use of covered loans. In the sections on Market Concerns--
Underwriting and Market Concerns--Payments, they helped add depth and
content to the Bureau's description of issues such as borrower
characteristics, the circumstances of borrowing, their expectations of
and experience with extended loan sequences, including harms they have
suffered as a consequence of delinquency, default, and loss of control
over budgeting. Many of these concerns were already known at the outset
of the rule-writing process, as a result of extensive outreach and
feedback the Bureau has received on the subject, as well as through the
research that the Bureau and others have performed on millions of
covered loans, all of which is discussed above.
Nonetheless, the Bureau's review of large numbers of individual
comments has reinforced certain points and prompted further
consideration of others. For example, many individuals stated great
concern that the proposed rule would make the underwriting process for
small-dollar loans too burdensome and complex. They commented
positively on the speed and convenience of obtaining such loans, and
were concerned that the process described in the proposed rule would
lead to fewer such loans being offered or made. This has influenced the
Bureau's consideration of the details of the underwriting process
addressed in Sec. 1041.5 of the final rule and contributed to the
Bureau's decision to modify various aspects of that process. At the
same time, many other individual commenters had much to say about the
perils of extended loan sequences and how they had harmed either
themselves or others, which helped underscore the need for the Bureau
to finalize a framework that would be sufficiently protective of
consumers. In particular, many commenters supported the general
requirement that lenders must reasonably assess the borrower's ability
to repay before making a loan according
[[Page 54519]]
to specific underwriting criteria, and that limited exceptions to those
criteria would be made only where other conditions applied to ensure
that lenders would not end up in extended loan sequences. There are
also many other places in the Bureau's discussion and explanation of
the final rule where individual comments played a role in the Bureau's
analysis.
Further Inter-Agency Consultation. In addition to the inter-agency
consultation that the Bureau engaged in prior to issuing the notice of
proposed rulemaking, pursuant to section 1022(b)(2) of the Dodd-Frank
Act, the Bureau has consulted further with the appropriate prudential
regulators and the FTC during the comment process. As a result of these
consultations, the Bureau has made a number of changes to the rule and
has provided additional explanation for various determinations it has
made about the provisions of the rule, which have been discussed with
the other regulators and agencies during the consultation process.
Ex Parte Submissions. In addition, the Bureau considered the
comments it received after the comment period had closed, as well as
other input from more than 50 ex parte submissions, meetings, and
telephone conferences.\368\ All such materials in the record are
available to the public at http://www.regulations.gov. Relevant
information received is discussed below in the section-by-section
analysis and subsequent parts of this notice, as applicable. The Bureau
considered all the comments it received about the proposal, made
certain modifications, and is adopting the final rule as described more
fully in part V below.
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\368\ See also Bureau of Consumer Fin. Prot., ``CFPB Bulletin
11-3, CFPB Policy on Ex Parte Presentations in Rulemaking
Proceedings,'' (Aug. 16, 2011), available at http://files.consumerfinance.gov/f/2011/08/Bulletin_20110819_ExPartePresentationsRulemakingProceedings.pdf,
updated and revised, Policy on Ex Parte Presentations in Rulemaking
Proceedings, 82 FR 18687 (Apr. 21, 2017).
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IV. Legal Authority
The Bureau is issuing this final rule pursuant to its authority
under the Dodd-Frank Act. The rule relies on rulemaking and other
authorities specifically granted to the Bureau by the Dodd-Frank Act,
as discussed below.
A. Section 1031 of the Dodd-Frank Act
Section 1031(b)--The Bureau's Authority To Identify and Prevent UDAAPs
Section 1031(b) of the Dodd-Frank Act provides the Bureau with
authority to prescribe rules to identify and prevent unfair, deceptive,
or abusive acts or practices, or UDAAPs. Specifically, section 1031(b)
of the Act authorizes the Bureau to prescribe rules ``applicable to a
covered person or service provider identifying as unlawful unfair,
deceptive, or abusive acts or practices in connection with any
transaction with a consumer for a consumer financial product or
service, or the offering of a consumer financial product or service.''
Section 1031(b) of the Act further provides that, ``Rules under this
section may include requirements for the purpose of preventing such
acts or practice.''
There are notable similarities between the Dodd-Frank Act and the
Federal Trade Commission Act (FTC Act) provisions relating to unfair
and deceptive acts or practices. Accordingly, these FTC Act provisions,
and case law and Federal agency rulemakings relying on them, inform the
scope and meaning of the Bureau's rulemaking authority with respect to
unfair and deceptive acts or practices under section 1031(b) of the
Dodd-Frank Act.\369\
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\369\ Section 18 of the FTC Act similarly authorizes the FTC to
prescribe ``rules which define with specificity acts or practices
which are unfair or deceptive acts or practices in or affecting
commerce'' and provides that such rules ``may include requirements
prescribed for the purpose of preventing such acts or practices.''
15 U.S.C. 57a(a)(1)(B). As discussed below, the Dodd-Frank Act,
unlike the FTC Act, also permits the Bureau to prescribe rules
identifying and preventing ``abusive'' acts or practices.
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Courts evaluating exercise of agency rulemaking authority under the
unfairness and deception standards of the FTC Act have held that there
must be a ``reasonable relation'' between the act or practice
identified as unlawful and the remedy chosen by the agency.\370\ The
Bureau agrees with this approach and therefore maintains it is
reasonable to interpret section 1031(b) of the Dodd-Frank Act to permit
the imposition of requirements to prevent acts or practices that are
identified by the Bureau as unfair or deceptive, as long as the
preventive requirements being imposed by the Bureau have a reasonable
relation to the identified acts or practices.
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\370\ See Am. Fin. Servs. Ass'n v. FTC, 767 F.2d 957, 988 (D.C.
Cir. 1985) (AFSA) (holding that the FTC ``has wide latitude for
judgment and the courts will not interfere except where the remedy
selected has no reasonable relation to the unlawful practices found
to exist'' (citing Jacob Siegel Co. v. FTC, 327 U.S. 608, 612-13
(1946)).
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The Bureau likewise maintains that it is reasonable to interpret
section 1031(b) of the Dodd-Frank Act to provide that same degree of
discretion to the Bureau with respect to the imposition of requirements
to prevent acts or practices that are identified by the Bureau as
abusive. Throughout this rulemaking process, the Bureau has relied on
and applied this interpretation in formulating and designing
requirements to prevent acts or practices identified as unfair or
abusive.
Section 1031(c)--Unfair Acts or Practices
Section 1031(c)(1) of the Dodd-Frank Act provides that the Bureau
shall have no authority under section 1031 to declare an act or
practice in connection with a transaction with a consumer for a
consumer financial product or service, or the offering of a consumer
financial product or service, to be unlawful on the grounds that such
act or practice is unfair, unless the Bureau ``has a reasonable basis''
to conclude that: The act or practice causes or is likely to cause
substantial injury to consumers which is not reasonably avoidable by
consumers; and such substantial injury is not outweighed by
countervailing benefits to consumers or to competition.\371\ Section
1031(c)(2) of the Act provides that, ``[i]n determining whether an act
or practice is unfair, the Bureau may consider established public
policies as evidence to be considered with all other evidence. Such
public policy considerations may not serve as a primary basis for such
determination.'' \372\
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\371\ 12 U.S.C. 5531(c)(1).
\372\ 12 U.S.C. 5531(c)(2).
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In sum, the unfairness standard under section 1031(c) of the Dodd-
Frank Act requires primary consideration of three elements: The
presence of a substantial injury, the absence of consumers' ability to
reasonably avoid the injury, and the countervailing benefits to
consumers or to competition associated with the act or practice. The
Dodd-Frank Act also permits secondary consideration of public policy
objectives.
As noted above, the unfairness provisions of the Dodd-Frank Act are
similar to the unfairness standard under the FTC Act.\373\ That
standard was developed, in part, when in 1994, Section 5(n) of the FTC
Act was amended to incorporate the principles set forth in the FTC's
December 17, 1980 ``Commission Statement of Policy on the
[[Page 54520]]
Scope of Consumer Unfairness Jurisdiction'' (the FTC Policy Statement
on Unfairness).\374\
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\373\ Section 5(n) of the FTC Act, as amended in 1994, provides
that, the FTC shall have no authority to declare unlawful an act or
practice on the grounds that such act or practice is unfair unless
the act or practice causes or is likely to cause substantial injury
to consumers which is not reasonably avoidable by consumers
themselves and not outweighed by countervailing benefits to
consumers or to competition. In determining whether an act or
practice is unfair, the FTC may consider established public policies
as evidence to be considered with all other evidence. Such public
policy considerations may not serve as a primary basis for such
determination. 15 U.S.C. 45(n).
\374\ Letter from the FTC to Hon. Wendell Ford and Hon. John
Danforth, Committee on Commerce, Science and Transportation, United
States Senate, Commission Statement of Policy on the Scope of
Consumer Unfairness Jurisdiction (December 17, 1980), reprinted in
In re Int'l Harvester Co., 104 F.T.C. 949, 1070 (1984) (Int'l
Harvester). See also S. Rept. 103-130, at 12-13 (1993) (legislative
history to FTC Act amendments indicating congressional intent to
codify the principles of the FTC Policy Statement on Unfairness).
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Due to the similarities between unfairness provisions in the Dodd-
Frank and FTC Acts, the scope and meaning of the Bureau's authority
under section 1031(b) of the Dodd-Frank Act to issue rules that
identify and prevent acts or practices that the Bureau determines are
unfair pursuant to section 1031(c) of the Dodd-Frank Act are naturally
informed by the FTC Act unfairness standard, the FTC Policy Statement
on Unfairness, FTC and other Federal agency rulemakings,\375\ and
related case law. The Bureau believes it is reasonable to interpret
section 1031 of the Dodd-Frank Act consistent with the specific
positions discussed in this section on Legal Authority. The Bureau's
interpretations are based on its expertise with consumer financial
products, services, and markets, and its experience with implementing
this provision in supervisory and enforcement actions. The Bureau also
generally finds persuasive the reasons provided by the authorities
supporting these positions as discussed in this section.
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\375\ In addition to the FTC's rulemakings under unfairness
authority, certain Federal prudential regulators have prescribed
rules prohibiting unfair practices under section 18(f)(1) of the FTC
Act and, in doing so, they applied the statutory elements consistent
with the standards articulated by the FTC. The Federal Reserve
Board, FDIC, and the OCC also issued guidance generally adopting
these standards for purposes of enforcing the FTC Act's prohibition
on unfair and deceptive acts or practices. See 74 FR 5498, 5502
(Jan. 29, 2009) (background discussion of legal authority for
interagency Subprime Credit Card Practices rule).
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Substantial Injury
The first element required for a determination of unfairness under
section 1031(c)(1) of the Dodd- Frank Act is that the act or practice
causes, or is likely to cause, substantial consumer injury. As noted
above, Bureau rulemaking regarding the meaning of the elements of this
unfairness standard is informed by the FTC Act unfairness standard, the
FTC Policy Statement on Unfairness, FTC and other Federal agency
rulemakings, and related case law.
The FTC noted in the FTC Policy Statement on Unfairness that
substantial injury ordinarily involves monetary harm, and that trivial
or speculative harms are not cognizable under the test for substantial
injury.\376\ The FTC also noted that an injury is ``sufficiently
substantial'' if it consists of a small amount of harm to a large
number of individuals or if it raises a significant risk of harm.\377\
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\376\ See FTC Policy Statement on Unfairness, Int'l Harvester,
104 F.T.C. 949, 1073 (1984). For example, in the Higher-Priced
Mortgage Loan (HPML) Rule, the Federal Reserve Board concluded that
a borrower who cannot afford to make the loan payments as well as
payments for property taxes and homeowners insurance because the
lender did not adequately assess the borrower's ability to repay
suffers substantial injury, due to the various costs associated with
missing mortgage payments (e.g., large late fees, impairment of
credit records, foreclosure related costs). See 73 FR 44522, 44541-
42 (July 30, 2008).
\377\ See FTC Policy Statement on Unfairness, Int'l Harvester,
104 F.T.C. at 1073 n.12.
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In addition, the FTC has also found that substantial injury may
involve a large amount of harm experienced by a small number of
individuals.\378\ And while the FTC has said that emotional impact and
other more subjective types of harm ordinarily will not constitute
substantial injury,\379\ the D.C. Circuit held that psychological harm
can form part of the substantial injury along with financial harm.\380\
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\378\ See Int'l Harvester, 104 F.T.C. at 1064.
\379\ See FTC Policy Statement on Unfairness, Int'l Harvester,
104 F.T.C. at 1073.
\380\ See AFSA, 767 F.2d at 973-74, n.20 (1985) (discussing the
potential psychological harm resulting from lenders' taking of non-
possessory security interests in household goods and associated
threats of seizure, which was part of the FTC's rationale for
intervention in the Credit Practices Rule).
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Not Reasonably Avoidable
The second element required for a determination of unfairness under
section 1031(c)(1) of the Dodd-Frank Act is that the substantial injury
is not reasonably avoidable by consumers. Again, the FTC Act unfairness
standard, the FTC Policy Statement on Unfairness, FTC and other Federal
agency rulemakings, and related case law inform the meaning of this
element of the unfairness standard.
The FTC has noted that knowing the steps for avoiding injury is not
enough for the injury to be reasonably avoidable; rather, the consumer
must also understand the necessity of taking those steps.\381\ As the
FTC explained in its Policy Statement on Unfairness, most unfairness
matters are brought to ``halt some form of seller behavior that
unreasonably creates or takes advantage of an obstacle to the free
exercise of consumer decision making.'' \382\ The D.C. Circuit held
that such behavior can create a ``market failure'' and the agency ``may
be required to take corrective action.'' \383\ Reasonable avoidability
also takes into account the costs of making a choice other than the one
made and the availability of alternatives in the marketplace.\384\
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\381\ See Int'l Harvester, 104 F.T.C. at 1066.
\382\ FTC Policy Statement on Unfairness, Int'l Harvester, 104
F.T.C. at 1074.
\383\ AFSA, 767 F.2d at 976. The D.C. Circuit noted that
Congress intended for the FTC to develop and refine the criteria for
unfairness on a ``progressive, incremental'' basis. Id. at 978. The
court upheld the FTC's Credit Practices Rule by reasoning in part
that ``the fact that the [FTC's] analysis applies predominantly to
certain creditors dealing with a certain class of consumers (lower-
income, higher-risk borrowers) does not, as the dissent suggests,
undercut its validity. [There is] a market failure with respect to a
particular category of credit transactions which is being exploited
by the creditors involved to the detriment of the consumers
involved.'' Id. at 982 n.29.
\384\ See FTC Policy Statement on Unfairness, Int'l Harvester,
104 F.T.C. at 1074 n.19 (``In some senses any injury can be
avoided--for example, by hiring independent experts to test all
products in advance, or by private legal actions for damages--but
these courses may be too expensive to be practicable for individual
consumers to pursue.''); AFSA, 767 F.2d at 976-77 (reasoning that
because of factors such as substantial similarity of contracts,
``consumers have little ability or incentive to shop for a better
contract'').
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Countervailing Benefits to Consumers or Competition
The third element required for a determination of unfairness under
section 1031(c)(1) of the Dodd- Frank Act is that the act or practice's
countervailing benefits to consumers or to competition do not outweigh
the substantial consumer injury. Once again, the FTC Act unfairness
standard, the FTC Policy Statement on Unfairness, FTC and other Federal
agency rulemakings, and related case law inform the meaning of this
element of the unfairness standard.
In applying the FTC Act's unfairness standard, the FTC has stated
that it is important to consider both the costs of imposing a remedy
and any benefits that consumers enjoy as a result of the practice.\385\
Authorities addressing the FTC Act's unfairness standard indicate that
the countervailing benefits test does not require a precise
quantitative analysis of benefits and costs, because such an analysis
may be unnecessary or, in some cases, impossible. Rather, the agency is
expected to gather and
[[Page 54521]]
consider reasonably available evidence.\386\
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\385\ See FTC Policy Statement on Unfairness, Int'l Harvester,
104 F.T.C. at 1073-74 (noting that an unfair practice must be
``injurious in its net effects'' and that ``[t]he Commission also
takes account of the various costs that a remedy would entail. These
include not only the costs to the parties directly before the
agency, but also the burdens on society in general in the form of
increased paperwork, increased regulatory burdens on the flow of
information, reduced incentives to innovation and capital formation,
and similar matters.'').
\386\ See S. Rept. 103-130, at 13 (1994) (legislative history
for the 1994 amendments to the FTC Act noting that, ``In determining
whether a substantial consumer injury is outweighed by the
countervailing benefits of a practice, the Committee does not intend
that the FTC quantify the detrimental and beneficial effects of the
practice in every case. In many instances, such a numerical benefit-
cost analysis would be unnecessary; in other cases, it may be
impossible. This section would require, however, that the FTC
carefully evaluate the benefits and costs of each exercise of its
unfairness authority, gathering and considering reasonably available
evidence.''); Pennsylvania Funeral Directors Ass'n v. FTC, 41 F.3d
81, 91 (3d Cir. 1994) (in upholding the FTC's amendments to the
Funeral Industry Practices Rule, the Third Circuit noted that ``much
of a cost-benefit analysis requires predictions and speculation'');
Int'l Harvester, 104 F.T.C. at 1065 n.59 (``In making these
calculations we do not strive for an unrealistic degree of precision
. . . . We assess the matter in a more general way, giving consumers
the benefit of the doubt in close issues . . . . What is important .
. . is that we retain an overall sense of the relationship between
costs and benefits. We would not want to impose compliance costs of
millions of dollars in order to prevent a bruised elbow.'').
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Public Policy
As noted above, section 1031(c)(2) of the Dodd-Frank Act provides
that, ``[i]n determining whether an act or practice is unfair, the
Bureau may consider established public policies as evidence to be
considered with all other evidence. Such public policy considerations
may not serve as a primary basis for such determination.'' \387\
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\387\ 12 U.S.C. 5531(c)(2).
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Section 1031(d)--Abusive Acts or Practices
The Dodd-Frank Act, in section 1031(b), authorizes the Bureau to
identify and prevent abusive acts and practices. The Bureau believes
that Congress intended for the statutory phrase ``abusive acts or
practices'' to encompass conduct by covered persons that is beyond what
would be prohibited as unfair or deceptive acts or practices, although
such conduct could overlap and thus satisfy the elements for more than
one of the standards.\388\
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\388\ See, e.g., S. Rept. No. 111-176, at 172 (Apr. 30, 2010)
(``Current law prohibits unfair or deceptive acts or practices. The
addition of `abusive' will ensure that the Bureau is empowered to
cover practices where providers unreasonably take advantage of
consumers.''); Public Law 111-203 (listing, in the preamble to the
Dodd- Frank Act, one of the purposes of the Act as ``protect[ing]
consumers from abusive financial services practices'').
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Under section 1031(d) of the Dodd-Frank Act, the Bureau ``shall
have no authority . . . to declare an act or practice abusive in
connection with the provision of a consumer financial product or
service'' unless the act or practice meets at least one of several
enumerated conditions. For example, under section 1031(d)(2)(A) of the
Act, an act or practice might ``take[ ] unreasonable advantage of'' a
consumer's ``lack of understanding . . . of the material risks, costs,
or conditions of the [consumer financial] product or service'' (i.e.,
the lack of understanding prong).\389\ Under section 1031(d)(2)(B) of
the Act, an act or practice might ``take[ ] unreasonable advantage of''
the ``inability of the consumer to protect the interests of the
consumer in selecting or using a consumer financial product or
service'' (i.e., the inability to protect prong).\390\ The Dodd-Frank
Act does not further elaborate on the meaning of these terms, leaving
it to the Bureau to interpret and apply these standards.
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\389\ 12 U.S.C. 5531(d)(2)(A).
\390\ 12 U.S.C. 5531(d)(2)(B). The Dodd-Frank Act's abusiveness
standard also permits the Bureau to intervene under section
1031(d)(1) if the Bureau determines that an act or practice
``materially interferes with the ability of a consumer to understand
a term or condition of a consumer financial product or service,'' 12
U.S.C. 5531(d)(1), and under section 1031(d)(2)(C) if an act or
practice ``takes unreasonable advantage of'' the consumer's
``reasonable reliance'' on the covered person to act in the
consumer's interests, 12 U.S.C. 5531(d)(2)(C).
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Although the legislative history on the meaning of the Dodd-Frank
Act's abusiveness standard is fairly limited, it suggests that Congress
was particularly concerned about the widespread practice of lenders
making unaffordable loans to consumers. A primary focus was on
unaffordable home mortgages and mortgages made without adequate or
responsible underwriting.\391\
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\391\ While Congress sometimes described other products as
abusive, it frequently applied the term to unaffordable mortgages
and mortgages made without adequate or responsible underwriting.
See, e.g., S. Rept. No. 111-176, at 11 (noting that the ``financial
crisis was precipitated by the proliferation of poorly underwritten
mortgages with abusive terms'').
---------------------------------------------------------------------------
However, there is some indication that Congress also intended the
Bureau to use the authority under section 1031(d) of the Dodd-Frank Act
to address payday lending through the Bureau's rulemaking, supervisory,
and enforcement authorities. For example, the Senate Committee on
Banking, Housing, and Urban Affairs report on the Senate version of the
legislation listed payday loans as one of several categories of
consumer financial products and services, other than mortgages, where
``consumers have long faced problems'' because they lack ``adequate
Federal rules and enforcement,'' noting further that ``[a]busive
lending, high and hidden fees, unfair and deceptive practices,
confusing disclosures, and other anti-consumer practices have been a
widespread feature in commonly available consumer financial products
such as credit cards.'' \392\ The same section of the Senate committee
report included a description of the basic features of payday loans and
the problems associated with them, specifically noting that many
consumers are unable to repay the loans while meeting their other
obligations and that many of these borrowers re-borrow, which results
in a ``perpetual debt treadmill.'' \393\ These portions of the
legislative history reinforce other indications in the Dodd-Frank Act
that Congress consciously intended to confer direct authority upon the
Bureau to address issues concerning payday loans.\394\
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\392\ See S. Rept. 111-176, at 17. In addition to credit cards,
the Senate committee report listed overdraft, debt collection,
payday loans, and auto dealer lending as the consumer financial
products and services warranting concern. Id. at 17-23.
\393\ See S. Rept. 111-176, 20-21; see also 155 Cong. Rec. 31250
(Dec. 10, 2009) (during a colloquy on the House floor with the one
of the authors of the Dodd-Frank Act, Representative Barney Frank,
Representative Henry Waxman stated that the ``authority to pursue
abusive practices helps ensure that the agency can address payday
lending and other practices that can result in pyramiding debt for
low income families.'').
\394\ Section 1024(a)(1)(E) of the Dodd-Frank Act also expressly
confers authority upon the Bureau to take specific acts concerning
``any covered person who . . . offers or provides to a consumer a
payday loan.'' These include the use of supervisory authority to
``conduct examinations'' for the purpose of ``assessing compliance
with the requirements of Federal consumer financial law,'' to
exercise ``exclusive'' authority to ``enforce Federal consumer
financial law,'' and to exercise ``exclusive'' authority to ``issue
regulations'' for the purpose of ``assuring compliance with Federal
consumer financial law.'' Congress conferred this authority only for
a defined and limited universe of consumer financial products--
payday loans, mortgage loans, and student loans--and in certain
other specified instances, thus indicating its intent to empower the
Bureau to consider and carry out broad regulatory and oversight
activity with respect to the market for payday loans, in particular.
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B. Section 1032 of the Dodd-Frank Act
Section 1032(a) of the Dodd-Frank Act provides that the Bureau may
prescribe rules to ensure that the features of any consumer financial
product or service, ``both initially and over the term of the product
or service,'' are ``fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances.'' \395\ This authority is broad, and
empowers the Bureau to prescribe rules regarding the disclosure of the
``features'' of consumer financial products and services generally.
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\395\ 12 U.S.C. 5532(a).
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Accordingly, the Bureau may prescribe rules containing disclosure
requirements even if other Federal
[[Page 54522]]
consumer financial laws do not specifically require disclosure of such
features. Section 1032(c) of the Dodd-Frank Act provides that, in
prescribing rules pursuant to section 1032 of the Act, the Bureau
``shall consider available evidence about consumer awareness,
understanding of, and responses to disclosures or communications about
the risks, costs, and benefits of consumer financial products or
services.'' \396\
---------------------------------------------------------------------------
\396\ 12 U.S.C. 5532(c).
---------------------------------------------------------------------------
Section 1032(b)(1) of the Dodd-Frank Act provides that ``any final
rule prescribed by the Bureau under this section requiring disclosures
may include a model form that may be used at the option of the covered
person for provision of the required disclosures.'' \397\ Section
1032(b)(2) of the Act provides that such a model form ``shall contain a
clear and conspicuous disclosure that, at a minimum--(A) uses plain
language comprehensible to consumers; (B) contains a clear format and
design, such as an easily readable type font; and (C) succinctly
explains the information that must be communicated to the consumer.''
\398\
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\397\ 12 U.S.C. 5532(b)(1).
\398\ 12 U.S.C. 5532(b)(2).
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Section 1032(b)(3) of the Dodd-Frank Act provides that any such
model form ``shall be validated through consumer testing.'' \399\ And
section 1032(d) of the Act provides that, ``Any covered person that
uses a model form included with a rule issued under this section shall
be deemed to be in compliance with the disclosure requirements of this
section with respect to such model form.'' \400\
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\399\ 12 U.S.C. 5532(b)(3).
\400\ 12 U.S.C. 5532(d).
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C. Other Authorities Under the Dodd-Frank Act
Section 1022(b)(1) of the Dodd-Frank Act provides that the Bureau's
director ``may prescribe rules and issue orders and guidance, as may be
necessary or appropriate to enable the Bureau to administer and carry
out the purposes and objectives of the Federal consumer financial laws,
and to prevent evasions thereof.'' \401\ ``Federal consumer financial
law'' includes rules prescribed under Title X of the Dodd-Frank
Act,\402\ including sections 1031(b) to (d) and 1032.
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\401\ 12 U.S.C. 5512(b)(1).
\402\ 12 U.S.C. 5481(14).
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Section 1022(b)(2) of the Dodd-Frank Act prescribes certain
standards for rulemaking that the Bureau must follow in exercising its
authority under section 1022(b)(1) of the Act.\403\ For a discussion of
the Bureau's standards for rulemaking under section 1022(b)(2) of the
Act, see part VII below.
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\403\ 12 U.S.C. 5512(b)(2).
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Section 1022(b)(3)(A) of the Dodd-Frank Act authorizes the Bureau,
by rule, to ``conditionally or unconditionally exempt any class of
covered persons, service providers, or consumer financial products or
services'' from any provision of Title X or from any rule issued under
Title X as the Bureau determines ``necessary or appropriate to carry
out the purposes and objectives'' of Title X. In doing so, the Bureau
must, ``tak[e] into consideration the factors'' set forth in section
1022(b)(3)(B) of the Act,\404\ which specifies three factors that the
Bureau shall, as appropriate, take into consideration in issuing such
an exemption.\405\
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\404\ 12 U.S.C. 5512(b)(3)(A).
\405\ Section 1022(b)(3)(B) of the Act provides that in issuing
an exemption, as permitted under section 1022(b)(3)(A) of the Act,
the Bureau shall, as appropriate, take into consideration: the total
assets of the class of covered persons; the volume of transactions
involving consumer financial products or services in which the class
of covered persons engages; and existing provisions of law which are
applicable to the consumer financial product or service and the
extent to which such provisions provide consumers with adequate
protections. 12 U.S.C. 5512(b)(3)(B).
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Furthermore, Sec. Sec. 1041.10 and 1041.11 of the final rule are
authorized by other Dodd-Frank Act authorities, such as sections
1021(c)(3),\406\ 1022(c)(7),\407\ 1024(b)(1),\408\ and 1024(b)(7) of
the Act.\409\ A more complete description of the Dodd-Frank Act
authorities on which the Bureau is relying for Sec. Sec. 1041.10 and
1041.11 of the final rule is contained in the section-by-section
analysis of those provisions.
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\406\ 12 U.S.C. 5511(c)(3).
\407\ 12 U.S.C. 5512(c)(7).
\408\ 12 U.S.C. 5514(b)(1).
\409\ 12 U.S.C. 5514(b)(7).
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D. Section 1041 of the Dodd-Frank Act and Preemption
Section 1041(a)(1) of the Dodd-Frank Act provides that Title X of
the Act, other than sections 1044 through 1048, ``may not be construed
as annulling, altering, or affecting, or exempting any person subject
to the provisions of [Title X] from complying with,'' the statutes,
regulations, orders, or interpretations in effect in any State
(sometimes hereinafter, State laws), ``except to the extent that any
such provision of law is inconsistent with the provisions of [Title X],
and then only to the extent of the inconsistency.'' \410\ Section
1041(a)(2) of the Act provides that, for purposes of section 1041, ``a
statute, regulation, order, or interpretation in effect in any State is
not inconsistent with'' the Title X provisions ``if the protection that
such statute, regulation, order, or interpretation affords to consumers
is greater than the protection provided'' under Title X.\411\ This
section further provides that a determination regarding whether a
statute, regulation, order, or interpretation in effect in any State is
inconsistent with the provisions of Title X may be made by the Bureau
on its own motion or in response to a nonfrivolous petition initiated
by any interested person.\412\
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\410\ 12 U.S.C. 5551(a)(1). Section 1002(27) of the Dodd-Frank
Act defines ``State'' to include any ``Federally recognized Indian
Tribe.'' See 12 U.S.C. 5481(27).
\411\ 12 U.S.C. 5551(a)(2).
\412\ 12 U.S.C. 5551(a)(2).
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The requirements of the final rule set minimum Federal standards
for the regulation of covered loans. They thus accord with the common
preemption principle that Federal law provides a floor and not a
ceiling on consumer financial protection,\413\ as provided in section
1041(a)(2) of the Dodd-Frank Act. The requirements of this rule will
thus coexist with State laws that pertain to the making of loans that
the rule treats as covered loans (hereinafter, ``applicable State
laws''). Consequently, any person subject to the final rule will be
required to comply with both the requirements of this rule and all
applicable State laws, except to the extent that the applicable State
laws are inconsistent with the requirements of the rule.\414\ This
approach reflects the established framework of cooperative federalism
between Federal and State laws in many other substantive areas.
Accordingly, the arguments advanced by some commenters that the payday
rule would ``occupy the field'' are incorrect. Where Federal law
occupies an entire field, ``even complementary State regulation is
impermissible'' because field preemption ``foreclose[s] any State
regulation in the area, even if it is parallel to Federal standards.''
\415\ This rule would not have that effect.
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\413\ The Bureau received a comment from a group of State
Attorneys General asking the Bureau to codify the statement that
this is a floor and not a ceiling. The Bureau does not believe this
is necessary, and that it would conflict with the regulatory scheme
of the rule, which is primarily aimed at obligations on the part of
lenders. This section should suffice for purposes of communicating
the Bureau's intent with regard to preemption.
\414\ The requirements of the final rule will also coexist with
applicable laws in cities and other localities, and the Bureau does
not intend the rule to annul, alter, affect, or exempt any person
from complying with the regulatory frameworks of cities and other
localities to the extent those frameworks provide greater consumer
protections than the requirements of this rule.
\415\ Arizona v. United States, 567 U.S. 387 (2012).
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As noted above, section 1041(a)(2) of the Dodd-Frank Act specifies
that State
[[Page 54523]]
laws which afford greater consumer protection than is provided under
Title X are not inconsistent with the provisions of Title X.
Specifically, as discussed in part II, different States have taken
different approaches to regulating loans that are treated as covered
loans under the final rule, with many States electing to permit the
making of such loans according to varying conditions, and other States
choosing not to do so by imposing usury caps that effectively render it
impractical to make such loans in those States.
Particularly in the States where fixed usury caps effectively
prohibit these types of loans, nothing in this rule is intended or
should be construed to undermine or cast doubt on whether those
provisions are sound public policy. Because Title X does not confer
authority on the Bureau to establish usury limits,\416\ its policy
interventions, as embodied in the final rule, are entirely distinct
from such measures as are beyond its statutory authority. Therefore,
nothing in this rule should be construed as annulling or even as
inconsistent with a regulatory or policy approach to such loans based
on usury caps, which are wholly within the prerogative of the States to
lawfully impose. Indeed, as described in part II, South Dakota became
the most recent State to impose a usury cap on payday loans after
conducting a ballot initiative in 2016 in which the public voted to
approve the measure by a substantial margin.
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\416\ Section 1027(o) of the Dodd-Frank Act provides that ``No
provision of this title shall be construed as conferring authority
on the Bureau to establish a usury limit applicable to an extension
of credit offered or made by a covered person to a consumer, unless
explicitly authorized by law.'' 12 U.S.C. 5517(o).
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The requirements of the final rule will coexist with different
approaches and frameworks for the regulation of such covered loans as
reflected in applicable State laws.\417\ The Bureau is aware of certain
applicable State laws that may afford greater protections to consumers
than do the requirements of this rule. For example, as described in
part II and just discussed above, certain States have fee or interest
rate caps (i.e., usury limits) that payday lenders may find are set too
low to sustain their business models. The Bureau regards the fee and
interest rate caps in these States as providing greater consumer
protections than, and thus as not inconsistent with, the requirements
of the final rule.
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\417\ Some State officials expressed concern that the
identification of unfair and abusive acts or practices in this
rulemaking may be construed to affect or limit provisions in State
statutes or State case law. The Bureau has identified unfair and
abusive acts or practices under the statutory definitions in section
1031(c) and (d) of the Dodd-Frank Act. The final rule is not
intended to limit the further development of State laws protecting
consumers from unfair or deceptive acts or practices as defined
under State laws, or from similar conduct prohibited by State laws,
consistent with the principles set forth in the Dodd-Frank Act as
discussed further above.
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Aside from those provisions of State law just discussed, the Bureau
declines to determine definitively in this rulemaking whether any other
individual statute, regulation, order, or interpretation in effect in
any State is inconsistent with the rule. Comments on the proposal and
internal analysis have led the Bureau to conclude that specific
questions of preemption should be decided upon application, and the
Bureau will respond to nonfrivolous petitions initiated by interested
persons in accordance with section 1041(a)(2) of the Dodd-Frank Act.
The Bureau believes that in most cases entities can apply the
principles articulated above in a straightforward manner to determine
their rights and obligations under both the rule and State law.
Moreover, in light of the variety of relevant State law provisions and
the range of practices that may be covered by those laws, it is
impossible for the Bureau to provide a definitive description of all
interactions or to anticipate all areas of potential concern.
Some commenters argued that because section 1041 of the Dodd-Frank
Act includes only the term ``this title,'' and not ``any rule or order
prescribed by the Bureau under this title,'' Congress contemplated only
statutory and not regulatory preemption of State law. The Bureau
disagrees and believes section 1041 is best interpreted to apply to
Title X and rules prescribed by the Bureau under that Title. Section
1041 was modeled in large part on similar provisions from certain
enumerated consumer laws. Consistent with longstanding case law holding
that State laws can be pre-empted by Federal regulations promulgated in
the exercise of delegated authority,\418\ those provisions were
definitively interpreted to apply to requirements imposed by
implementing regulations, even where the statutory provisions include
explicit reference only to the statutes themselves.\419\ Congress is
presumed to have been aware of those applications in enacting Title X,
and section 1041 is best interpreted similarly. Moreover, the Bureau's
interpretation furthers principles of consistency, uniformity, and
manageability in interpreting Title X and legislative rules with the
force and effect of law implementing that statute. Finally, while
section 1041 of the Act instructs preemption analyses, any actual pre-
emptive force derives from the substantive provisions of Title X and
its implementing rules, not from section 1041 itself. A reading that
section 1041 would apply only to Title X itself could lead to the
conclusion that rules prescribed by the Bureau under Title X have
broader preemptive effect than does Title X itself. The better
interpretation is that the preemptive effect of regulations exercised
under delegated authority should be guided by the provisions of section
1041.
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\418\ See, e.g., Hillsborough County v. Automated Med.
Laboratories, 471 U.S. 707, 713 (1985).
\419\ See, e.g., 15 U.S.C. 1610(a)(1) & 12 CFR 1026.28 (TILA &
Regulation Z); 15 U.S.C. 1691d(f) & 12 CFR 1002.11 (ECOA &
Regulation B).
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Lastly, the Bureau intends this rule to interact in the same manner
with laws or regulations at other government levels, like city or
locality laws or regulations.
E. General Comments on the Bureau's Legal Authority
In addition to setting out the Bureau's legal authority for this
rulemaking and responding to comments directed to specific sources of
authority, it is necessary to address several more general comments
that challenged or criticized certain aspects of the Bureau's ability
to proceed to finalize this rule. They will be addressed here.
Some industry commenters and State Attorneys General have contended
that the Bureau lacks the legal authority to adopt this rule because
the Bureau itself or its statutory authority is unconstitutional on
various grounds, including separation-of-powers, the non-delegation
doctrine, and the 10th Amendment. No court has ever held that the
Bureau is unable to issue regulations on the basis that it is
unconstitutional, and in fact the Bureau has issued dozens of
regulations to date, including many major rules that have profoundly
affected key consumer markets such as mortgages, prepaid accounts,
remittance transfers, and others--a number of which were mandated by
Congress. In addition, longstanding precedent has established that a
government agency lacks the authority to decide the constitutionality
of congressional enactments.\420\
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\420\ See, e.g., Johnson v. Robison, 415 U.S. 361, 368 (1974);
Public Utils. Comm'n v. United States, 355 U.S. 534, 539 (1958).
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One commenter argued that the timing of the proposed rule prevented
the Bureau from using data gathered in Treasury Department Financial
Empowerment Studies on small dollar loans conducted under Title XII of
the Dodd-Frank Act, and that the
[[Page 54524]]
combination of Title XII and section 1022 of the Dodd-Frank Act
evidence Congress's intent to not grant the Bureau authority to issue a
rule that reduces the availability of payday loans. There is nothing in
either the plain language or structure of the Dodd-Frank Act to suggest
that Congress intended the Bureau to postpone any regulation of unfair
and abusive payday lending practices until after Treasury had
established the multiyear grant program that Congress authorized
Treasury to establish. Indeed, it is noteworthy that Title XII does not
mandate that Treasury create such programs--it merely authorizes
Treasury to do so. Moreover, contrary to the commenter's assertions,
the final rule will not end payday lending and it will not undermine
the rationale for the grants for which Congress provided in Title XII.
There is no basis to conclude that the Bureau is under any obligation
to wait for such grant programs to play out to prevent UDAAPs.
Some industry commenters have made the claim that the Bureau had
impermissibly prejudged the evidence about whether and how to proceed
with this rule and failed to comply with its own ex parte policy by
engaging in improper communications with special interest groups prior
to the publication of the notice of proposed rulemaking. The Bureau
does not agree with these claims for several reasons. First, part III
of the final rule, which summarizes in detail the Bureau's rulemaking
process, shows that these claims are without basis. That discussion
reflects the Bureau's considerable experience with these issues and
with this market for over five years of steady work. It also includes a
description of the Bureau's approach to handling the great volume of
public comments received on the proposed rule, as well as a number of
ex parte communications, which have been documented and incorporated
into the administrative record and are available to the public at
www.regulations.gov. Second, both the proposed rule and the final rule
are based on the Bureau's careful review of the relevant evidence,
including evidence generated by the Bureau's own studies, as well as
evidence submitted by a broad range of stakeholders, including industry
stakeholders. Finally, the numerous changes made in the final rule in
response to stakeholder comments, including industry stakeholders, is
further evidence that the Bureau has not prejudged any issues.
A number of industry commenters have argued that the rule conflicts
with the Bureau's statutory purpose under section 1021(b)(4) of the
Dodd-Frank Act, which is to enforce the law consistently for all
persons, regardless of their status as depository institutions, because
it addresses covered loans but does not address other types of
financial products, such as overdraft services or credit card accounts.
The Bureau notes in response that each of these products has its own
features, characteristics, historical background, and prior regulatory
treatment, as discussed further in the section-by-section analysis of
Sec. 1041.3(d). Just as it has not been judged to be impermissibly
inconsistent for Federal and State authorities (including the Congress)
to treat these distinct products differently as a matter of statutory
law and regulation, despite certain similarities of product features
and uses, even so it is not inconsistent for the Bureau to do so for
the purposes of this rule. Further, while it may be true that more
nonbanks will be impacted by this rule than banks by virtue of the
products that banks and nonbanks are currently providing, that does not
mean that this rule conflicts with section 1021(b)(4), but simply
reflects the current makeup of this marketplace.
Finally, and more narrowly, some Tribal and industry commenters
have averred that the Bureau lacks authority to adopt regulations
pursuant to section 1031 of the Dodd-Frank Act that apply to Indian
tribes or to any of the entities to which they have delegated Tribal
authority. These arguments raised on behalf of Tribal lenders have also
been raised in Tribal consultations that the Bureau has held with
federally recognized Indian Tribes, as discussed in part III, and in
various court cases to date. They rest on what the Bureau believes is a
misreading of the Act and of Federal law and precedents governing the
scope of Tribal immunity, positions that the Bureau has briefed
extensively to the Federal courts in some key cases testing these
issues.\421\
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\421\ See CFPB v. Great Plains Lending, 846 F.3d 1049 (9th Cir.
2017), reh'g denied (Apr. 5, 2017) (Court of Appeals affirmed
District Court ruling upholding and enforcing the Bureau's authority
to issue civil investigative demands to payday lenders claiming
Tribal affiliation and rejecting their claim of ``tribal sovereign
immunity''; a petition for certiorari to the Supreme Court is now
pending); see also Otoe-Missouria Tribe of Indians v. New York State
Dep't of Fin. Servs., 769 F.3d 105, 107 (2d Cir. 2014) (upholding
the State's claim to be able to be able to pursue an enforcement
action against payday lenders claiming Tribal affiliation that
``provide short-term loans over the Internet, all of which have
triple-digit interest rates that far exceed the ceiling set by New
York law;'' the Bureau filed an amicus curiae brief in support of
the State's position).
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V. Section-by-Section Analysis
Subpart A--General
Section 1041.1 Authority and Purpose
Proposed Sec. 1041.1 provided that the rule is being issued
pursuant to Title X of the Dodd-Frank Wall Street Reform and Consumer
Protection Act.\422\ It also provided that the purpose of this part is
to identify certain unfair and abusive acts or practices in connection
with certain consumer credit transactions; to set forth requirements
for preventing such acts or practices; and to prescribe requirements to
ensure that the features of those consumer credit transactions are
fully, accurately, and effectively disclosed to consumers. It also
noted that this part prescribes processes and criteria for registration
of information systems.
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\422\ Public Law 111-203, 124 Stat. 1376, 1955 (2010).
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The Bureau did not receive any comments on proposed Sec. 1041.1
and is finalizing this provision as proposed.
Section 1041.2 Definitions
Proposed Sec. 1041.2 set forth definitions for certain terms
relevant to the proposal. Additional definitions were set forth in
proposed Sec. Sec. 1041.3, 1041.5, 1041.9, 1041.14, and 1041.17 for
further terms used in those respective sections. To the extent those
definitions are used in the final rule and have not been moved into
Sec. 1041.2, as discussed below, they are addressed in the context of
those particular sections (some of which have been renumbered in the
final rule).
In general, the Bureau proposed to incorporate a number of defined
terms under the Dodd-Frank Act and under other statutes or regulations
and related commentary, particularly Regulation Z and Regulation E as
they implement the Truth in Lending Act (TILA) \423\ and the Electronic
Fund Transfer Act (EFTA),\424\ respectively. The Bureau believed that
basing the proposal's definitions on previously defined terms may
minimize regulatory uncertainty and facilitate compliance, especially
where the other regulations are likely to apply to the same
transactions in their own right. However, as discussed further below,
the Bureau proposed, in certain definitions, to expand or modify the
existing definitions or the concepts enshrined in such definitions for
purposes of the proposal to ensure that the rule had its intended scope
of effect, particularly as industry practices may evolve.
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\423\ Public Law 90-321, 82 Stat. 146 (1968).
\424\ Public Law 95-630, 92 Stat. 3641 (1978).
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[[Page 54525]]
The Bureau received numerous comments about these proposed terms
and their definitions, as well as some suggestions to define additional
concepts left undefined in the proposal. The Bureau is finalizing Sec.
1041.2 with some revisions and deletions from the proposal, as
discussed further below, including the addition of a rule of
construction as Sec. 1041.2(b) to provide general guidance concerning
the incorporation of terms from other statutes and regulations in the
context of part 1041.
2(a) Definitions
2(a)(1) Account
Proposed Sec. 1041.2(a)(1) would have defined account by cross-
referencing to the definition of that same term in Regulation E, 12 CFR
part 1005. Regulation E generally defines account to include demand
deposit (checking), savings, or other consumer asset accounts (other
than an occasional or incidental credit balance in a credit plan) held
directly or indirectly by a financial institution and established
primarily for personal, family, or household purposes.\425\ The term
account was also used in proposed Sec. 1041.3(c), which would provide
that a loan is a covered loan if, among other requirements, the lender
or service provider obtains repayment directly from a consumer's
account. This term was also used in proposed Sec. 1041.14, which would
impose certain requirements when a lender seeks to obtain repayment for
a covered loan directly from a consumer's account, and in proposed
Sec. 1041.15, which would require lenders to provide notices to
consumers before attempting to withdraw payments from consumers'
accounts. The Bureau stated that defining this term consistently with
an existing regulation would reduce the risk of confusion among
consumers, industry, and regulators. The Bureau considered the
Regulation E definition to be appropriate because that definition is
broad enough to capture the types of transactions that may implicate
the concerns addressed by this part. Proposed comment 2(a)(1)-1 also
made clear that institutions may rely on 12 CFR 1005.2(b) and its
related commentary in determining the meaning of account.
---------------------------------------------------------------------------
\425\ Regulation E also specifically includes payroll card
accounts and certain government benefit card accounts. As
specifically noted in the proposal here, 81 FR 47864, 47904 n.416
(July 22, 2016), the Bureau was considering in a separate rulemaking
whether to provide comprehensive consumer protections under
Regulation E to a broader category of prepaid accounts. The Bureau
later finalized that proposed rule. See 81 FR 83934 (Nov. 22, 2016).
---------------------------------------------------------------------------
One commenter stated that the definition of account should be
expanded to include general-use prepaid cards, regardless of whether
they are labeled and marketed as a gift card, as defined in 12 CFR
1005.20(a)(3). The Bureau recently finalized a separate rule creating
comprehensive consumer protections for prepaid accounts, and in the
process amended the definition of account in 12 CFR 1005.2(b) to
include ``a prepaid account,'' so the thrust of the comment is already
effectively addressed.\426\ The definition of ``prepaid account'' in
that rulemaking only excludes gift cards that are both labeled and
marketed as a gift card, which are subject to separate rules under
Regulation E.\427\ The Bureau does not believe that such products are
likely to be tendered as a form of leveraged payment mechanism, but
will monitor the market for this issue and take appropriate action if
it appears that lenders are using such products to evade coverage under
the rule. The Bureau did not receive any other comments on this portion
of the proposal and is finalizing this definition as proposed. Proposed
comment 2(a)(1)-1 has now been incorporated into comment 2(b)(1)-1 to
illustrate the broader rule of construction discussed in Sec.
1041.2(b).
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\426\ See 81 FR 83934, 83965-83978, 84325-84326 (Nov. 22, 2016).
\427\ See 81 FR 83934, 83976-83978 (Nov. 22, 2016) (discussing
Sec. 1005.2(b)(3)(ii)(D) and comment 2(b)(3)(ii)-3 of the final
prepaid rule.).
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2(a)(2) Affiliate
Proposed Sec. 1041.2(a)(2) would have defined affiliate by cross-
referencing to the definition of that same term in the Dodd-Frank Act,
12 U.S.C. 5481(1). The Dodd-Frank Act defines affiliate as any person
that controls, is controlled by, or is under common control with
another person. Proposed Sec. Sec. 1041.6 and 1041.10 would have
imposed certain limitations on lenders making loans to consumers who
have outstanding covered loans with an affiliate of the lender, and the
Bureau's analyses of those proposed sections discussed in more detail
the particular requirements related to affiliates. The Bureau stated
that defining this term in the proposal consistently with the Dodd-
Frank Act would reduce the risk of confusion among consumers, industry,
and regulators. Although the limitations in proposed Sec. Sec. 1041.6
and 1041.10 are not being finalized, the final rule includes a number
of other provisions in which the term affiliate is used, including the
conditional exemption in Sec. 1041.3(f). The Bureau did not receive
any comments on this portion of the proposal and is finalizing this
definition as proposed.
2(a)(3) Closed-End Credit
Proposed Sec. 1041.2(a)(3) would have defined closed-end credit as
an extension of credit to a consumer that is not open-end credit under
proposed Sec. 1041.2(a)(14). This term is used in various parts of the
rule where the Bureau proposed to tailor provisions specifically for
closed-end and open-end credit in light of their different structures
and durations. Most notably, proposed Sec. 1041.2(a)(18) prescribed
slightly different methods of calculating the total cost of credit for
closed-end and open-end credit. Proposed Sec. 1041.16(c) also required
lenders to furnish information about whether a covered loan is closed-
end or open-end credit to registered information systems. Proposed
comment 2(a)(3)-1 also made clear that institutions may rely on 12 CFR
1026.2(a)(10) and its related commentary in determining the meaning of
closed-end credit, but without regard to whether the credit is consumer
credit or is extended to a consumer, as those terms are defined in 12
CFR 1026.2(a).
The Bureau did not receive any comments on the definition of
closed-end credit contained in the proposal and is finalizing the
definition and commentary as proposed. The Bureau did, however, receive
a number of comments on the definition of open-end credit contained in
the proposal and made some changes to that definition in light of the
comments received, all as discussed below. Because the term closed-end
credit is defined in contradistinction to the term open-end credit, the
changes made to the latter definition will affect the parameters of
this definition as well.
2(a)(4) Consumer
Proposed Sec. 1041.2(a)(4) would have defined consumer by cross-
referencing the definition of that term in the Dodd-Frank Act, which
defines consumer as an individual or an agent, trustee, or
representative acting on behalf of an individual.\428\ The term is used
in numerous provisions across proposed part 1041 to refer to applicants
for and borrowers of covered loans. The Bureau stated that this
definition, rather than the arguably narrower Regulation Z definition
of consumer--which defines consumer as ``a cardholder or natural person
to whom consumer credit is offered or extended''--is appropriate to
[[Page 54526]]
capture the types of transactions that may implicate the concerns
addressed by the proposed rule. In particular, the definition of this
term found in the Dodd-Frank Act expressly includes agents and
representatives of individuals, rather than just individuals
themselves. The Bureau believed this definition might more
comprehensively foreclose possible evasion of the specific consumer
protections imposed by proposed part 1041 than would the definition
found in Regulation Z. The Bureau did not receive any comments on this
portion of the proposal and is finalizing this definition as proposed.
---------------------------------------------------------------------------
\428\ 12 U.S.C. 5481(4).
---------------------------------------------------------------------------
2(a)(5) Consummation
Proposed Sec. 1041.2(a)(5) would have defined consummation as the
time that a consumer becomes contractually obligated on a new loan,
which is consistent with the definition of the term in Regulation Z
Sec. 1026.2(a)(13), or the time that a consumer becomes contractually
obligated on a modification of an existing loan that increases the
amount of the loan. The proposal used the term both in defining certain
categories of covered loans and in defining the timing of certain
proposed requirements. The time of consummation was important both in
applying certain proposed definitions for purposes of coverage and in
applying certain proposed substantive requirements. For example, under
proposed Sec. 1041.3(b)(1), whether a loan is a covered short-term
loan would depend on whether the consumer is required to repay
substantially all of the loan within 45 days of consummation. Under
proposed Sec. 1041.3(b)(2)(i), the determination of whether a loan is
subject to a total cost of credit exceeding 36 percent per annum would
be made at the time of consummation. Pursuant to proposed Sec. Sec.
1041.6 and 1041.10, certain limitations would potentially apply to
lenders making covered loans based on the consummation dates of those
loans. Pursuant to proposed Sec. 1041.15(b), lenders would have to
furnish certain disclosures before a loan subject to the requirements
of that section is consummated.
In the proposal, the Bureau stated that defining this term
consistently with Regulation Z with respect to new loans would reduce
the risk of confusion among consumers, industry, and regulators.
Proposed comment 2(a)(5)-1 also made clear that the question of when a
consumer would become contractually obligated with regard to a new loan
is a matter to be determined under applicable law; for example, a
contractual commitment agreement that binds the consumer to the loan
would be a consummation. However, the comment stated that consummation
does not occur merely because the consumer has made some financial
investment in the transaction (for example, by paying a non-refundable
fee), unless applicable law holds otherwise. The Bureau also provided
guidance as to consummation with respect to particular loan
modifications, so as to further the intent of proposed Sec. Sec.
1041.3(b)(1) and (2), 1041.5(b), and 1041.9(b), all of which would
impose requirements on lenders as of the time that the loan amount
increases on an existing loan. The Bureau concluded that defining these
increases in loan amounts as consummations would improve clarity for
consumers, industry, and regulators. The above-referenced sections, as
proposed, would impose no duties or limitations on lenders when a loan
modification decreases the amount of the loan. Accordingly, in addition
to incorporating Regulation Z commentary as to the general definition
of consummation for new loans, proposed comment 2(a)(5)-2 explained the
time at which certain modifications of existing loans would be
considered to be a consummation for purposes of the rule. Proposed
comment 2(a)(5)-2 explained that a modification would be considered a
consummation if the modification increases the amount of the loan.
Proposed comment 2(a)(5)-2 also explained that a cost-free repayment
plan, or ``off-ramp'' as it is commonly known in the market, would not
result in a consummation under proposed Sec. 1041.2(a)(5).
In the proposal, the Bureau stated that it considered expressly
defining a new loan in order to clarify when lenders would need to make
the ability-to-repay determinations prescribed in proposed Sec. Sec.
1041.5 and 1041.9. The definition that the Bureau considered would have
defined a new loan as a consumer-purpose loan made to a consumer that
(a) is made to a consumer who is not indebted on an outstanding loan,
(b) replaces an outstanding loan, or (c) modifies an outstanding loan,
except when a repayment plan, or ``off-ramp'' extends the term of the
loan and imposes no additional fees.
Although some commenters requested more guidance to distinguish a
loan modification from an instance of re-borrowing or a loan
refinancing, the Bureau has concluded that the examples provided in the
commentary sufficiently address all of the relevant scenarios where
ambiguity could arise about whether consummation occurs. No other
comments were received on any other aspect of this portion of the
proposal. The Bureau has reworded parts of comment 2(a)(5)-2 for
clarity in describing what types of loan modifications trigger
substantive requirements under part 1041, but otherwise is finalizing
this definition and the commentary as proposed.
2(a)(6) Cost of Credit
Proposed Sec. 1041.2(a)(18) set forth the method for lenders to
calculate the total cost of credit to determine whether a longer-term
loan would be covered under proposed Sec. 1041.3(b)(2). Proposed Sec.
1041.2(a)(18) generally would have defined the total cost of credit as
the total amount of charges associated with a loan expressed as a per
annum rate, including various charges that do not meet the definition
of finance charge under Regulation Z. The charges would be included
even if they were paid to a party other than the lender. The Bureau
proposed to adopt this approach to defining loan costs from the
Military Lending Act, and also to have adopted the MLA's 36 percent
threshold in defining what covered longer-term loans were subject to
part 1041. The effect would have been that a loan with a term of longer
than 45 days must have a total cost of credit exceeding a rate of 36
percent per annum in order to be a covered loan. The Bureau thus
proposed using an all-in measure of the total cost of credit rather
than the definition of annual percentage rate (APR) under Regulation Z
because it was concerned that lenders might otherwise shift their fee
structures to fall outside traditional Regulation Z concepts. This in
turn would lead them to fall outside the proposed underwriting criteria
for covered longer-term loans, which they could do, for example, by
imposing charges in connection with a loan that are not included in the
calculation of APR under Regulation Z.
The Bureau acknowledged that lenders were less familiar with the
approach involving the MLA calculations than they are with the more
traditional APR approach and calculations under Regulation Z.
Therefore, the Bureau specifically sought comment on the compliance
burdens of the proposed approach and whether to use the more
traditional APR approach instead.
The Bureau received many comments on the definition of the total
cost of credit, which reflected its functional position in the proposed
rule as the trigger for the additional underwriting criteria applicable
to covered longer-term loans. A number of comments addressed what kinds
of fees and charges should be included or excluded from the total cost
of credit and demanded more technical guidance,
[[Page 54527]]
which reflected the increased complexity of using this method. One
lender noted a specific loan program that would only be included in the
rule because of the inclusion of participation fees in the proposed
definition. Various commenters noted the greater simplicity of the APR
calculation in Regulation Z, and contended that greater burdens would
be imposed and less clarity achieved by applying the proposed
definition of total cost of credit. The latter, they suggested, would
confuse consumers who are accustomed to Regulation Z's APR definition,
would be difficult to administer properly, and would be likely to have
unintended consequences, such as causing many lenders to choose not to
offer optional ancillary products like credit life and disability
insurance, to the detriment of borrowers. Consumer groups, by contrast,
generally preferred the proposed definition of total cost of credit,
though they offered suggestions to tighten and clarify it in several
respects.
As noted earlier, the Bureau is not finalizing the portions of the
proposed rule governing underwriting criteria for covered longer-term
loans at this time. Given that covered longer-term loans are only
subject to the payment requirements in subpart C, and in view of the
comments received, the Bureau concludes that the advantages of
simplicity and consistency militate in favor of adopting an APR
threshold as the measure of the cost of credit, which is widely
accepted and built into many State laws, and which is the cost that
will be disclosed to consumers under Regulation Z. Moreover, the Bureau
believes that the other changes in the rule mean that the basis for
concern that lenders would shift their fee structures to fall outside
traditional Regulation Z definitions has been reduced. Instead, the
cost-of-credit threshold is now relevant only to determine whether the
portions of the final rule governing payments apply to longer-term
loans, which the Bureau has concluded are much less likely to prompt
lenders to seek to modify their fee structures simply to avoid the
application of those provisions.
The Bureau notes that in determining here that the Regulation Z
definition of cost of credit would be simpler and easier to use for the
limited purpose of defining the application of the payment provisions
of subpart C of this rule, the Bureau does not intend to decide or
endorse this measure of the cost of credit--as contrasted with the
total cost of credit adopted under the MLA--for any subsequent rule
governing the underwriting of covered longer-term loans without
balloons. The stricter and more encompassing measure used for the MLA
rule may well be more protective of consumers,\429\ and the Bureau will
consider the applicability of that measure as it considers how to
address longer-term loans in a subsequent rule.
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\429\ In particular, the Bureau notes the statement that the
Department of Defense made in the MLA rule that ``unqualified
exclusions from the MAPR [military annual percentage rate] for
certain fees, or all non-periodic fees, could be exploited by a
creditor who would be allowed to preserve a high-cost, open-end
credit product by offering a relatively lower periodic rate coupled
with an application fee, participation fee, or other fee,'' in
declining to adopt any such exclusions, which indicates the more
protective nature of a ``total cost of credit'' definition when
coupled with such further measures as necessary to protect
consumers. 80 FR 43563.
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To effectuate this change, the Bureau has adopted as the final
rule's defined term ``cost of credit,'' which is an APR threshold
rather than a threshold based on the total cost of credit as defined in
the proposed rule. The cost of credit is defined to be consistent with
Regulation Z and thus includes finance charges associated with the
credit as stated in Regulation Z, 12 CFR 1026.4. As discussed further
below in connection with Sec. 1041.3(b)(3), for closed-end credit, the
total cost of credit must be calculated at consummation and according
to the requirements of Regulation Z, 12 CFR 1026.22, but would not have
to be recalculated at some future time, even if a leveraged payment
mechanism is not obtained until later. For open-end credit, the total
cost of credit must be calculated at consummation and, if it does not
cross the 36 percent threshold at that time, at the end of each billing
cycle thereafter according to the rules for calculating the effective
annual percentage rate for a billing cycle as stated in Regulation Z,
12 CFR 1026.14(c) and (d). This is a change from the proposal in order
to determine coverage in situations in which there may not be an
immediate draw, which was not expressly addressed in the proposal.
The Bureau has concluded that defining the term cost of credit
consistently with Regulation Z would reduce the risk of confusion among
consumers, industry, and regulators. It also reduces burden and avoids
undue complexities, especially now that the Bureau is not finalizing
the underwriting criteria that were proposed for covered longer-term
loans at this time. For these reasons, the Bureau is finalizing the
definition of cost of credit in a manner consistent with the discussion
above, as renumbered, and with some minor additional wording revisions
from the proposed rule for clarity and consistency. The proposed
commentary associated with the term total cost of credit is no longer
relevant and has been omitted from the final rule.
2(a)(7) Covered Longer-Term Balloon-Payment Loan
Proposed Sec. 1041.2(a)(7) would have defined a covered longer-
term balloon-payment loan as a covered longer-term loan described in
proposed Sec. 1041.3(b)(2)--as further specified in the next
definition below--where the consumer is required to repay the loan in a
single payment or through at least one payment that is more than twice
as large as any other payment(s) under the loan. Proposed Sec.
1041.9(b)(2) contained certain rules that lenders would have to follow
when determining whether a consumer has the ability to repay a covered
longer-term balloon-payment loan. Moreover, some of the restrictions
imposed in proposed Sec. 1041.10 would apply to covered longer-term
balloon-payment loans in certain situations.
The term covered longer-term balloon-payment loan would include
loans that are repayable in a single payment notwithstanding the fact
that a loan with a ``balloon'' payment is often understood in other
contexts to mean a loan repayable in multiple payments with one payment
substantially larger than the other payments. In the proposal, the
Bureau found as a preliminary matter that both structures pose similar
risks to consumers, and proposed to treat both types of loans the same
way for the purposes of proposed Sec. Sec. 1041.9 and 1041.10.
Accordingly, the Bureau proposed to use a single defined term for both
loan types to improve the proposal's readability.
Apart from including single-payment loans within the definition of
covered longer-term balloon-payment loans, the proposed term
substantially tracked the definition of balloon payment contained in
Regulation Z Sec. 1026.32(d)(1), with one additional modification. The
Regulation Z definition requires the larger loan payment to be compared
to other regular periodic payments, whereas proposed Sec. 1041.2(a)(7)
required the larger loan payment to be compared to any other payment(s)
under the loan, regardless of whether the payment is a regular periodic
payment. Proposed comments 2(a)(7)-2 and 2(a)(7)-3 explained that
payment in this context means a payment of principal or interest, and
excludes certain charges such as late fees and payments that are
accelerated upon the consumer's default. Proposed comment 2(a)(7)-1
would have specified that a
[[Page 54528]]
loan described in proposed Sec. 1041.3(b)(2) is considered to be a
covered longer-term balloon-payment loan if the consumer must repay the
entire amount of the loan in a single payment.
A coalition of consumer advocacy groups commented that this
proposed definition is under-inclusive because it fails to include
other loans that create risk that consumers will need to re-borrow
because larger payments inflict payment shock on the borrowers. The
commenter suggested that a more appropriate definition would be the one
found in the North Carolina Retail Installment Sales Act, which defines
a balloon payment as a payment that is more than 10 percent greater
than other payments, except for the final payment, which is a balloon
payment if it is more than 25 percent greater than other payments. In
light of this comparison, the commenter recommended that any payment
that is 10 percent greater than any other payment should be considered
a balloon payment.
The Bureau recognizes these concerns, but notes that the proposed
definition is generally consistent with how balloon-payment loans are
defined and treated under Regulation Z, and therefore believes that
adopting that definition for purposes of this rule would promote
consistency and reduce the risk of confusion among consumers, industry,
and regulators. The Bureau will be alert to the risk that smaller
irregular payments that are not as large as twice the amount of the
other payments could still cause expense shock for some consumers and
lead to the kinds of problems addressed here, and thus could trigger a
finding of unfairness or abusiveness in particular circumstances. In
addition, the Bureau has experience with the rules adopted to implement
the Military Lending Act, where loan products and lending practices
adopted by some lenders in this industry evolved to circumvent the
provisions of those rules. In particular, as noted in the proposal,
lenders began offering payday loans greater than 91 days in duration
and vehicle title loans greater than 181 days in duration, along with
open-end products, in a direct response intended to evade the MLA
rules--a development that prompted further Congressional and regulatory
intervention. If problems begin to appear in this market from practices
that are intended to circumvent the provisions of this rule, the Bureau
and other regulators would be able to address any unfair or abusive
practices with respect to such loan products through supervision or
enforcement authority, or by amending this rule to broaden the
definition.
Some industry commenters contended that the Bureau's concerns about
re-borrowing for covered longer-term loans were most applicable to
loans with balloon-payment structures, and they therefore argued that
any ability-to-repay restrictions and underwriting criteria should be
limited to longer-term balloon-payment loans. The Bureau agrees that
many of its concerns about covered longer-term balloon-payment loans
are similar to its concerns about covered short-term loans. Yet the
Bureau also has considerable concerns about certain lending practices
with respect to other covered longer-term loans, and will continue to
scrutinize those practices under its supervision and enforcement
authority and in a future rulemaking. At this time, however, as
described more fully below in the section on Market Concerns--
Underwriting, the Bureau has observed longer-term loans involving
balloon payments where the lender does not reasonably assess the
borrower's ability to repay before making the loan, and in those
circumstances it has observed many of the same types of consumer harms
that it has observed when lenders fail to reasonably assess the
borrower's ability to repay before making covered short-term loans.
As noted in part I, for a number of reasons the Bureau has decided
not to address the underwriting of all covered longer-term loans at
this time. Nonetheless, as just mentioned and as discussed more fully
below in Market Concerns--Underwriting, the Bureau is concerned that if
subpart B is not applied to covered longer-term balloon-payment loans,
then lenders would simply extend the terms of their current short-term
products beyond 45 days, without changing the payment structures of
those loans or their current inadequate underwriting practices, as a
way to circumvent the underwriting criteria for covered short-term
loans. As stated above, the balloon-payment structure of these loans
tend to pose very similar risks and harms to consumers as for covered
short-term loans, including likely poses similar forecasting problems
for consumers in repaying such loans. Therefore, in Sec. 1041.5 of the
final rule, the specific underwriting criteria that apply to covered
short-term loans are made applicable to covered longer-term balloon-
payment loans also. The Bureau has also modified the definition of
covered longer-term balloon-payment loan so that it applies to all
loans with the payment structures described in the proposal. This
represents an expansion in scope as compared to the proposal, as
longer-term balloon-payment loans are now being covered without regard
to the cost of credit or whether the lender has taken a leveraged
payment mechanism in connection with the loan. In the proposal, the
Bureau specifically sought comment on this potential modification, and
the reasons for it are set out more extensively below in Market
Concerns--Underwriting. And along with other covered longer-term loans,
these particular loans remain covered by the sections of the final rule
on payments as well.
In light of the decision to treat covered longer-term balloon-
payment loans differently from other covered longer-term loans, the
Bureau decided to shift the primary description of the requirements for
covered longer-term balloon-payment loans to Sec. 1041.3(b)(2).
Accordingly, the language of Sec. 1041.2(a)(7) of the final rule has
been revised to mirror the language of Sec. 1041.2(a)(8) and (10),
which simply cross-reference the descriptions of the various types of
covered loans specified in proposed Sec. 1041.3(b). As a housekeeping
matter, therefore, the substantive definition for longer-term balloon-
payment loans is now omitted from this definition and is addressed
instead in a comprehensive manner in Sec. 1041.3(b)(2) of this final
rule, where it has been expanded to address in more detail various loan
structures that constitute covered longer-term balloon-payment loans.
For the same reason, proposed comments 2(a)(7)-1 to 2(a)(7)-3 are
omitted from the final rule and those matters are addressed in comments
3(b)(2)-1 to 3(b)(2)-4 of the final rule, as discussed below.
The term covered longer-term balloon-payment loan is therefore
defined in the final rule as a loan described in Sec. 1041.3(b)(2).
2(a)(8) Covered Longer-Term Loan
Proposed Sec. 1041.2(a)(8) would have defined a covered longer-
term loan to be a loan described in proposed Sec. 1041.3(b)(2). That
proposed section, in turn, described a covered loan as one made to a
consumer primarily for personal, family, or household purposes that is
not subject to any exclusions or exemptions, and which can be either:
(1) Closed-end credit that does not provide for multiple advances to
consumers, where the consumer is not required to repay substantially
the entire amount due under the loan within 45 days of consummation; or
(2) all other loans (whether open-end credit or closed-end credit),
where the consumer is not required to repay
[[Page 54529]]
substantially the entire amount of the advance within 45 days of the
advance under the loan and, in either case, two other conditions are
satisfied--the total cost of credit for the loan exceeds an annual rate
of 36 percent, as measured at specified times; and the lender or
service provider obtains a leveraged payment mechanism, including but
not limited to vehicle security, at specified times.
Some restrictions in proposed part 1041 would have applied only to
covered longer-term loans described in proposed Sec. 1041.3(b)(2). For
example, proposed Sec. 1041.9 would have prescribed the ability-to-
repay determination that lenders are required to perform when making
covered longer-term loans. Proposed Sec. 1041.10 would have imposed
limitations on lenders making covered longer-term loans to consumers in
certain circumstances that may indicate the consumer lacks the ability
to repay. The Bureau proposed to use a defined term for the loans
described in proposed Sec. 1041.3(b)(2) for clarity.
The Bureau received many comments on this definition that focused
primarily on whether the definition was appropriate for purposes of the
proposed underwriting requirements or for inclusion in the rulemaking
generally, rather than with regard to the payment interventions in
particular. A law firm representing a traditional installment lending
client commented that the definition of covered longer-term loan in the
proposed rule would include traditional installment loans to a greater
extent than the Bureau anticipated, with a correspondingly larger
impact on credit availability as installment lenders would be forced to
replace their proven underwriting techniques with burdensome and
untried approaches. Others contended that the Bureau had presented no
evidence indicating that the practices associated with traditional
installment loans are unfair or abusive.
Several commenters noted that a number of traditional installment
loan products may exceed a total cost of credit of 36 percent, and some
may even exceed a 36 percent annual percentage rate under TILA as well.
A trade association said that such a stringent all-in annual percentage
rate could encompass many bank loan products. More broadly, some
commenters criticized the use of any form of interest rate threshold to
determine the legal status of any loans as potentially violating the
prohibition in section 1027(o) of the Dodd-Frank Act against imposing
usury limits on extensions of consumer credit.
Many commenters offered their views on the prong of the definition
that focused on the taking of a leveraged payment mechanism or vehicle
security, again often in the context of application of the underwriting
requirements rather than the payment requirements. Those concerns have
largely been addressed or mooted by the Bureau's decisions to apply
only the payment requirements to covered longer-term loans and to
narrow the definition of such loans to focus only on those types of
leveraged payment mechanisms that involve the ability to pull money
from consumers' accounts, rather than vehicle security. Comments
focusing on that narrower definition of leveraged payment mechanism are
addressed in more depth in connection with Sec. 1041.3(c) below.
Therefore, in light of these comments and the considerations
discussed above and in connection with Sec. 1041.3(b)(3) below, the
Bureau is finalizing the definition of covered longer-term loan in
Sec. 1041.2(a)(8) as discussed, with the cross-reference to proposed
Sec. 1041.3(b)(2) now edited and renumbered as Sec. 1041.3(b)(3). As
for the latter section now referenced in this definition, it too has
been edited to clarify that covered longer-term loans no longer
encompass covered longer-term balloon-payment loans, which are now
treated separately, as the former are no longer subject to specific
underwriting criteria whereas the latter are subject to the same
specific underwriting criteria as covered short-term loans, which are
set out in Sec. 1041.5 of the final rule.
The term covered longer-term loan is therefore defined in the final
rule, as described in Sec. 1041.3(b)(3), as one made to a consumer
primarily for personal, family, or household purposes that is not
subject to any exclusions or exemptions, and which can be neither a
covered short-term loan nor a covered longer-term balloon-payment
loan--and thus constitutes a covered longer-term loan without a
balloon-payment structure--and which meets both of the following
conditions: The cost of credit for the loan exceeds a rate of 36
percent per annum; and the lender or service provider obtains a
leveraged payment mechanism as defined in Sec. 1041.3(c) of the final
rule.
The details of that description, and how it varies from the
original proposed description of a covered longer-term loan, are
provided and explained more fully in the section-by-section analysis of
Sec. 1041.3(b)(3) of the final rule.
2(a)(9) Covered Person
The Bureau has decided to include in the final rule a definition of
the term covered person, which the final rule defines by cross-
referencing the definition of that same term in the Dodd-Frank Act, 12
U.S.C. 5481(6). In general, the Dodd-Frank Act defines covered person
as any person that engages in offering or providing a consumer
financial product or service and any affiliate of such person if the
affiliate acts as a service provider to such person. The Bureau
concludes that defining the term covered person consistently with the
Dodd-Frank Act is a mere clarification that reduces the risk of
confusion among consumers, industry, and regulators, since this term is
used throughout the final rule. The Bureau therefore is including this
definition in the final rule as Sec. 1041.2(a)(9).
2(a)(10) Covered Short-Term Loan
Proposed Sec. 1041.2(a)(6) would have defined a covered short-term
loan to be a loan described in proposed Sec. 1041.3(b)(1). That
proposed section, in turn, described a covered loan as one made to a
consumer primarily for personal, family, or household purposes that is
not subject to any exclusions or exemptions, and which can be either:
Closed-end credit that does not provide for multiple advances to
consumers, where the consumer is required to repay substantially the
entire amount due under the loan within 45 days of consummation, or all
other loans (whether open-end credit or closed-end credit), where the
consumer is required to repay substantially the entire amount of the
advance within 45 days of the advance under the loan. Some provisions
in proposed part 1041 would apply only to covered short-term loans as
described in proposed Sec. 1041.3(b)(1). For example, proposed Sec.
1041.5 would prescribe the ability-to-repay determination that lenders
are required to perform when making covered short-term loans. Proposed
Sec. 1041.6 would impose limitations on lenders making sequential
covered short-term loans to consumers. And proposed Sec. 1041.16 would
impose the payment provisions on covered short-term loans as well. The
Bureau proposed to use a defined term for the loans described in Sec.
1041.3(b)(1) for clarity.
Various commenters stated that this definition is extraordinarily
broad and sweeps in many different types of short-term loans, and
institutions and trade associations both argued for exempting the types
of loans they or their members commonly make. For example, one credit
union commenter argued that the Bureau should exclude loans with total
cost of credit under 36 percent. Consumer advocates argued, to the
contrary, that broad coverage under the
[[Page 54530]]
proposed rule is necessary to capture the relevant market, which can
differ legally and functionally from one State to another. The Bureau
finds that covered short-term loans pose substantial risks and harms
for consumers, as it has detailed more thoroughly below in Market
Concerns--Underwriting and the section-by-section analysis for Sec.
1041.4 of the final rule. At the same time, the Bureau is adopting
various exclusions and exemptions from coverage under the rule in Sec.
1041.3(d), (e), and (f) below, and has discussed commenters' requests
for exclusions of various categories of loans and lenders in connection
with those provisions. The Bureau has expanded the alternative loan
exclusion, which now triggers off of cost of credit as defined under
Regulation Z, and thus, it appears likely that the products of the
credit union noted above are excluded. In light of the aggregate effect
of this broad definition coupled with those exclusions and exemptions,
the Bureau concludes that its definition of covered short-term loan is
specific, yet necessarily broad in its coverage, in order to effectuate
protections for consumers against practices that the Bureau has found
to be unfair and abusive in the market for these loans. The Bureau is
finalizing as proposed other than renumbering. Likewise, the provision
referenced in this definition--proposed Sec. 1041.3(b)(1)--is being
finalized with only non-substantive language changes, though additional
commentary on that provision has been added in the final rule and will
be addressed below in the discussion of that portion of the rule.
2(a)(11) Credit
Proposed Sec. 1041.2(a)(9) would have defined credit by cross-
referencing the definition of credit in Regulation Z, 12 CFR part 1026.
Regulation Z defines credit as the right to defer payment of debt or to
incur debt and defer its payment. This term was used in numerous places
throughout the proposal to refer generically to the types of consumer
financial products that would be subject to the requirements of
proposed part 1041. The Bureau stated that defining this term
consistently with an existing regulation would reduce the risk of
confusion among consumers, industry, and regulators. The Bureau also
stated that the definition in Regulation Z is appropriately broad so as
to capture the various types of transaction structures that implicate
the concerns addressed by proposed part 1041. Proposed comment 2(a)(9)
further made clear that institutions may rely on 12 CFR 1026.2(a)(14)
and its related commentary in determining the meaning of credit.
One consumer group commented that the definition of credit did not
include a definition of loan and that these commonly related terms
should be clarified to avoid the potential for confusion--a point that
is addressed in Sec. Sec. 1041.2(a)(13) and 1041.3(a) of the final
rule. The Bureau did not receive any other comments on this portion of
the proposal and is finalizing this definition and the commentary as
proposed.
2(a)(12) Electronic Fund Transfer
Proposed Sec. 1041.2(a)(10) would have defined electronic fund
transfer by cross-referencing the definition of that same term in
Regulation E, 12 CFR part 1005. Proposed Sec. 1041.3(c) would provide
that a loan may be a covered longer-term loan if the lender or service
provider obtains a leveraged payment mechanism, which can include the
ability to withdraw payments from a consumer's account through an
electronic fund transfer. Proposed Sec. 1041.14 would impose
limitations on how lenders use various payment methods, including
electronic fund transfers. Proposed comment 2(a)(10)-1 also made clear
that institutions may rely on 12 CFR 1005.3(b) and its related
commentary in determining the meaning of electronic fund transfer. The
Bureau stated that defining this term consistently with an existing
regulation would reduce the risk of confusion among consumers,
industry, and regulators. The Bureau did not receive any comments on
this portion of the proposal and is finalizing this definition as
renumbered and the commentary as proposed.
2(a)(13) Lender
Proposed Sec. 1041.2(a)(11) would have defined lender as a person
who regularly makes loans to consumers primarily for personal, family,
or household purposes. This term was used throughout the proposal to
refer to parties that are subject to the requirements of proposed part
1041. This proposed definition is broader than the general definition
of creditor under Regulation Z in that, under this proposed definition,
the credit that the lender extends need not be subject to a finance
charge as that term is defined by Regulation Z, nor must it be payable
by written agreement in more than four installments.
The Bureau proposed a broader definition than in Regulation Z for
many of the same reasons that it proposed using the total cost of
credit as a threshold for covering longer-term loans rather than the
traditional definition of annual percentage rate as defined by
Regulation Z, which was discussed in the analyses of Sec. Sec.
1041.2(a)(11) and 1041.3(b)(2)(i) of the proposed rule. In both
instances, the Bureau was concerned that lenders might otherwise shift
their fee structures to fall outside of traditional Regulation Z
concepts and thus outside the coverage of proposed part 1041. For
example, the Bureau stated that some loans that otherwise would meet
the requirements for coverage under proposed Sec. 1041.3(b) could
potentially be made without being subject to a finance charge as that
term is defined by Regulation Z. If the Bureau adopted that particular
Regulation Z requirement in the definition of lender, a person who
regularly extended closed-end credit subject only to an application
fee, or open-end credit subject only to a participation fee, would not
be deemed to have imposed a finance charge. In addition, many of the
loans that would be subject to coverage under proposed Sec.
1041.3(b)(1) are repayable in a single payment, so those same lenders
might also fall outside the Regulation Z trigger for loans payable in
fewer than four installments. Thus, the Bureau proposed to use a
definition that is broader than the one contained in Regulation Z to
ensure that the provisions proposed in part 1041 would apply as
intended.
The Bureau proposed to carry over from the Regulation Z definition
of creditor the requirement that a person ``regularly'' makes loans to
a consumer primarily for personal, family, or household purposes in
order to be considered a lender under proposed part 1041. Proposed
comment 2(a)(11)-1 explained that the test for determining whether a
person regularly makes loans is the same as in Regulation Z, as
explained in 12 CFR 1026.2(a)(17)(v), and depends on the overall number
of loans made to a consumer for personal, family, or household
purposes, not just covered loans. The Bureau stated in the proposal
that it would be appropriate to exclude from the definition of lender
those persons who make loans for personal, family, or household
purposes on an infrequent basis so that persons who only occasionally
make loans would not be subject to the requirements of proposed part
1041. Such persons could include charitable, religious, or other
community institutions that make loans very infrequently or individuals
who occasionally make loans to family members.
Consumer groups noted in commenting on the definition of lender
that the proposed rule did not explicitly
[[Page 54531]]
define what a loan is and urged the Bureau to include a definition of
this term as well, as it is used frequently throughout the rule. They
also commented that the definition of lender should be broadened to
encompass service providers as well.
For the reasons explained above in the section-by-section analysis
of Sec. 1041.2(a)(6), with respect to the definition of the term cost
of credit, the Bureau has now narrowed the coverage of longer-term
loans by using a threshold that is based on finance charges under
Regulation Z rather than the broader range of items included in the
proposed definition of total cost of credit. At the same time, it has
decided to maintain the broader definition of lender, which includes
parties that extend credit even if it is not subject to a finance
charge as defined in Regulation Z, nor payable by written agreement in
more than four installments. With regard to covered short-term and
longer-term balloon-payment loans, the Bureau has concluded that it is
important to maintain broad coverage over such products, even if the
companies that provide them may try to structure them so as to avoid
qualifying as a ``creditor'' under Regulation Z. The reasons for
revising the definition of cost of credit, again as explained further
below, were driven in large part by the Bureau's decision not to
address the underwriting of other covered longer-term loans in this
rule at this time, given the benefits of alignment with Regulation Z
and greater simplicity. The broader definition of lender remains
germane, however, to the types of loans that are subject to the
underwriting provisions of the final rule.
In addition, the Bureau does not find it necessary to supplement
these definitions further by adding a new definition of loan in
addition to the modified definitions of credit and lender. Instead, the
Bureau is addressing the commenters' point by modifying the definition
of lender in Sec. 1041.2(a)(13) to refer to a person who regularly
``extends credit'' rather than making loans, and has revised Sec.
1041.3(a) to refer to a lender who ``extends credit by making covered
loans.'' The loans covered by the final rule are credit as defined in
the rule and are made by lenders as defined in the rule. In addition,
key subsets of the broader universe of loans--including covered short-
term loans, covered longer-term loans, and covered longer-term balloon-
payment loans--are also defined explicitly in the final rule. And these
definitions are premised in turn on the explication of what is a
covered loan in proposed Sec. 1041.3(b). As for the relationship
between the terms lender and service provider, the Bureau is satisfied
that these relationships and their effects are addressed in a
satisfactory manner by defining lender as set forth here and by
including separate definitions of covered person and service provider
in conformity to the Dodd-Frank Act, as discussed in Sec. 1041.2(a)(9)
and (18) of the final rule. The relationship between lender and service
provider is discussed further below in the section-by-section analysis
of Sec. 1041.2(a)(18), which concerns the definition of service
provider.
One other segment of commenters sought to be excluded or exempted
from coverage under this rule, raising many of the same points that
they had raised during Bureau outreach prior to release of the
proposal.
As stated in the proposal, some stakeholders had suggested to the
Bureau that the definition of lender should be narrowed so as to exempt
financial institutions that predominantly make loans that would not be
covered loans under the proposed rule. They stated that some financial
institutions only make loans that would be covered loans as an
accommodation to existing customers, and that providing such loans is
such a small part of the overall business that it would not be
practical for the institutions to develop the required procedures for
making covered loans. The Bureau solicited comment on whether it should
narrow the definition of lender based on the quantity of covered loans
an entity offers, and, if so, how to define such a de minimis test.
Similarly, during the comment period many commenters, including but not
limited to smaller depository institutions, presented their views that
this kind of accommodation lending is longstanding and widespread and
so should not be subject to coverage under the rule.
At the same time, stakeholders had urged and the Bureau recognized
at the time it issued the proposed rule that some newly formed
companies are providing services that, in effect, allow consumers to
draw on money they have earned but not yet been paid. Certain of these
services do not require the consumer to pay any fees or finance
charges, relying instead on voluntary ``tips'' to sustain the business,
while others are compensated through electronic fund transfers from the
consumer's account. Some current or future services may use other
business models. The Bureau also noted the existence of some newly
formed companies providing financial management services to low- and
moderate-income consumers that include features to smooth income. The
Bureau solicited comment on whether such entities should be considered
lenders under the regulation.
During the public comment period, a coalition of consumer groups,
some ``fintech'' firms, and others expressed concern about how the
definition of lender would apply to new businesses that are creating
services to consumers to access earned income for a fee--thereby
jeopardizing certain promising innovations by making them subject to
the constraining provisions of this rule--and others offered views on
that set of issues as well. Commenters also offered their thoughts on
other innovative income-smoothing and financial-management initiatives.
The Bureau has decided to address the issues raised by commenters
that were seeking an exclusion or exemption from this rule not by
altering the definition of lender but instead by fashioning specific
exclusions and conditional exemptions as addressed below in Sec.
1041.3(d), (e), and (f) of the final rule.
Therefore in light of the comments and responses, the Bureau is
finalizing this definition as renumbered and the commentary as
proposed, with the one modification--use of the phrase ``extends
credit''--as discussed above.
2(a)(14) Loan Sequence or Sequence
Proposed Sec. 1041.2(a)(12) generally would have defined a loan
sequence or sequence as a series of consecutive or concurrent covered
short-term loans in which each of the loans (other than the first loan)
is made while the consumer currently has an outstanding covered short-
term loan or within 30 days thereafter. It would define both loan
sequence and sequence the same way because the terms are used
interchangeably in various places throughout the proposal. Furthermore,
it also specified how to determine a given loan's place within a
sequence (for example, whether a loan constitutes the first, second, or
third loan in a sequence), which would implicate other provisions of
the proposed rule.
The Bureau's rationale for proposing to define loan sequence in
this manner was discussed in more detail in the section-by-section
analysis of proposed Sec. Sec. 1041.4 and 1041.6. The Bureau also
sought comment on whether alternative definitions of loan sequence may
better address its concerns about how a consumer's inability to repay a
covered loan may cause the need for a successive covered loan.
[[Page 54532]]
Some consumer advocates commented that this definition would be
clarified by including language from local ordinances or State laws
that have the same effective meaning so as to avoid any confusion in
compliance and enforcement. Consumer groups commented that the rule
should treat a loan made within 60 days of another loan, rather than 30
days, as part of the same loan sequence in order to better effectuate
its purpose of addressing the flipping of both short-term and longer-
term loans and to include late fees as rollover fees. Some industry
commenters argued for a shorter period.
The Bureau has considered a number of ways to specify and clarify
the definition of loan sequences in order to minimize or avoid evasions
of the final rule. Adopting local or State definitions would not appear
to clarify the issues, as they are inconsistent from one jurisdiction
to another. However, as discussed in greater detail below in Market
Concerns--Underwriting and in Sec. Sec. 1041.4 and 1041.5(d) of the
final rule, the Bureau has decided to incorporate covered longer-term
balloon-payment loans into this definition, reflecting concerns about
the harms that can occur to consumers who take out a series of covered
longer-term balloon-payment loans in quick succession as well as the
Bureau's concerns about potential evasions of the underwriting
criteria.
As discussed in the proposal, the Bureau also has considered
various time frames for the definition of loan sequence, including 14
days as well as 30 days and 60 days, and decided in finalizing the rule
to adhere to 30 days as a reasonable and appropriate frequency for use
in this definition, to align with consumer expense cycles, which often
involve recurring expenses that are typically a month in length. This
is designed to account for the fact that where repaying a loan causes a
shortfall, the consumer may seek to return during the same expense
cycle to get funds to cover downstream expenses. In addition, a number
of consumers receive income on a monthly basis. The various
considerations involved in resolving these issues are discussed more
fully in the section-by-section analysis of Sec. 1041.5(d) of the
final rule.
In light of the discussion above, the Bureau otherwise is
finalizing this renumbered definition as modified. In addition,
wherever the proposed definition had referred to a covered short-term
loan, the definition in the final rule refers instead to a covered
short-term loan or a covered longer-term balloon-payment loan--or,
where pluralized, the definition in the final rule refers instead to
covered short-term loans or covered longer-term balloon-payment loans,
or a combination thereof.
2(a)(15) Motor Vehicle
In connection with proposing to subject certain longer-term loans
with vehicle security to part 1041, in proposed Sec. 1041.3(d) the
Bureau would have defined vehicle security to refer to the term motor
vehicle as defined in section 1029(f)(1) of the Dodd-Frank Act. That
definition encompasses not only vehicles primarily used for on-road
transportation, but also recreational boats, motor homes, and other
categories. As described below, the Bureau has now decided to narrow
the definition of covered-longer term loan to focus only on loans that
meet a certain rate threshold and involve the taking of a leveraged
payment mechanism as defined in Sec. 1041.3(c) of the final rule,
without regard to whether vehicle security is taken on the loan.
However, the definitions of vehicle security and motor vehicle are
still relevant to Sec. 1041.6(b)(3), which prohibits lenders from
making covered short-term loans under Sec. 1041.6 if they take vehicle
security in connection with such a loan, for the reasons explained in
the section-by-section analysis of that provision.
Upon further consideration in light of this context and its
experience from other related rulemakings, the Bureau has decided to
narrow the definition of motor vehicle in the final rule to focus on
any self-propelled vehicle primarily used for on-road transportation,
but not including motor homes, recreational vehicles, golf carts, and
motor scooters. Some commenters did suggest that vehicle title loans
should encompass boats, motorcycles, and manufactured homes.
Nonetheless, the Bureau has concluded that it is more appropriate to
use a narrower definition because the term motor vehicle is germane to
the vehicle title loans addressed in the final rule, which involve the
prospect of repossession of the vehicle for failing to repay the loan.
The impact to consumers from default or repossession likely operates
differently for basic on-road transportation used to get to work or
manage everyday affairs, thus creating different pressures to repay
loans based on these kinds of vehicles as compared to loans based on
other forms of transportation.
Moreover, from the Bureau's prior experience of writing rules with
respect to vehicles, most notably in the Bureau's larger participant
rule authorizing its supervision authority over certain entities in the
market for auto loans, it is aware that treatment of this category of
items requires clarification in light of what can be some difficult and
unexpected boundary issues. The definition included here in Sec.
1041.2(a)(15) of the final rule is thus similar to the language used in
the Bureau's larger participant rule for the auto loan market,\430\
which generally encompasses the kinds of vehicles--specifically cars
and trucks and motorcycles--that consumers primarily use for on-road
transportation rather than for housing or recreation. The Bureau also
notes that it had proposed to exclude loans secured by manufactured
homes under Sec. 1041.3(e)(2), and has finalized that provision in
Sec. 1041.3(d)(2) as discussed below.
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\430\ 80 FR 37496 (June 30, 2015).
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2(a)(16) Open-End Credit
Proposed Sec. 1041.2(a)(14) would have defined open-end credit by
cross-referencing the definition of that same term in Regulation Z, 12
CFR part 1026, but without regard to whether the credit is consumer
credit, as that term is defined in Regulation Z Sec. 1026.2(a)(12), is
extended by a creditor, as that term is defined in Regulation Z Sec.
1026.2(a)(17), or is extended to a consumer, as that term is defined in
Regulation Z Sec. 1026.2(a)(11). In general, Regulation Z Sec.
1026.2(a)(20) provides that open-end credit is consumer credit in which
the creditor reasonably contemplates repeated transactions, the
creditor may impose a finance charge from time to time on an
outstanding unpaid balance, and the amount of credit that may be
extended to the consumer during the term of the plan (up to any limit
set by the creditor) is generally made available to the extent that any
outstanding balance is repaid. For the purposes of defining open-end
credit under proposed part 1041, the term credit, as defined in
proposed Sec. 1041.2(a)(9), was substituted for the term consumer
credit in the Regulation Z definition of open-end credit; the term
lender, as defined in proposed Sec. 1041.2(a)(11), was substituted for
the term creditor in the same Regulation Z definition; and the term
consumer, as defined in proposed Sec. 1041.2(a)(4), was substituted
for the term consumer in the Regulation Z definition of open-end
credit.
The term open-end credit was used in various parts of the proposal
where the Bureau tailored requirements separately for closed-end and
open-end credit in light of their different structures and durations.
Most notably, proposed Sec. 1041.2(a)(18) would require lenders to
employ slightly different methods when
[[Page 54533]]
calculating the total cost of credit of closed-end versus open-end
loans. Proposed Sec. 1041.16(c) also would require lenders to report
whether a covered loan is a closed-end or open-end loan.
In the proposal, the Bureau stated that generally defining this
term consistently across regulations would reduce the risk of confusion
among consumers, industry, and regulators. With regard to the
definition of consumer, however, the Bureau proposed that, for the
reasons discussed in connection with proposed Sec. 1041.2(a)(4), it
would be more appropriate to incorporate the definition from the Dodd-
Frank Act rather than the definition from Regulation Z, which is
arguably narrower. Similarly, the Bureau indicated that it would be
more appropriate to use the broader definition of lender contained in
proposed Sec. 1041.2(a)(11) than the Regulation Z definition of
creditor.
One commenter recommended that the Bureau defer action on lines of
credit entirely (not just overdraft lines of credit as would be
excluded in proposed Sec. 1041.3) and address these loan products in a
future rulemaking. A number of commenters stated that the underwriting
criteria for such products should be aligned with the provisions of the
Credit CARD Act and the Bureau's rule on prepaid accounts, and raised
questions about the timing calculations on line-of-credit payments.
In response, the Bureau continues to judge it to be important to
address open-end lines of credit in this rule in order to achieve more
comprehensive coverage, outside of those lines of credit that are
excluded under final Sec. 1041.3(d)(6) as discussed below. In response
to many comments, including those urging closer alignment with other
standards for assessing ability to repay under other statutory schemes,
the Bureau has also modified the underwriting criteria in Sec. 1041.5
of the final rule in a number of respects, as explained further below.
The Bureau is therefore finalizing Sec. 1041.2(a)(16) largely as
proposed, with one substantive clarification that credit products that
otherwise meet the definition of open-end credit under Regulation Z
should not be excluded from the definition of open-end credit under
Sec. 1041.2(a)(16) because they do not involve a finance charge. This
change will assure that products are appropriately classified as open-
end credit under part 1041, rather than as closed-end credit. The
Bureau has also revised comment 2(a)(16)-1 to reflect this change and
to streamline guidance clarifying that for the purposes of defining
open-end credit under part 1041, the term credit, as defined in Sec.
1041.2(a)(11), is substituted for the term consumer credit, as defined
in 12 CFR 1026.2(a)(12); the term lender, as defined in Sec.
1041.2(a)(13), is substituted for the term creditor, as defined in 12
CFR 1026.2(a)(17); and the term consumer, as defined in Sec.
1041.2(a)(4), is substituted for the term consumer, as defined in 12
CFR 1026.2(a)(11).
For all the reasons discussed above, the Bureau is finalizing this
definition and the commentary as renumbered and revised.
2(a)(17) Outstanding Loan
Proposed Sec. 1041.2(a)(15) would have generally defined
outstanding loan as a loan that the consumer is legally obligated to
repay, except that a loan ceases to be outstanding if the consumer has
not made any payments on the loan within the previous 180 days. Under
this definition, a loan is an outstanding loan regardless of whether
the loan is delinquent or subject to a repayment plan or other workout
arrangement if the other elements of the definition are met. Under
proposed Sec. 1041.2(a)(12), a covered short-term loan would be
considered to be within the same loan sequence as a previous such loan
if it is made within 30 days of the consumer having the previous
outstanding loan. Proposed Sec. Sec. 1041.6 and 1041.7 would impose
certain limitations on lenders making covered short-term loans within
loan sequences, including a prohibition on making additional covered
short-term loans for 30 days after the third loan in a sequence.
In the proposal, the Bureau stated that if the consumer has not
made any payment on the loan for an extended period of time, it may be
appropriate to stop considering the loan to be an outstanding loan for
the purposes of various provisions of the proposed rule. Because
outstanding loans are counted as major financial obligations for
purposes of underwriting and because treating a loan as outstanding
would trigger certain restrictions on further borrowing by the consumer
under the proposed rule, the Bureau attempted to balance several
considerations in crafting the proposed definition. One is whether it
would be appropriate for very stale and effectively inactive debt to
prevent the consumer from accessing credit, even if so much time has
passed that it seems relatively unlikely that the new loan is a direct
consequence of the unaffordability of the previous loan. Another is how
to define such stale and inactive debt for purposes of any cut-off, and
to account for the risk that collections might later be revived or that
lenders would intentionally exploit a cut-off in an attempt to
encourage new borrowing by consumers.
The Bureau proposed a 180-day threshold as striking an appropriate
balance, and noted that this approach would generally align with the
policy position taken by the Federal Financial Institutions Examination
Council (FFIEC), which generally requires depository institutions to
charge off open-end credit at 180 days of delinquency. Although that
policy also requires that closed-end loans be charged off after 120
days, the Bureau found as a preliminary matter that a uniform 180-day
rule for both closed-end and open-end loans may be more appropriate,
given the underlying policy considerations discussed above, as well as
for simplicity.
Proposed comment 2(a)(15)-1 would clarify that the status of a loan
that otherwise meets the definition of outstanding loan does not change
based on whether the consumer is required to pay a lender, affiliate,
or service provider or whether the lender sells the loan or servicing
rights to a third party. Proposed comment 2(a)(15)-2 would clarify that
a loan ceases to be an outstanding loan as of the earliest of the date
the consumer repays the loan in full, the date the consumer is released
from the legal obligation to repay, the date the loan is otherwise
legally discharged, or the date that is 180 days following the last
payment that the consumer made on the loan. Additionally, proposed
comment 2(a)(15)-2 would explain that any payment the consumer makes
restarts the 180-day period, regardless of whether the payment is a
scheduled payment or in a scheduled amount. Proposed comment 2(a)(15)-2
would further clarify that once a loan is no longer an outstanding
loan, subsequent events cannot make the loan an outstanding loan. The
Bureau proposed this one-way valve to ease compliance burden on lenders
and to reduce the risk of consumer confusion.
One consumer group commented that, with respect to loans that could
include more than one payment, it would be helpful for the definition
to refer to an installment in order to ensure its alignment with terms
used in State and local laws. Other consumer groups suggested various
other changes to clarify details of timing addressed in this
definition, as well as urging that the 180-day period should be changed
to 365 days so that more loans would be considered as outstanding.
Several commented that the definition should be changed so that the
180-day period should run from either the date of the
[[Page 54534]]
last payment by the consumer or from the date of the last debt
collection activity by the collector, in order to more accurately
determine what is truly stale debt and to broaden the scope of what
loans are outstanding to ensure that older loans are not being used by
lenders to encourage consumers to re-borrow. To support compliance
under the modified definition, they also urged that lenders be required
to report collection activity to the registered information systems.
The Bureau has concluded that language in final comment 2(a)(17)-2
emphasizing that any payment restarts the 180-day clock is sufficient
to address the commenter's concern without having to incorporate new
terminology to align the term with its use in State and local laws.
With respect to the comments about the time frame, and 365 days in
particular, the Bureau was not persuaded of the reasoning or need to
broaden the scope of outstanding loans to this extent. The Bureau's
proposed 180-day period was already aligned to the longer end of the
FFIEC treatment of these issues, by adopting the 180 days that the
FFIEC has applied to open-end credit rather than the 120 days that it
has applied to closed-end credit. In addition, the Bureau's experience
with these markets suggests that these types of lenders typically write
off their debts even sooner than 180 days.
The Bureau concludes that the various suggested changes that were
offered to tighten the proposed standard are not necessary to be
adopted at this time, though such matters could be revisited over time
as supervision and enforcement of the final rule proceed in the future.
In particular, the comment that lenders should be required to report
collection activity to the registered information systems would have
broadened the requirements of the rule and the burdens imposed in
significant and unexpected ways that did not seem warranted at this
juncture.
The Bureau also carefully considered the comments made about
extending the period of an outstanding loan, which suggested that it
should run not just 180 days from the date of the last payment made on
the loan but also 180 days from the date of the last debt collection
activity on the loan. The Bureau declines to adopt this proposed
change, for several reasons. It would add a great deal of complexity
that would encumber the rule, not only in terms of ensuring compliance
but in terms of carrying out supervision and enforcement
responsibilities as well. For example, this modification would appear
not to be operational unless debt collection activities were reported
to the registered information systems, which as noted above would add
significant and unexpected burdens to the existing framework. Moreover,
timing the cooling-off period to any debt collection activity could
greatly extend how long a consumer would have to wait to re-borrow
after walking away from a debt, thereby disrupting the balance the
Bureau was seeking to strike in the proposal between these competing
objectives. The Bureau also judged that if the comment was aimed at
addressing and discouraging certain types of debt collection
activities, it would be better addressed in the rulemaking process that
the Bureau has initiated separately to govern debt collection issues.
Finally, this suggestion seems inconsistent with the Bureau's
experience, which indicates that lenders in this market typically cease
their own collection efforts within 180 days.
For these reasons, the Bureau is finalizing this definition as
renumbered and the commentary as proposed with minor changes for
clarity. The Bureau has also added a sentence to comment 2(a)(17)-2 to
expressly state that a loan is outstanding for 180 days after
consummation if the consumer does not make any payments on it, the
consumer is not otherwise released from the legal obligation to pay,
and the loan is not otherwise legally discharged.
2(a)(18) Service Provider
Proposed Sec. 1041.2(a)(17) would have defined service provider by
cross-referencing the definition of that same term in the Dodd-Frank
Act, 12 U.S.C. 5481(26). In general, the Dodd-Frank Act defines service
provider as any person that provides a material service to a covered
person in connection with the offering or provision of a consumer
financial product or service, including one that participates in
designing, operating, or maintaining the consumer financial product or
service or one that processes transactions relating to the consumer
financial product or service. Moreover, the Act specifies that the
Bureau's authority to identify and prevent unfair, deceptive, or
abusive acts or practices through its rulemaking authority applies not
only to covered persons, but also to service providers.\431\ Proposed
Sec. 1041.3(c) and (d) would provide that a loan is covered under
proposed part 1041 if a service provider obtains a leveraged payment
mechanism or vehicle title and the other coverage criteria are
otherwise met.
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\431\ 12 U.S.C. 5531(a) and (b).
---------------------------------------------------------------------------
The definition of service provider and the provisions in proposed
Sec. 1041.3(c) and (d) were designed to reflect the fact that in some
States, covered loans are extended to consumers through a multi-party
transaction. In these transactions, one entity will fund the loan,
while a separate entity, often called a credit access business or a
credit services organization, will interact directly with, and obtain a
fee or fees from, the consumer. This separate entity will often service
the loan and guarantee the loan's performance to the party funding the
loan. The credit access business or credit services organization, and
not the party funding the loan, will in many cases obtain the leveraged
payment mechanism or vehicle security. In these cases, the credit
access business or credit services organization is performing the
responsibilities normally performed by a party funding the loan in
jurisdictions where this particular business arrangement is not used.
Despite the formal division of functions between the nominal lender and
the credit access business, the loans produced by such arrangement are
functionally the same as those covered loans issued by a single entity
and appear to present the same set of consumer protection concerns.
Accordingly, the Bureau stated in the proposal that it is appropriate
to bring loans made under these arrangements within the scope of
coverage of proposed part 1041. Proposed comment 2(a)(17)-1 further
made clear that persons who provide a material service to lenders in
connection with the lenders' offering or provision of covered loans
during the course of obtaining for consumers, or assisting consumers in
obtaining, loans from lenders are service providers, subject to the
specific limitations in section 1002(26) of the Dodd-Frank Act.
The Bureau stated that defining the term service provider
consistently with the Dodd-Frank Act reduces the risk of confusion
among consumers, industry, and regulators. Consumer groups commented
that the rule should apply to service providers, including credit
service organizations and their affiliates, whenever it applies to
lenders and their affiliates. The Bureau concludes that the definitions
of and references to lender and service provider, including
incorporation of the statutory definitions of covered person and
service provider into the regulatory definitions, throughout the
regulation text and commentary are sufficiently well articulated to
make these points clear as to the applicability and scope of coverage
of part 1041. Both section 1031(a) and section 1036(a) of the Dodd-
Frank Act specify that a service provider
[[Page 54535]]
can be held liable on the same terms as a covered person--which
includes a lender as defined by Sec. 1041.2(13)--to the extent that a
service provider engages in conduct that violates this rule on behalf
of a lender, or entities such as credit access businesses and credit
service organizations that provide a material service to a lender in
making these kinds of covered loans.\432\ The Bureau did not receive
any other comments on this portion of the proposal and is finalizing
this definition and the commentary as just discussed and as renumbered.
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\432\ See 12 U.S.C. 5531(a) (providing that the Bureau may take
any action authorized under subtitle E of the Act (i.e., Enforcement
powers) to prevent a covered person or service provider from
committing or engaging in an unfair, deceptive, or abusive act or
practice under Federal law in connection with any transaction with a
consumer for a consumer financial product or service, or the
offering of a consumer financial product or service); 12 U.S.C.
5536(a) (equating covered persons and service providers for purposes
of prohibited acts in violation of Federal consumer financial law,
including liability for violations for engaging in ``any unfair,
deceptive, or abusive act or practice'').
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2(a)(19) Vehicle Security
The Bureau has decided to make ``vehicle security'' a defined term,
incorporating language that described the practice of taking vehicle
security from proposed Sec. 1041.3(d). Its role is now more limited,
however, due to other changes in the rule, which no longer governs the
underwriting of covered longer-term loans (other than balloon-payment
loans), which instead are now subject only to the payment provisions.
Nonetheless, the Bureau is preserving the language explaining vehicle
security and moving it here for purposes of defining the exclusion of
vehicle title loans from coverage under Sec. 1041.6 of the final rule,
which provides for conditionally exempted loans.
As to the definition itself, the proposal would have stated that
for purposes of defining a covered loan, a lender or service provider
obtains vehicle security if it obtains an interest in a consumer's
motor vehicle (as defined in section 1029(f)(1) of the Dodd-Frank Act)
as a condition of the credit, regardless of how the transaction is
characterized by State law, including: (1) Any security interest in the
motor vehicle, motor vehicle title, or motor vehicle registration
whether or not the security interest is perfected or recorded; or (2) a
pawn transaction in which the consumer's motor vehicle is the pledged
good and the consumer retains use of the motor vehicle during the
period of the pawn agreement. Under the proposal, the lender or service
provider would obtain vehicle security if the consumer is required,
under the terms of an agreement with the lender or service provider, to
grant an interest in the consumer's vehicle to the lender in the event
that the consumer does not repay the loan.
As noted in the proposal, because of exclusions contained in
proposed Sec. 1041.3(e)(1) and (5), the term vehicle security would
have excluded loans made solely and expressly for the purpose of
financing a consumer's initial purchase of a motor vehicle in which the
lender takes a security interest as a condition of the credit, as well
as non-recourse pawn loans in which the lender has sole physical
possession and use of the property for the entire term of the loan.
Proposed comment 3(d)(1)-1 also would have clarified that mechanic
liens and other situations in which a party obtains a security interest
in a consumer's motor vehicle for a reason that is unrelated to an
extension of credit do not trigger coverage.
The Bureau proposed that the security interest would not need to be
perfected or recorded in order to trigger coverage under proposed Sec.
1041.3(d)(1). The Bureau reasoned that consumers may not be aware that
the security interest is not perfected or recorded, nor would it matter
in many cases. Perfection or recordation protects the lender's interest
in the vehicle against claims asserted by other creditors, but does not
necessarily affect whether the consumer's interest in the vehicle is at
risk if the consumer does not have the ability to repay the loan. Even
if the lender or service provider does not perfect or record its
security interest, the security interest can still change a lender's
incentives to determine the consumer's ability to repay the loan and
exacerbate the harms the consumer experiences if the consumer does not
have the ability to repay the loan.
The Bureau received many comments on the prong of the definition
that focused on the taking of a leveraged payment mechanism or vehicle
security, again often in the context of application of the underwriting
requirements rather than the payment requirements. Those concerns have
largely been addressed or mooted by the Bureau's decisions to apply
only the payment requirements to covered longer-term loans and to
narrow the definition of such loans to focus only on those types of
leveraged payment mechanisms that involve the ability to pull money
from consumers' accounts, rather than vehicle security. Comments
focusing on that narrower definition of leveraged payment mechanism are
addressed in more depth in connection with Sec. 1041.3(c) below.
Importantly, the term vehicle security as defined in proposed Sec.
1041.3(d) was further limited in its effect by the provisions of
proposed Sec. 1041.3(b)(3)(ii), which had stated that a lender or
service provider did not become subject to the proposed underwriting
criteria merely by obtaining vehicle security at any time, but instead
had to obtain vehicle security before, at the same time as, or within
72 hours after the consumer receives the entire amount of funds that
the consumer is entitled to receive under the loan. Many commenters
criticized the 72-hour requirement as undermining consumer protections
and fostering evasion of the rule. Because of various changes that have
occurred in revising the coverage of the underwriting criteria and
reordering certain provisions in the final rule, this limitation is no
longer necessary to effectuate any of those purposes of the rule. The
definition of vehicle security remains relevant to the provisions of
Sec. 1041.6 of the final rule, but it is unclear how a 72-hour
limitation is germane to establishing the scope of coverage under that
section, and so it has been eliminated from the final rule.
One consumer group suggested that a vehicle title loan should be
covered under the rule regardless of whether the title was a condition
of the loan. The Bureau does not find it necessary to alter the
definition in this manner in order to accomplish the purpose of
covering vehicle title loans, particularly in light of the language in
comment 2(a)(19)-1, which indicates that vehicle security will attach
to the vehicle for reasons that are related to the extension of credit.
With respect to comments on the details of the definition of
vehicle security, one commenter had suggested that the final rule
should make clear that the proposed restrictions on this form of
security interest do not interfere with or prohibit any statutory liens
that have been authorized by Congress. Because nothing in the language
of the final rule purports to create any such interference or
prohibition, the Bureau does not find it necessary to modify its
definition of vehicle security in this regard. Other commenters made
various points about the meaning and coverage of the term motor vehicle
in the Bureau's treatment of the term vehicle security. Those comments
are addressed separately in the discussion of the definition of motor
vehicle in Sec. 1041.2(a)(15) of the final rule.
The Bureau has moved the discussion of vehicle security from
proposed Sec. 1041.3(d) to Sec. 1041.2(a)(19) in the
[[Page 54536]]
general definitions section, and has narrowed the definition of motor
vehicle contained in section 1029(f)(1) of the Dodd-Frank Act,
replacing it with the somewhat narrower definition of motor vehicle
contained in Sec. 1041.2(a)(15) of the final rule as described above.
The definition of vehicle security still includes the other elements of
the proposal, as slightly rewritten for clarity to focus on this term
itself rather than on the actions of a lender or service provider.
Accordingly, the term vehicle security is defined in the final rule
as an interest in a consumer's motor vehicle obtained by the lender or
service provider as a condition of the credit, regardless of how the
transaction is characterized by State law, including: (1) Any security
interest in the motor vehicle, motor vehicle title, or motor vehicle
registration whether or not the security interest is perfected or
recorded; or (2) a pawn transaction in which the consumer's motor
vehicle is the pledged good and the consumer retains use of the motor
vehicle during the period of the pawn agreement. This definition also
carries with it proposed comment 3(d)(1)-1, now finalized as comment
2(a)(19)-1, which explains that an interest in a consumer's motor
vehicle is a condition of credit only to the extent the security
interest is obtained in connection with the credit, and not for a
reason that is unrelated to an extension of credit, such as the
attachment of a mechanic's lien. This comment is finalized with the
language unchanged.\433\
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\433\ Two definitions in the proposal are no longer operative
and so have been omitted from the final rule. First, proposed Sec.
1041.2(a)(13) would have defined the term non-covered bridge loan.
Second, proposed Sec. 1041.2(a)(16) would have defined the term
prepayment penalty. Because the Bureau is not finalizing the
portions of the proposed rule on underwriting of covered longer-term
loans at this time, along with other changes made in Sec. Sec.
1041.5 and 1041.6 of the final rule governing the underwriting and
provision of covered short-term loans, these two definitions and the
related commentary are being omitted from the final rule.
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2(b) Rule of Construction
After reserving this provision in the proposal, the Bureau has
determined to add a rule of construction for purposes of part 1041,
which states that where definitions are incorporated from other
statutes or regulations, the terms have the meaning and incorporate the
embedded definitions, appendices, and commentary from those other laws
except to the extent that part 1041 provides a different definition for
a parallel term. The Bureau had included versions of this basic
principle in the regulation text and commentary for certain individual
provisions of the proposed rule, but has concluded that it would be
helpful to memorialize it as a general rule of construction.
Accordingly, the Bureau moved certain proposed commentary for
individual definitions to comment 2(b)-1 of the final rule in order to
provide examples of the rule of construction, and streamlined certain
other proposed commentary as described above.
Section 1041.3 Scope of Coverage; Exclusions; Exemptions
The primary purpose of proposed part 1041 was to identify and adopt
rules to prevent unfair and abusive practices as defined in section
1031 of the Dodd-Frank Act in connection with certain consumer credit
transactions. Based upon its research, outreach, and analysis of
available data, the Bureau proposed to identify such practices with
respect to two categories of loans to which it proposed to apply this
rule: (1) Consumer loans with a duration of 45 days or less; and (2)
consumer loans with a duration of more than 45 days that have a total
cost of credit above a certain threshold and that are either repayable
directly from the consumer's income stream, as set forth in proposed
Sec. 1041.3(c), or are secured by the consumer's motor vehicle, as set
forth in proposed Sec. 1041.3(d).
In the proposal, the Bureau tentatively concluded that it is an
unfair and abusive practice for a lender to make a covered short-term
loan without determining that the consumer has the ability to repay the
loan. The Bureau likewise tentatively concluded that it is an unfair
and abusive practice for a lender to make a covered longer-term loan
without determining the consumer's ability to repay the loan.
Accordingly, the Bureau proposed to apply the protections of proposed
part 1041 to both categories of loans.
In particular, proposed Sec. Sec. 1041.5 and 1041.9 would have
required that, before making a covered loan, a lender must determine
that the consumer has the ability to repay the loan. Proposed
Sec. Sec. 1041.6 and 1041.10 would have imposed certain limitations on
repeat borrowing, depending on the type of covered loan. Proposed
Sec. Sec. 1041.7, 1041.11, and 1041.12 would have provided for
alternative requirements that would allow lenders to make covered
loans, in certain limited situations, without first determining that
the consumer has the ability to repay the loan. Proposed Sec. 1041.14
would have imposed consumer protections related to repeated lender-
initiated attempts to withdraw payments from consumers' accounts in
connection with covered loans. Proposed Sec. 1041.15 would have
required lenders to provide notices to consumers before attempting to
withdraw payments on covered loans from consumers' accounts. Proposed
Sec. Sec. 1041.16 and 1041.17 would have required lenders to check and
report borrowing history and loan information to certain information
systems with respect to most covered loans. Proposed Sec. 1041.18
would have required lenders to keep certain records on the covered
loans that they make. And proposed Sec. 1041.19 would have prohibited
actions taken to evade the requirements of proposed part 1041.
The Bureau did not propose to extend coverage to several other
types of loans and specifically proposed excluding, to the extent they
would otherwise be covered under proposed Sec. 1041.3, certain
purchase money security interest loans, certain loans secured by real
estate, credit cards, student loans, non-recourse pawn loans, and
overdraft services and lines of credit. The Bureau likewise proposed
not to cover loans that have a term of longer than 45 days if they are
not secured by a leveraged payment mechanism or vehicle security or if
they have a total cost of credit below a rate of 36 percent per annum.
By finalizing application of the underwriting requirements with
respect to certain categories of loans as described above, and
excluding certain other types of loans from the reach of the rule, the
Bureau does not mean to signal any definitive conclusion that it could
not be an unfair or abusive practice to make any other types of loans,
such as loans that are not covered by part 1041, without reasonably
assessing a consumer's ability to repay. Moreover, this rule does not
supersede or limit any protections imposed by other laws, such as the
Military Lending Act and implementing regulations. The coverage limits
in the rule simply reflect the fact that these are the types of loans
the Bureau has studied in depth to date and has chosen to address
within the scope of the proposal. Indeed, the Bureau issued,
concurrently with the proposal, a Request for Information (RFI), which
solicited information and evidence to help assess whether there are
other categories of loans for which lenders do not determine the
consumer's ability to repay that may pose risks to consumers. The
Bureau also sought comment in response to the RFI as to whether other
lender practices associated with covered loans may warrant further
action by the Bureau.
The Bureau thus is reinforcing the point that all covered persons
within the meaning of the Dodd-Frank Act have
[[Page 54537]]
a legal duty not to engage in unfair, deceptive, or abusive acts or
practices. The Bureau is explicitly authorized to consider, on a case-
by-case basis, through its supervisory or enforcement activities,
whether practices akin to those addressed here are unfair, deceptive,
or abusive in connection with loans not covered by the rule. The Bureau
also is emphasizing that it may decide to engage in future rulemaking
with respect to other types of loans or other types of practices
associated with covered loans at a later date.
3(a) General
In proposed Sec. 1041.3(a), the Bureau provided that proposed part
1041 would apply to a lender that makes covered loans. The Bureau
received no specific comments on proposed Sec. 1041.3(a), and is
finalizing this provision as proposed except that it has adopted
language as discussed above in connection with the definition of lender
in Sec. 1041.2(a)(13) to refer to a person who ``extends credit by
making covered loans.''
3(b) Covered Loan
In the proposal, the Bureau noted that section 1031(b) of the Dodd-
Frank Act empowers it to prescribe rules to identify and prevent
unfair, deceptive, or abusive acts or practices associated with
consumer financial products or services. Section 1002(5) of the Dodd-
Frank Act defines such products or services as those offered or
provided for use by consumers primarily for personal, family, or
household purposes or, in certain circumstances, those delivered,
offered, or provided in connection with another such consumer financial
product or service. Proposed Sec. 1041.3(b) would have provided,
generally, that a covered loan means closed-end or open-end credit that
is extended to a consumer primarily for personal, family, or household
purposes that is not excluded by Sec. 1041.3(e).
By proposing to apply the rule only to loans that are extended to
consumers primarily for personal, family, or household purposes, the
Bureau intended it not to apply to loans that are made primarily for a
business, commercial, or agricultural purpose. But the proposal
explained that a lender would violate proposed part 1041 if it extended
a loan ostensibly for a business purpose and failed to comply with the
requirements of proposed part 1041 for a loan that is, in fact,
primarily for personal, family, or household purposes. In this regard,
the Bureau referenced the section-by-section analysis of proposed Sec.
1041.19, which provided further discussion of evasion issues.
Proposed comment 3(b)-1 would have clarified that whether a loan is
covered is generally based on the loan terms at the time of
consummation. Proposed comment 3(b)-2 would have clarified that a loan
could be a covered loan regardless of whether it is structured as open-
end or closed-end credit. Proposed comment 3(b)-3 would have explained
that the test for determining the primary purpose of a loan is the same
as the test prescribed by Regulation Z Sec. 1026.3(a) and clarified by
the related commentary in supplement I to part 1026. The Bureau stated
that lenders are already familiar with the Regulation Z test and that
it would be appropriate to apply that same test here to maintain
consistency in interpretation across credit markets, though the Bureau
also requested comment on whether more tailored guidance would be
useful here as the related commentary in supplement I to part 1026, on
which lenders would be permitted to rely in interpreting proposed Sec.
1041.3(b), did not discuss particular situations that may arise in the
markets that would be covered by proposed part 1041.
One commenter noted that while business loans are outside the scope
of the rule, many small business owners use their personal vehicles to
secure title loans for their businesses, and asserted that it will be
difficult for lenders to differentiate the purposes of a loan in such
instances. Another commenter suggested that provisions should be added
to ensure that loans are made for personal use only. More generally,
one commenter stated that the breadth of the definition of covered loan
would enhance the burden that the proposed rule would impose on credit
unions.
In response, the Bureau notes that its experience with these
markets has made it aware that the distinction between business and
household purposes is necessarily fact-specific, yet the basic
distinction is embedded as a jurisdictional matter in many consumer
financial laws and has long been regarded as a sensible line to draw.
Further, the concern about the breadth of this definition as affecting
credit unions is addressed substantially by the measures adopted in the
final rule to reduce burdens for lenders, along with the exclusions and
exemptions that have been adopted, including the conditional exemption
for alternative loans.
The Bureau is finalizing Sec. 1041.3(b) as proposed. The
commentary is finalized as proposed, except proposed comment 3(b)-1,
which the Bureau is not finalizing. That comment had proposed that
whether a loan is covered is generally determined based on the loan
terms at the time of consummation. As noted below, final comment
3(b)(3)-3 makes clear that a loan may become a covered longer-term loan
at any such time as both requirements of Sec. 1041.3(b)(3)(i) and (ii)
are met, even if they were not met when the loan was initially made.
3(b)(1)
Proposed Sec. 1041.3(b)(1) would have brought within the scope of
proposed part 1041 those loans in which the consumer is required to
repay substantially the entire amount due under the loan within 45 days
of either consummation or the advance of loan proceeds. Loans of this
type, as they exist in the market today, typically take the form of
single-payment loans, including payday loans, vehicle title loans, and
deposit advance products. However, coverage under proposed Sec.
1041.3(b)(1) was not limited to single-payment products, but rather
included any single-advance loan with a term of 45 days or less and any
multi-advance loan where repayment is required within 45 days of a
credit draw.\434\ Under proposed Sec. 1041.2(a)(6), this type of
covered loan was defined as a covered short-term loan.
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\434\ While application of the 45-day duration limit for covered
short-term loans varies based on whether the loan is a single- or
multiple-advance loan, the Bureau often used the phrase ``within 45
days of consummation'' throughout the proposal and in the final rule
as a shorthand way of referring to coverage criteria of both types
of loans.
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Specifically, proposed Sec. 1041.3(b)(1) prescribed different
tests for determining whether a loan is a covered short-term loan based
on whether or not the loan is closed-end credit that does not provide
for multiple advances to consumers. For this type of credit, a loan
would be a covered short-term loan if the consumer is required to repay
substantially the entire amount of the loan within 45 days of
consummation. For all other types of loans, a loan would be a covered
short-term loan if the consumer is required to repay substantially the
entire amount of an advance within 45 days of the advance.
As proposed comment 3(b)(1)-1 explained, a loan does not provide
for multiple advances to a consumer if the loan provides for full
disbursement of the loan proceeds only through disbursement on a single
specific date. The Bureau stated that a different test to determine
whether a loan is a covered short-term loan is appropriate for loans
that provide for multiple advances to consumers, because open-end
credit and closed-end credit providing for multiple advances may be
consummated long
[[Page 54538]]
before the consumer incurs debt that must be repaid. If, for example,
the consumer waited more than 45 days after consummation to draw on an
open-end line, but the loan agreement required the consumer to repay
the full amount of the draw within 45 days of the draw, the loan would
not be practically different than a closed-end loan repayable within 45
days of consummation. The Bureau preliminarily found that it is
appropriate to treat the loans the same for the purposes of proposed
Sec. 1041.3(b)(1).
As the Bureau described in part II of the proposal, the terms of
short-term loans are often tied to the date the consumer receives his
or her paycheck or benefits payment. While pay periods typically vary
from one week to one month, and expense cycles are typically one month,
the Bureau proposed 45 days as the upper bound for covered short-term
loans in order to accommodate loans that are made shortly before a
consumer's monthly income is received and that extend beyond the
immediate income payment to the next income payment. These
circumstances could result in loans that are somewhat longer than a
month in duration, but the Bureau believed that they nonetheless pose
similar risks of harm to consumers as loans with durations of a month
or less.
The Bureau also considered proposing to define covered short-term
loans as loans that are substantially repayable within either 30 days
of consummation or advance, 60 days of consummation or advance, or 90
days of consummation or advance. The Bureau, nonetheless, did not
propose the 30-day period because, as described above, some loans for
some consumers who are paid on a monthly basis can be slightly longer
than 30 days, yet still would essentially constitute a one-pay-cycle,
one-expense-cycle loan. The Bureau stated that it did not propose
either the 60-day or 90-day period because loans with those terms
encompass multiple income and expense cycles, and thus may present
somewhat different risks to consumers, though such loans would have
been covered longer-term loans if they met the criteria set forth in
proposed Sec. 1041.3(b)(2).
As discussed in the proposal, the Bureau proposed to treat longer-
term loans, as defined in proposed Sec. 1041.3(b)(2), as covered loans
only if the total cost of credit exceeds a rate of 36 percent per annum
and if the lender or service provider obtains a leveraged payment
mechanism or vehicle security as defined in proposed Sec. 1041.3(c)
and (d). The Bureau did not propose similar limitations with respect to
the definition of covered short-term loans because the evidence
available to the Bureau seemed to suggest that the structure and short-
term nature of these loans give rise to consumer harm even in the
absence of costs above the 36 percent threshold or particular means of
repayment.
Proposed comment 3(b)(1)-2 noted that both open-end credit and
closed-end credit may provide for multiple advances to consumers. The
comment explained that open-end credit is self-replenishing even though
the plan itself has a fixed expiration date, as long as during the
plan's existence the consumer may use the line, repay, and reuse the
credit. Likewise, closed-end credit may consist of a series of
advances. For example, under a closed-end commitment, the lender might
agree to lend a fixed total amount in a series of advances as needed by
the consumer, and once the consumer has borrowed the maximum, no more
is advanced under that particular agreement, even if there has been
repayment of a portion of the debt.
Proposed comment 3(b)(1)-3 explained that a determination of
whether a loan is substantially repayable within 45 days requires
assessment of the specific facts and circumstances of the loan.
Proposed comment 3(b)(1)-4 provided guidance on determining whether
loans that have alternative, ambiguous, or unusual payment schedules
would fall within the definition. The comment explained that the key
principle in determining whether a loan would be a covered short-term
loan or a covered longer-term loan is whether, under applicable law,
the consumer would be considered to be in breach of the terms of the
loan agreement if the consumer failed to repay substantially the entire
amount of the loan within 45 days of consummation.
As noted above, Sec. 1041.3(b)(1) provides the substance of the
definition of covered short-term loan as referenced in Sec.
1041.2(a)(10) of the final rule. The limited comments on this provision
are presented and addressed in the section-by-section analysis of that
definition. For the reasons stated there, the Bureau is finalizing
Sec. 1041.3(b)(1) as proposed, with only non-substantive language
changes. One modification has been made in the commentary, however, to
address comments received about deposit advance products. New comment
3(b)(1)-4 in the final rule states that a loan or advance is
substantially repayable within 45 days of consummation or advance if
the lender has the right to be repaid through a sweep or withdrawal of
any qualifying electronic deposit made into the consumer's account
within 45 days of consummation or advance. A loan or advance described
in this paragraph is substantially repayable within 45 days of
consummation or advance even if no qualifying electronic deposit is
actually made into or withdrawn by the lender from the consumer's
account. This comment was added to address more explicitly a deposit
advance product in which the lender can claim all the income coming in
to the account, as it comes in, for the purpose of repaying the loan,
regardless of whether income in fact comes in during the first 45 days
after a particular advance. Proposed comment 3(b)(1)-4 thus has been
renumbered as comment 3(b)(1)-5 of the final rule.
3(b)(2)
Proposed Sec. 1041.3(b)(2) would have brought within the scope of
proposed part 1041 several types of loans for which, in contrast to
loans covered under proposed Sec. 1041.3(b)(1), the consumer is not
required to repay substantially the entire amount of the loan or
advance within 45 days of consummation or advance. Specifically,
proposed Sec. 1041.3(b)(2) extended coverage to longer-term loans with
a total cost of credit exceeding a rate of 36 percent per annum if the
lender or service provider also obtains a leveraged payment mechanism
as defined in proposed Sec. 1041.3(c) or vehicle security as defined
in proposed Sec. 1041.3(d) in connection with the loan before, at the
same time, or within 72 hours after the consumer receives the entire
amount of funds that the consumer is entitled to receive. Under
proposed Sec. 1041.2(a)(8), this type of covered loan would be defined
as a covered longer-term loan.
As discussed above in connection with Sec. 1041.2(a)(7), the
Bureau defined a sub-category of covered longer-term loans that would
be subject to certain tailored provisions in proposed Sec. Sec.
1041.6, 1041.9, and 1041.10 because they involved balloon-payment
structures that the Bureau believed posed particular risks to
consumers. The Bureau proposed to cover such longer-term balloon-
payment loans only if they exceeded the general rate threshold and
involved leveraged payment mechanisms or vehicle security, but
specifically sought comment on whether such products should be subject
to the rule more generally in light of the particular concerns about
balloon payment structures.
In light of the Bureau's decision to differentiate which parts of
the rule apply to longer-term balloon-payment loans and more generally
to longer-term
[[Page 54539]]
loans, the Bureau has decided to make the two categories mutually
exclusive and to describe them separately in Sec. 1041.3(b)(2) and (3)
of the final rule, respectively. Accordingly, the Bureau is finalizing
Sec. 1041.3(b)(2) to define longer-term balloon-payment loans,
incorporating the language of proposed Sec. 1041.2(a)(7) as further
revised in various respects.
First, for purposes of greater clarity in ordering Sec. 1041.3(b)
of the final rule, the Bureau is separating out its treatment of
covered longer-term balloon-payment loans (in Sec. 1041.3(b)(2)) from
its treatment of all other covered longer-term loans (in Sec.
1041.3(b)(3)). As described in greater detail below in Market
Concerns--Underwriting and in the section-by-section analysis of Sec.
1041.4, the Bureau has decided to restructure these provisions in this
way because it has decided in the final rule to subject covered longer-
term balloon-payment loans both to the underwriting criteria and the
payment requirements of the final rule, but to apply only the payment
requirements to other types of covered longer-term loans.
This organization reflects in part the comments received from
industry and trade groups who contended that the Bureau's concerns
about re-borrowing for covered longer-term loans were most applicable
to loans with balloon-payment structures. They therefore argued that
any ability-to-repay restrictions and underwriting criteria should be
limited to longer-term balloon-payment loans. These comments reinforced
the Bureau's preliminary view that concerns about the re-borrowing of
covered longer-term balloon-payment loans were most similar to the
concerns it had about the re-borrowing of covered short-term loans. As
described more fully below in the section on Market Concerns--
Underwriting, the Bureau has observed longer-term loans involving
balloon payments where the lender does not reasonably assess the
borrower's ability to repay before making the loan, and has observed in
these circumstances the same types of consumer harms that it has
observed when lenders fail to make a reasonable assessment of the
borrower's ability to repay before making covered short-term loans.
Nonetheless, the Bureau also maintains its concerns about lender
practices in the market for other covered longer-term loans, and
emphasizes that it retains supervision and enforcement authority to
oversee such lenders for unfair, deceptive, or abusive acts or
practices.
As discussed further below, for a number of reasons the Bureau has
decided not to address the underwriting of all covered longer-term
loans at this time. Nonetheless, as discussed above in the section-by-
section analysis of Sec. 1041.2(a)(7) of the final rule, the Bureau is
concerned that covered longer-term balloon-payment loans have a loan
structure that poses many of the same risks and harms to consumers as
with covered short-term loans, and could be adapted in some manner as a
loan product intended to circumvent the underwriting criteria for
covered short-term loans. Therefore, in Sec. 1041.5 of the final rule,
the specific underwriting criteria that apply to covered short-term
loans are, with certain modifications, made applicable to covered
longer-term balloon-payment loans also (without regard to interest rate
or the taking of a leveraged payment mechanism). And along with other
covered longer-term loans, these loans remain covered by the sections
of the final rule on payment practices as well.
Given this resolution of the considerations raised by the comments
and based on the Bureau's further consideration and analysis of the
market, the Bureau is finalizing Sec. 1041.3(b)(2) in parallel with
Sec. 1041.3(b)(1), since both types of loans--covered short-term loans
and covered longer-term balloon loans--are subject to the same
underwriting criteria and payment requirements as prescribed in the
final rule.
As noted above in the discussion of Sec. 1041.2(a)(7), in
conjunction with making the definition of covered longer-term balloon-
payment loan into a separate category in its own right rather than a
subcategory of the general definition of covered longer-term loan, the
Bureau has decided to subject such loans to an expansion in scope as
compared to the proposal, since longer-term balloon-payment loans are
now being covered by both the underwriting and payment provisions of
the final rule without regard to whether the loans exceed a particular
threshold for the cost of credit or involve the taking of a leveraged
payment mechanism or vehicle security. The Bureau had specifically
sought comment as to whether to cover longer-term balloon-payment loans
regardless of these two conditions, and has concluded that it is
appropriate to do so in light of concerns about the risks and harms
that balloon-payment structures pose to consumers and of potential
industry evolution to circumvent the rule, as set out more extensively
below in Market Concerns--Underwriting.
The Bureau has also revised the definition of covered longer-term
balloon-payment loan to address different types of loan structures in
more detail. As discussed above in connection with Sec. 1041.2(a)(7),
the proposal would generally have defined the term to include loans
that require repayment in a single payment or that require at least one
payment that is more than twice as large as any other payment(s) under
the loan. The Bureau based the twice-as-large threshold on the
definition of balloon payment under Regulation Z, but with some
modification in details. However, the Bureau did not expressly address
whether covered longer-term balloon-payment loans could be both closed-
end and open-end credit.
After further consideration of the policy concerns that prompted
the Bureau to apply the underwriting requirements in subpart B to
covered longer-term balloon-payment loans, the Bureau has concluded
that it is appropriate to define that term to include both closed-end
and open-end loans that involve the kinds of large irregular payments
that were described in the proposed definition. In light of the fact
that such loans could be structured a number of ways, the Bureau finds
it helpful for purposes of implementation and compliance to build out
the definition to more expressly address different types of structures.
The Bureau has done this by structuring Sec. 1041.3(b)(2) to be
similar to the covered-short-term definition in Sec. 1041.3(b)(1), but
with longer time frames and descriptions of additional potential
payment structures.
Specifically, the revised definition for covered longer-term
balloon-payment loans separately addresses closed-end loans that do not
provide for multiple advances from other loans (both closed-end and
open-end) that do involve multiple advances. With regard to the former
set of loans, Sec. 1041.3(b)(2)(i) defines a covered longer-term
balloon-payment loan to include those where the consumer is required to
repay the entire balance of the loan more than 45 days after
consummation in a single payment or to repay such loan through at least
one payment that is more than twice as large as any other payment(s).
With regard to multiple-advance loans, the revised definition focuses
on either of two types of payment structures. Under the first
structure, the consumer is required to repay substantially the entire
amount of an advance more than 45 days after the advance is made or is
required to make at least one payment on the advance that is more than
twice as large as any other payment(s). Under the second structure, the
consumer is paying the required minimum payments but may not fully
amortize the outstanding balance by a specified date
[[Page 54540]]
or time, and the amount of the final payment to repay the outstanding
balance at such time could be more than twice the amount of other
minimum payments under the plan.
The contours of this definition are thus very similar to those for
covered short-term loans, which pose the same kinds of risks and harms
for consumers, and its focus on payments that are more than twice as
large as other payments is generally consistent with how balloon-
payment loans are defined and treated under Regulation Z. The Bureau
believes retaining that payment size threshold will promote consistency
and reduce the risk of confusion among consumers, industry, and
regulators.
Along with finalizing Sec. 1041.3(b)(2) as just stated, the Bureau
has also built out the related commentary to incorporate the original
commentary to proposed Sec. 1041.2(a)(7) and concepts that were
already used in the definition of covered short-term loan, as well as
to elaborate further on language that has been added to the final rule.
As now adopted, comment 3(b)(2)-1 specifies that a closed-end loan is
considered to be a covered longer-term balloon-payment loan if the
consumer must repay the entire amount of the loan in a single payment
which is due more than 45 days after the loan was consummated, or to
repay substantially the entire amount of any advance in a single
payment more than 45 days after the funds on the loan were advanced, or
is required to pay at least one payment that is more than twice as
large as any other payment(s). Comment 3(b)(2)-2 states that for
purposes of Sec. 1041.3(b)(2)(i) and (ii), all required payments of
principal and any charges (or charges only, depending on the loan
features) due under the loan are used to determine whether a particular
payment is more than twice as large as another payment, regardless of
whether the payments have changed during the loan term due to rate
adjustments or other payment changes permitted or required under the
loan. Comment 3(b)(2)-3 discusses charges for actual unanticipated late
payments, for exceeding a credit limit, or for delinquency, default, or
a similar occurrence that may be added to a payment, and notes that
they are excluded from the determination of whether the loan is
repayable in a single payment or a particular payment is more than
twice as large as another payment. Likewise, sums that are accelerated
and due upon default are excluded from the determination of whether the
loan is repayable in a single payment or a particular payment is more
than twice as large as another payment. These three comments are based
on prior comments to proposed Sec. 1041.2(a)(7), with certain
revisions made for consistency and form.
Comment 3(b)(2)-4 is new and provides that open-end loans are
considered to be covered longer-term balloon-payment loans under Sec.
1041.3(b)(2)(ii) if: either the loan has a billing cycle with more than
45 days and the full balance is due in each billing period, or the
credit plan is structured such that paying the required minimum payment
may not fully amortize the outstanding balance by a specified date or
time, and the amount of the final payment to repay the outstanding
balance at such time could be more than twice the amount of other
minimum payments under the plan. An example is provided to show how
this works for an open-end loan, in light of particular credit limits,
monthly billing cycles, minimum payments due, fees or interest, and
payments made, to determine whether the credit plan is a covered loan
and why.
3(b)(3)
As noted above, proposed Sec. 1041.3(b)(2) encompassed both
covered longer-term balloon-payment loans and certain other covered
longer-term loans. Because the Bureau is finalizing a separate
definition of covered longer-term balloon-payment loans in Sec.
1041.3(b)(2), new Sec. 1041.3(b)(3) of the final rule addresses
covered loans that are neither covered short-term loans nor covered
longer-term balloon-payment loans, but rather are covered longer-term
loans that are only subject to provisions of the rule relating to
payment practices.
Specifically, proposed Sec. 1041.3(b)(2) would have extended
coverage to longer-term loans with a total cost of credit exceeding a
rate of 36 percent per annum if the lender or service provider also
obtains a leveraged payment mechanism as defined in proposed Sec.
1041.3(c) or vehicle security as defined in proposed Sec. 1041.3(d) in
connection with the loan before, at the same time, or within 72 hours
after the consumer receives the entire amount of funds that the
consumer is entitled to receive. Under proposed Sec. 1041.2(a)(8),
this type of covered loan would have been defined as a covered longer-
term loan.
The Bureau received extensive comments on covered longer-term
loans, but key changes in the final rule mitigate most of the points
made in those comments. As discussed above in connection with Sec.
1041.2(a)(8), many commenters offered views on the prongs of the
definition of covered longer-term loan as triggers for whether such
loans should be subject not only to the payment requirements of part
1041 but also its underwriting requirements. As just discussed above
and discussed more fully in part I and in Market Concerns--
Underwriting, the Bureau has decided not to apply these underwriting
requirements to longer-term loans unless they involve balloon payments
as defined in Sec. Sec. 1041.2(a)(7) and 1041.3(b)(2). However, the
Bureau believes that such longer-term loans may still pose substantial
risk to consumers with regard to certain lender payment practices, and
therefore is finalizing subpart C of the rule to apply to covered
longer-term loans. It thus remains relevant to describe the parameters
of such loans in Sec. 1041.3(b)(3) of the final rule, which continues
to provide the substantive content for the parallel definition of
covered longer-term loans in Sec. 1041.2(a)(8) of the final rule.
In light of this decision about the policy interventions, the
Bureau has also decided to narrow the definition of covered longer-term
loans relative to the proposal both by relaxing the rate threshold and
narrowing the focus to only loans involving the taking of a leveraged
payment mechanism. Thus, Sec. 1041.3(b)(3) of the final rule defines
covered longer-term loans as loans that do not meet the definition of
covered short-term loans under Sec. 1041.3(b)(1) or of covered longer-
term balloon-payment loans under Sec. 1401.3(b)(2); for all remaining
covered loans, two further limitations that were contained in the
proposed rule apply, so that a loan only becomes a covered longer-term
loan if both of the following conditions are also satisfied: The cost
of credit for the loan exceeds a rate of 36 percent per annum, as
measured in specified ways; and the lender or service provider obtains
a leveraged payment mechanism as defined in Sec. 1041.3(c) of the
final rule.
As described above in connection with the definition of cost of
credit in Sec. 1041.2(a)(6), the Bureau has decided to relax the rate
threshold in the final rule by basing the threshold on the annual
percentage rate as defined in Regulation Z rather than the total cost
of credit concept used in the Military Lending Act. The final rule
retains the numeric threshold of 36 percent, however, since, as the
proposal explained more fully, that annual rate is grounded in many
established precedents of Federal and State law.
With regard to the taking of leveraged payment mechanisms or
vehicle security as part of the definition of covered longer-term loan,
as discussed in more detail below in connection with
[[Page 54541]]
Sec. 1041.3(c), the Bureau has narrowed the definition to focus solely
on loans that involve types of leveraged payment mechanisms that enable
a lender to pull funds directly from a consumer's account. Accordingly,
a loan that involves vehicle security may be a covered longer-term loan
if it involves a leveraged payment mechanism under Sec. 1041.3(c), but
not because it involves vehicle security in its own right.
The final rule also modifies and clarifies certain details of
timing about when status as a covered longer-term loan is determined,
in light of the fact that such loans are only subject to the payment
requirements under the final rule. With regard to the rate threshold,
it is measured at the time of consummation for closed-end credit. For
open-end credit, it is measured at consummation and, if the cost of
credit at consummation is not more than 36 percent per annum, again at
the end of each billing cycle for open-end credit. Once open-end credit
meets the threshold, it is treated as doing so for the duration of the
plan. The rule also provides a rule for calculating the cost of credit
in any billing cycle in which a lender imposes a charge included in the
cost of credit where the principal balance is $0. The definition of
leveraged payment mechanisms is also truncated, as mechanisms based on
access to employer payments or payroll deduction repayments are no
longer germane to a policy intervention that is limited solely to the
payment practices in Sec. 1041.8 of the final rule. Also, vehicle
security is no longer relevant to determining coverage of longer-term
loans. The Bureau has also omitted language providing a 72-hour window
for determining coverage as a longer-term loan from the final rule, as
that was driven largely by the need for certainty on underwriting. In
short, the two major modifications to this provision as it had been set
forth in the proposal are further clarification of how the 36 percent
rate is measured for open-end credit and the removal of any references
to vehicle security and other employment-based sources of repayment.
The commentary to proposed Sec. 1041.3(b)(2) has been extensively
revised in light of the other restructuring that has occurred in Sec.
1041.3(b) of the final rule. To summarize briefly, comments 3(b)(3)-1
to 3(b)(3)-3 and 3(b)(3)(ii)-1 to 3(b)(3)(ii)-2 largely recapitulate
the provisions of Sec. 1041.3(b)(3) of the final rule in greater
detail, as well as clarifying their practical application through a
series of examples. Two key points of clarification, however, concern
timing. First, comment 3(b)(3)-3 makes clear that a loan may become a
covered longer-term loan at any such time as both requirements of Sec.
1041.3(b)(3)(i) and (ii) are met, even if they were not met when the
loan was initially made. Second, comment 3(b)(3)(ii)-1 states that the
condition in Sec. 1041.3(b)(3)(ii) is satisfied if a lender or service
provider obtains a leveraged payment mechanism before, at the same time
as, or after the consumer receives the entire amount of funds that the
consumer is entitled to receive under the loan, regardless of the means
by which the lender or service provider obtains a leveraged payment
mechanism.
For the reasons stated in view of the comments, the Bureau is
finalizing Sec. 1041.3(b)(3) and the commentary as described above.
3(c) Leveraged Payment Mechanism
Proposed Sec. 1041.3(c) would have set forth three ways that a
lender or a service provider could obtain a leveraged payment mechanism
that, if other conditions were met under proposed Sec. 1041.3(b)(2),
would bring a longer-term loan within the proposed coverage of proposed
part 1041. Specifically, the proposal would have treated a lender as
having obtained a leveraged payment mechanism if the lender or service
provider had the right to initiate a transfer of money from the
consumer's account to repay the loan, the contractual right to obtain
payment from the consumer's employer or other payor of expected income,
or required the consumer to repay the loan through payroll deduction or
deduction from another source of income. In all three cases, the
consumer would be required, under the terms of an agreement with the
lender or service provider, to cede autonomy over the consumer's
account or income stream in a way that the Bureau believed, as stated
in the proposal, would change incentives to determine the consumer's
ability to repay the loan and can exacerbate the harms the consumer
experiences if the consumer does not have the ability to repay the loan
and still meet the consumer's basic living expenses and major financial
obligations. As explained in the section-by-section analysis of
proposed Sec. Sec. 1041.8 and 1041.9, the Bureau preliminarily found
that it is an unfair and abusive practice for a lender to make such a
loan without determining that the consumer has the ability to repay.
Proposed Sec. 1041.3(c)(1) generally would have provided that a
lender or a service provider obtains a leveraged payment mechanism if
it has the right to initiate a transfer of money, through any means,
from a consumer's account (as defined in proposed Sec. 1041.2(a)(1))
to satisfy an obligation on a loan. For example, this would occur with
a post-dated check or preauthorization for recurring electronic fund
transfers. However, the proposed regulation did not define leveraged
payment mechanism to include situations in which the lender or service
provider initiates a one-time electronic fund transfer immediately
after the consumer authorizes such transfer.
In the proposal, the functionality of this determination was that
it served as one of three preconditions to the underwriting of such
covered longer-term loans, along with the provisions of proposed Sec.
1041.3(c)(2) and (3). In light of other changes to the proposed rule,
however, the final rule is no longer covering the underwriting of
covered longer-term loans (other than balloon-payment loans), but
simply determining whether they are subject to the intervention for
payment practices in Sec. 1041.8 of the final rule. As described
above, as a result of the decision to apply only the rule's payment
requirements to covered-longer term loans, the Bureau is not finalizing
the provisions of proposed Sec. 1041.3(c)(2) and (3), which covered
payment directly from the employer and repayment through payroll
deduction, respectively, as they are no longer germane to the purpose
of this policy intervention. With the elimination of those two
provisions, Sec. 1041.3(c)(1) is being reorganized more simply as just
part of Sec. 1041.3(c) of the final rule to focus on forms of
leveraged payment mechanism that involve direct access to consumers'
transaction accounts.
Proposed Sec. 1041.3(c)(1) generally would have provided that a
lender or a service provider obtains a leveraged payment mechanism if
it has the right to initiate a transfer of money, through any means,
from a consumer's account (as defined in proposed Sec. 1041.2(a)(1))
to satisfy an obligation on a loan. For example, this would occur with
a post-dated check or preauthorization for recurring electronic fund
transfers. However, the proposed regulation did not define leveraged
payment mechanism to include situations in which the lender or service
provider initiates a one-time electronic fund transfer immediately
after the consumer authorizes such transfer.
As proposed comment 3(c)(1)-1 explained, the key principle that
makes a payment mechanism leveraged is whether the lender has the
ability to ``pull'' funds from a consumer's account without any
intervening action or further assent by the consumer. In those cases,
the lender's ability to pull
[[Page 54542]]
payments from the consumer's account gives the lender the ability to
time and initiate is to coincide with expected income flows into the
consumer's account. This means that the lender may be able to continue
to obtain payment (as long as the consumer receives income and
maintains the account) even if the consumer does not have the ability
to repay the loan while meeting his or her major financial obligations
and basic living expenses. In contrast, the Bureau stated in the
section-by-section analysis of proposed Sec. 1041.3(c)(1) that a
payment mechanism in which the consumer ``pushes'' funds from his or
her account to the lender does not provide the lender leverage over the
account in a way that changes the lender's incentives to determine the
consumer's ability to repay the loan or exacerbates the harms the
consumer experiences if the consumer does not have the ability to repay
the loan.
Proposed comment 3(c)(1)-2 provided examples of the types of
authorizations for lender-initiated transfers that constitute leveraged
payment mechanisms. These include checks written by the consumer,
authorizations for electronic fund transfers (other than immediate one-
time transfers as discussed further below), authorizations to create or
present remotely created checks, and authorizations for certain
transfers by account-holding institutions (including a right of set-
off). Proposed comment 3(c)(1)-4 explained that a lender does not
obtain a leveraged payment mechanism if a consumer authorizes a third
party to transfer money from the consumer's account to a lender as long
as the transfer is not made pursuant to an incentive or instruction
from, or duty to, a lender or service provider. Proposed comment
3(c)(1)-3 contained similar language.
As noted above, proposed Sec. 1041.3(c)(1) provided that a lender
or service provider does not obtain a leveraged payment mechanism by
initiating a one-time electronic fund transfer immediately after the
consumer authorizes the transfer. This provision is similar to what the
Bureau proposed in Sec. 1041.15(b), which exempts lenders from
providing the payment notice when initiating a single immediate payment
transfer at the consumer's request, as that term is defined in proposed
Sec. 1041.14(a)(2), and is also similar to what the Bureau proposed in
Sec. 1041.14(d), which permits lenders to initiate a single immediate
payment transfer at the consumer's request even after the prohibition
in proposed Sec. 1041.14(b) on initiating further payment transfers
has been triggered.
Accordingly, proposed comment 3(c)(1)-3 clarified that if the loan
agreement between the parties does not otherwise provide for the lender
or service provider to initiate a transfer without further consumer
action, the consumer may authorize a one-time transfer without causing
the loan to be a covered loan. Proposed comment 3(c)(1)-3 further
clarified that the term ``immediately'' means that the lender initiates
the transfer after the authorization with as little delay as possible,
which in most circumstances will be within a few minutes. Proposed
comment 3(c)(1)-4 took the opposite perspective, noting that a lender
or service provider does not initiate a transfer of money from a
consumer's account if the consumer authorizes a third party, such as a
bank's automatic bill pay service, to initiate a transfer of money from
the consumer's account to a lender or service provider as long as the
third party does not transfer the money pursuant to an incentive or
instruction from, or duty to, a lender or service provider.
In the proposal, the Bureau noted that it anticipated that
scenarios involving authorizations for immediate one-time transfers
would only arise in certain discrete situations. For closed-end loans,
a lender would be permitted to obtain a leveraged payment mechanism
more than 72 hours after the consumer has received the entirety of the
loan proceeds without the loan becoming a covered loan. Thus, in the
closed-end context, this exception would only be relevant if the
consumer was required to make a payment within 72 hours of receiving
the loan proceeds--a situation which is unlikely to occur. However, the
Bureau acknowledged that the situation may be more likely to occur with
open-end credit. According to the proposal, longer-term open-end loans
could be covered loans if the lender obtained a leveraged payment
mechanism within 72 hours of the consumer receiving the full amount of
the funds which the consumer is entitled to receive under the loan.
Thus, if a consumer only partially drew down the credit plan, but the
consumer was required to make a payment, a one-time electronic fund
transfer could trigger coverage without the one-time immediate transfer
exception.
The Bureau received a few comments on Sec. 1041.3(c)(1) of the
proposed rule and the related commentary. One commenter contended that
the definition of leveraged payment mechanism is overly broad as
between different types of push and pull transactions. Another
commenter claimed that the Bureau was improperly attributing motive to
the practices of different types of lenders that were using the same
leveraged payment mechanisms, that its treatment of leveraged payment
mechanisms would have more than a minimal effect on lenders that were
already engaged in substantial underwriting, and that the proposed rule
and commentary were misaligned with respect to transactions that push
or pull money from the consumer's account.
In response to these comments, the Bureau concludes that, in
general, its definition is reasonably calibrated to address the core
practice at issue here, which is a lender or service provider
establishing a right to initiate payment directly from the consumer
without any intervening action or further assent from the consumer,
subject to certain narrow limitations. The definition of leveraged
payment mechanism thus is not overbroad for the purposes served by the
rule. As for the final set of comments, the Bureau did not undertake
any inquiry or determine any of these issues based on speculation about
the motivations of particular lenders; rather, it presumed that lenders
that secure leveraged payment mechanisms do so for a mix of reasons.
The Bureau also acknowledges at least some tension between the proposed
rule and the related commentary in their treatment of push and pull
transactions from a consumer's account. On further consideration,
however, the Bureau has concluded that with the focus now solely on
payment practices, push transactions are no longer germane to the
analysis and thus has revised proposed comments 3(c)(1)-1 and 3(c)(1)-4
accordingly.
In light of these comments received and the responses, the Bureau
is finalizing proposed Sec. 1041.3(c)(1) as part of Sec. 1041.3(c),
and is revising the definition of leveraged payment mechanism to align
more closely with the rule's payment provisions. Specifically, the
Bureau is revising the proposed language that would have excluded a
one-time immediate transfer from the definition. Under the definition
as finalized, the exception applies if the lender initiates a single
immediate payment transfer at the consumer's request, as defined in
Sec. 1041.8(a)(2). As discussed in the section-by-section analysis of
Sec. Sec. 1041.8 and 1041.9, transfers meeting the definition of a
single immediate payment transfer at the consumer's request are
excluded from the cap on failed payment attempts and the payment notice
requirements. The Bureau has concluded that using the same definition
for purposes of
[[Page 54543]]
excluding certain transfers from the definition of leveraged payment
mechanism is important for the consistency of the rule.
One practical result of this revision is that, whereas the proposed
exclusion from the definition of leveraged payment mechanism would have
applied only to a one-time electronic fund transfer, the exclusion as
finalized permits the lender to initiate an electronic fund transfer or
process a signature check without triggering coverage under Sec.
1041.3(b)(3), provided that the lender initiates the transfer or
processes the signature check in accordance with the timing and other
conditions in Sec. 1041.8(a)(2). The Bureau notes, however, that the
definition of single immediate payment transfer at the consumer's
request applies only to the first time that a lender initiates the
electronic fund transfer or processes the signature check pursuant to
the exception. It does not apply to the re-presentment or re-submission
of a transfer or signature check that is returned for nonsufficient
funds. If a transfer or signature check is returned, the lender could
still work with the consumer to obtain payment in cash or to set up
another transfer meeting the definition of single immediate payment
transfer at the consumer's request.
The Bureau is finalizing the remainder of the commentary to this
provision, which is reordered as comments 3(c)-1 to 3(c)-4 of the final
rule, with revisions to the language consistent with the revisions made
to the definition of leverage payment mechanism in Sec. 1041.3(c).
3(d) Exclusions for Certain Credit Transactions
As discussed above, the Bureau decided to narrow how part 1041
applies to covered longer-term loans to focus only on payment
practices. Accordingly, the detailed discussion of vehicle security
that appeared in proposed Sec. 1041.3(d) in connection with the
definition of covered longer-term loan under proposed Sec.
1041.3(b)(2) is no longer germane to the final rule. As noted in the
section-by-section analysis of Sec. 1041.2(a)(19) of the final rule,
the Bureau has now moved certain language from proposed Sec. 1041.3(d)
describing vehicle security to Sec. 1041.2(a)(19) of the final rule,
since vehicle security is relevant to application to Sec. 1041.6 of
the final rule. Thus the remainder of Sec. 1041.3 is being renumbered,
and all references to the provisions of proposed Sec. 1041.3(e) have
now been finalized as Sec. 1041.3(d), with further revisions and
additions as described below.
Proposed Sec. 1041.3(e) would have excluded specific types of
credit from part 1041, specifically purchase money security interest
loans extended solely for the purchase of a good, real estate secured
loans, certain credit cards, student loans, non-recourse pawn loans in
which the consumer does not possess the pledged collateral, and
overdraft services and overdraft lines of credit. The Bureau found as a
preliminary matter that notwithstanding the potential term, cost of
credit, repayment structure, or security of these loans, they arise in
distinct markets that may pose a somewhat different set of concerns for
consumers. At the same time, the Bureau was concerned about the risk
that these exclusions could create avenues for evasion of the proposed
rule. In the Accompanying RFI, the Bureau also solicited information
and additional evidence to support further assessment of whether other
categories of loans may pose risks to consumers where lenders do not
determine the consumer's ability to repay. The Bureau also emphasized
that it may determine in a particular supervisory or enforcement matter
or in a later rulemaking, in light of evidence available at the time,
that the failure to assess ability to repay when making a loan excluded
from coverage here may nonetheless be an unfair or abusive act or
practice.
The Bureau did not receive any comments on the brief opening
language in Sec. 1041.3(e) of the proposed rule, and is finalizing the
language which notes that the exclusions listed in Sec. 1041.3(d) of
the final rule apply to certain transactions, with slight modifications
for clarity.
The Bureau did, however, receive some general comments about the
topic of exclusions from the scope of coverage of the proposed rule.
First, various consumer groups argued that there should be no
exclusions or exemptions from coverage under the rule, which would
weaken its effectiveness.
A ``fintech'' company urged the Bureau to develop a ``sandbox''
type of model to allow innovation and to encourage the development of
alternative loan models. Another such company offered a more
complicated and prescriptive regulatory scheme establishing a safe
harbor, lifting income verification requirements for loans with low
loss rates and loans with amortizing payment plans, and full relief
from cooling-off periods if borrowers repay their loans on time with
their own money. One commenter during the SBREFA process argued for a
broad exemption from the rule for payday lenders in States that permit
such loans pursuant to existing regulatory frameworks governing payday
lending. Another sought an exemption for Tribal lenders, asserting that
the Bureau lacked statutory authority to treat them as covered by the
rule. Many finance companies, and others commenting on their behalf,
offered reasons why the Bureau should omit traditional installment
loans from coverage under the rule; they also presented different
formulations of how this result could be achieved.
The Bureau does not agree that the exclusions listed in the
proposal should be eliminated, for all the reasons set out in the
discussion of those specific exclusions below (and notes that a further
exclusion and two conditional exemptions have been added to or revised
from the proposed rule). As for the notion of a ``sandbox'' approach to
financial innovation, the Bureau has developed its own approach to
these issues, having created and operated its Project Catalyst for
several years now as a means of carrying out the Bureau's statutory
objective to ensure that ``markets for consumer financial products and
services operate transparently and efficiently to facilitate access and
innovation.'' \435\ The suggestion that a distinct and highly
prescriptive regulatory approach should be adopted in preference to the
framework actually set out in the proposal is not supported by any data
or analysis of this market.
---------------------------------------------------------------------------
\435\ 12 U.S.C. 5511(b)(5). More information about Project
Catalyst is available on the Bureau's Web site at https://www.consumerfinance.gov/about-us/project-catalyst/ (last visited
Sept. 24, 2017).
---------------------------------------------------------------------------
The arguments for an exemption of payday lender in those States
where they are permitted to make such loans are directly contrary to
all of the data and analysis contained in the extended discussions
above in part II and below in Market Concerns--Underwriting. All of the
risks and harms that the Bureau has identified from covered loans
occur, by definition, in those States that authorize such lending,
rather than in the 15 States and the District of Columbia that have
effectively banned such lending under their State laws. The arguments
raised on behalf of Tribal lenders have also been raised in Tribal
consultations that the Bureau has held with federally recognized Indian
tribes, as discussed in part III, and rest on what the Bureau believes
is a misreading of the statutes and of governing Federal law and
precedents governing the scope of Tribal immunity.\436\
---------------------------------------------------------------------------
\436\ See, e.g., CFPB v. Great Plains Lending, 846 F.3d 1049
(9th Cir. 2017), reh'g denied (Apr. 5, 2017) (court of appeals
affirmed district court ruling that Tribal Lending Entities must
comply with civil investigative demands issued by the CFPB); see
also Otoe-Missouria Tribe of Indians v. New York State Dep't of Fin.
Servs., 769 F.3d 105, 107 (2d Cir. 2014); Donovan v. Coeur d'Alene
Tribal Farms, 751 F.2d 1113, 1115 (9th Cir. 1985).
---------------------------------------------------------------------------
[[Page 54544]]
As for the points raised by finance companies and others about
traditional installment loans, they are largely being addressed by
various modifications to the proposed rule, including by not imposing
underwriting requirements for covered longer-term loans (other than
covered longer-term balloon-payment loans), by adopting the exclusions
and conditional exemptions, and, as some commenters suggested, by
adopting the definition of cost of credit under TILA in place of the
definition of total cost of credit in the proposed rule.
3(d)(1) Certain Purchase Money Security Interest Loans
Proposed Sec. 1041.3(e)(1) would have excluded from coverage under
proposed part 1041 loans extended for the sole and express purpose of
financing a consumer's initial purchase of a good when the good being
purchased secures the loan. Accordingly, loans made solely to finance
the purchase of, for example, motor vehicles, televisions, household
appliances, or furniture would not be subject to the consumer
protections imposed by proposed part 1041 to the extent the loans are
secured by the good being purchased. Proposed comment 3(e)(1)-1
explained the test for determining whether a loan is made solely for
the purpose of financing a consumer's initial purchase of a good. If
the item financed is not a good or if the amount financed is greater
than the cost of acquiring the good, the loan is not solely for the
purpose of financing the initial purchase of the good. Proposed comment
3(e)(1)-1 further explained that refinances of credit extended for the
purchase of a good do not fall within this exclusion and may be subject
to the requirements of proposed part 1041.
Purchase money loans are typically treated differently than non-
purchase money loans under the law. The FTC's Credit Practices Rule
generally prohibits consumer credit in which a lender takes a
nonpossessory security interest in household goods but makes an
exception for purchase money security interests.\437\ The Federal
Bankruptcy Code, the UCC, and some other State laws also apply
different standards to purchase money security interests. This
differential treatment facilitates the financing of the initial
purchase of relatively expensive goods, which many consumers would not
be able to afford without a purchase money loan. In the proposal, the
Bureau stated that it had not yet determined whether purchase money
loans pose similar risks to consumers as the loans covered by proposed
part 1041. Accordingly, the Bureau proposed not to cover such loans at
this time.
---------------------------------------------------------------------------
\437\ 16 CFR 444.2(a)(4).
---------------------------------------------------------------------------
A number of commenters expressed concern about the proposal's use
of a sole purpose test for determining when a loan made to finance the
consumer's initial purchase of a good gives rise to a purchase money
security interest. Other alternatives were suggested, including a
primary purpose test or perhaps the definition used in the UCC adopted
in many States. Some commenters expressed concerns about motor vehicle
purchases, in particular, noting that where the amount financed
includes not simply the vehicle itself, but also the costs of ancillary
products such as an extended service contract or a warranty, or other
related costs such as taxes, tags, and title, it may be unclear whether
the loan would lose its status as a purchase money security interest
loan and become a covered loan instead. Others contended that covering
the refinancing of credit that was extended for the purchase of a good
could seem inconsistent with the terms of the exclusion itself, and
could also bring back within the proposed rule's scope of coverage many
motor vehicle loans where the total cost of credit would exceed a rate
of 36 percent per annum. These commenters again were particularly
concerned about motor vehicle loans, which they noted often exceed a
100 percent lien-to-value ratio because additional products, such as
add-on products like extended warranties, are often financed along with
the price of the vehicle.
In response to these comments, the Bureau streamlined and added
language to proposed comment 3(e)(1)-1 to specify that a loan qualifies
for this exclusion even if the amount financed under the loan includes
Federal, State, or local taxes or amounts required to be paid under
applicable State and Federal licensing and registration requirements.
The Bureau recognized that these mandatory and largely unavoidable
items should not cause a loan to lose its excluded status. Yet the same
considerations do not apply to ancillary products that are being sold
along with a vehicle or other household good, but are not themselves
the good in which the lender takes a security interest as a condition
of the credit. As to the concern about refinances of credit extended
for the purchase of a good, and especially the concern that this
provision could bring back within the proposed rule's scope of coverage
many motor vehicle loans where the total cost of credit would exceed a
rate of 36 percent per annum, the Bureau concluded that other changes
made elsewhere in the final rule largely mitigate these concerns. In
particular, the Bureau notes that the definition of total cost of
credit in Sec. 1041.2(a)(18) of the proposed rule has now been
replaced with the definition of cost of credit in Sec. 1041.2(a)(6) of
the final rule, which aligns this term with Regulation Z. The Bureau
also notes that these concerns about refinancing are most applicable to
covered longer-term loans, which are no longer subject to underwriting
criteria in the final rule (with the exception of covered longer-term
balloon-payment loans). And though they are subject to the payment
provisions, other changes in the coverage and the scope of the
exceptions for certain payment transfers mitigate the effects for
credit unions, in particular, that were the source of many of the
comments on this issue.
For these reasons, the Bureau is finalizing the regulation text as
proposed, and the revised commentary as explained above as Sec.
1041.3(d)(1) in the final rule.
3(d)(2) Real Estate Secured Credit
Proposed Sec. 1041.3(e)(2) would have excluded from coverage under
proposed part 1041 loans that are secured by real property, or by
personal property used as a dwelling, and in which the lender records
or perfects the security interest. The Bureau stated that even without
this exclusion, very few real estate secured loans would meet the
coverage criteria set forth in proposed Sec. 1041.3(b). Nonetheless,
the Bureau preliminarily found that a categorical exclusion would be
appropriate. For the most part, these loans are already subject to
Federal consumer protection laws, including, for most closed-end loans,
ability-to-repay requirements under Regulation Z Sec. 1026.43. The
proposed requirement that the security interest in the real estate be
recorded or perfected also strongly discourages attempts to use this
exclusion for sham or evasive purposes. Recording or perfecting a
security interest in real estate is not a cursory exercise for a
lender--recording fees are often charged and documentation is required.
As proposed comment 3(e)(2)-1 explained, if the lender does not record
or otherwise perfect the security interest in the property during the
term of the loan, the loan does not fall under this exclusion and may
be subject to the requirements of proposed part 1041. The Bureau did
not receive any comments on this portion of the proposed rule, and is
[[Page 54545]]
finalizing this exclusion and the commentary as proposed, with
formatting changes only.
3(d)(3) Credit Cards
Proposed Sec. 1041.3(e)(3) would have excluded from coverage under
proposed part 1041 credit card accounts meeting the definition of
credit card account under an open-end (not home-secured) consumer
credit plan in Regulation Z Sec. 1026.2(a)(15)(ii), rather than
products meeting the more general definition of credit card accounts
under Regulation Z Sec. 1026.2(a)(15). By focusing on the narrower
category, the exclusion would apply only to credit card accounts that
are subject to the Credit CARD Act of 2009,\438\ which provides various
heightened safeguards for consumers. These protections include a
limitation that card issuers cannot open a credit card account or
increase a credit line on a card account unless the card issuer first
considers the consumer's ability to repay the required payments under
the terms of the account, as well as other protections such as
limitations on fees during the first year after account opening, late
fee restrictions, and a requirement that card issuers give consumers a
reasonable amount of time to pay their bill.\439\
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\438\ Public Law 111-24, 123 Stat. 1734 (2009).
\439\ 15 U.S.C. 1665e; see also 12 CFR 1026.51(a); supplement I
to 12 CFR part 1026.
---------------------------------------------------------------------------
The Bureau preliminarily found that potential consumer harms
related to credit card accounts are more appropriately addressed by the
CARD Act, its implementing regulations, and other applicable law. At
the same time, if the Bureau were to craft a broad exclusion for all
credit cards as generally defined under Regulation Z, the Bureau would
be concerned that a lender seeking to evade the requirements of the
rule might seek to structure a product in a way that is designed to
take advantage of this exclusion. The Bureau therefore proposed a
narrower definition, focusing only on those credit card accounts that
are subject to the full range of protections under the CARD Act and its
implementing regulations. Among other requirements, the regulations
imposing the CARD Act prescribe a different ability-to-repay standard
that lenders must follow, and the Bureau found as a preliminary matter
that the combined consumer protections governing credit card accounts
subject to the CARD Act are sufficient for that type of credit.
One commenter stated that all credit cards should be excluded from
coverage under the rule, not just those subject to the CARD Act.
Another industry commenter found it noteworthy that credit cards are
not covered under the rule even though they can result in a cycle of
debt. Consumer groups argued that this exclusion should be narrowed to
lower-cost mainstream credit cards in harmony with the provisions of
the Military Lending Act and implementing regulations. Other narrowing
categories were also suggested in that comment.
For all the reasons stated in the proposal, the Bureau does not
find it sensible to expand coverage in this exclusion beyond those
credit cards that are subject to the various heightened safeguards and
protections for consumers in the CARD Act. At the same time, the
reasons for drawing the boundaries of this exclusion around that
particular universe of credit cards also militate against narrowing the
scope of the exclusion further. Accordingly, the Bureau is finalizing
this exclusion as proposed, with formatting changes only. The Bureau
notes that ``hybrid prepaid-credit card'' products, which are treated
as open-end (not home-secured) consumer credit plans under the final
prepaid accounts rule, will be excluded from the scope of this final
rule under Sec. 1041.3(d)(3).\440\
---------------------------------------------------------------------------
\440\ 81 FR 83934 (Nov. 22, 2016).
---------------------------------------------------------------------------
3(d)(4) Student Loans
Proposed Sec. 1041.3(e)(4) would have excluded from coverage under
proposed part 1041 loans made, insured, or guaranteed pursuant to a
Federal student loan program, and private education loans. The Bureau
stated that even without this exclusion, very few student loans would
meet the coverage criteria set forth in proposed Sec. 1041.3(b).
Nonetheless, the Bureau preliminarily determined that a categorical
exclusion is appropriate. Federal student loans are provided to
students or parents meeting eligibility criteria established by Federal
law and regulations, such that the protections afforded by this
proposed rule would be unnecessary. Private student loans are sometimes
made to students based on their future potential ability to repay (as
distinguished from their current ability), but they are typically co-
signed by a party with financial capacity. These loans raise discrete
issues that may warrant further attention in the future, but the Bureau
found as a preliminary matter that they were not appropriately
considered along with the types of loans at issue in this rulemaking.
The Bureau stated in the proposal that it would continue to monitor the
student loan servicing market for trends and developments; for unfair,
deceptive, or abusive practices; and to evaluate possible policy
responses, including potential rulemaking.
Consumer groups contended that student loans should not be excluded
from coverage under the rule. They noted that the effect of deleting
this exclusion would likely be limited to private education loans,
since the total cost of credit for Federal student loans in the
proposed rule would likely not exceed a rate of 36 percent per annum.
The Bureau continues to judge that student loans are specialized in
nature, are subject to certain other regulatory constraints more
specifically contoured to the loan product, and are generally not
appropriately considered among the types of loans at issue here. The
Bureau did not receive any other comments on this portion of the
proposed rule, and is finalizing this exclusion as proposed, with
formatting changes only.
3(d)(5) Non-Recourse Pawn Loans
Proposed Sec. 1041.3(e)(5) generally would have excluded from
coverage, under proposed part 1041, loans secured by pawned property in
which the lender has sole physical possession and use of the pawned
property for the entire term of loan, and for which the lender's sole
recourse if the consumer does not redeem the pawned property is the
retention and disposal of the property. Proposed comment 3(e)(5)-1
explained that if any consumer, including a co-signor or guarantor, is
personally liable for the difference between the outstanding loan
balance and the value of the pawned property, then the loan does not
fall under this exclusion and may be subject to the requirements of
proposed part 1041.
The Bureau preliminarily found that bona fide, non-recourse pawn
loans generally pose somewhat different risks to consumers than loans
covered under proposed part 1041. As described in part II, non-recourse
pawn loans involve the consumer physically relinquishing control of the
item that secures the loan during the term of the loan. The Bureau
stated that consumers may be more likely to understand and appreciate
the risks associated with physically turning over an item to the lender
when they are required to do so at consummation. Moreover, in most
situations, the loss of a non-recourse pawned item over which the
lender has sole physical possession during the term of the loan is less
likely to affect the rest of the consumer's finances than is either a
leveraged payment mechanism or vehicle security. For instance, a pawned
item of this nature may be valuable to the consumer, but the consumer
most likely does not rely on the pawned item for
[[Page 54546]]
transportation to work or to pay basic living expenses or major
financial obligations. Otherwise, the consumer likely would not have
pawned the item under those terms. Finally, because the loans are non-
recourse, in the event that a consumer is unable to repay the loan, the
lender must accept the pawned item as fully satisfying the debt,
without further collection activity on any remaining debt obligations.
In all of these ways, the Bureau stated in the proposal that pawn
transactions appear to differ significantly from the secured loans that
would be covered under proposed part 1041.
One commenter claimed that the same reasons for excluding non-
recourse pawn loans applies to vehicle title loans, and that vehicle
title loans may even be preferred by consumers as the consumer retains
the use of the vehicle and they can be less costly. Another similarly
argued that the Bureau ignored the principle of a level playing field
among different financial products by excluding high-cost alternatives
like pawn loans, which can be even more costly at times than payday
loans. Consumer groups suggested that the exclusion should be narrowed
only to pawn loans where the loan does not exceed the fair market value
of the good.
Another commenter representing pawnbrokers argued that the
exclusion for pawn loans is justified because pawn transactions
function as marketed, they are less likely than other loan products to
affect the rest of the consumer's finances, consumers do not experience
very high default rates or aggressive collection efforts, certain other
harms identified in the proposal do not occur in the pawn market, State
and local government regulation is working well, consumers are given
clear disclosures on their pawn ticket, and loan terms are longer than
the typical 14-day payday loan.
The Bureau does not find that these comments justify any
modifications to this provision, and therefore finalizes the exclusion
and the commentary as proposed, with formatting changes only. The first
two comments do not provide any tangible support for eliminating the
rationale for the exclusion of non-recourse pawn loans, and issues
involving vehicle title loans are addressed elsewhere, as in Market
Concerns--Underwriting, which describes the special risks and harms to
consumers of repossession of their vehicle, which would potentially
cause them to lose their basic transportation to work and to manage
their everyday affairs. The suggestion that certain pawn loans should
be covered loans depending on the relationship between the amount of
the loan and the fair market value of the good would introduce needless
complexity into the rule without discernible benefits. The Bureau notes
that non-recourse pawn loans had previously been referenced in the
definition of non-covered bridge loan in proposed Sec. 1041.2(a)(13),
which has now been omitted from the final rule. To the extent that
provision would have restricted the making of such loans in connection
with the underwriting criteria for covered longer-term loans, those
provisions are not being included in the final rule. To the extent that
provision would have restricted the making of such loans in connection
with the requirements in the rule for making covered short-term or
longer-term balloon-payment loans, the Bureau concludes that various
other changes made in Sec. Sec. 1041.5 and 1041.6 address the subject
of those restrictions in ways that obviate the need for defining the
term non-covered bridge loan. However, note that any type of loan,
including pawn loans, if used to bridge between multiple covered short-
term loans or covered longer-term balloon-payment loans, are factors
which could indicate that a lender's ability-to-repay determinations
are unreasonable. See comment 5(b)-2.
3(d)(6) Overdraft Services and Lines of Credit
Proposed Sec. 1041.3(e)(6) would have excluded from coverage under
proposed part 1041 overdraft services on deposit accounts as defined in
12 CFR 1005.17(a), as well as payments of overdrafts pursuant to a line
of credit subject to Regulation Z, 12 CFR part 1026. Proposed comment
3(e)(6)-1 noted that institutions could rely on the commentary to 12
CFR 1005.17(a) in determining whether credit is an overdraft service or
an overdraft line of credit that is excluded from the requirements of
part 1041. Overdraft services generally operate on a consumer's deposit
account as a negative balance, where the consumer's bank processes and
pays certain payment transactions for which the consumer lacks
sufficient funds in the account and imposes a fee for the service as an
alternative to either refusing to authorize the payment (in the case of
most debit and ATM transactions and ACH payments initiated from the
consumer's account) or rejecting the payment and charging a non-
sufficient funds fee (in the case of other ACH payments as well as
paper checks). Overdraft services have been treated separately from the
provisions of Regulation Z in certain circumstances, and are subject to
specific rules under EFTA and the Truth in Savings Act (TISA) and their
respective implementing regulations.\441\ In contrast, overdraft lines
of credit are separate open-end lines of credit under Regulation Z that
have been linked to a consumer's deposit account to provide automatic
credit draws to cover the processing of payments for which the funds in
the deposit account are insufficient.
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\441\ 74 FR 59033 (Nov. 17, 2009) (EFTA); 70 FR 29582 (May 24,
2005) (TISA).
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As discussed above in part II, the Bureau is engaged in research
and other activity in anticipation of a separate rulemaking on
overdraft products and practices.\442\ Given that overdraft services
and overdraft lines of credit involve complex overlays with rules about
payment processing, deposit accounts, set-off rights, and other forms
of depository account access, the Bureau preliminarily found that any
discussion of whether additional regulatory protections are warranted
for those two products should be reserved for that rulemaking.
Accordingly, the Bureau proposed excluding both types of overdraft
products from the scope of this rule, using definitional language from
Regulation E to distinguish both overdraft services and overdraft lines
of credit from other types of depository credit products.
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\442\ CFPB Study of Overdraft Programs White Paper; Checking
Account Overdraft.
---------------------------------------------------------------------------
One industry commenter argued that the Bureau ignored the principle
of a level playing field among different financial products by
excluding high-cost alternatives like overdraft, which can be even more
costly at times than payday loans. Consumer groups argued that the
Bureau should eliminate this exclusion or limit it in various ways. The
Bureau maintains the analysis presented in the proposed rule to
conclude that overdraft services and lines of credit are unique
products with a distinct regulatory history and treatment, which should
be excluded from this rule and addressed on their own as a matter of
supervision, enforcement, and regulation. The Bureau also did not find
persuasive the suggestion that overdraft services and lines of credit
should be covered in some partial manner, which would introduce
needless complexity into the rule without discernible benefits. Having
received no other comments on this portion of the proposed rule, the
Bureau is finalizing this exclusion and the commentary as proposed,
with formatting changes only.
[[Page 54547]]
3(d)(7) Wage Advance Programs
Based on prior discussions with various stakeholders, the Bureau
solicited and received comments in the proposal in connection with the
definition of lender under proposed Sec. 1041.2(a)(11) about some
newly formed companies that are seeking to develop programs that
provide innovative access to consumers' wages in ways that do not seem
to pose the kinds of risks and harms presented by covered loans.
Certain of these companies, but by no means all of them, are part of
the ``fintech'' wave. Some are developing new products as an outgrowth
of businesses focusing mainly on payroll processing, for example,
whereas others are not associated with consumers' employers but rather
are focused primarily on devising new means of advising consumers about
how to improve their approach to cash management. The Bureau has
consistently expressed interest in encouraging more experimentation in
this space.
In particular, a number of these innovative financial products are
seeking to assist consumers in finding ways to draw on the accrued cash
value of wages they have earned but not yet been paid. Some of these
products are doing so without imposing any fees or finance charges,
other than a charge for participating in the program that is designed
to cover processing costs. Others are developing different models that
may involve fees or advances on wages not yet earned.
The Bureau notes that some efforts to give consumers access to
accrued wages may not be credit at all. For instance, when an employer
allows an employee to draw accrued wages ahead of a scheduled payday
and then later reduces the employee's paycheck by the amount drawn,
there is a quite plausible argument that the transaction does not
involve ``credit'' because the employee may not be incurring a debt at
all. This is especially likely where the employer does not reserve any
recourse upon the payment made to the employee other than the
corresponding reduction in the employee's paycheck.
Other initiatives are structured in more complicated ways that are
more likely to constitute ``credit'' under the definition set forth in
Sec. 1041.2(a)(11) and Regulation Z. For example, if an employer
cannot simply reduce the amount of an employee's paycheck because
payroll processing has already begun, there may be a need for a
mechanism for the consumer to repay the funds after they are deposited
in the consumer's account.
The Bureau has decided in new Sec. 1041.3(d)(7) to exclude such
wage advance programs--to the extent they constitute credit--from
coverage under the rule if they meet certain additional conditions. The
Bureau notes that the payment of accrued wages on a periodic basis,
such as bi-weekly or monthly, appears to be largely driven by
efficiency concerns with payroll processing and employers' cash
management. In addition, the Bureau believes that the kinds of risks
and harms that the Bureau has identified with making covered loans,
which are often unaffordable as a result of the identified unfair and
abusive practice, may not be present where these types of innovative
financial products are subject to appropriate safeguards. Accordingly,
where advances of wages constitute credit, the Bureau is adopting Sec.
1041.3(d)(7) to exclude them from part 1041 if the advances are made by
an employer, as defined in the Fair Labor Standards Act, 29 U.S.C.
203(d), or by the employer's business partner, to the employer's
employees, provided that the following conditions apply:
The employee is not required to pay any charges or fees
in connection with such an advance from the employer or the
employer's business partner, other than a charge for participating
in the program; and
The entity advancing the funds warrants that it has no
legal or contractual claim or remedy against the employee based on
the employee's failure to repay in the event the amount advanced is
not repaid in full; will not engage in any debt collection
activities if the advance is not deducted directly from wages or
otherwise repaid on the scheduled date; will not place the amount
advanced as a debt with or sell the debt to a third party; and will
not report the debt to a consumer reporting agency concerning the
amount advanced.
The Bureau has considered the comments as well as its own analysis
of this evolving marketplace and has concluded that new and innovative
financial products that meet these conditions will tend not to produce
the kinds of risks and harms that the Bureau's final rule is seeking to
address with respect to covered loans. At the same time, nothing
prevents the Bureau from reconsidering these assumptions in a future
rulemaking if there is evidence that such products are harming
consumers.
The Bureau has also adopted new commentary. Comment 3(d)(7)-1 notes
that wage advance programs must be offered by the employee's employer
or the employer's business partner, and examples are provided of such
business partners, which could include companies that are involved in
providing payroll processing, accounting services, or benefits programs
to the employer. Comment 3(d)(7)(i)-1 specifies that the advance must
be made only against accrued wages and must not exceed the amount of
the employee's accrued wages, and provides further definition around
the meaning of accrued wages. Comment 3(d)(7)(ii)(B)-1 clarifies that
though the entity advancing the funds is required to warrant that it
has no legal or contractual claim or remedy against the consumer based
on the consumer's failure to repay in the event the amount advanced is
not repaid in full, this provision does not prevent the entity from
obtaining a one-time authorization to seek repayment from the
consumer's transaction account.
For these reasons, the Bureau is adopting the exclusion for wage
advance programs as described in Sec. 1041.3(d)(7) of the final rule
and the related commentary.
3(d)(8) No-Cost Advances
As discussed above in connection with Sec. 1041.3(d)(7), the
Bureau noted in the proposal, in connection with its discussion of the
definition of lender in proposed Sec. 1041.2(a)(11), that some newly
formed companies are providing products or services that allow
consumers to draw on wages they have earned but not yet been paid. Some
of these companies are providing advances of funds and are doing so
without charging any fees or finance charges, for instance by relying
on voluntary tips. The proposal noted that others were seeking
repayment and compensation through electronic transfers from the
consumer's account. The Bureau sought comment on whether to exclude
such entities and similar products from coverage under the rule.
The Bureau received limited comments on this issue, perhaps
reflecting that it represents a fairly new business model in the
marketplace, with some championing the potential benefits for consumers
and others maintaining that no exclusions--or at least no additional
exclusions--should be created to the rule as it was proposed. Some
comments described in more detail how the evolution of these products
was unfolding, how they operate, and how they may affect the
marketplace and consumers. The Bureau has also had discussions with
stakeholders in connection with its other functions, such as market
monitoring, supervision, and general outreach, that have informed its
views and understanding of these new products and methods of providing
access to funds for more consumers. As discussed above in connection
with
[[Page 54548]]
Sec. 1041.3(d)(7), the Bureau is aware that some of these products
provide access to the consumer's own funds in the form of earned wages
already accrued but not yet paid out because of administrative and
payroll processes historically developed by employers, whereas other
products rely on estimates of wages likely to be accrued, or accrued on
average, and may make advances against expected wages that are not
already earned and accrued.
The Bureau has carefully considered the comments it has received on
these issues, as well as other information about the market that it has
gleaned from the course of its regular activities. The Bureau has
addressed certain wage advance programs offered by employers or their
business partners in Sec. 1041.3(d)(7), as discussed above. In
addition, after further weighing the potential benefits to consumers of
this relatively new approach, the Bureau has decided to create a
specific exclusion in Sec. 1041.3(d)(8) of the final rule to apply to
no-cost advances, regardless of whether they are offered by an employer
or its business partner. The exclusion contains similar conditions to
Sec. 1041.3(d)(7), except that it applies to advances of funds where
the consumer is not required to pay any charge or fee (even a fee for
participating in the program), and it is not limited to the accrued
cash value of the employee's wages. Like Sec. 1041.3(d)(7), the
exclusion is further limited to situations in which the entity
advancing the funds warrants to the consumer as part of the contract
between the parties (i) that it has no legal or contractual claim or
remedy against the consumer based on the consumer's failure to repay in
the event the amount advanced is not repaid in full; and (ii) that with
respect to the amount advanced to the consumer, the entity advancing
the funds will not engage in any debt collection activities, place the
debt with or sell the debt to a third party, or report the debt to a
consumer reporting agency if the advance is not repaid on the scheduled
date.
The exclusion in Sec. 1041.3(d)(8) is thus designed to apply to
programs relying solely on a ``tips'' model or otherwise providing
emergency assistance at no cost to consumers. The Bureau estimates,
based on its experience with the marketplace for different types of
small-dollar loans, that products meeting the conditions of Sec.
1041.3(d)(8) are likely to benefit consumers and unlikely to lead to
the risks and harms described below in Market Concerns--Underwriting.
Unlike the proposal, the Bureau has decided not to confine such no-fee
advances solely to the employer-employee context, as the very specific
features of their product structure makes an exclusion from the rule
for them likely to be beneficial for consumers across the spectrum. At
the same time, nothing prevents the Bureau from reconsidering these
assumptions in a future rulemaking if there is evidence that such
products are harming consumers.
New comment 3(d)(8)-1 further provides that though an entity
advancing the funds is required to warrant that it has no legal or
contractual claim or remedy against the consumer based on the
consumer's failure to repay in the event the amount advanced is not
repaid in full, this provision does not prevent the entity from
obtaining a one-time authorization to seek repayment from the
consumer's transaction account.
For these reasons, the Bureau is adopting the exclusion for no-cost
advances as described in Sec. 1041.3(d)(8) of the final rule and the
related commentary.
3(e) Conditional Exemption for Alternative Loans
In Sec. 1041.11 of the proposed rule, the Bureau set forth a
conditional exemption for loans with a term of between 46 days and 180
days, if they satisfied a set of conditions that generally followed
those established by the NCUA under the Payday Alternative Loan (PAL)
Program as described above in part II. The proposal did not, however,
contain a comparable exemption for PAL loans with durations between 30
and 45 days, with 30 days being the minimum duration permitted for a
PAL loan. Loans that met the conditions of the proposed conditional
exemption would have been exempted from the proposed underwriting
criteria applicable to covered longer-term loans, but still would have
been subject to the requirements on payment practices and the notice
requirements.
The Bureau received many general comments on the proposed exemption
for PAL loans offered by credit unions and for comparable loan products
if offered by other lenders. Some commenters argued that credit unions,
as a class of entity, should be entirely exempted from all coverage
under the rule. Others asked for more tailored exemptions for certain
credit unions, such as for those with assets totaling less than $10
billion. Still others requested that credit unions be relieved of
specific obligations under the rule, such as from compliance and record
retention provisions (because their prudential regulators already
address those matters); or from payment regulations for internal
collections that do not incur fees; or from underwriting requirements
for Community Development Financial Institutions (CDFIs) that provide
beneficial credit and financial services to underserved markets and
populations. By contrast, other commenters did not think the Bureau
could or should create any special provisions for credit unions in
particular. But some consumer and legal aid groups were supportive of
the PAL program, which they viewed as beneficial to consumers and not
easily subject to manipulation.
Some asserted that the PAL program was too constrained to support
any broad provision of such loans, which were unlikely to yield a
reasonable rate of return and thus not likely to generate a substantial
volume of loans or to be sustainable for other lenders that are not
depository institutions. Others argued that the proposed rule contained
provisions that would go beyond the terms of the PAL program and
increase complexity, and these additional provisions should be scaled
back to mirror the PAL program more closely. Some commenters contended
that the PAL program itself imposed a usury limit, which would be
improper if adopted by the Bureau.
As discussed earlier, the Bureau has decided not to finalize the
specific underwriting criteria with respect to covered longer-term
loans (other than covered longer-term balloon-payment loans) at this
time. However, the Bureau has decided, for the reasons explained below,
to create a conditional exemption to the rule that applies to any
alternative loan, which is a term that is defined more specifically
below. In brief, an alternative loan is a covered loan that meets
certain conditions and requirements that are generally consistent with
the provisions of the PAL program as authorized and administered by the
NCUA, including any such loan made by a Federal credit union that is in
compliance with that program. The conditions and requirements of the
exemption are modified in certain respects relative to the proposal to
reflect that the conditional exemption now also encompasses loans of
less than 45 days in duration to create a more comprehensive lending
framework, unlike the coverage initially described in the proposed
rule. In creating this exception, the Bureau agrees with the commenters
that concluded, after observing the PAL program over time, that program
is generally beneficial to consumers and not easily subject to
manipulation in ways that would create risks and harms to consumers.
[[Page 54549]]
At the same time, the Bureau recognizes that one of the objectives
set forth in the Dodd-Frank Act is for Federal consumer financial law
to be enforced consistently without regard to the status of a person as
a depository institution.\443\ Consistent with that objective, the
Bureau has set forth the elements of alternative loans in general form,
so that lenders other than Federal credit unions--including both banks
and other types of financial institutions--can offer comparable loans
in accordance with essentially the same conditions and requirements. By
doing so, the Bureau is making it possible for more lenders to offer
this product, which will offer the opportunity to test the prediction
made by some commenters that these loans would not scale if offered by
lenders that are not depository institutions--a point on which the
Bureau is not yet convinced either way.
---------------------------------------------------------------------------
\443\ See 12 U.S.C. 5511(b)(4) (``Federal consumer financial law
is enforced consistently, without regard to the status of a person
as a depository institution, in order to promote fair
competition.'').
---------------------------------------------------------------------------
The conditional exemption for alternative loans contained in Sec.
1041.3(e) of the final rule is adopted pursuant to the Bureau's
exemption authority in section 1022(b)(3) of the Dodd-Frank Act to
``conditionally or unconditionally exempt any class of covered persons,
service providers, or consumer financial products or services, from any
. . . rule issued under this title.'' \444\ In this respect, Congress
gave the Bureau broad latitude, simply stating that it should do so
``as [it] deems necessary or appropriate to carry out the purposes and
objectives of this title.'' \445\ The statutory language thus indicates
that the Bureau should evaluate the case for creating such an exemption
in light of its general purposes and objectives as Congress articulated
them in section 1021 of the Dodd-Frank Act. In addition, when the
Bureau exercises its exemption authority under section 1022(b)(3) of
the Dodd-Frank Act, it is further required to take into consideration,
as appropriate, three additional statutory factors: (i) The total
assets of the class of covered persons; (ii) the volume of transactions
involving consumer financial products or services in which the class of
covered persons engages; and (iii) existing provisions of law which are
applicable to the consumer financial product or service and the extent
to which such provisions provide consumers with adequate
protections.\446\
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\444\ 12 U.S.C. 5512 (b)(3)(A).
\445\ 12 U.S.C. 5512(b)(3)(A).
\446\ 12 U.S.C. 5512(b)(3)(B)(i)-(iii).
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Here, the Bureau perceives tangible benefit for consumers and for
lenders by preserving the framework of the PAL program, which as
discussed in part II has had some success in generating approximately
$134.7 million in originations in 2016--up 9.7 percent from the 2015
levels--with relatively low costs of credit and relatively low levels
of charge-offs for this particular market. In particular, the Bureau
agrees with those commenters that noted the distinct elements of the
PAL program, including the specified product features, are not
configured to give rise to the kinds of risks and harms that are more
evident with covered short-term loans or covered longer-term balloon-
payment loans. In short, the PAL product thus far seems to be
beneficial for consumers, and a conditional exemption to make such
loans more broadly available to the public appears consistent with the
Bureau's purpose ``of ensuring that all consumers have access to
markets for consumer financial products and services.'' \447\ Likewise,
it seems consistent also with the Bureau's objective of ensuring that
``markets for consumer financial products and services operate
transparently and efficiently to facilitate access and innovation,''
and the competition that alternative loans could provide to other types
of covered loans may be helpful in protecting consumers ``from unfair .
. . or abusive acts and practices.'' \448\
---------------------------------------------------------------------------
\447\ 12 U.S.C. 5511(a).
\448\ 12 U.S.C. 5511(b)(5) and (b)(2).
---------------------------------------------------------------------------
Turning to the statutory factors set out in section 1022(b)(3), the
assets of the expected class of lenders is likely to remain relatively
small in light of the thousands of smaller credit unions, as also is
the volume of transactions, which many commenters did not seem to
expect would scale into much larger loan programs, though the Bureau is
not yet convinced on this point either way. In addition, the PAL
program itself is regulated and overseen by NCUA with respect to the
credit unions who offer it, which means that ``existing provisions of
law . . . are applicable to [it]'' and it is reasonable at this time to
judge that ``such provisions provide consumers with adequate
protection'' in using this loan product, as Congress indicated was
germane to determining the justifications for an exemption.\449\
Moreover, under the general terms of Sec. 1041.3(e), which allows all
lenders to make alternative loans regardless of whether they are credit
unions, the Bureau and other regulators, including State regulators,
stand well-positioned to monitor the development of this loan product
over time, and to make adjustments if the current experience of these
loans as generally beneficial for consumers were perceived to be
changing in ways that created greater consumer risks and harms.
---------------------------------------------------------------------------
\449\ 12 U.S.C. 5512(b)(3)(B)(iii).
---------------------------------------------------------------------------
The Bureau decided to create this conditional exemption in order to
recognize that the NCUA is currently operating and supervising this
established loan program for credit unions and to avoid duplicative
overlap of requirements that could foster confusion and create undue
burdens for certain lenders, in light of the Bureau's conclusion that
loans made on terms that are generally consistent with the PAL program
do not pose the same kinds of risks and harms for consumers as the
types of covered loans addressed by this rule.\450\ It also judges this
approach to be superior to the broader scope of exemptions urged by
various commenters, such as a complete exemption from the rule for all
loans of all types made by credit unions (rather than just PAL loans),
or even a conditional exemption from certain portions of the rule for
all loans of all types made by credit unions. As for the comment that
these loans impose a usury cap, the Bureau has explained elsewhere that
an actual usury cap would flatly prohibit certain loans from being made
based directly on the interest rate being charged, whereas the
exemption provided here would merely allow such loans to avoid
triggering certain conditions of making such loans--most notably, the
requirement that the lender reasonably assess the borrower's ability to
repay the loan according to its terms but also the provisions
concerning payment practices.
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\450\ See 12 U.S.C. 5512(b)(3)(B) (in deciding whether to issue
an exemption, ``the Bureau shall, as appropriate, take into
consideration . . . existing provisions of law which are applicable
to the consumer financial product or service and the extent to which
such provisions provide consumers with adequate protection'').
---------------------------------------------------------------------------
For all of these reasons, the Bureau is finalizing this provision
and the related commentary with several modifications. First, in
response to comments suggesting that various conditions for alternative
loans as stated in the proposed rule would render this loan product too
burdensome and complex, the Bureau has eliminated certain conditions
for such loans in the final rule. In particular, among the conditions
added in the proposal that now are dropped are: required monthly
payments; rules on charging fees; required checking of affiliate
records; certain additional requirements, such as prohibitions on
prepayment penalties
[[Page 54550]]
and sweeping of accounts in certain circumstances, as well as required
information furnishing. Second, certain changes have been made to take
account of the fact that proposed Sec. 1041.11 had applied only to
covered longer-term loans, whereas Sec. 1041.3(e) of the final rule
applies to covered loans more generally. The language of each prong of
Sec. 1041.3(e)(1) through (4) of the final rule is set out below, and
immediately thereafter any changes made from the proposed language to
the text of the final rule are specified and explained. Again, as a
prefatory matter, an alternative loan is a covered loan that meets all
four of these sets of conditions and requirements.
3(e)(1) Loan Term Conditions
Loan term conditions. An alternative loan must satisfy
the following conditions:
[cir] The loan is not structured as open-end credit, as defined
in Sec. 1041.2(a)(16);
[cir] The loan has a term of not less than one month and not
more than six months;
[cir] The principal of the loan is not less than $200 and not
more than $1,000;
[cir] The loan is repayable in two or more payments, all of
which payments are substantially equal in amount and fall due in
substantially equal intervals, and the loan amortizes completely
during the term of the loan; and
[cir] The loan carries a cost of credit (excluding any
application fees) of not more than the interest rate permissible for
Federal credit unions to charge under regulations issued by the
National Credit Union Administration at 12 CFR 701.21(c)(7)(iii),
and any application fees charged to the consumer reflect the actual
costs associated with processing the application and do not exceed
the application fees permissible for Federal credit unions to charge
under regulations issued by the National Credit Union Administration
at 12 CFR 701.21(c)(7)(iii).
The language of the final rule originated in Sec. 1041.11(a) of
the proposed rule. The name of the exemption has been revised from a
conditional exemption for certain covered longer-term loans up to six
months in duration to a conditional exemption for alternative loans.
The term of the loan is modified from ``not more than six months'' to
``not less than one month and no more than six months,'' again to
reflect the change made in this exemption to encompass the broader set
of all covered loans, rather than just covered longer-term loans. The
other conditions, including the $200 floor and the $1,000 cap, are
maintained because they are consistent with the requirements of the PAL
program. The prior condition that the loan be repayable in two or more
payments ``due no less frequently than monthly'' is now changed to omit
the quoted language because the term of these loans may now be shorter
than was the case in the proposal. The amortization provision is broken
out and simplified to provide more flexibility around the payment
schedule and allocation, which again reflects the fact that many of
these loans may now be covered short-term loans. Finally, the prior
language around total cost of credit is now replaced with cost of
credit, which is consistent with TILA and Regulation Z and is
responsive to suggestions made by several commenters; the permissible
interest rate on such products is that set by the NCUA for the PAL
program; any application fees charged to the consumer must reflect the
actual associated costs and comply with the provisions of any NCUA
regulations; and the lender does not impose any charges other than the
rate and application fees permitted by the NCUA for the PAL program.
3(e)(2) Borrowing History Condition
Section 1041.3(e)(2) provides that prior to making an alternative
loan under Sec. 1041.3(e), the lender must determine from its records
that the loan would not result in the consumer being indebted on more
than three outstanding loans made under this section from the lender
within a period of 180 days. Section 1041.3(e)(2) also provides that
the lender must also make no more than one alternative loan under Sec.
1041.3(e) at a time to a consumer.
Aside from conforming language changes, the only substantive
revision here is to excise references to affiliates of the lenders,
consistent with the NCUA's practice in administering the PAL program.
3(e)(3) Income Documentation Condition
Section 1041.3(e)(3) provides that in making an alternative loan
under Sec. 1041.3(e), the lender must maintain and comply with
policies and procedures for documenting proof of recurring income.
This prong contains minor conforming language changes only.
3(e)(4) Safe Harbor
Section 1041.3(e)(4) provides that loans made by Federal credit
unions in compliance with the conditions set forth by the National
Credit Union Administration at 12 CFR 701.21(c)(7)(iii) for a Payday
Alternative Loan are deemed to be in compliance with the requirements
and conditions of Sec. 1041.3(e)(1), (2), and (3).
This prong contains entirely new language, replacing what had been
``additional requirements'' in Sec. 1041.11(e) of the proposed rule.
Those additional requirements tailored by the NCUA for credit unions
and included in the original proposal would be cumbersome in various
respects for all lenders to adopt, including provisions on additional
information furnishing, restrictions on sweeps and set-offs as means of
a depository institution collecting on the loan, and prepayment
penalties. The safe harbor provided for Federal credit unions in
compliance with NCUA's requirements for the PAL program, however,
reflects the fact that to qualify for the safe harbor, a credit union
would be obligated to comply with all of the additional requirements of
the PAL program.
Having considered the comments received, the Bureau concludes that
it is appropriate to finalize Sec. 1041.3(e) for all the reasons
discussed above. The Bureau also is finalizing proposed comment
3(d)(8)-1 as comment 3(e)-1 of the final rule, which notes that this
provision does not confer on the lenders of such loans any exemption
from the requirements of other applicable laws, including State laws.
This comment also clarifies that all lenders, including Federal credit
unions and persons that are not Federal credit unions, are permitted to
make loans under the specific terms in Sec. 1041.3(e), provided that
such loans are permissible under other applicable laws, including State
laws. The remainder of the commentary is being carried forward from the
proposed rule with revisions, all made to align them with the modified
language in Sec. 1041.3(e) of the final rule. The proposed comments
previously designated as 11(a)-1 to (11)(e)(1)(ii)-2 are now renumbered
as comments 3(e)(1)-1 to 3(e)(3)-1 in the final rule.
3(f) Conditional Exemption for Accommodation Loans
In the proposal, in connection with the discussion of the proposed
definition of lender in Sec. 1041.2(a)(11), the Bureau noted that some
stakeholders had suggested narrowing the definition of lender to avoid
covering lenders that are primarily focused on other types of lending
or other types of financial services, but on occasion make covered
loans as a means of accommodating their existing customers. The
stakeholders posited that such loans would be likely to operate
differently from loans made as a primary line of business, for instance
because the lenders who make them have information about consumers'
financial situations from their primary lines of business and because
their incentives in making the loans is to preserve their
[[Page 54551]]
customer relationships, and thus may not pose the same risks and harms
as other types of covered loans. The Bureau solicited comments on this
suggestion.
The Bureau had also proposed a more detailed provision, in proposed
Sec. 1041.12, in order to provide a conditional exemption for certain
covered longer-term loans that would be made through accommodation
lending programs and would be underwritten to achieve an annual
portfolio default rate of not more than five percent. The proposal
would have allowed a lender to make such loans without meeting the
specific underwriting criteria contained in the proposed rule, though
proposed Sec. 1041.12 laid out its own detailed provisions applicable
to the making of such loans. Notably, the Bureau found that the
feedback it received on this provision overlapped considerably with the
comments submitted in response to the question the Bureau had asked
with respect to the definition of lender about providing an exception
based on de minimis lending.
Many commenters expressed their views favoring a de minimis
exemption. Several of them urged that the Bureau should set parameters
for the exemption based both on loan volume and the percentage of
revenue derived from such loans. More specific suggestions ranged from
caps of 100 to several thousand loans per year; one commenter suggested
2,000 loans per year that yield no more than five percent of revenue;
others urged a cap of 2,500 loans per year that yield no more than 10
percent of revenue.
The Bureau also received a number of comments on proposed Sec.
1041.12 and proposed comments 12(a)-1 to (12)(f)(1)(ii)-2. Banking
organizations argued that the Bureau should exempt types of
institutions rather than types of loans, and that because community
banks are responsible providers of small loans, they should be
conditionally exempted from coverage.
Many commenters were also critical of the provisions of proposed
Sec. 1041.12, which they viewed as so cumbersome as to discourage many
institutions from engaging in this type of lending. These comments
focused particularly on the back-end requirements and calculations
included in the proposal. Some commenters noted the guidance already in
place from other banking regulators that had suppressed such lending at
the banks, and predicted that the proposal would exacerbate those
difficulties. State bank regulators, in particular, advocated in favor
of a de minimis threshold to preserve such lending by smaller community
banks as beneficial to consumers, especially in rural areas and as a
way to provide alternatives if the effect of the rule would be to cause
consolidation in the small-dollar lending market. Consumer groups
generally opposed exemptions to the rule but acknowledged that a
properly structured de minimis provision would be unlikely to create
much if any harm to consumers.
As stated earlier, the Bureau has decided not to finalize the
ability-to-repay requirements with respect to covered longer-term loans
(other than covered longer-term balloon-payment loans) at this time.
However, as a result of reviewing and analyzing the public input on the
issue of accommodation lending more generally, the Bureau has
determined to create a conditional exemption that is applicable to
accommodation loans that have been traditionally made primarily by
community banks and credit unions. At the same time, in line with the
Dodd-Frank Act's goal of enforcing Federal consumer financial law
without regard to a financial company's status as a depository
institution,\451\ the Bureau has set forth the elements of
accommodation loans in general form such that any lender whose covered
loan originations fall below the thresholds set in final Sec.
1041.3(f) can qualify for the conditional exemption. In part, the
Bureau is reaching this conclusion based on its review of the comments
received, which indicated that lenders would find the approach taken in
proposed Sec. 1041.12 to be cumbersome or even unworkable for lenders.
Whether or not this was objectively demonstrable for most lenders, it
was clear that the proposed approach would have been taken as a
discouraging factor for those deciding whether or not to make such
loans. Moreover, the Bureau concluded that loans made as an occasional
accommodation to existing customers were not likely to pose the same
risks and harms as other types of covered loans, because such loans
would be likely to operate differently and carry different incentives
for the lender as compared to loans made as a primary line of business.
---------------------------------------------------------------------------
\451\ See 12 U.S.C. 5511(b)(4) (``Federal consumer financial law
is enforced consistently, without regard to the status of a person
as a depository institution, in order to promote fair
competition.'').
---------------------------------------------------------------------------
As discussed in the preceding section on alternative loans, when
the Bureau exercises its exemption authority under section 1022(b)(3)
of the Dodd-Frank Act to create an exemption for ``any class of covered
persons, service providers, or consumer financial products or services,
from any * * * rule issued under this title,'' it has broad latitude
that Congress conferred upon it to do so.\452\ Again, Congress simply
said that the Bureau should exercise this authority ``as [it] deems
necessary or appropriate to carry out the purposes and objectives of
this title,'' \453\ and the Bureau's general purposes and objectives
are stated in section 1021 of the Dodd-Frank Act. In addition, when the
Bureau exercises its exemption authority under section 1022(b)(3) of
the Dodd-Frank Act, it is further required, as appropriate, to take
into consideration three statutory factors: The total assets of the
class of covered persons; the volume of transactions involving consumer
financial products or services in which the class of covered persons
engages; and existing provisions of law which are applicable to the
consumer financial product or service and the extent to which such
provisions provide consumers with adequate protections.\454\ Here, too,
it appears that Congress intended the Bureau to do so in view of its
purposes and objectives as set forth in the Dodd-Frank Act.
---------------------------------------------------------------------------
\452\ 12 U.S.C. 5512 (b)(3)(A).
\453\ 12 U.S.C. 5512(b)(3)(A).
\454\ 12 U.S.C. 5512(b)(3)(B)(i)-(iii).
---------------------------------------------------------------------------
Here, the Bureau perceives tangible benefit for consumers and for
lenders to be able to maintain access to individualized loans of the
kind permitted by this provision and in line with the traditions and
experience of community banks over many years, which have generally
underwritten these loans as an accommodation on an individualized basis
in light of their existing customer relationships. In this manner, the
conditional exemption would help ensure ``that all consumers have
access to markets for consumer financial products and services,'' \455\
which is a principal purpose of the Dodd-Frank Act, and would not be
restricted in their existing access to such traditional loan products.
At the same time, this conditional exemption would enable the Bureau
``to reduce unwarranted regulatory burdens'' \456\ on these
longstanding loan products made to existing bank customers on an
individualized basis in light of their existing customer relationships,
without posing any of the kinds of risks and harms to consumers that
exist with the types of covered loans addressed by this rule.
---------------------------------------------------------------------------
\455\ 12 U.S.C. 5511(a).
\456\ 12 U.S.C. 5511(b)(3).
---------------------------------------------------------------------------
And though the provisions of Sec. 1041.3(f) are written in general
terms to be applicable to lenders that are not themselves depository
institutions, it does not appear likely that these
[[Page 54552]]
provisions would be open to wide-scale abuse, precisely because the
loan and revenue restrictions are set at a de minimis level that would
tend to limit the scope of any predatory behavior. Assessing the matter
against the three additional statutory factors as well, then, the
assets of these lenders availing themselves of this provision would
likely be limited; the volume of transactions would be small, by
definition and design; and Federal consumer financial law, as
implemented through the Bureau's continuing supervisory and enforcement
authorities and by other means as provided in the statute, would
maintain consumer protections in the broader market despite this slight
restriction on coverage under the rule.
Therefore, as stated in Sec. 1041.3(f), this provision will
conditionally exempt any accommodation loan from coverage under the
final rule. That category is defined to apply to a covered loan made by
any lender where the lender and its affiliates collectively have made
2,500 or fewer covered loans in the current calendar year and also made
2,500 or fewer covered loans in the preceding calendar year; and during
the most recent completed tax year in which the lender was in
operation, if applicable, the lender and any affiliates that were in
operation and used the same tax year derived no more than 10 percent of
their receipts from covered short-term and longer-term balloon-payment
loans, or if the lender was not in operation in a prior tax year, the
lender reasonably anticipates that the lender and any of its affiliates
that use the same tax year will, during the current tax year, derive no
more than 10 percent of their receipts from covered short-term loans
and covered longer-term balloon-payment loans. Comment 3(f)-1 of the
final rule provides an example of the application of this provision to
a sample lender.
Although, in general, all covered loans and the receipts from those
loans would count toward the thresholds in Sec. 1041.3(f) for the
number of loans per year and for receipts, Sec. 1041.3(f) allows
lenders not to count toward either threshold covered longer-term loans
for which the conditional exclusion for transfers in Sec.
1041.8(a)(1)(ii) applies to all transfers for payments made under the
loan. As explained in the section-by-section discussion of Sec.
1041.8(a)(1)(ii), when the lender is the account-holder, that provision
excludes certain transfers from the definition of payment transfer if,
pursuant to the terms of the loan agreement or account agreement, the
lender (1) does not charge the consumer any fee, other than a late fee
under the loan agreement, in the event that the lender initiates a
transfer of funds from the consumer's account in connection with the
covered loan for an amount that the account lacks sufficient funds to
cover; and (2) does not close the consumer's account in response to a
negative balance that results from a transfer of funds initiated in
connection with the covered loan. These conditions provide substantial
protection against the harms targeted by the provisions in Sec. Sec.
1041.8 and 1041.9. As a result, loans for which all payment transfers
are excluded under Sec. 1041.8(a)(1)(ii) from the definition of
payment transfer are not subject to either the prohibition in Sec.
1041.8(b) on initiating more than two consecutive failed payment
transfers or the requirement in Sec. 1041.9(b) to provide payment
notices prior to initiating certain payment withdrawals. Since those
loans carry with them substantial protection against the harms targeted
in subpart C and would not be subject to those provisions, the Bureau
believes that it is simpler not to count them for purposes of Sec.
1041.3(f) either.
The Bureau had sought comment about the appropriate parameters of
this conditional exemption, which is designed to be a de minimis
provision to allow only a certain amount of lending of this kind to
accommodate customers as a distinct sidelight to the institution's main
lines of business. Once again, the purpose of this provision is to
accommodate existing customers through what traditionally have been
loans that were underwritten on an individualized basis for existing
customers. It was not proposed, and is not being adopted, to stimulate
the development of a model for loans that are offered in high volumes.
As for the parameters that the Bureau decided on, they closely reflect
the submissions received in the comment process, with both the overall
loan limit (2,500 per year) and the revenue limit (no more than 10
percent of receipts) intended to keep loans made pursuant to this
exemption to a very limited part of the lender's overall business. Each
of the two provisions operates together to achieve that joint
objective, which would not necessarily be achieved by either component
operating in isolation.
The Bureau decided to create this conditional exemption in order to
respond to the persuasive points made by the commenters about the
benefits that would flow from preserving this modest amount of latitude
to be able to contour specialized loans as an accommodation to
individual customers. That is especially so in view of the unlikelihood
that this practice would pose the same kinds of risks and harms that
the Bureau recognized with covered short-term loans and covered longer-
term balloon-payment loans as described below in Market Concerns--
Underwriting. The adoption of this conditional exemption also evinces
the Bureau's recognition of the input it has heard from many
stakeholders over the years, particularly from depository institutions,
who have regularly supplied the Bureau with details about their
perspective that smaller depository lenders such as community banks and
credit unions have a long history and tradition of making loans to
accommodate their existing customers for various personal reasons, such
as minor expenses related to some type of family event. These loans are
typically underwritten, customized, made for small amounts and at
reasonable cost, and generate low levels of defaults. Although this
type of accommodation lending is often quite specialized and
individualized, it could be construed to overlap in certain ways with
the covered loans encompassed by the rule. The conditional exemption
that is now finalized in Sec. 1041.3(f) provides an effective method
of addressing legitimate concerns about the potentially detrimental
consequences of that overlap for consumers.
3(g) Receipts
The Bureau has added a new definition of the term receipts, which
Sec. 1041.3(g) of the final rule defines to mean total income (or, in
the case of a sole proprietorship, gross income) plus cost of goods
sold as these terms are defined and reported on Internal Revenue
Service (IRS) tax return forms (such as Form 1120 for corporations;
Form 1120S and Schedule K for S corporations; Form 1120, Form 1065, or
Form 1040 for LLCs; Form 1065 and Schedule K for partnerships; and Form
1040, Schedule C for sole proprietorships). Receipts do not include net
capital gains or losses; taxes collected for and remitted to a taxing
authority if included in gross or total income, such as sales or other
taxes collected from customers but excluding taxes levied on the entity
or its employees; or amounts collected for another (but fees earned in
connection with such collections are receipts). Items such as
subcontractor costs, reimbursements for purchases a contractor makes at
a customer's request, and employee-based costs such as payroll taxes
are included in receipts. This definition of receipts is modeled on the
definitions of the same term in the Bureau's larger participant
rulemakings for the consumer
[[Page 54553]]
reporting \457\ and debt collection markets,\458\ which in turn were
based in part on the Small Business Administration's definition of
receipts at 13 CFR 121.104.
---------------------------------------------------------------------------
\457\ 77 FR 42874 (July 20, 2012).
\458\ 77 FR 65775 (Oct. 31. 2012).
---------------------------------------------------------------------------
The Bureau is adding this definition to clarify how the term is
used in Sec. 1041.3(f) in the course of describing accommodation
loans, and to reduce the risk of confusion among consumers, industry,
and regulators.
3(h) Tax Year
The Bureau has added a new definition of the term tax year, which
Sec. 1041.3(h) of the final rule defines to have the same meaning
attributed to this term by the IRS as set forth in IRS Publication 538,
which provides that a tax year is an annual accounting period for
keeping records and reporting income and expenses. The Bureau is adding
this definition to clarify how the term is used in Sec. 1041.3(f) in
the course of describing accommodation loans, and to reduce the risk of
confusion among consumers, industry, and regulators.
Subpart B--Underwriting
Overview of the Bureau's Approach in the Proposal and in the Final Rule
The Bureau proposed to identify an unfair and abusive practice with
respect to the making of covered short-term loans pursuant to its
authority to ``prescribe rules * * * identifying as unlawful unfair,
deceptive, or abusive acts or practices.'' \459\ The proposal explained
the Bureau's preliminary view that it is both an unfair and abusive
practice for a lender to make such a loan without reasonably
determining that the consumer will have the ability to repay the loan.
To avoid committing this unfair and abusive practice, the Bureau stated
that a lender would have to make a reasonable assessment that the
consumer has the ability to repay the loan. The proposal would have
established a set of requirements to prevent the unlawful practice by
requiring lenders to follow certain specified underwriting practices in
assessing whether the consumer has the ability to repay the loan, as
well as imposing certain limitations on rapid re-borrowing. The Bureau
proposed the ability-to-repay requirements under its authority to
prescribe rules for ``the purpose of preventing unfair and abusive acts
or practices.'' \460\
---------------------------------------------------------------------------
\459\ Public Law 111-203, section 1031(b), 124 Stat. 1376
(2010).
\460\ 12 U.S.C. 5531(b).
---------------------------------------------------------------------------
The proposal would have further relied on section 1022(b)(3) of the
Dodd-Frank Act \461\ to exempt certain covered short-term loans from
the ability-to-repay requirements if the loans satisfied a set of
conditions designed to avoid the harms that can result from
unaffordable loans, including the harms that can flow from extended
sequences of multiple loans in rapid succession. Accordingly, lenders
seeking to make covered short-term loans would have the choice, on a
case-by-case basis, either to comply with the ability-to-repay
requirements according to the specified underwriting criteria or to
make loans that meet the conditions set forth in the proposed
exemption--conditions that are specifically designed as an alternative
means to protect consumers against the harms that can result from
unaffordable loans.
---------------------------------------------------------------------------
\461\ 12 U.S.C. 5512(b)(3).
---------------------------------------------------------------------------
As detailed further below, the Bureau has carefully considered its
own research, analysis performed by others, and the public comments
received with respect to this rulemaking and is now finalizing its
finding that failing to reasonably determine whether consumers have the
ability to repay covered short-term loans according to their terms is
an unfair and abusive practice. These sources establish that
unaffordable covered short-term loans generate severe harms for a
substantial population of consumers. The Bureau has made the judgment
that the harms and risks of such loans can be addressed most
effectively by requiring lenders to underwrite such loans in accordance
with specific criteria and thus not to make such a loan without
reasonably determining that the consumer has the ability to repay the
loan according to its terms. The Bureau has also retained the
conditional exemption, while noting that the conditions on such loans,
which are specifically designed as an alternative means to protect
consumers against the harms that can result from unaffordable loans,
will likely prompt lenders to consider more carefully their criteria
for making such loans as well, given that defaults and delinquencies
can no longer be offset by the revenues from repeated re-borrowing. The
Bureau has modified various details of the proposed rule with respect
to the underwriting criteria for the ability-to-repay requirement and
the conditional exemption to strike a better balance among compliance
burdens and other concerns, but has maintained the basic framework that
was initially set forth in the proposed rule.
The Bureau also proposed to identify the same unfair and abusive
practice with respect to the failure to assess consumers' ability to
repay certain longer-term loans, including both installment and
balloon-payment structures, as long as the loans exceeded certain price
thresholds and involved the taking of either a leveraged payment
mechanism or vehicle security. The Bureau proposed to subject these
covered longer-term loans to underwriting requirements similar to those
for covered short-term loans, as well as proposing two exemptions for
loans that satisfied different sets of conditions designed to avoid the
risks and harms that can result from unaffordable loans.
As detailed further below, the Bureau has carefully considered its
own research, analysis performed by others, and the public comments
received with respect to the proposed treatment of covered longer-term
loans, and has decided to take a bifurcated approach at this time to
concerns about unfair or abusive underwriting of longer-term loans.
With regard to balloon payment structures, the Bureau finds that
failing to reasonably assess whether consumers have the ability to
repay covered longer-term balloon-payment loans according to specific
underwriting criteria is an unfair and abusive practice. Because they
require large lump-sum or irregular payments, these loans impose
financial hardships and payment shocks on consumers that are similar to
those posed by short-term loans over just one or two income cycles.
Indeed, the Bureau's analysis of longer-term balloon-payment loans in
the market for vehicle title loans found that borrowers experienced
high default rates--notably higher than for similar loans with
amortizing installment payments. The Bureau also has concluded that the
outcomes between a single-payment loan with a term of 46 or more days
is unlikely to be much different for consumers than an identical loan
with a term of 45 days, and is concerned that failing to cover longer-
term balloon-payment loans would induce lenders to slightly extend the
terms of their existing short-term lump-sum loans in an effort to evade
coverage under the final rule, as occurred in this market in response
to regulations adopted under the Military Lending Act.
For these reasons, the Bureau is finalizing its finding that
failing to reasonably assess whether consumers have the ability to
repay covered longer-term balloon-payment loans is an unfair and
abusive practice. The Bureau has made the judgment that these risks and
harms can be addressed most effectively--as with covered short-term
loans--by requiring lenders to
[[Page 54554]]
underwrite such loans in accordance with specified criteria and thus
not to make such a loan without reasonably determining that the
consumer has the ability to repay the loan according to its terms.
After having sought comment on the issue of whether longer-term
balloon-payment loans should be covered regardless of price or the
taking of a leveraged payment mechanism or vehicle security, the Bureau
has decided, in light of the risks to consumers, to apply the rule to
all such loans, aside from certain exclusions and exemptions described
above in Sec. 1041.3 of the final rule.
The Bureau has decided, however, not to move forward with its
primary finding that it is an unfair and abusive practice to make
certain higher-cost longer-term installment loans without making a
reasonable determination that the consumer will have the ability to
repay the loan, and, accordingly, its prescription of underwriting
requirements designed to prevent that practice. The Bureau has decided
to defer this aspect of the proposal for further consideration in a
later rulemaking. After consideration of the research and the public
comments, the Bureau has concluded that further analysis and outreach
are warranted with respect to such loans, as well as other types of
credit products on which the Bureau sought comment as part of the
Request for Information. While such loans differ in certain ways from
the loans covered in this final rule, the Bureau remains concerned that
failing to underwrite such products may nonetheless pose substantial
risk for consumers. The Bureau will continue to gather evidence about
the risks and harms of such products for consideration as a general
matter in a later rulemaking, and will continue in the meantime to
scrutinize such lending for potential unfair, deceptive, or abusive
acts or practices pursuant to its supervisory and enforcement
authority.
And, as detailed in subpart C below, the Bureau has concluded that
it is appropriate to apply certain limitations and disclosure
requirements concerning payment practices (and related recordkeeping
requirements) to longer-term installment loans with a cost of credit
above 36 percent that involve the taking of a leveraged payment
mechanism.
The predicate for the identification of an unfair and abusive
practice in the Bureau's proposal--and thus for the preventive ability-
to-repay requirements--was a set of preliminary findings about the
consumers who use storefront and online payday loans, single-payment
vehicle title loans, and other covered short-term loans, and the impact
on those consumers of the practice of making such loans without
assessing the consumers' ability to repay. The preliminary findings as
set forth in the proposal, the comments that the Bureau received on
them, and the Bureau's responses to those comments as the foundation of
its final rule are all discussed below in the following section
referred to as Market Concerns--Underwriting. Further in the discussion
below, the Bureau also addresses the same issues with respect to
covered longer-term balloon-payment loans.
Market Concerns--Underwriting
Short-Term Loans
In the proposal, the Bureau stated its concern that lending
practices in the markets for storefront and online payday lending,
single-payment vehicle title loans, and other covered short-term loans
are causing harm to many consumers who use these products. Those harms
include default, delinquency, and re-borrowing, as well as various
collateral harms from making unaffordable payments. This section
reviews the available evidence with respect to the consumers who use
covered short-term loans, their reasons for doing so, and the outcomes
they experience. It also reviews the lender practices that contribute
to these outcomes. The discussion begins with the main points presented
in this section of the proposal, stated in summary form, and provides a
high-level overview of the general responses offered by the commenters.
More specific issues and comments are then treated in more detail in
the succeeding subsections. In the proposal, the Bureau's preliminary
views were stated in summary form as follows:
Lower-income, lower-savings consumers. Consumers who use
these products tend to come from lower- or moderate-income households.
They generally do not have any savings to fall back on, and they have
very limited access to other sources of credit; indeed, typically they
have sought unsuccessfully to obtain other, lower cost, credit before
turning to a short-term loan. The commenters generally validated these
factual points, though many disputed the inferences and conclusions to
be drawn from these points, whereas others agreed with them. Individual
commenters generally validated the factual descriptions of these
characteristics of borrowers as well.
Consumers in financial difficulty. Some consumers turn to
these products because they have experienced a sudden drop in income
(``income shock'') or a large unexpected expense (``expense shock'').
Other borrowers are in circumstances in which their expenses
consistently outstrip their income. A sizable percentage of users
report that they would have taken a loan on almost any terms offered.
Again, the commenters generally validated these points as a factual
matter, but disputed the inferences and conclusions to be drawn
therefrom.
Loans do not function as marketed. Lenders market single-
payment products as short-term loans designed to provide a bridge to
the consumer's next payday or other income receipt. In practice,
however, the amounts due on these loans consume such a large portion of
the consumer's paycheck or other periodic income source as to be
unaffordable for most consumers seeking to recover from an income or
expense shock, and even more so for consumers with a chronic income
shortfall. Lenders actively encourage consumers either simply to pay
the finance charges due and roll over the loan instead of repaying the
loan in full (or effectively roll over the loan by engaging in back-to-
back transactions or returning to re-borrow in no more than a few days
after repaying the loan). Indeed, lenders are dependent upon such re-
borrowing for a substantial portion of their revenue and would lose
money if each borrower repaid the loan when it was due without re-
borrowing. The commenters tended to recharacterize these points rather
than disputing them as a factual matter, though many industry
commenters disagreed that these loans should be considered
``unaffordable'' for ``most'' consumers if many consumers manage to
repay them after borrowing once or twice. Others contended that these
loans should not be considered ``unaffordable'' if they are repaid
eventually, even after re-borrowing multiple times in extended loan
sequences. The commenters on all sides generally did not dispute the
nature of the underlying business model as resting on repeat re-
borrowing that lenders actively encourage, though they sharply disputed
whether this model benefited or harmed consumers.
Very high re-borrowing rates. Most borrowers find it
necessary to re-borrow when their loan comes due or shortly after
repaying their loan, as other expenses come due. This re-borrowing
occurs both with payday loans and with single-payment vehicle title
loans. The Bureau found that 56 percent of payday loans are borrowed on
the same day and 85 percent of these loans are re-borrowed within a
month. Fifty percent
[[Page 54555]]
of all new storefront payday loans are followed by at least three more
loans and 33 percent are followed by six more loans. While single-
payment vehicle title loans are often for somewhat longer durations
than payday loans, typically with terms of one month, re-borrowing
tends to occur sooner and longer sequences of loans are more common.
The Bureau found that 83 percent of single-payment vehicle title loans
are re-borrowed on the same day and 85 percent of them are re-borrowed
within a month. Over half (56 percent) of all new single-payment
vehicle title loans are followed by at least three more loans, and more
than a third (36 percent) are followed by six or more loans. Of the
payday loans made to borrowers paid weekly, bi-weekly, or semi-monthly,
over 20 percent are in loan sequences of 20 loans or more and over 40
percent of loans made to borrowers paid monthly are in loan sequences
of comparable durations (i.e., 10 or more monthly loans). The
commenters did not challenge the thrust of these points as
demonstrating a high incidence of re-borrowing, which is a point that
was reinforced by consumer groups and was illustrated by many
individual commenters as well.
Consumers do not expect lengthy loan sequences. Many
consumers who take out a payday loan do not expect to re-borrow to the
extent that they do. This is especially true of those consumers who end
up in extended cycles of indebtedness. Research shows that many
consumers who take out loans are able to accurately predict how long it
will take them to get out of debt, especially if they repay immediately
or re-borrow only once, but a substantial population of consumers is
not able to do so, and for those consumers who end up in extended loan
sequences, there is little correlation between predictions and
behavior. A study on this topic found that as many as 43 percent of
borrowers may have underestimated the length of time to repayment by
two weeks or more.\462\ The study found that consumers who have
borrowed heavily in the recent past are even more likely to
underestimate how long it will take to repay the loan.\463\ Consumers'
difficulty in this regard may be exacerbated by the fact that such
loans involve a basic mismatch between how they are marketed as short-
term credit and appear designed to function as long sequences of re-
borrowing, which regularly occurs for a number of consumers. This
disparity can create difficulties for consumers in being able to
estimate accurately how long they will remain in debt and how much they
will ultimately pay for the initial extension of credit. Research into
consumer decision-making also helps explain why consumers may re-borrow
more than they expect. For example, people under stress, including
consumers in financial crisis, tend to become very focused on their
immediate problems and think less about the future. Consumers also tend
to underestimate their future expenses, and may be overly optimistic
about their ability to recover from the shock they have experienced or
to bring their expenses in line with their incomes. These points were
sharply disputed by the commenters, and will be discussed further
below.
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\462\ See Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Sup. Ct. Econ. Rev. 105 (2013).
\463\ See id.
---------------------------------------------------------------------------
Very high default rates and collateral harms. Some
consumers do succeed in repaying short-term loans without re-borrowing,
and others eventually repay the loan after re-borrowing multiple times.
But research shows that approximately 20 percent of payday loan
sequences and 33 percent of single-payment vehicle title loan sequences
end up with the consumer defaulting. Consumers who default can become
subject to often aggressive and psychologically harmful debt collection
efforts. While delinquent, they may also seek to avoid default in ways
that lead to a loss of control over budgeting for their other needs and
expenses. In addition, 20 percent of single-payment vehicle title loan
sequences end with borrowers losing their cars or trucks to
repossession. Even borrowers who have not yet defaulted may incur
penalty fees, late fees, or overdraft fees along the way and may find
themselves struggling to pay other bills or meet their basic living
expenses. Commenters generally did not dispute that consumers may feel
the effects of these negative collateral consequences of such loans and
of delinquency and default, though industry commenters tended to
downplay them and some argued that any such harms were outweighed by
the economic benefits of such loans. Individual commenters validated
this account of the negative collateral consequences of such loans as
reflecting their own experiences. Many others countered that they had
successful experiences with these loans and that they were benefited
more than they were harmed by these experiences.
Harms occur despite existing regulation. The research
indicates that in the States that have authorized payday and other
short-term loans, these harms persist despite existing regulatory
frameworks. Indeed, payday loans do not legally exist in many States,
so by definition the harms identified by the Bureau's research flow
from such loans in those States where they are offered pursuant to
existing regulatory frameworks. Even in those States where such loans
are offered pursuant to somewhat different conditions, these
distinctions do not appear to eliminate the harms that flow from the
structure of such loans. In particular, the Bureau is concerned that
existing caps on the amount that a consumer can borrow, rollover
limitations, and short cooling-off periods still appear to leave many
consumers vulnerable to the specific harms discussed above relating to
default, delinquency, re-borrowing, and other collateral harms from
attempting to avoid the other injuries by making unaffordable payments.
Industry commenters took issue with these concerns and disputed this
characterization of the effects of such loans.
In the proposal, the Bureau also reviewed the available evidence
underlying each of these preliminary views. The Bureau sought and
received comments on its review of the evidence, and those comments are
reviewed and addressed in the discussion below. Based on the reasons
set forth in each of the segments in this part, which respond to the
comments and present further analysis that the Bureau has engaged in to
consider these matters further, the Bureau now adopts as its findings
underlying the final rule its views as stated in this initial summary
overview, with certain modifications as set forth below.
a. Borrower Characteristics and Circumstances of Borrowing
As the Bureau laid out in the proposal, borrowers who take out
payday, single-payment vehicle title, and other covered short-term
loans are typically low-to-moderate income consumers who are looking
for quick access to cash, who have little to no savings, who often have
poor credit histories, and who have limited access to other forms of
credit. Comments received from industry participants, trade
associations, and individual users of these loans noted that this
description of the borrower population does not describe all of the
people who use these loans. That is so, of course, but the Bureau's
discussion in the proposal was not intended as an exhaustive account of
the entire universe of borrowers. Instead, it merely represented many
of the recurring borrower characteristics that the Bureau
[[Page 54556]]
found based on its experience with such loans over the past several
years and based on data from a number of studies as discussed further
below.
In the proposal, the Bureau had found preliminarily that the desire
borrowers have for immediate cash may be the result of an emergency
expense or an unanticipated drop in income. The comments received from
industry participants, trade associations, and individual users of
these loans strongly reinforce the basis for this finding. Many
comments describe the function that these loans perform as coping with
income and expense shocks--that is, with unexpected, temporary expenses
or shortfalls in income. These comments cited surveys and studies to
bolster this point, including one survey that noted 86 percent of
borrowers strongly or somewhat agreed that their use of a payday loan
was to cope with an unexpected expense. Many other comments, including
comments from individual users of these loans, offered anecdotal
accounts of the personal reasons many borrowers have for taking out
these loans, including a wide variety of circumstances that can create
such income or expense shocks. Comments received from consumer groups
were also in agreement on these points and further underscored a shared
understanding that this impetus drives much of the demand for such
loans.
The comments received from industry participants, trade
associations, and individual users of these loans made a different
point as well. One trade association, for example, noted that many
consumers use such loans for ``income smoothing'' or to create a better
match between income and expenses in the face of income and expense
volatility--that is, where the consumer's income or expenses fluctuate
over the course of the year, such that credit is needed during times of
lower income or higher expenses to tide the consumer over until times
of higher income or lower expenses. Many reasons were given by
commenters, including a high volume of individual commenters, for such
income and expense volatility, and the following examples are merely
illustrative of the broader and more widespread phenomenon: People who
work on commission; people scheduled to receive one-time or
intermittent income supplements, such as holiday bonuses; people who
work irregular hours, including many contractor or part-time workers;
people who have seasonal opportunities to earn extra income by working
additional hours; or circumstances that may arise that create the need
or the opportunity to satisfy in full some other outstanding debt that
is pressing. Comments from consumer groups echoed these accounts of how
these economic situations drive a certain amount of the demand for such
loans. The nature and weight of these comments thus lend further
support to the preliminary findings that the Bureau had made on these
issues.
In the proposal, the Bureau also noted that many borrowers who take
out payday or single-payment vehicle title loans are consumers whose
living expenses routinely exceed their income. This category of
borrowers may consistently experience negative residual income, or to
use a common phrase, find that they routinely have ``too much month at
the end of the money'' and take out such loans in an effort to bolster
their income--an effort that often proves to be unsuccessful when they
are later unable to repay the loan according to its terms. Various
commenters agreed with this account of some borrowers, and some of the
individual commenters likewise described their own experiences in this
vein.
In addition, some commenters noted that certain borrowers may use
these kinds of loans to manage accumulated debt, preferring to use the
proceeds of the loan to pay down other debt for which nonpayment or
default would be more costly alternatives. This was not frequently
cited as a reason why many borrowers decide to take out such loans, but
it may explain occasional instances.
1. Borrower Characteristics
In the proposal, the Bureau noted that a number of studies have
focused on the characteristics of payday borrowers. For instance, the
FDIC and the U.S. Census Bureau have undertaken several special
supplements to the Current Population Survey (CPS Supplement); the
proposal cited the most recent available data from 2013, which found
that 46 percent of payday borrowers (including storefront and online
borrowers) have a family income of under $30,000.\464\ The latest
edition of the Survey has more recent data from 2015, which finds that
the updated figure is 49 percent.\465\ A study covering a mix of
storefront and online payday borrowers similarly found that 49 percent
had income of $25,000 or less.\466\ Other analyses of administrative
data that include the income borrowers reported to lenders show similar
results.\467\
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\464\ Fed. Deposit Ins. Corp., ``2013 FDIC National Survey of
Unbanked and Underbanked Households: Appendices,'' at appendix. D-
12a (Oct. 2014), available at https://www.fdic.gov/householdsurvey/2013/2013appendix.pdf.
\465\ Fed. Deposit Ins. Corp., ``2015 FDIC National Survey of
Unbanked and Underbanked Households,'' (Oct. 20, 2016), available at
https://www.fdic.gov/householdsurvey/2015/2015report.pdf
(Calculations made using custom data tool.).
\466\ Pew Charitable Trusts, ``Payday Lending in America: Who
Borrows, Where They Borrow, and Why,'' at 35 exhibit 14 (Report 1,
2012), available at http://www.pewtrusts.org/~/media/legacy/
uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf.
\467\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 18 (reporting that based on confidential supervisory data
of a number of storefront payday lenders, borrowers had a reported
median annual income of $22,476 at the time of application (not
necessarily household income)). Similarly, data from several State
regulatory agencies indicate that average incomes range from about
$31,000 (Delaware) to slightly over $36,000 (Washington). See Letter
from Robert A. Glen, Del. State Bank Comm'r to Hon. Bryan Townsend,
Chairman, S. Banking and Bus. Comm. and Hon. Bryon H. Short,
Chairman, H. Econ. Dev./Banking/Ins./Commerce Comm. (enclosing
Veritec Solutions, ``State of Delaware Short-term Consumer Loan
Program--Report on Delaware Short-term Consumer Loan Activity For
the Year Ending December 31, 2014,'' at 6 (Mar. 12, 2015), available
at http://banking.delaware.gov/pdfs/annual/Short_Term_Consumer_Loan_Database_2014_Operations_Report.pdf; Wash.
Dep't of Fin. Insts., ``2014 Payday Lending Report,'' at 6 (2014),
available at http://www.dfi.wa.gov/sites/default/files/reports/2014-payday-lending-report.pdf; nonPrime 101 found the median income for
online payday borrowers to be $30,000. nonPrime101, ``Report 1:
Profiling Internet Small-Dollar Lending,'' at 7 (2014), available at
https://www.nonprime101.com/wp-content/uploads/2013/10/Clarity-Services-Profiling-Internet-Small-Dollar-Lending.pdf.
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A 2012 survey administered by the Center for Financial Services
Innovation (CFSI) to learn more about users of small-dollar credit
products including payday loans, pawn loans, direct deposit advances,
installment loans, and auto title loans found that 43 percent of small-
dollar credit consumers had a household income between $0 and $25,000,
compared to 26 percent of non-small-dollar credit consumers.\468\ The
mean annual household income for those making use of such products was
$32,000, compared to $40,000 for those not using such products. Other
studies and survey evidence presented by commenters were broadly
consistent with the data and analysis contained in the studies that the
Bureau had cited on this point.
---------------------------------------------------------------------------
\468\ Rob Levy & Joshua Sledge, ``A Complex Portrait: An
Examination of Small-Dollar Credit Consumers,'' (Ctr. for Fin.
Servs. Innovation, 2012), available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
---------------------------------------------------------------------------
Additionally, the Bureau found in its analysis of confidential
supervisory data that 18 percent of storefront borrowers relied on
Social Security or some other form of government benefits or public
assistance.\469\ The FDIC study further found that payday borrowers are
disproportionately Hispanic or African-
[[Page 54557]]
American (with borrowing rates two to three times higher respectively
than for non-Hispanic whites) and that unmarried female-headed families
are more than twice as likely as married couples to be payday
borrowers.\470\ The CFSI study discussed above upheld this general
assessment with regard to race, with African-American and Hispanic
borrowers over-represented among such borrowers.\471\ The commenters
did not take issue with these points, and various submissions across
the broad spectrum of stakeholders, including both industry
participants and consumer groups, consistently reinforced the point
that these loans disproportionately go to minority borrowers.
---------------------------------------------------------------------------
\469\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 18.
\470\ Fed. Deposit Ins. Corp., ``2015 FDIC National Survey of
Unbanked and Underbanked Households,'' (Oct. 20, 2016), available at
https://www.fdic.gov/householdsurvey/2015/2015report.pdf
(Calculations made using custom data tool.).
\471\ Rob Levy & Joshua Sledge, ``A Complex Portrait: An
Examination of Small-Dollar Credit Consumers,'' (Ctr. for Fin.
Servs. Innovation, 2012), available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
---------------------------------------------------------------------------
The demographic profiles of single-payment vehicle title borrowers
appear to be roughly comparable to the demographics of payday
borrowers.\472\ Calculations from the CPS Supplement indicate that 44
percent of title borrowers have annual family incomes under
$30,000.\473\ Another survey likewise found that 54 percent of title
borrowers reported incomes below $30,000, compared with 60 percent for
payday borrowers.\474\ Commenters presented some data to suggest that
various borrowers are more educated and that many are middle-aged, but
these results did not alter the great weight of the overall survey data
on this point.
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\472\ None of the sources of information on the characteristics
of vehicle title borrowers that the Bureau is aware of distinguishes
between borrowers taking out single-payment and installment vehicle
title loans. The statistics provided here are for borrowers taking
out either type of vehicle title loan.
\473\ Fed. Deposit Ins. Corp., ``2015 FDIC National Survey of
Unbanked and Underbanked Households,'' (Oct. 20, 2016), available at
https://www.fdic.gov/householdsurvey/2015/2015report.pdf
(Calculations made using custom data tool.).
\474\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers Experiences,'' at 28 (2015), available at
http://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf; Pew Charitable Trusts, ``Payday Lending in
America: Who Borrows, Where They Borrow, and Why,'' at 35 (Report 1,
2012), available at http://www.pewtrusts.org/~/media/legacy/
uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf.
---------------------------------------------------------------------------
And as with payday borrowers, data from the CPS Supplement show
vehicle title borrowers to be disproportionately African-American or
Hispanic, and more likely to live in unmarried female-headed
families.\475\ Similarly, a survey of borrowers in three States
conducted by academic researchers found that title borrowers were
disproportionately female and minority. Over 58 percent of title
borrowers were female. African-Americans were over-represented among
borrowers compared to their share of their States' population at large.
Hispanic borrowers were over-represented in two of the three States;
however, these borrowers were under-represented in Texas, the State
with the highest proportion of Hispanic residents in the study.\476\
Commenters generally did not take issue with these points, and various
submissions from both industry participants and consumer groups support
the view that they are an accurate reflection of the borrower
population. One commenter contended that the data did not show vehicle
title borrowers to be disproportionately minority consumers, though
this view did not seem to take into account the composition of the
total population in the States that were surveyed.
---------------------------------------------------------------------------
\475\ Fed. Deposit Ins. Corp., ``2015 FDIC National Survey of
Unbanked and Underbanked Households,'' (Oct. 20, 2016), available at
https://www.fdic.gov/householdsurvey/2015/2015report.pdf
(Calculations made using custom data tool.).
\476\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013, at 1029-1030 (2014).
---------------------------------------------------------------------------
As noted in the proposal, studies of payday borrowers' credit
histories show both poor credit histories and recent credit-seeking
activity. One academic paper that matched administrative data from one
storefront payday lender to credit bureau data found that the median
credit score for a payday applicant was in the bottom 15 percent of
credit scores overall.\477\ The median applicant had one open credit
card, but 80 percent of applicants had either no credit card or no
credit available on a card. The average borrower had 5.2 credit
inquiries on her credit report over the preceding 12 months before her
initial application for a payday loan (three times the number for the
general population), but obtained only 1.4 accounts on average. This
suggests that borrowers made repeated but generally unsuccessful
efforts to obtain additional other forms of credit prior to initiating
a payday loan. While typical payday borrowers may have one or more
credit cards, they are unlikely to have unused credit; in fact, they
are often delinquent on one or more cards, and have often experienced
multiple overdrafts and/or NSFs on their checking accounts.\478\ A
recent report analyzing credit scores of borrowers from five large
storefront payday lenders provides corroborative support, finding that
the average borrower had a VantageScore 3.0 \479\ score of 532 and that
over 85 percent of borrowers had a score below 600, indicating high
credit risk.\480\ By way of comparison, the national average
VantageScore is 669 and only 30 percent of consumers have a
VantageScore below 600.\481\
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\477\ Neil Bhutta et al., ``Consumer Borrowing after Payday Loan
Bans,'' 59 J. of L. and Econ. 225, at 231-233 (2016). Note that the
credit score used in this analysis was the Equifax Risk Score which
ranges from 280-850. Frederic Huynh, ``FICO Score Distribution,''
FICO Blog (Apr. 15, 2013), http://www.fico.com/en/blogs/risk-compliance/fico-score-distribution-remains-mixed/.
\478\ Neil Bhutta et al., ``Consumer Borrowing after Payday Loan
Bans,'' 59 J. of L. and Econ. 225, at 231-233 (2016).
\479\ A VantageScore 3.0 score is a credit score created by an
eponymous joint venture of the three major credit reporting
companies; scores lie on the range 300-850.
\480\ nonPrime101, ``Report 8: Can Storefront Payday Borrowers
Become Installment Loan Borrowers?,'' at 7 (2015), available at
https://www.nonprime101.com/blog/can-storefront-payday-borrowers-become-installment-loan-borrowers/.
\481\ Experian, ``What is Your State of Credit,'' (2015),
available at http://www.experian.com/live-credit-smart/state-of-credit-2015.html.
---------------------------------------------------------------------------
The proposal also cited reports using data from a specialty
consumer reporting agency, which indicate that online borrowers have
comparable credit scores to storefront borrowers (a mean VantageScore
3.0 score of 525 versus 532 for storefront).\482\ Another study based
on the data from the same specialty consumer reporting agency and an
accompanying survey of online small-dollar credit borrowers reported
that 79 percent of those surveyed had been denied traditional credit in
the past year due to having a low or no credit score, 62 percent had
already sought assistance from family and friends, and 24 percent
reported having negotiated with a creditor to whom they owed
money.\483\ Moreover, heavy use of online payday loans seems to be
correlated with more strenuous credit-seeking: compared to light
(bottom quartile) users of online loans, heavy (top quartile) users
were more likely to
[[Page 54558]]
have been denied credit in the past year (87 percent of heavy users
compared to 68 percent of light users).\484\
---------------------------------------------------------------------------
\482\ nonPrime101, ``Report 8: Can Storefront Payday Borrowers
Become Installment Loan Borrowers?,'' at 5 (2015), available at
https://www.nonprime101.com/blog/can-storefront-payday-borrowers-become-installment-loan-borrowers/. Twenty percent of online
borrowers are unable to be scored; for storefront borrowers the
percentage of unscorable consumers is negligible. However, this may
partly reflect the limited quality of the data online lenders obtain
and/or report about their customers and resulting inability to
obtain a credit report match.
\483\ Stephen Nunez et al., ``Online Payday and Installment
Loans: Who Uses Them and Why?, at 44, 51, 60 (MDRC, 2016), available
at http://www.mdrc.org/sites/default/files/online_payday_2016_FR.pdf.
\484\ Stephen Nunez et al., ``Online Payday and Installment
Loans: Who Uses Them and Why?, at 38 tbl. 6 (MDRC, 2016), available
at http://www.mdrc.org/sites/default/files/online_payday_2016_FR.pdf.
---------------------------------------------------------------------------
In the proposal, the Bureau also noted that other surveys of payday
borrowers added to the picture of consumers in financial distress. For
example, in a survey of payday borrowers published in 2009, fewer than
half reported having any savings or reserve funds.\485\ Almost a third
of borrowers (31.8 percent) reported monthly debt-to-income payments of
30 percent or higher, and more than a third (36.4 percent) of borrowers
reported that they regularly spend all the income they receive.
Similarly, a 2010 survey found that over 80 percent of payday borrowers
reported making at least one late payment on a bill in the preceding
three months, and approximately one quarter reported frequently paying
bills late. Approximately half reported bouncing at least one check in
the previous three months, and 30 percent reported doing so more than
once.\486\ Furthermore, a 2012 survey found that 58 percent of payday
borrowers report that they struggled to pay their bills on time. More
than a third (37 percent) said they would have taken out a loan on
almost any terms offered. This figure rises to 46 percent when the
respondent rated his or her financial situation as particularly
poor.\487\
---------------------------------------------------------------------------
\485\ Gregory Elliehausen, ``An Analysis of Consumers' Use of
Payday Loans,'' at 29 (Geo. Wash. Sch. of Bus., Monograph No. 41,
2009), available at https://www.researchgate.net/publication/237554300_AN_ANALYSIS_OF_CONSUMERS%27_USE_OF_PAYDAY_LOANS.
\486\ Jonathan Zinman, ``Restricting Consumer Credit Access:
Household Survey Evidence on Effects Around the Oregon Rate Cap,''
at 20 tbl. 1 (Dartmouth College, 2008), available at http://
www.dartmouth.edu/~jzinman/Papers/
Zinman_RestrictingAccess_oct08.pdf.
\487\ See Pew Charitable Trusts, ``Payday Lending in America:
How Borrowers Choose and Repay Payday Loans,'' at 20 (Report 2,
2013), http://www.pewtrusts.org/en/research-and-analysis/reports/2013/02/19/how-borrowers-choose-and-repay-payday-loans.
---------------------------------------------------------------------------
A large number of comments received from industry participants,
trade associations, consumer groups, academics, and individual users of
these loans extensively reinforced this picture of the financial
situation for many storefront and online borrowers. Industry
participants and trade associations presented their understanding of
the characteristics of the borrower population as being marked by poor
credit histories, an acute need for credit, aggressive efforts to seek
credit, and general unavailability of other means of credit for many of
these borrowers. In many of the comments, these characteristics were
described in particular detail and emphasized as making the case to
show the need for the availability of such loans. Many individual users
of these loans also related their own personal stories and situations,
which were typically marked by these same features of their financial
histories that demonstrated their need for credit products.
Despite these points of general agreement, many industry
participants, trade associations, individual users of such loans, and
some academics submitted comments that vigorously disagreed with what
they regarded as assumptions the Bureau had made in the proposal about
payday and vehicle title borrowers. In their view, the Bureau was
wrongly portraying these consumers as financially unsophisticated and
incapable of acting in their own best interests. On the contrary, many
of these commenters stated, such borrowers are often very knowledgeable
about the costs and terms of such loans. Their decision to take out a
payday or vehicle title loan was represented, in many instances, as
being based on a rational judgment that access to this form of credit
is far more valuable than reducing the risks and costs associated with
their indebtedness.
The Bureau recognizes that the characteristics of individual users
of payday and single-payment vehicle title loans are differentiated in
many and various ways. Much of the debate here represents different
characterizations and opinions about potential conclusions drawn from
the facts, rather than direct disagreements about the facts themselves.
These issues are important and they are considered further in the
discussions of unfairness and abusiveness under final Sec. 1041.4.
2. Circumstances of Borrowing
The proposal discussed several surveys that have asked borrowers
why they took out their loans or for what purpose they used the loan
proceeds, and noted that these are challenging questions to study. Any
survey that asks about past behavior or events runs some risk of recall
errors.\488\ In addition, the fact that money is fungible makes this
question more complicated. For example, a consumer who has an
unexpected expense may not feel the effect fully until weeks later,
depending on the timing of the unexpected expense relative to other
expenses and to the receipt of income. In that circumstance, a borrower
may say either that she took out the loan because of the unexpected
expense, or that she took out the loan to cover regular expenses.
Perhaps because of this difficulty, results across surveys are somewhat
inconsistent, with one finding high levels of unexpected expenses,
while others find that payday loans are used primarily to pay for
regular expenses.
---------------------------------------------------------------------------
\488\ See generally David Grimes and Kenneth F. Schulz, ``Bias
and Causal Associations in Observational Research,'' 359 Lancet
9302, at 248-252. (2002); see E. Hassan, ``Recall Bias Can Be a
Threat to Retrospective and Prospective Research Designs,'' 3
Internet J. of Epidemiology 2 (2005) (for a more specific discussion
of recall bias).
---------------------------------------------------------------------------
In the first survey discussed in the proposal, a 2007 survey of
payday borrowers, the most common reason cited for taking out a loan
was ``an unexpected expense that could not be postponed,'' with 71
percent of respondents strongly agreeing with this reason and 16
percent somewhat agreeing.\489\ A 2012 survey of payday loan borrowers,
by contrast, found that 69 percent of respondents took their first
payday loan to cover a recurring expense, such as utilities, rent, or
credit card bills, and only 16 percent took their first loan for an
unexpected expense.\490\
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\489\ Gregory Elliehausen, ``An Analysis of Consumers' Use of
Payday Loans,'' at 35 (Geo. Wash. Sch. of Bus., Monograph No. 41,
2009), available at https://www.researchgate.net/publication/237554300_AN_ANALYSIS_OF_CONSUMERS%27_USE_OF_PAYDAY_LOANS.
\490\ Pew Charitable Trusts, ``Payday Lending in America: Who
Borrows, Where They Borrow, and Why,'' at 5 (Report 1, 2012),
available at attp://www.pewtrusts.org/~/media/legacy/uploadedfiles/
pcs_assets/2012/pewpaydaylendingreportpdf.pdf.
---------------------------------------------------------------------------
The 2012 CFSI survey of alternative small-dollar credit products,
discussed earlier in this section asked separate questions about what
borrowers used the loan proceeds for and what precipitated the
loan.\491\ Responses were reported for ``very short term'' and ``short
term'' credit; ``very short term'' referred to payday, pawn, and
deposit advance products. Respondents could report up to three reasons
for what precipitated the loan; the most common reason given for very-
short-term borrowing (approximately 37 percent of respondents) was ``I
had a bill or payment due before my paycheck arrived,'' which the
authors of the report on the survey results interpreted as a mismatch
in the timing of income and expenses. Unexpected expenses were cited by
30 percent of very-short-term borrowers, and approximately 27
[[Page 54559]]
percent reported unexpected drops in income. Approximately 34 percent
reported that their general living expenses were consistently more than
their income. Respondents could also report up to three uses for the
funds; the most common answers related to paying for routine expenses,
with about 40 percent reporting the funds were used to ``pay utility
bills,'' about 40 percent reporting the funds were used to pay
``general living expenses,'' and about 20 percent saying the funds were
used to pay rent. Of all the reasons for borrowing, consistent
shortfalls in income relative to expenses was the response most highly
correlated with consumers who reported repeated usage or rollovers.
---------------------------------------------------------------------------
\491\ Rob Levy & Joshua Sledge, ``A Complex Portrait: An
Examination of Small-Dollar Credit Consumers,'' (Ctr. for Fin.
Servs. Innovation, 2012), available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
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A survey of 768 online payday users conducted in 2015 and drawn
from a large administrative database of payday borrowers looked at
similar questions, and compared the answers of heavy and light users of
online loans.\492\ Based on consumers' self-reported borrowing history,
they were segmented into heavy users (users with borrowing frequency in
the top quartile of the dataset) and light users (bottom quartile).
Heavy users were much more likely to report that they ``[i]n past three
months, often or always ran out of money before the end of the month''
(60 percent versus 34 percent). In addition, heavy users were nearly
twice as likely as light users to state their primary reason for
seeking their most recent payday loan as being to pay for ``regular
expenses such as utilities, car payment, credit card bill, or
prescriptions'' (49 percent versus 28 percent). Heavy users were less
than half as likely as light users to state their reason as being to
pay for an ``unexpected expense or emergency'' (21 percent versus 43
percent). Notably, 18 percent of heavy users stated that their primary
reason for seeking a payday loan online was that they ``had a
storefront loan, needed another [loan]'' as compared to just over one
percent of light users.
---------------------------------------------------------------------------
\492\ Stephen Nunez et al., ``Online Payday and Installment
Loans: Who Uses Them and Why?, (MDRC, 2016), available at http://www.mdrc.org/sites/default/files/online_payday_2016_FR.pdf (A
demand-side analysis from linked administrative, survey, and
qualitative interview data.).
---------------------------------------------------------------------------
One industry commenter asserted that a significant share of vehicle
title loan borrowers were small business owners who use these loans for
business, rather than personal uses. The commenter pointed to one study
that cited anonymous ``industry sources'' who claimed that 25-30
percent of title borrowers were small businesses \493\ and another
study that cited an unpublished lender survey which found that about 20
percent of borrowers were self-employed.\494\ Evidence was not provided
by the commenter to document the share of vehicle title loan borrowers
who are either self-employed or small business owners; however, the
Bureau notes that it is important to distinguish between borrowers who
may be small business owners but may not necessarily use a title loan
for a business purpose. For example, one survey of title loan borrowers
found that while 16 percent of title loan borrowers were self-employed,
only 6 percent of title loan borrowers state that they took the loan
for a business expense.\495\ The study's authors concluded that ``. . .
it seems like business credit is not a significant portion of the
loans.'' \496\ Another survey found that 20 percent of title loan
borrowers are self-employed, and an additional 3 percent were both
self-employed and worked for an employer. In that survey, 3 percent of
title loan borrowers reported the loan was for a business expense and 2
percent reported the loan was for a mix of personal and business
use.\497\
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\493\ Todd. J. Zywicki, ``Consumer Use and Government Regulation
of Title Pledge Lending, 22 Loyola Cons. Law. Rev. 4 (2010),
available at http://lawecommons.luc.edu/cgi/viewcontent.cgi?article=1053&context=lclr.
\494\ Jim Hawkins, ``Credit on Wheels: The Law and Business of
Auto-Title Lending,'' 69 Wash. & Lee L. Rev. 535, 545 (2012).
\495\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013, 1033 (2014).
\496\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013, 1036 (2014).
\497\ See Pew Charitable Trusts, ``Auto Title Loans,'' at 29
(March 2015), available at http://www.pewtrusts.org/~/media/assets/
2015/03/autotitleloansreport.pdf.
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Some commenters agreed with the Bureau that the results across
surveys are somewhat inconsistent, perhaps because of methodological
issues. Industry commenters predictably chose to place more emphasis on
the results that accorded with their arguments that these loans help
consumers cope with financial shocks or allow smoothing of income. By
contrast, consumer groups predictably took the opposite perspective.
They contended that these loans do present special risks and harms for
consumers that outweigh the benefits of access to such loans without
being subject to any underwriting, especially for those consumers who
experience chronic shortfalls of income. Both groups of commenters
chose to downplay the results that tended to undermine their arguments.
On the whole, these comments do not call into question the Bureau's
treatment of the factual issues here, but go more to the potential
characterization of those facts or the inferences to be drawn from
them. Those issues are discussed further in the section-by-section
analysis for Sec. 1041.4 below.
A number of comments from industry participants and trade
associations faulted the Bureau for not undertaking to conduct its own
surveys of borrowers to gauge the circumstances that lead them to use
payday, title, or other covered short-term loans. Although the Bureau
had reviewed and analyzed at least four different surveys of such
borrowers conducted over the past decade, as discussed above, these
commenters stated that the Bureau would have furthered its
understanding by speaking with and hearing directly from such
borrowers. Nonetheless, many of these commenters offered further non-
survey information of this kind by referencing the consumer narratives
in thousands of individual consumer complaints about payday, title, and
other covered loans that have been filed with the Bureau (which also
include a substantial number of debt collection complaints stemming
from such loans). They also pointed to individual responses that have
been filed about such loans on the Bureau's online ``Tell Your Story''
function, where some number of individual borrowers have explained how
they use such loans, often describing the benefits and challenges they
have experienced as a result.
In addition, a large volume of comments--totaling well over a
million comments about the proposal, both pro and con--were filed with
the Bureau by individual users of payday and vehicle title loans. Many
of these commenters described their own personal experiences with these
loans, and others offered their perspectives. The Bureau has reviewed
these comments and has carefully considered the stories they told.
These comments include a large number of positive accounts of how
people successfully used such loans to address shortfalls or cope with
emergencies and concerns about the possibility of access to such loans
being removed. The comments included fewer but still a very sizable
number of other accounts, much more negative in tone, of how consumers
who took out such loans became trapped in long cycles of repeated re-
borrowing that led to financial distress, marked by problems such as
budgetary distortions, high collateral costs, the loss of depository
accounts and other services, ultimate default on the loans, and the
loss of other assets such as people's homes and their vehicles. Some of
these comments
[[Page 54560]]
came from the individual consumers themselves, while many came from
friends, family members, clergy, legal aid attorneys, neighbors, or
others who were concerned about the impact the loans had on consumers
whom they knew, and in some cases whom they had helped to mitigate the
negative experience through financial assistance, counseling, or legal
assistance. The enormous volume of such individual comments itself
helps to provide considerably more information about borrowers that
helps to supplement the prior survey data discussed in the proposal. It
appears that various parties on both sides of these issues went to
great lengths to solicit such a large number of comment submissions by
and about individual users of such loans.
The substantial volume and variation of individual comments have
further added to the Bureau's understanding of the wide variety of
circumstances in which such borrowing occurs. They underscore the
Bureau's recognition that not only the personal characteristics, but
also the particularized circumstances, of individual users of payday
and single-payment vehicle title loans can be quite differentiated from
one another across the market. Nonetheless, the focus of this rule is
on how the identified lender practice of making such loans without
reasonably assessing the borrower's ability to repay the loan according
to its terms affects this broad and diverse universe of consumers.
b. Lender Practices
As described in the proposal, the business model of lenders who
make payday and single-payment vehicle title loans is predicated on the
lenders' ability to secure extensive re-borrowing. As recounted in the
Background section, the typical storefront payday loan has a principal
amount of $350, and the consumer pays a typical fee of 15 percent of
the principal amount. For a consumer who takes out such a loan and
repays it when it is due without re-borrowing, this means the typical
loan would produce roughly $50 in revenue to the lender. Lenders would
thus require a large number of ``one-and-done'' consumers to cover
their overhead and acquisition costs and generate profits. However,
because lenders are able to induce a large percentage of borrowers to
repeatedly re-borrow, lenders have built a model in which the typical
storefront lender, as discussed in part II above, has two or three
employees serving around 500 customers per year. Online lenders do not
have the same overhead costs, but they have been willing to pay
substantial acquisition costs to lead generators and to incur
substantial fraud losses, all of which can only be sufficiently offset
by their ability to secure more than a single fee--and often many
repeated fees--from their borrowers.
In the proposal, the Bureau used the term ``re-borrow'' to refer to
situations in which consumers either roll over a loan (which means they
pay a fee to defer payment of the principal for an additional period of
time), or take out a new loan within a short period time following a
previous loan. Re-borrowing can occur concurrently with repayment in
back-to-back transactions or can occur shortly thereafter. In the
proposal, the Bureau stated its reasons for concluding that re-
borrowing often indicates that the previous loan was beyond the
consumer's ability to repay while meeting the consumer's other major
financial obligations and basic living expenses. As discussed in more
detail in the section-by-section analysis of Sec. 1041.6, the Bureau
proposed and now concludes that it is appropriate to consider loans to
be re-borrowings when the second loan is taken out within 30 days of
the consumer being indebted on a previous loan. While the Bureau's 2014
Data Point used a 14-day period and the Small Business Review Panel
Outline used a 60-day period, the Bureau used a 30-day period in its
proposal to align the time frame with consumer expense cycles, which
are typically a month in length. This duration was designed to account
for the fact that where repaying a loan causes a shortfall, the effect
is most likely to be experienced within a 30-day period in which
monthly expenses for matters such as housing and other debts come due.
The Bureau recognizes that some re-borrowing that occurs after a 30-day
period may be attributable to the spillover effects of an unaffordable
loan and that some re-borrowing that occurs within the 30-day period
may be attributable to a new need that arises unrelated to the impact
of repaying the short-term loan. Thus, while other periods could
plausibly be used to determine when a follow-on loan constitutes re-
borrowing, the Bureau believes that the 30-day period provides the most
appropriate period for these purposes. In fact, the evidence presented
below suggests that for any of these three potential time frames,
though the percentage varies somewhat, the number of loans that occur
as part of extended loan sequences of 10 loans or more is around half
of all payday loans. Accordingly, this section, Market Concerns--
Underwriting, uses a 30-day period to determine whether a loan is part
of a loan sequence.
The proposal noted that the majority of lending revenue earned by
storefront payday lenders and lenders that make single-payment vehicle
title loans comes from borrowers who re-borrow multiple times and
become enmeshed in long loan sequences. Based on the Bureau's data
analysis, approximately half of all payday loans are in sequences that
contain 10 loans or more, depending on the time frame that is used to
define the sequence.\498\ Looking just at loans made to borrowers who
are paid weekly, bi-weekly, or semi-monthly, more than 20 percent of
loans are in sequences that are 20 loans or longer. Similarly, the
Bureau found that about half of all single-payment vehicle title loans
are in sequences of 10 loans or more, and over two-thirds of them are
in sequences of at least seven loans.\499\ The commenters did not take
serious issue with this data analysis, and the Bureau finds these
particular facts to be of great significance in assessing the
justifications for regulatory measures that would address the
consequent harms experienced by consumers.
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\498\ This is true regardless of whether sequence is defined
using either a 14-day, 30-day, or 60-day period to determine whether
loans are within the same loan sequence. Using the 14-day period,
just under half of these loans (47 percent) are in sequences that
contain 10 loans or more. Using a longer period, more than half of
these loans (30 days, 53 percent; 60 days, 59 percent) are in
sequences that contain 10 loans or more.
\499\ CFPB Single-Payment Vehicle Title Lending, at 14.
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Commenters on all sides of the proposal did not seriously take
issue with the account presented in the proposal of the basic business
model in the marketplace for payday and single-payment vehicle title
loans. They did have widely divergent views about whether they would
characterize these facts as beneficial or pernicious, or what
consequences they perceive as resulting from this business model. One
credit union trade association stated its view that such lending takes
advantage of consumers and exacerbates bad financial situations and
thus it favored curbs on payday lending. Consumer groups and numerous
individual borrowers echoed this view. Industry participants, other
trade associations, and many other individual borrowers took the
position, explicitly or implicitly, that the benefits experienced by
successful users of these loans outweighed the costs incurred by those
who engaged in repeat re-borrowing with consequent negative outcomes
and collateral consequences.
As discussed below, the Bureau has considered the comments
submitted on
[[Page 54561]]
the proposal and continues to believe that both the short term and the
single-payment structure of these loans contributes to the long loan
sequences that borrowers take out. Various lender practices exacerbate
the problem by marketing to borrowers who are particularly likely to
wind up in long sequences of loans, by failing to screen out borrowers
who are likely to wind up in long-term debt or to establish guardrails
to avoid long-term indebtedness, and by actively encouraging borrowers
to continue to re-borrow when their single-payment loans come due.
1. Loan Structure
The proposal described how the single-payment structure and short
duration of these loans makes them difficult to repay. Within the space
of a single income or expense cycle, a consumer with little to no
savings cushion and who has borrowed to meet an unexpected expense or
income shortfall, or who chronically runs short of funds, is unlikely
to have the available cash needed to repay the full amount borrowed
plus the finance charge on the loan when it is due and to cover other
ongoing expenses. This is true for loans of a very short duration
regardless of how the loan may be categorized. Loans of this type, as
they exist in the market today, typically take the form of single-
payment loans, including payday loans and vehicle title loans, though
other types of credit products are possible.\500\ Because the focus of
the Bureau's research has been on payday and vehicle title loans, the
discussion in Market Concerns--Underwriting centers on those types of
products.
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\500\ In the past, a number of depository institutions have also
offered deposit advance products. A small number of institutions
still offer similar products. Like payday loans, deposit advances
are typically structured as short-term loans. However, deposit
advances do not have a pre-determined repayment date. Instead,
deposit advance agreements typically stipulate that repayment will
automatically be taken out of the borrower's next qualifying
electronic deposit. Deposit advances are typically requested through
online banking or over the phone, although at some institutions they
may be requested at a branch. As described in more detail in the
CFPB Payday Loans and Deposit Advance Products White Paper, the
Bureau's research demonstrated similar borrowing patterns in both
deposit advance products and payday loans. See CFPB Payday Loans and
Deposit Advance Products White Paper, at 32-42.
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The size of single-payment loan repayment amounts (measured as loan
principal plus finance charges owed) relative to the borrower's next
paycheck gives some sense of how difficult repayment may be. The
Bureau's storefront payday loan data shows that the average borrower
being paid on a bi-weekly basis would need to devote 37 percent of her
bi-weekly paycheck to repaying the loan. Single-payment vehicle title
borrowers face an even greater challenge. In the data analyzed by the
Bureau, the median borrower's payment on a 30-day loan is equal to 49
percent of monthly income,\501\ and the Bureau finds it especially
significant as indicating the severe challenges and potential for
negative outcomes associated with these loans.
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\501\ The data used for this calculation is described in CFPB
Data Point: Payday Lending, at 10-15 and in CFPB Report on
Supplemental Findings.
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The commenters did not offer any data that disagreed with this
analysis of how the loan structure works in practice. Industry
commenters did assert, however, that the structure of these loans is
not intended or designed as a means of exploiting consumers, but rather
has evolved as needed to comply with the directives of State law and
State regulation of this lending market. As a historical matter, this
appears to be incorrect; indeed, another commenter is the founder of
the company who helped to initiate the payday lending industry, W.
Allan Jones. The comment notes that the ``traditional `payday loan'
product'' was first developed by his company in 1993 in Tennessee and
then became the basis for legislation and regulation that has spread to
a majority of States, with various modifications and refinements. As
noted above in part II.A, however, another large payday lender--QC
Financial--began making payday loans in Kansas in 1992 under an
existing provision of that state's existing consumer lending structure
and that same year at least one State regulator formally held that
deferred presentment activities constituted consumer lending subject to
the State's consumer credit laws.\502\ Other accounts of the history of
payday lending generally tend to reinforce these historical accounts
that modern payday lending began emerging in the early 1990s as a
variant of check-cashing stores whereby the check casher would cash and
hold consumers' personal checks for a fee for several days--until
payday--before cashing them.\503\ The laws of States, particularly
those that had adopted the Uniform Consumer Credit Code (UCCC)
including Kansas and Colorado, permitted lenders to retain a minimum
finance charge on loans ranging in the 1990's from about $15 to $25 per
loan regardless of State rate caps, and payday lenders used those
provisions to make payday loans. In other States, and later in UCCC
States, more specific statutes were enacted to authorize and regulate
what had become payday lending. No doubt the structure of such loan
products over time is affected by and tends to conform to State laws
and regulations, but the point here is that the key features of the
loan structure, which tend to make these loans difficult to repay for a
significant population of borrowers, are core to this financial product
and are fairly consistent across time and geography.
---------------------------------------------------------------------------
\502\ QC Holdings, Inc., Registration Statement (Form S-1), at 1
(May 7, 2004); see, e.g., Laura Udis, Adm'r Colo. Dep't of Law,
Unif. Consumer Credit Code, ``Check Cashing Entities Which Provide
Funds In Return For A Post-Dated Check Or Similar Deferred Payment
Arrangement And Which Impose A Check Cashing Charge Or Fee May Be
Consumer Lenders Subject To The Colorado Uniform Consumer Credit
Code,'' Administrative Interpretation No. 3.104-9201 (June 23, 1992)
(on file).
\503\ Pew Charitable Trusts, ``A Short History of Payday Lending
Law,'' (July 18, 2012), available at http://www.pewtrusts.org/en/research-and-analysis/analysis/2012/07/a-short-history-of-payday-lending-law.
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Regardless of the historical background, however, one implication
of the suggestion put forward by these commenters appears to be that
the intended consequence of this loan product is to produce cycles of
re-borrowing or extended loan sequences for many consumers that exceed
the permissible short-term loan periods adopted under State law. The
explanation seems to be that the actual borrowing needs of consumers
extend beyond the permissible loan periods permitted by State law. If
that is so, then the inherent nature of this mismatched product imposes
large forecasting risks on the consumer, which may often lead to
unexpected harms. And even if the claim instead is that the loan
structure manages to co-exist with the formal constraints imposed by
State law, this justification does little to minimize the risks and
harms to the substantial population of consumers who find themselves
trapped in extended loan sequences.
2. Marketing
The proposal also noted that the general positioning of short-term
products in marketing and advertising materials as a solution to an
immediate liquidity challenge attracts consumers facing these problems,
encouraging them to focus on short-term relief rather than the
likelihood that they are taking on a new longer-term debt. Lenders
position the purpose of the loan as being for use ``until next payday''
or to ``tide over'' the consumer until she receives her next
paycheck.\504\ These types of
[[Page 54562]]
product characterizations can encourage consumers to think of these
loans as easy to repay, a fast solution to a temporary cash shortfall,
and a short-term obligation, all of which lessen the risk in the
consumer's mind that the loan will become a long-term debt cycle.
Indeed, one study reporting consumer focus group feedback noted that
some participants reported that the marketing made it seem like payday
loans were ``a way to get a cash infusion without creating an
additional bill.'' \505\
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\504\ See, e.g., Speedy Cash, ``Payday Loan'', https://www.speedycash.com/payday-loans (last visited Sept. 24, 2017) (``A
Speedy Cash payday loan may be a solution to help keep you afloat
until your next pay day.''); Check Into Cash, ``Our Loan Process,''
https://checkintocash.com/payday-loans/ (last visited Sept. 24,
2017) (``A payday loan is a small dollar short-term advance used as
an option to help a person with small, often unexpected
expenses.''); Cash America, ``Cash Advance/Short-term Loans,''
http://www.cashamerica.com/LoanOptions/CashAdvances.aspx (last
visited May 18, 2016) (noting that ``a short-term loan, payday
advance or a deferred deposit transaction--can help tide you over
until your next payday'' and that ``A single payday advance is
typically for two to four weeks. However, borrowers often use these
loans over a period of months, which can be expensive. Payday
advances are not recommended as long-term financial solutions.'');
Cmty. Fin. Servcs. Ass'n of Am., ``Is A Payday Advance Appropriate
For You?,'' http://cfsaa.com/what-is-a-payday-advance/is-a-payday-advance-appropriate-for-you.aspx (last visited May 18, 2016) (The
national trade association representing storefront payday lenders
analogizes a payday loan to ``a cost-efficient `financial taxi' to
get from one payday to another when a consumer is faced with a
small, short-term cash need.'' The Web site elaborates that, ``Just
as a taxi is a convenient and valuable service for short distance
transportation, a payday advance is a convenient and reasonably-
priced service that should be used to meet small-dollar, short-term
needs. A taxi service, however, is not economical for long-distance
travel, and a payday advance is inappropriate when used as a long-
term credit solution for ongoing budget management.'').
\505\ Pew Charitable Trusts, ``Payday Lending in America: How
Borrowers Choose and Repay Payday Loans,'' at 22 (Report 2, 2013),
available at http://www.pewtrusts.org/en/research-and-analysis/reports/2013/02/19/how-borrowers-choose-and-repay-payday-loans (``To
some focus group respondents, a payday loan, as marketed, did not
seem as if it would add to their recurring debt, because it was a
short-term loan to provide quick cash rather than an additional
obligation. They were already in debt and struggling with regular
expenses, and a payday loan seemed like a way to get a cash infusion
without creating an additional bill.'').
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As discussed in the proposal, in addition to presenting loans as
short-term solutions, rather than potentially long-term obligations,
lender advertising often focuses on how quickly and easily consumers
can obtain a loan. An academic paper reviewing the advertisements of
Texas storefront and online payday and vehicle title lenders found that
the speed of getting a loan is the most frequently advertised feature
in both online (100 percent) and storefront (50 percent) payday and
title loans.\506\ Advertising that is focused on immediacy and speed
capitalizes on the sense of urgency borrowers feel when facing a cash
shortfall. Indeed, the names of many payday and vehicle title lenders
include the words (in different spellings) ``speedy,'' ``cash,''
``easy,'' and ``quick,'' thus emphasizing their rapid and simple loan
funding.
---------------------------------------------------------------------------
\506\ Jim Hawkins, ``Using Advertisements to Diagnose Behavioral
Market Failure in Payday Lending Markets,'' 51 Wake Forest L. Rev.
57, at 71 (2016). The next most advertised features in online
content are simple application process and no credit check/bad
credit OK (both at 97 percent). For storefront lenders, the ability
to get a high loan amount was the second most highly advertised
content.
---------------------------------------------------------------------------
All of the commenters generally agreed as a factual matter that the
marketing and offering of such loans is typically marked by ease,
speed, and convenience, which are touted as positive attributes of such
loans that make them desirable credit products from the standpoint of
potential borrowers. Yet industry participants and trade associations
broadly disputed what they viewed as the Bureau's perspective on the
potential implications of this marketing analysis, as suggesting that
many borrowers lack knowledge or awareness about the nature, costs, and
overall effects of these loans. Consumer advocates, on the other hand,
contended that the manner in which these loans are being marketed
affects the likelihood that borrowers will tend to view them as short-
term obligations that will not have long-term effects on their overall
financial position, which often leads consumers to experience the
negative outcomes associated with unexpectedly ending up in extended
loan sequences.
3. Failure To Assess Ability To Repay
As discussed in the proposal, the typical loan process for
storefront payday, online payday, and single-payment vehicle title
lenders generally involves gathering some basic information about
borrowers before making a loan. Lenders normally do collect income
information, although the information they collect may just be self-
reported or ``stated'' income. Payday lenders collect information to
ensure the borrower has a checking account, and title lenders need
information about the vehicle that will provide the security for the
loan. Some lenders access consumer reports prepared by specialty
consumer reporting agencies and engage in sophisticated screening of
applicants, and at least some lenders turn down the majority of
applicants to whom they have not previously made loans.
One of the primary purposes of this screening, however, is to avoid
fraud and other ``first payment defaults,'' not to make any kind of
determination that borrowers will be able to repay the loan without re-
borrowing. These lenders generally do not obtain any information about
the borrower's existing obligations or living expenses, which means
that they cannot and do not prevent those with expenses chronically
exceeding income, or those who have suffered from an income or expense
shock from which they need substantially more time to recover than the
term of the loan, from taking on additional obligations in the form of
payday or similar loans. Thus, lenders' failure to assess the
borrower's ability to repay the loan permits those consumers who are
least able to repay the loans, and consequently are most likely to re-
borrow, to obtain them.
Lending to borrowers who cannot repay their loans would generally
not be profitable in a traditional lending market, but as described
elsewhere in this section, the factors that funnel consumers into
cycles of repeat re-borrowing turn the traditional model on its head by
creating incentives for lenders to actually want to make loans to
borrowers who cannot afford to repay them when due if instead the
consequence is that these borrowers are likely to find themselves re-
borrowing repeatedly. Although industry stakeholders have argued that
lenders making short-term loans already take steps to assess ``ability
to repay'' and will always do so out of economic self-interest, the
Bureau believes that this refers narrowly to whether the consumer will
default up front on the loan, rather than whether the consumer has the
capacity to repay the loan without having to re-borrow and while
meeting other financial obligations and basic living expenses. The fact
that lenders often do not perform additional underwriting when
borrowers are rolling over a loan, or are returning to borrow again
soon after repaying a prior loan, further shows that lenders do not see
re-borrowing as a sign of borrowers' financial distress or as an
outcome to be avoided. Rather, repeated re-borrowing may be perceived
as a preferred outcome for the lender or even as an outcome that is a
crucial underpinning to the business model in this loan market.
For the most part, commenters did not take issue with the tenets of
this factual description of the typical underwriting process for such
loans, though some lenders contended that they do not intentionally
seek out potential customers who are likely to have to re-borrow
multiple times. As noted, however, this approach is consistent with the
basic business model for such loans as described above. Industry
[[Page 54563]]
participants and trade associations did dispute one perceived
implication of this discussion by asserting that long loan sequences,
at least standing alone, cannot simply be assumed to be harmful or to
demonstrate a consumer's inability to repay these loans, as many
factors may bear on those outcomes. This point is discussed further
below.
4. Encouraging Long Loan Sequences
In the proposal, the Bureau recounted its assessment of the market
by noting that lenders attract borrowers in financial crisis, encourage
them to think of the loans as a short-term solution, and fail to screen
out those for whom the loans are likely to become a long-term debt
cycle. After that, lenders then actively encourage borrowers to re-
borrow and continue to be indebted rather than pay down or pay off
their loans. Although storefront payday lenders typically take a post-
dated check, which could be presented in a manner timed to coincide
with deposit of the borrower's paycheck or government benefits, lenders
usually encourage or even require borrowers to come back to the store
to redeem the check and pay in cash.\507\ When the borrowers return,
they are typically presented by lender employees with two salient
options: Repay the loan in full, or simply pay a fee to roll over the
loan (where permitted under State law). If the consumer does not
return, some lenders may reach out to the customer but ultimately the
lender will proceed to attempt to collect by cashing the check. On a
$300 loan at a typical charge of $15 per $100 borrowed, the cost to
defer the due date for another 14 days until the next payday is $45,
while repaying in full would cost $345, which may leave the borrower
with insufficient remaining income to cover expenses over the ensuing
month and therefore tends to prompt re-borrowing. Requiring repayment
in person gives staff at the stores the opportunity to frame for
borrowers a choice between repaying in full or just paying the finance
charge, which may be coupled with encouragement guiding them to choose
the less immediately painful option of paying just the finance charge
and rolling the loan over for another term. Based on its experience
from supervising payday lenders over the past several years, the Bureau
has observed that storefront employees are generally incentivized to
maximize the store's loan volume and the data suggest that re-borrowing
is a crucial means of achieving this goal.\508\
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\507\ The Bureau believes from its experience in conducting
examinations of storefront payday lenders and its outreach that cash
repayments on payday and vehicle title loans are prevalent, even
when borrowers provide post-dated checks or ACH authorizations for
repayment. The Bureau has developed evidence from reviewing a number
of payday lenders subject to supervisory examination in 2014 that
the majority of them call each borrower a few days before payment is
due to remind them to come to the store and pay the loan in cash. As
an example, one storefront lender requires borrowers to come in to
the store to repay. Its Web site states: ``All payday loans must be
repaid with either cash or money order. Upon payment, we will return
your original check to you.'' Others give borrowers ``appointment''
or ``reminder'' cards to return to make a payment in cash. In
addition, vehicle title loans do not require a bank account as a
condition of the loan, and borrowers without a checking account must
return to storefront title locations to make payments.
\508\ Most storefront lenders examined by the Bureau employ
simple incentives that reward employees and store managers for loan
volumes.
---------------------------------------------------------------------------
As laid out in the proposal, the Bureau's research shows that
payday borrowers rarely re-borrow a smaller amount than the initial
loan. Doing so would effectively amortize their loans by reducing the
principal amount owed over time, thereby reducing their costs and the
expected length of their loan sequences. Rather than encouraging
borrowers to make amortizing payments that would reduce their financial
exposure over time, lenders encourage borrowers to pay the minimum
amount and re-borrow the full amount of the earlier loan, thereby
contributing to this outcome. In fact, as discussed in the proposal,
some online payday loans automatically roll the loan over at the end of
its term unless the consumer takes affirmative action in advance of the
due date, such as notifying the lender in writing at least three days
before the due date. As some industry commenters noted, single-payment
vehicle title borrowers who take out multiple loans in a sequence are
more likely than payday borrowers who taken out multiple loans in a
sequence to reduce the loan amount from the beginning to end of that
sequence. After excluding for single loan sequences for which this
analysis is not applicable, 37 percent of single-payment vehicle title
loan sequences have declining loan amounts compared to just 15 percent
of payday loan sequences. This greater likelihood of declining loan
amounts for single-payment vehicle title loans compared to payday loans
may also be influenced by the larger median size of title loans, which
is $694, as compared to the median size of payday loans, which is $350.
However, this still indicates that a large majority of single payment
vehicle title loan borrowers have constant or increasing loan amounts
over the course of a sequence. In addition, the Bureau's analysis shows
that those single payment vehicle title loan borrowers who do reduce
their loan amounts during a sequence only do so for a median of about
$200, which is less than a third of the median loan amount of about
$700.\509\ This may reflect the effects of certain State laws
regulating vehicle title loans that require some reduction in loan size
across a loan sequence.
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\509\ See CFPB Single-Payment Vehicle Title Lending, at 18.
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Lenders also actively encourage borrowers who they know are
struggling to repay their loans to roll over and continue to borrow. In
the Bureau's work over the past several years to monitor the operations
and compliance of such lenders, including supervisory examinations and
enforcement actions, the Bureau has found evidence that lenders
maintain training materials that promote borrowing by struggling
borrowers.\510\ In one enforcement action, the Bureau found that if a
borrower did not repay in full or pay to roll over the loan on time,
personnel would initiate collections. Store personnel or collectors
would then offer new loans as a source of relief from the collections
activities. This approach, which was understood to create a ``cycle of
debt,'' was depicted graphically as part of the standard ``loan
process'' in the company's new hire training manual. The Bureau is
aware of similar practices in the single-payment vehicle title lending
market, where store employees offer borrowers additional cash during
courtesy calls and when calling about past-due accounts, and company
training materials instruct employees to ``turn collections calls into
sales calls'' and encourage delinquent borrowers to refinance to avoid
default and repossession of their vehicles.
---------------------------------------------------------------------------
\510\ Press Release, Bureau of Consumer Fin. Prot., ``CFPB Takes
Action Against Ace Cash Express for Pushing Payday Borrowers Into
Cycle of Debt,'' (July 10, 2014), available at http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.
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It also appears that lenders do little to affirmatively promote the
use of ``off ramps'' or other alternative repayment options, even when
those are required by law to be made available to borrowers. Such
alternative repayment plans could help at least some borrowers avoid
lengthy cycles of re-borrowing. Lenders that belong to one of the two
national trade associations for storefront payday lenders have agreed
to offer an extended payment plan to borrowers, but only if the
borrower makes a request at least one day prior to the date on which
the loan is due.\511\
[[Page 54564]]
(The second national trade association reports that its members provide
an extended payment plan option, but details on that option are not
available.) In addition, about 18 States require payday lenders to
offer repayment plans to borrowers who encounter difficulty in repaying
payday loans. The usage rate of these repayment plans varies widely,
but in all cases it is relatively low.\512\ One explanation for the low
take-up rate on these repayment plans may be that certain lenders
disparage the plans or fail to promote their availability.\513\ By
discouraging the use of repayment plans, lenders make it more likely
that such consumers will instead re-borrow. The Bureau's supervisory
examinations uncovered evidence that one or more payday lenders train
their employees not to mention repayment plans until after the
employees have offered renewals, and then only to mention repayment
plans if borrowers specifically ask about them.
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\511\ Cmty. Fin. Srvcs. Ass'n of Am., ``CFSA Member Best
Practices,'' http://cfsaa.com/cfsa-member-best-practices.aspx (last
visited May 18, 2016); Cmty. Fin. Srvcs. Ass'n of Am., ``What Is an
Extended Payment Plan?,'' http://cfsaa.com/cfsa-member-best-practices/what-is-an-extended-payment-plan.aspx (last visited May
18, 2016); Fin. Srvc. Ctrs. of Am., Inc., ``FiSCA Best Practices,''
http://www.fisca.org/Content/NavigationMenu/AboutFISCA/CodesofConduct/default.htm (last visited May 18, 2016).
\512\ Washington permits borrowers to request a no-cost
installment repayment schedule prior to default. In 2014, 14 percent
of payday loans were converted to installment loans. Wash. Dep't of
Fin. Insts., ``2014 Payday Lending Report,'' at 7 (2014), available
at http://www.dfi.wa.gov/sites/default/files/reports/2014-payday-lending-report.pdf Illinois allows payday loan borrowers to request
a repayment plan with 26 days after default. Between 2006 and 2013,
the total number of repayment plans requested was less than 1
percent of the total number of loans made in the same period. Ill.
Dep't. of Fin. & Prof. Reg., ``Illinois Trends Report All Consumer
Loan Products Through December 2015,'' at 19 (Apr. 14, 2016),
available at http://www.idfpr.com/DFI/CCD/pdfs/IL_Trends_Report%202015-%20FINAL.pdf?ActID=1204&ChapterID=20). In
Colorado, in 2009, 21 percent of eligible loans were converted to
repayment plans before statutory changes repealed the repayment
plan. State of Colorado, Dep't of Law, Office of the Att'y Gen.,
``2009 Deferred Deposit Lenders Annual Report,'' at 2 (2009)
(hereinafter Colorado 2009 Deferred Deposit Lenders Annual Report),
available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/2009_ddl_composite.pdf. In Utah, six percent
of borrowers entered into an extended payment plan. G. Edward Leary,
Comm'r of Fin. Insts. for the State of Utah to Hon. Gary R. Herbert,
Governor, and the Legislature, (Report of the Commissioner of
Financial Institutions for the Period July 1, 2013 to June 30,
2014), at 135, (Oct. 2, 2014) available at http://dfi.utah.gov/wp-content/uploads/sites/29/2015/06/Annual1.pdf. Florida law also
requires lenders to extend the loan term on the outstanding loan by
sixty days at no additional cost for borrowers who indicate that
they are unable to repay the loan when due and agree to attend
credit counseling. Although 84 percent of loans were made to
borrowers with seven or more loans in 2014, fewer than 0.5 percent
of all loans were granted a cost-free term extension. See Brandon
Coleman & Delvin Davis, ``Perfect Storm: Payday Lenders Harm Florida
Consumer Despite State Law,'' at 4 (Ctr. for Responsible Lending,
2016), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
\513\ Colorado's 2009 annual report of payday loan activity
noted lenders' self-reporting of practices to restrict borrowers
from obtaining the number of loans needed to be eligible for a
repayment plan or imposing cooling-off periods on borrowers who
elect to take a repayment plan. Colorado 2009 Deferred Deposit
Lenders Annual Report. This evidence was from Colorado under the
state's 2007 statute which required lenders to offer borrowers a no-
cost repayment plan after the third balloon loan. The law was
changed in 2010 to prohibit balloon loans, as discussed in part II.
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In general, most of the commenters did not take issue with this
factual account of the mechanics or incentives that lead to a high
incidence of rolling over such loans, and much of what they said tended
to confirm it. In particular, industry commenters acknowledged that
incentive programs for their employees based on net revenue are
widespread in the industry. Such programs are not illegal, of course,
but given the structure of these loans as described above, this
suggests that employees are being incentivized to encourage re-
borrowing and extended loan sequences by having borrowers roll their
loans over repeatedly.
Industry participants, trade associations, and some individual
users of such loans did argue, however, about the implications of this
analysis. One of their claims is that many consumers have an actual
borrowing need that extends beyond the loan period permitted under
State law, and thus repeated re-borrowing may be a means of
synchronizing the consumer's borrowing needs to the specific contours
of the loan product. In particular, they contended that re-borrowing
may be beneficial to consumers as part of longer-term strategies around
income smoothing or debt management, a point that is discussed further
below.
5. Payment Mechanisms and Vehicle Title
The proposal noted that where lenders can collect payments through
post-dated checks or ACH authorizations, or obtain security interests
in borrowers' vehicles, these mechanisms also can be used to encourage
borrowers to re-borrow, as a way to avoid what otherwise could be
negative consequences if the lender were to cash the check or repossess
the vehicle. For example, consumers may feel significantly increased
pressure to return to a storefront to roll over a payday or vehicle
title loan that includes such features. They may do so rather than risk
incurring new fees in connection with an attempt to deposit the
consumer's post-dated check, such as an overdraft or NSF fee from the
bank and a returned-item fee from the lender if the check were to
bounce or risk suffering the repossession of their vehicle. The
pressure can be especially acute when the lender obtains security in
the borrower's vehicle.
The proposal also noted that in cases where consumers do ultimately
default on their loans, and these mechanisms are at last effectuated,
they often magnify the total harm that consumers suffer from losing
their access to essential transportation. Consumers often will have
additional account and lender fees assessed against them, and some will
end up having their bank accounts closed. When this occurs, they will
have to bear the many attendant costs of becoming stranded outside the
banking system, which include greater inconvenience, higher costs,
reduced safety of their funds, and the loss of the other advantages of
a standard banking relationship.
These harms are very real for many consumers. For example, as
discussed in more detail below in Market Concerns--Payments, the
Bureau's research has found that 36 percent of borrowers who took out
online payday or payday installment loans and had at least one failed
payment during an eighteen-month period had their checking accounts
closed by the bank by the end of that period, a rate that is four times
greater than the closure rate for accounts that only had NSFs from non-
payday transactions.\514\ For accounts with failed online payday loan
transactions, account closures typically occur within 90 days of the
last observed online payday loan transaction; in fact, 74 percent of
account closures in these situations occur within 90 days of the first
NSF return triggered by an online payday or payday installment
lender.\515\ This suggests that the online loan played a role in the
closure of the account, or that payment attempts failed because the
account was already headed towards closure, or both.\516\
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\514\ CFPB Online Payday Loan Payments, at 12.
\515\ CFPB Online Payday Loan Payments, at 23.
\516\ See also Complaint at 14, Baptiste v. J.P. Morgan Chase
Bank, No. 12-04889 (E.D.N.Y. Oct. 1, 2012) (alleging plaintiff's
bank account was closed with a negative balance of $641.95, which
consisted entirely of bank's fees triggered by the payday lenders'
payment attempts); id. at 20-21 (alleging plaintiff's bank account
was closed with a negative balance of $1,784.50, which consisted
entirely of banks fees triggered by the payday lender's payment
attempts and payments provided to the lenders through overdraft, and
that plaintiff was subsequently turned down from opening a new
checking account at another bank because of a negative ChexSystems
report stemming from the account closure).
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[[Page 54565]]
In general, the commenters did not challenge the Bureau's factual
account of how these payment mechanisms can lead to these collateral
consequences that harm consumers. Industry commenters did disagree,
however, with the premise that these harms were caused by the use of
covered short-term loans. Some disagreed about the overall magnitude of
these harms, stating that there is no evidence that covered short-term
loans actually cause account closures or NSF fees, as stated in the
proposal, and arguing that the Bureau overstated the extent to which
consumers who default are subjected to NSF fees or fees resulting from
bounced checks. But they did not present any convincing data to refute
what the Bureau had observed from its own research and experience, and
the assertion that online loans may have performed more poorly than
storefront loans in these respects was not persuasive. Although the
Bureau did not purport to find that the evidence in its data was
determinative as to causation, the relationship between the consumer
experience on such loans and the borrower outcomes was strongly
reinforced by the data and logical as to the connection between them.
c. Patterns of Lending and Extended Loan Sequences
The Bureau's proposal described how borrower characteristics, the
circumstances of borrowing, the structure of the short-term loans, and
the practices of the lenders together lead to dramatic negative
outcomes for many payday and single-payment vehicle title borrowers.
There is strong evidence that a meaningful share of borrowers who take
out payday and single-payment vehicle title loans end up with very long
sequences of loans, and the loans made to borrowers with these negative
outcomes make up a majority of all the loans made by these
lenders.\517\
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\517\ In addition to the array of empirical evidence
demonstrating this finding, industry stakeholders themselves have
expressly or implicitly acknowledged the dependency of most
storefront payday lenders' business models on repeat borrowing. A
June 20, 2013 letter to the Bureau from an attorney for a national
trade association representing storefront payday lenders asserted
that, ``[i]n any large, mature payday loan portfolio, loans to
repeat borrowers generally constitute between 70 and 90 percent of
the portfolio, and for some lenders, even more,'' and that ``[t]he
borrowers most likely to roll over a payday loan are, first, those
who have already done so, and second, those who have had un-rolled-
over loans in the immediately preceding loan period.'' Letter from
Hilary B. Miller to Bureau of Consumer Fin. Prot. (June 20, 2013),
available at http://files.consumerfinance.gov/f/201308_cfpb_cfsa-information-quality-act-petition-to-CFPB.pdf. The letter asserted
challenges under the Information Quality Act to the Bureau's
published White Paper (2013); see also Letter from Ron Borzekowski &
B. Corey Stone, Jr., Bureau of Consumer Fin. Prot., to Hilary B.
Miller (Aug. 19, 2013), available at https://encrypted.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0ahUKEwjEzu_EuMDWAhUGYiYKHY00ASEQFggvMAI&url=http%3A%2F%2Ffiles.consumerfinance.gov%2Ff%2F201308_cfpb_cfsa-response.pdf&usg= AFQjCNF8PpFfXq_pt-lFOJtot1tRX_Or6A
(Bureau's response to the challenge).
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Long loan sequences lead to very high total costs of borrowing.
Each single-payment loan carries the same cost as the initial loan that
the borrower took out. For a storefront borrower who takes out the
average-sized payday loan of $350 with a typical fee of $15 per $100,
each re-borrowing by rolling over the loan means paying additional fees
of $52.50. After just three re-borrowings, the borrower will have paid
more than $150 simply to defer payment of the original principal amount
by an additional period ranging from six weeks to three months.
As noted in the proposal, the cost of re-borrowing for title
borrowers is even more dramatic, given the higher price and larger size
of those loans. The Bureau's data indicates that the median loan size
for single-payment vehicle title loans is $694. One study found that
the most common rate charged on the typical 30-day title loan is $25
per $100 borrowed, which is a common State limit and equates to an APR
of 300 percent.\518\ A typical instance of re-borrowing thus means that
the consumer pays a fee of around $175. After just three re-borrowings,
a consumer will typically have paid about $525 simply to defer payment
of the original principal amount by three months.
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\518\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrower Experiences,'' at 11, 34 n.15 (2015),
available at http://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf.
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The proposal cited evidence for the prevalence of long sequences of
payday and title loans, which comes from the Bureau's own work, from
analysis by independent researchers and analysts commissioned by
industry, and from statements by industry stakeholders. The Bureau has
published several analyses of storefront payday loan borrowing.\519\
Two of these have focused on the length of loan sequences that
borrowers take out. In these publications, the Bureau defined a loan
sequence as a series of loans where each loan was taken out either on
the day the prior loan was repaid or within some number of days from
when the loan was repaid. The Bureau's 2014 Data Point used a 14-day
window to define a sequence of loans. Those data have been further
refined in the CFPB Report on Supplemental Findings and shows that when
a borrower who is not currently in a loan sequence takes out a payday
loan, borrowers wind up taking out at least four loans in a row before
repaying 43 percent of the time, take out at least seven loans in a row
before repaying 27 percent of the time, and take out at least 10 loans
in a row before repaying 19 percent of the time.\520\ In the CFPB
Report on Supplemental Findings, the Bureau re-analyzed the data using
30-day and 60-day definitions of sequences. The results are similar,
although using longer windows leads to longer sequences of more loans.
Using the 30-day definition of a sequence, 50 percent of new loan
sequences contain at least four loans, 33 percent of sequences contain
at least seven loans, and 24 percent of sequences contain at least 10
loans.\521\ Borrowers who take out a fourth loan in a sequence have a
66 percent likelihood of taking out at least three more loans, for a
total sequence length of seven loans. And such borrowers have a 48
percent likelihood of taking out at least six more loans, for a total
sequence length of 10 loans.\522\
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\519\ See generally CFPB Data Point: Payday Lending; CFPB Payday
Loans and Deposit Advance Products White Paper.
\520\ See CFPB Report on Supplemental Findings.
\521\ CFPB Report on Supplemental Findings. In proposed Sec.
1041.6 the Bureau proposed some limitations on loans made within a
sequence, and in proposed Sec. 1041.2(a)(12), the Bureau proposed
to define a sequence to include loans made within 30 days of one
another. The Bureau believes that this is a more appropriate
definition of sequence than using either a shorter or longer time
horizon for the reasons set forth in the section-by-section analyses
of proposed Sec. Sec. 1041.2(a)(12) and 1041.6. For these same
reasons, the Bureau believes that the findings contained in the CFPB
Report on Supplemental Findings and cited in text provide the most
accurate quantification of the degree of harm resulting from cycles
of indebtedness.
\522\ These figures are calculated simply by taking the share of
sequences that are at least seven (or ten) loans long and diving by
the share of sequences that are at least four loans long.
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These findings are mirrored in other analyses. During the SBREFA
process, one participant submitted an analysis prepared by Charles
River Associates (CRA) of loan data from several small storefront
payday lenders.\523\ Using a 60-day sequence as its definition, CRA
found patterns of borrowing very similar to those that the Bureau had
found. Compared to the Bureau's results using a 60-day sequence
definition, in the
[[Page 54566]]
CRA analysis there were more loans where the borrower defaulted on the
first loan or repaid without re-borrowing (roughly 44 percent versus 25
percent), and fewer loans that had 11 or more loans in the sequence,
but otherwise the patterns were nearly identical.\524\
---------------------------------------------------------------------------
\523\ Arthur Baines et al., ``Economic Impact on Small Lenders
of the Payday Lending Rules Under Consideration by the CFPB,''
Charles River Associates, (2015), available at http://www.crai.com/publication/economic-impact-small-lenders-payday-lending-rules-under-consideration-cfpb. The CRA analysis states that it used the
same methodology as the Bureau.
\524\ See generally CFPB Report on Supplemental Findings.
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Similarly, in an analysis funded by an industry research
organization, researchers found a mean sequence length, using a 30-day
sequence definition, of nearly seven loans.\525\ This is slightly
higher than the mean 30-day sequence length in the Bureau's analysis
(5.9 loans).
Analysis of a multi-lender, multi-year dataset by a research group
affiliated with a specialty consumer reporting agency found that over a
period of approximately four years the average borrower had at least
one sequence of nine loans; that 25 percent of borrowers had at least
one loan sequence of 11 loans; and that 10 percent of borrowers had at
least one loan sequence of 22 loans.\526\ Looking at these same
borrowers for a period of 11 months--one month longer than the duration
analyzed by the Bureau--the researchers found that on average the
longest sequence these borrowers experienced over the 11 months was 5.3
loans, that 25 percent of borrowers had a sequence of at least seven
loans, and that 10 percent of borrowers had a sequence of at least 12
loans.\527\ This research group also identified a core of users with
extremely persistent borrowing, and found that 30 percent of borrowers
who took out a loan in the first month of the four-year period also
took out a loan in the last month.\528\ The median time in debt for
this group of extremely persistent borrowers was over 1,000 days, which
is more than half of the four-year period. The median borrower in this
group of extremely persistent borrowers had at least one loan sequence
of 23 loans long or longer (which was nearly two years for borrowers
who were paid monthly). Perhaps most notable, almost one out of ten
members of this research group (nine percent) borrowed continuously for
the entire four-year period.\529\
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\525\ Marc Anthony Fusaro & Patricia J. Cirillo, ``Do Payday
Loans Trap Consumers in a Cycle of Debt?,'' at 23 (2011), available
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776.
\526\ nonPrime 101, ``Report 7B: Searching for Harm in
Storefront Payday Lending, A Critical Analysis of the CFPB's `Debt
Trap' Data,'' at 60 tbl. C-1 (2016), available at https://www.nonprime101.com/wp-content/uploads/2016/02/Report-7-B-Searching-for-Harm-in-Storefront-Payday-Lending-nonPrime101.pdf. Sequences are
defined based on the borrower pay period, with a loan taken out
before a pay period has elapsed since the last loan was repaid being
considered part of the same loan sequence.
\527\ nonPrime 101, ``Report 7B: Searching for Harm in
Storefront Payday Lending, A Critical Analysis of the CFPB's `Debt
Trap' Data,'' at 60 tbl. C-1 (2016), available at https://www.nonprime101.com/wp-content/uploads/2016/02/Report-7-B-Searching-for-Harm-in-Storefront-Payday-Lending-nonPrime101.pdf. The
researchers were able to link borrowers across the five lenders in
their dataset and include within a sequence loans taking out from
different lenders. Following borrowers across multiple lenders did
not materially increase the average length of the longest sequence
but did increase the length of sequences for the top decile by one
to two loans. Compare id. at tbl. C-2 with tbl. C-1. The author of
the report focus on loan sequences where a borrower pays more in
fees than the principal amount of the loan as sequences that cause
consumer harm. The Bureau does not believe that this is the correct
metric for determining whether a borrower has suffered harm.
\528\ nonprime 101, ``Report 7C: A Balanced View of Storefront
Payday Lending,'' (2016), available at https://www.nonprime101.com/wp-content/uploads/2016/03/Report-7-C-A-Balanced-View-of-Storefront-Payday-Borrowing-Patterns-3https://www.nonprime101.com/wp-content/uploads/2016/03/Report-7-C-A-Balanced-View-of-Storefront-Payday-Borrowing-Patterns-3.28.pdf.28.pdf.
\529\ nonprime 101, ``Report 7C: A Balanced View of Storefront
Payday Lending,'' at tbl. 2 (2016), available at https://www.nonprime101.com/wp-content/uploads/2016/03/Report-7-C-A-Balanced-View-of-Storefront-Payday-Borrowing-Patterns-3https://www.nonprime101.com/wp-content/uploads/2016/03/Report-7-C-A-Balanced-View-of-Storefront-Payday-Borrowing-Patterns-3.28.pdf.28.pdf. A study of borrowers in Florida claims that after
the first year, over 20 percent of borrowers never use payday loans
again and 50 percent of borrowers no longer use payday loans after
two years. Floridians for Financial Choice, ``The Florida Model:
Baseless and Biased Attacks are Dangerously Wrong on Florida Payday
Lending,'' at 5 (2016), available at http://financialchoicefl.com/wp-content/uploads/2016/05/FloridaModelReport.pdf.
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In the proposal, the Bureau also presented its analysis of single-
payment vehicle title loans according to the same basic
methodology.\530\ Using a 30-day definition of loan sequences, the
Bureau found that short-term single-payment vehicle title loans had
loan sequences that were similar to payday loans. More than half (56
percent) of these sequences contained at least four loans; 36 percent
contained seven or more loans; and 23 percent had 10 or more loans. The
Bureau's analysis found that title borrowers were less likely than
those using payday loans to repay a loan without re-borrowing or
defaulting. Only 12 percent of single-payment vehicle title loan
sequences consisted of a single loan that was repaid without subsequent
re-borrowing, compared to 22 percent of payday loan sequences.\531\
Other sources on title lending are more limited than for payday
lending, but are generally consistent. For instance, the Tennessee
Department of Financial Institutions publishes a biennial report on 30-
day single-payment vehicle title loans. The most recent report shows
very similar results to those the Bureau found in its research, with 66
percent of borrowers taking out four or more loans in row, 40 percent
taking out more than seven loans in a row, and 24 percent taking out
more than 10 loans in a row.\532\
---------------------------------------------------------------------------
\530\ See generally CFPB Single-Payment Vehicle Title Report.
\531\ CFPB Single-Payment Vehicle Title Lending, at 11; CFPB
Report on Supplemental Findings, at 121.
\532\ Letter from Greg Gonzales, Comm'r, Tennessee Dep't of Fin.
Insts., to Hon. Bill Haslam, Governor and Hon. Members of the 109th
General Assembly, at 8 (Apr. 12, 2016) (Report on the Title Pledge
Industry), available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf.
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Some commenters noted data showing that vehicle title borrowers use
re-borrowing to self-amortize their principal balance to a greater
extent than payday borrowers do, which they suggested is evidence that
title re-borrowing is not injurious. As noted previously, while it is
true that more title borrowers in multi-loan sequences have declining
loan balances than do payday borrowers in multi-loan sequences, this is
likely the result of title loans starting out at much larger amounts.
More salient is the fact that 63 percent of multi-loan sequences of
title loans are for principal amounts that either remain unchanged or
actually increase during the sequence, and that even those title loan
sequences that do have a decline in loan amount over time only have a
median decline of about $200 from beginning to end of the sequence,
which is less than one-third of the average total amount of these
loans. And the default rate remains high even for amortizing multi-loan
sequences of title loans, at 22 percent, which is slightly higher than
the default rate for payday loans (20 percent), even though the latter
amortize less often. All of this suggests that even if title borrowers
can somewhat reduce the larger principal amount of their loans over
time, it remains difficult to succeed in digging themselves out of the
debts they have incurred with these loans.
In addition to direct measures of the length of loan sequences, the
cumulative number of loans that borrowers take out provides ample
indirect evidence that they are often getting stuck in a long-term debt
cycle. The Bureau has measured total borrowing by payday borrowers in
two ways. In one study, the Bureau took a snapshot of borrowers in
lenders' portfolios at a point in time (measured as borrowing in a
particular month) and tracked them for an additional 11 months (for a
total of 12 months) to assess overall loan use. This study
[[Page 54567]]
found that the median borrowing level was 10 loans over the course of a
year, and more than half of the borrowers had loans outstanding for
more than half of the year.\533\ In another study, the Bureau measured
the total number of loans taken out by borrowers beginning new loan
sequences. It found that these borrowers had lower total borrowing than
borrowers who may have been mid-sequence at the beginning of the
period, but the median number of loans for the new borrowers was six
loans over a slightly shorter (11-month) period.\534\ Research by
others finds similar results, with average or median borrowing, using
various data sources and various samples, of six to 13 loans per
year.\535\
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\533\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 23.
\534\ CFPB Data Point: Payday Lending, at 10-15.
\535\ Paige Marta Skiba and Jeremy Tobacman, ``Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default,'' (Vand. L. and Econ., Research Paper No.
08-33, 2008). (finding an average of 5.5 loans per year for payday
borrowers). A study of Oklahoma payday borrowing found an average of
eight loans per year. Uriah King and Leslie Parrish, ``Payday Loans,
Inc.: Short on Credit, Long on Debt,'' at 1 (Ctr. for Responsible
Lending, 2011), available at http://www.responsiblelending.org/payday-lending/research-analysis/payday-loan-inc.pdf; Michael A.
Stegman, Payday Lending, 21 J. of Econ. Perspectives 169, at 176
(2007) (finding a median of 8-12 loans per year).
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One commenter provided further data on the length of time consumers
use payday loans, which gave more particulars about multi-year
indebtedness in States with payday lending, such as South Carolina and
Florida. The Florida data showed that over 40 percent of all consumers
who took out one or more payday loans in 2012 continued to use the
product three years later, and about a third of all consumers who took
one or more payday loans in 2012 continued to use the product five
years later. The South Carolina data provided similar information, but
reported findings for consumers by borrowing intensity. It tended to
show that those with the greatest intensity of borrowing were the least
likely to end the borrowing relationship over a three-year period.
Separately, a report on payday lending market trends by a specialty
consumer reporting agency finds that over half of all loans are made to
existing customers rather than consumers who have not used payday loans
before.\536\ This report concludes that ``even though new customers are
critical, existing customers are the most productive.'' \537\
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\536\ See generally Clarity Services, Inc., ``2017 Subprime
Lending Trends: Insights into Consumers & the Industry,'' (2017),
available at https://www.clarityservices.com/wp-content/uploads/2017/03/Subprime-Lending-Report-2017-Clarity-Services-3.28.17.pdf.
\537\ Clarity Services, Inc., ``2017 Subprime Lending Trends:
Insights into Consumers & the Industry,'' at 8 (2017), available at
https://www.clarityservices.com/wp-content/uploads/2017/03/Subprime-Lending-Report-2017-Clarity-Services-3.28.17.pdf.
---------------------------------------------------------------------------
The proposal also noted that, given differences in the regulatory
context and the overall nature of the market, less information is
available about online lending than storefront lending. Borrowers who
take out payday loans online are likely to change lenders more
frequently than storefront borrowers, so that absent comprehensive data
that allows borrowing patterns to be tracked across all lenders,
measuring the duration of loan sequences becomes much more challenging.
The limited information that is available suggests that online
borrowers take out fewer loans than storefront borrowers, but that
borrowing is highly likely to be under-counted. A report commissioned
by an online lender trade association, using data from three online
lenders making single-payment payday loans, reported an average loan
length of 20 days and an average of 73 days in debt per year.\538\ The
report averages the medians of the three lenders' data, which makes
interpretation of these values difficult; still, these findings
indicate that borrowers take out three to four loans per year at these
lenders.
---------------------------------------------------------------------------
\538\ G. Michael Flores, ``The State of Online Short-Term
Lending, Second Annual Statistical Analysis Report,'' Bretton-Woods,
Inc., at 5 (Feb. 28, 2014), available at http://onlinelendersalliance.org/wp-content/uploads/2015/07/2015-Bretton-Woods-Online-Lending-Study-FINAL.pdf (commissioned by the Online
Lenders Alliance).
---------------------------------------------------------------------------
Additional analysis is available based on the records of a
specialty consumer reporting agency. The records show similar loans per
borrower, 2.9, but over a multi-year period.\539\ These loans, however,
are not primarily single-payment payday loans. A small number are
installment loans, while most are ``hybrid'' loans with a typical
duration of roughly four pay cycles. In addition, this statistic likely
understates usage because online lenders may not report all of the
loans they make, and some may only report the first loan they make to a
borrower. Borrowers may also be more likely to change lenders online
and, as many lenders do not report to the specialty consumer reporting
agency that provided the data for the analysis, when borrowers change
lenders their subsequent loans often may not be in the data analyzed.
---------------------------------------------------------------------------
\539\ nonPrime 101, Report 7-A, ``How Persistent in the
Borrower-Lender Relationship in Payday Lending?'', at 6 tbl. 1
(2015) available at https://www.nonprime101.com/how-persistent-is-the-borrower-lender-relationship-in-payday-lending-2/.
---------------------------------------------------------------------------
Although many industry commenters disputed the significance of
these findings, they offered little evidence that was inconsistent with
the data presented by the Bureau. One commenter disputed the accuracy
of the Bureau's statement that 69 percent of payday loan sequences
which end in default are multi-loan sequences and offered its own
analysis based on its own customer data, which presented somewhat lower
numbers but was largely consistent with the data presented by the
Bureau. Still other commenters cited a petition that purported to show
data errors relating to the Bureau's White Paper on payday loans and
deposit advance products that was used to draw conclusions about the
prevalence of re-borrowing, which they argued was based on an
unrepresentative sample weighted heavily toward repeat users. The
Bureau has addressed this criticism previously, and explained that the
methodology used in the White Paper, which took a snapshot of borrowers
at the beginning of a twelve-month observation period and followed
those borrowers over the ensuing eleven months, is an appropriate
method of assessing borrowing intensity even though it is true that any
such snapshot will be disproportionately composed of repeat borrowers
because they comprise the bulk of payday lenders' business. At the same
time, the Bureau has conducted an alternative analysis which tracks the
borrowing experience of fresh borrowers and it is that analysis on
which the Bureau is principally relying here for covered short-term
loans.
Another study was cited to suggest that cost does not drive the
cycle of debt because it found that borrowers who were given no-fee
loans had re-borrowing rates that were comparable to those who were
given loans with normal fees.\540\ The upshot of this study, however,
tended to show that the single-payment loan structure was instead a
sufficient driver of the debt cycle, even without regard to the size of
the fees that were charged. In fact, this study actually tends to
refute the claim made elsewhere by industry commenters that the Bureau
is trying to evade the statutory prohibition on imposing a usury cap by
addressing price, since price alone does not seem to drive the cycle of
debt that is a primary source of the harms resulting from these loans--
[[Page 54568]]
rather, it is the single-payment loan structure that does so.
---------------------------------------------------------------------------
\540\ Marc A. Fusaro and Patricia J. Cirillo, ``Do Payday Loans
Trap Consumers in a Cycle of Debt?'' (Ark. Tech U. & Cypress
Research Group, 2011).
---------------------------------------------------------------------------
Many industry participants and trade associations contended that,
standing alone, multiple loan sequences cannot be presumed to be
harmful to consumers. In particular, one trade association stated that
where an income or expense shock cannot be resolved at once, re-
borrowing in extended loan sequences can be an effective longer-term
strategy of income smoothing or debt management until the consumer's
financial situation improves. Thus re-borrowing cannot be presumed to
be necessarily irrational or harmful, depending on the circumstances.
This commenter also cited studies that examined the credit scores of
payday borrowers and reported finding better outcomes for longer-term
borrowers than for those who are limited to shorter loan durations, and
also that reported finding better outcomes for consumers in States with
less restrictive payday lending laws than for those in States with more
restrictive laws. These issues are important and they are discussed
further in Sec. 1041.4 below.
A coalition of consumer groups was in agreement as a factual matter
that many consumers of payday and single-payment vehicle title loans
end up in extended loan sequences, and many individual commenters
described their own personal experiences and perspectives on this
point. They observed that borrowers in these situations do in fact
suffer many if not all of the harmful collateral consequences described
in the proposal, which merely compound their existing financial
difficulties and leave them worse off than they were before they took
out such loans. Once again, however, putting aside the starkly
different conclusions that commenters were drawing from the data, the
basic accuracy of the data presented in the proposal on the patterns of
lending and extended loan sequences was generally acknowledged. The
arguments for and against the validity of their respective conclusions
are considered further in the section-by-section analysis for Sec.
1041.4 below.
d. Consumer Expectations and Understanding of Loan Sequences
As discussed in the proposal, extended sequences of loans raise
tangible concerns about the market for short-term loans. These concerns
are exacerbated by the empirical evidence on consumer understanding of
such loans. The available evidence indicates that many of the borrowers
who take out long sequences of payday loans and single-payment vehicle
title loans do not anticipate at the outset that they will end up
experiencing those long sequences.
Measuring consumers' expectations about re-borrowing is inherently
challenging. When answering survey questions about loan repayment,
there is the risk that borrowers may conflate repaying an individual
loan with completing an extended sequence of borrowing. Asking
borrowers retrospective questions about their expectations at the time
they started borrowing is likely to suffer from recall problems, as
people have difficulty remembering what they expected at some time in
the past. The recall problem is likely to be compounded by respondents
tending to want to avoid admitting that they have made a mistake.
Asking about expectations for future borrowing may also be imperfect,
as some consumers may not be thinking explicitly about how many times
they will roll a loan over when taking out their first loan. Merely
asking the question may cause people to think about it and focus on it
more than they otherwise would have.
Two studies discussed in the proposal have asked payday and vehicle
title borrowers at the time they took out their loans about their
expectations about re-borrowing, either the behavior of the average
borrower or their own borrowing, and compared their responses with
actual repayment behavior of the overall borrower population.\541\ One
2009 survey of payday borrowers found that over 40 percent of borrowers
thought that the average borrower would have a loan outstanding for
only two weeks, and another 25 percent said four weeks. Translating
weeks into loans, the four-week response likely reflects borrowers who
believe the average number of loans that a borrower will take out
before repaying is either one loan or two loans, depending on how many
respondents were paid bi-weekly as opposed to monthly. The report did
not provide data on actual re-borrowing, but based on analysis
performed by the Bureau and others, these results suggest that
respondents were, on average, somewhat optimistic about re-borrowing
behavior.\542\ However, it is difficult to be certain that some survey
respondents did not conflate the time during which the loans are
outstanding with the contract term of individual loans. This may be so
because the researchers asked borrowers, ``What's your best guess of
how long it takes the average person to pay back in full a $300 payday
loan?'' Some borrowers may have interpreted this question to refer to
the specific loan being taken out, rather than subsequent rollovers.
People's beliefs about their own re-borrowing behavior could also vary
from their beliefs about average borrowing behavior by others. This
study also did not specifically distinguish other borrowers from the
subset of borrowers who end up in extended loan sequences.
---------------------------------------------------------------------------
\541\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013 (2014); Marianne Bertrand and Adair Morse,
``Information Disclosure, Cognitive Biases and Payday Borrowing,''
66 J. of Fin. 1865 (2011).
\542\ Marianne Bertrand and Adair Morse, ``Information
Disclosure, Cognitive Biases and Payday Borrowing,'' 66 J. of Fin.
1865 (2011). Based on the Bureau's analysis, approximately 50-55
percent of loan sequences, measured using a 14-day sequence
definition, end after one or two loans, including sequences that end
in default. See also CFPB Data Point: Payday Lending, at 11; CFPB
Report on Supplemental Findings, at chapter 5. Using a relatively
short re-borrowing period seems more likely to match how respondents
interpret the survey question, but that is speculative. Translating
loans to weeks is complicated by the fact that loan terms vary
depending on borrowers' pay frequency; four weeks is two loans for a
borrower paid bi-weekly, but only one loan for a borrower paid
monthly.
---------------------------------------------------------------------------
Another study discussed in the proposal was a study of single-
payment vehicle title borrowers, where researchers surveyed borrowers
about their expectations about how long it would take to repay the
loan.\543\ The report did not have data on borrowing, but compared the
responses with the distribution of repayment times reported by the
Tennessee Department of Financial Institutions. The report found that
the entire population of borrowers was slightly optimistic, on average,
in their predictions.\544\
---------------------------------------------------------------------------
\543\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013, at 1029-1030 (2014).
\544\ As noted above, the Bureau found that the re-borrowing
patterns in data analyzed by the Bureau are very similar to those
reported by the Tennessee Department of Financial Institutions.
---------------------------------------------------------------------------
The two studies just described compared borrowers' predictions of
average borrowing with overall average borrowing levels, which is only
informative about how accurate borrowers' predictions are about the
average. By contrast, a 2014 study by Professor Ronald Mann,\545\ which
was discussed in the proposal, did attempt to survey borrowers at the
point at which they were borrowing. This survey asked them about their
expectations for repaying their loans and compared their responses with
their subsequent actual borrowing behavior, using loan records to
measure how accurate their predictions were. The results described
[[Page 54569]]
in the report, combined with subsequent analysis that Professor Mann
shared with Bureau staff, show the following: \546\
---------------------------------------------------------------------------
\545\ Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105 (2013).
\546\ The Bureau notes that Professor Mann draws different
interpretations from his analysis than does the Bureau in certain
instances, as explained below, and industry stakeholders, including
SERs, have cited Mann's study as support for their criticism of the
Small Business Review Panel Outline. Much of this criticism is based
on Professor Mann's finding that ``about 60 percent of borrowers
accurately predict how long it will take them finally to repay their
payday loans.'' Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, at 105 (2013). The
Bureau notes, however, that this was largely driven by the fact that
many borrowers predicted that they would not remain in debt for
longer than one or two loans, and in fact this prediction was
accurate for many such borrowers. But it did not address the much
larger forecasting problems experienced by other borrowers,
particularly those who ended up in extended loan sequences.
---------------------------------------------------------------------------
First, and most significant, many fewer borrowers expected to
experience long sequences of loans than actually did experience long
sequences. Focusing on the borrowers who ended up borrowing for more
than 150 days, it is notable that none predicted they would be in debt
for even 100 days.\547\ And of those who ended up borrowing for more
than 100 days, only a very small fraction predicted that outcome.\548\
Indeed, the vast majority of those who borrowed for more than 100 days
actually expected to borrow for less than 50 days.\549\ Borrowers who
experienced long sequences of loans do not appear to have expected
those long sequences when they made their initial borrowing decision;
in fact they had not predicted that their sequences would be longer
than the average predicted by borrowers overall. And while some
borrowers did expect long sequences, those borrowers were more likely
to err in their predictions; as Mann noted, ``both the likelihood of
unexpectedly late payment and the proportionate size of the error
increase substantially with the length of the borrower's prediction.''
\550\
---------------------------------------------------------------------------
\547\ See Attachment to Email from Ronald Mann, Professor,
Columbia Law School, to Jialan Wang & Jesse Leary, Bureau of
Consumer Fin. Prot. (Sept. 24, 2013, 1:32 EDT), at 17.
Correspondence between Bureau staff and Professor Mann was included
as related material in the public docket supporting the proposed
rule as published in the Federal Register on July 22, 2016.
\548\ See Attachment to Email from Ronald Mann, Professor,
Columbia Law School, to Jialan Wang & Jesse Leary, Bureau of
Consumer Fin. Prot. (Sept. 24, 2013, 1:32 EDT), at 17.
\549\ See Attachment to Email from Ronald Mann, Professor,
Columbia Law School, to Jialan Wang & Jesse Leary, Bureau of
Consumer Fin. Prot. (Sept. 24, 2013, 1:32 EDT), at 17. The same
point can be made from another angle as well. Only 10 percent of
borrowers expected to be in debt for more than 70 days (five two-
week loans), and only 5 percent expected to be in debt for more than
110 days (roughly eight two-week loans), yet the actual numbers were
substantially higher. See Ronald Mann, ``Assessing the Optimism of
Payday Loan Borrowers,'' 21 Supreme Court Econ. Rev. 105, at 122
(2013) Indeed, approximately 12 percent of borrowers still remained
in debt after 200 days (14 two-week loans). See comment letter
submitted by Prof. Ronald Mann, at 2.
\550\ Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, at 127 (2013).
---------------------------------------------------------------------------
Second, Mann's analysis suggests that past borrowing experience is
not indicative of increased understanding of product use. In fact,
those who had borrowed the most in the past did not do a better job of
predicting their future use; they were actually more likely to
underestimate how long it would take them to repay fully. As Mann noted
in his paper, ``heavy users of the product tend to be those that
understand least what is likely to happen to them.'' \551\
---------------------------------------------------------------------------
\551\ See Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, at 127 (2013).
---------------------------------------------------------------------------
Finally, Mann's research also indicated that about as many
consumers underestimated how long they would need to re-borrow as those
who overestimated it, which suggested they have difficulty predicting
the extent to which they will need to re-borrow. In particular, the
Bureau's analysis of the data underlying Mann's paper determined that
there was not a correlation between borrowers' predicted length of re-
borrowing and their actual length of re-borrowing.\552\ Professor Mann,
in an email to the Bureau, confirmed that his data showed no
significant relationship between the predicted number of days and the
days to clearance.\553\ This point was reinforced in his survey results
by the fact that fully 20 percent of the borrowers who responded were
not even able to offer any prediction at all about their expected
duration of indebtedness.\554\
---------------------------------------------------------------------------
\552\ Attachment to Email from Ronald Mann, Professor, Columbia
Law School, to Jialan Wang & Jesse Leary, Bureau of Consumer Fin.
Prot. (Sept. 24, 2013, 1:32 EDT), at 17.
\553\ Email from Ronald Mann, Professor, Columbia Law School, to
Jialan Wang & Jesse Leary, Bureau of Consumer Fin. Prot. (Sept. 24,
2013, 1:32 EDT).
\554\ Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, at 121 (2013).
---------------------------------------------------------------------------
Professor Mann submitted a comment about his paper, which took
issue with the Bureau's analysis of its findings. He contended his
research shows instead that most payday borrowers expected some
repeated sequences of loans, most of them accurately predicted the
length of the sequence that they would borrow, and they did not
systematically err on the optimistic side. The Bureau acknowledges
these findings, and does not believe they are inconsistent with the
interpretation provided here. Mann also noted that the Bureau placed
its main emphasis not on the entire universe of borrowers, but on the
group of borrowers who continued borrowing over the period for which he
had access to the loan data, where his research showed that many of
those borrowers did not anticipate that they would end up in such
extended loan sequences. He further acknowledged that ``the absolute
size of the errors is largest for those with the longest sequences.''
\555\ He went on to state that this finding suggests ``that the
borrowers who have borrowed the most are those who are in the most dire
financial distress, and consequently least able to predict their future
liquidity.'' \556\ He also noted that the errors of estimation these
borrowers tend to make are unsystematic and do not consist either of
regular underestimation or regular overestimation of their subsequent
duration of borrowing.\557\
---------------------------------------------------------------------------
\555\ Prof. Ronald Mann comment letter, at 3.
\556\ Prof. Ronald Mann comment letter, at 3.
\557\ Prof. Ronald Mann comment letter, at 3.
---------------------------------------------------------------------------
The discussion of these survey findings thus seems to reflect more
of a difference in emphasis than a disagreement over the facts.
Professor Mann's interpretation appears most applicable to those
borrowers who remain in debt for a relatively short period, who
constitute a majority of all borrowers, and who do not appear to
systematically fail to appreciate what will happen to them when they
re-borrow. The Bureau does not disagree with this point. Instead, it
emphasizes the subset of borrowers who are its principal concern, which
consists of those longer-term borrowers who find themselves in extended
loan sequences and thereby experience the various harms that are
associated with a longer cycle of indebtedness. For those borrowers,
the picture is quite different, and their ability to estimate
accurately what will happen to them when they take out a payday loan is
more limited, as Mann noted in his paper and in the comment he
submitted.\558\ For example, of the borrowers who remained in debt at
least 140 days (10 biweekly loans), it appears that all (100 percent)
underestimated their times in debt, with the average borrower in this
group spending 119 more days in debt than anticipated (equivalent to
8.5 unanticipated rollovers). Of those borrowers who spent 90 or more
days in debt (i.e., those most directly affected by the rule's limits
on re-borrowing under the Sec. 1041.6), it appears that more than
[[Page 54570]]
95 percent underestimated their time in debt, spending an average of 92
more days in debt than anticipated (equivalent to 6.5 unanticipated
rollovers). Additionally, a line of ``best fit'' provided by Professor
Mann describing the relationship between a borrower's expected time in
debt and the actual time in debt experienced by that borrower shows
effectively zero slope (indicating no correlation between a borrower's
expectations and outcomes). In other words, while many individuals
appear to have anticipated short durations of use with reasonable
accuracy (highlighted by Mann's interpretation), virtually none
properly anticipated long durations (which is the market failure
described here).\559\ For further discussion on the Mann data, see the
Section 1022(b)(2) Analysis in part VII below.
---------------------------------------------------------------------------
\558\ Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, at 127 (2013); Prof.
Ronald Mann comment letter, at 2.
\559\ It should be noted that Professor Mann did not provide his
data to the Bureau, either prior to the proposal, or in his comment
in response to the proposal. In place of these data, the Bureau is
relying on the charts and graphs he provided in his correspondence
with and presentation to the Bureau. Amongst other things, these
graphs depict the distribution of borrowers' expectations and
outcomes, but as they are scatterplots, counting the number of
observations in areas of heavy mass (e.g., expecting no rollovers)
is difficult. As such the analysis provided here may be somewhat
imprecise.
---------------------------------------------------------------------------
Professor Mann's comment also referred to two other surveys of
payday borrowers that the Bureau discussed in its proposal. A trade
association commissioned the two surveys, which suggest that consumers
are able to predict their borrowing patterns.\560\ Both studies, as the
Bureau had noted and as Professor Mann acknowledged, are less reliable
in their design than the original Mann study because they focus only on
borrowers who had successfully repaid a recent loan, which clearly
would have biased the results of those surveys, because that approach
would tend to under-sample borrowers who are in extended loan
sequences. In addition, by entirely omitting borrowers whose loan
sequences ended in default, these studies would have skewed the sample
in other respects as well. At a minimum, the majority of borrowers who
are light users of payday loans are likely to experience such loans
very differently from the significant subset of borrowers (who are a
minority of all borrowers, though the loans made to them constitute an
overall majority of these loans) who find that they end up in extended
loan sequences and suffer the various negative consequences of that
predicament.
---------------------------------------------------------------------------
\560\ Tarrance Group et al., ``Borrower and Voter Views of
Payday Loans,'' Cmty. Fin. Servs. Ass'n of America (2016), available
at http://www.tarrance.com/docs/CFSA-BorrowerandVoterSurvey-AnalysisF03.03.16.pdf; Harris Interactive, ``Payday Loans and the
Borrower Experience,'' Cmty. Fin. Servs. Ass'n of America (2013),
available at http://cfsaa.com/Portals/0/Harris_Interactive/CFSA_HarrisPoll_SurveyResults.pdf. The trade association and SERs
have cited this survey in support of their critiques of the Bureau's
Small Business Review Panel Outline.
---------------------------------------------------------------------------
These surveys, which were very similar to each other, were
conducted in 2013 and 2016 of storefront payday borrowers who had
recently repaid a loan and had not taken another loan within a
specified period of time. Of these borrowers, 94 to 96 percent reported
that when they took out the loan they understood well or very well
``how long it would take to completely repay the loan'' and a similar
percentage reported that they, in fact, were able to repay their loan
in the amount of time they expected. These surveys suffer from the
challenge of asking people to describe their expectations about
borrowing at some time in the past, which may lead to recall problems,
as described earlier. In light of the sampling bias discussed above and
the challenge inherent in the survey design, the Bureau concludes that
these studies do not undermine the evidence above indicating that
especially those consumers who engage in long-term re-borrowing through
extended loan sequences are generally not able to predict accurately
the number of times that they will need to re-borrow.
As discussed in the proposal, several factors may contribute to
consumers' lack of understanding of the risk of re-borrowing that will
result from loans that prove unaffordable. As explained above in the
section on lender practices, there is a mismatch between how these
products are marketed and described by industry and how they actually
operate in practice. Although lenders present the loans as a temporary
bridge option, only a minority of payday loans are repaid without any
re-borrowing. These loans often produce lengthy cycles of rollovers or
new loans taken out shortly after the prior loans are repaid. Not
surprisingly, many borrowers (especially those who end up in extended
loan sequences) are not able to tell when they take out the first loan
how long their cycles will last and how much they will ultimately pay
for the initial disbursement of cash. Even borrowers who believe they
will be unable to repay the loan immediately--and therefore expect some
amount of re-borrowing--are generally unable to predict accurately how
many times they will re-borrow and at what cost, unless they manage to
repay the loan fairly quickly. And, as noted above, borrowers who end
up re-borrowing many times are especially susceptible to inaccurate
predictions.
Moreover, as noted in the proposal, research suggests that
financial distress can be one of the factors in borrowers' decision-
making. As discussed above, payday and single-payment vehicle title
loan borrowers are often in financial distress at the time they take
out the loans. Their long-term financial condition is typically very
poor. For example, as described above, studies find that both
storefront and online payday borrowers have little to no savings and
very low credit scores, which is a sign of overall distressed financial
condition. They may have credit cards but likely do not have unused
credit, are often delinquent on one or more cards, and have often
experienced multiple overdrafts and/or NSFs on their checking
accounts.\561\ They typically have tried and failed to obtain other
forms of credit before turning to a payday lender, or they otherwise
may perceive that such other options would not be available to them and
there is no time to comparison shop when facing an imminent liquidity
crisis.
---------------------------------------------------------------------------
\561\ See Neil Bhutta et al., ``Payday Loan Choices and
Consequences,'' at 15-16 (Apr. 2, 2014), available at http://www.calcfa.com/docs/PaydayLoanChoicesandConsequences.pdf; Neil
Bhutta et al., ``Payday Loan Choices and Consequences,'' 47 J. of
Money, Credit and Banking 223 (2015); CFPB Online Payday Loan
Payments, at 3-4; Brian Baugh, ``What Happens When Payday Borrowers
Are Cut Off From Payday Lending? A Natural Experiment,) Payday
Lending? A Natural Experiment,) (Ph.D. dissertation, Ohio State
University, 2015), available at http://fisher.osu.edu/supplements/10/16174/Baugh.pdf.
---------------------------------------------------------------------------
Research has shown that when people are under pressure they tend to
focus on the immediate problem they are confronting and discount other
considerations, including the longer- term implications of their
actions. Researchers sometimes refer to this phenomenon as
``tunneling,'' evoking the tunnel-vision decision-making that people
may tend to engage in as they confront such situations. Consumers
experiencing a financial crisis, as they often are when they are
deciding whether or not to take out these kinds of loans, can be prime
examples of this behavior.\562\ Even when consumers are not facing a
crisis, research shows that they tend to underestimate their near-term
expenditures \563\ and, when
[[Page 54571]]
estimating how much financial ``slack'' they will have in the future,
tend to discount even the expenditures they do expect to incur.\564\
Finally, regardless of their financial situation, research suggests
that consumers may generally have unrealistic expectations about their
future earnings, their future expenses, and their ability to save money
to repay future obligations. Much research has documented that
consumers in many contexts demonstrate optimism bias about future
events and their own future performance. Without attempting to specify
how frequently these considerations may affect individual borrower
behavior, it is enough here to note that they are supported in the
academic literature and are consistent with the observed behavior of
those who use covered short-term loans.\565\
---------------------------------------------------------------------------
\562\ See generally Sendhil Mullainathan & Eldar Shafir,
``Scarcity: The New Science of Having Less and How It Defines Our
Lives,'' (Picador, 2014).
\563\ Johanna Peetz & Roger Buehler, ``When Distance Pays Off:
The Role of Construal Level in Spending,'' Predictions, 48 J. of
Experimental Soc. Psychol. 395 (2012); Johanna Peetz & Roger
Buehler, ``Is the A Budget Fallacy? The Role of Savings Goals in the
Prediction of Personal Spending,'' 34 Personality and Social
Psychol. Bull. 1579 (2009); Gulden Ulkuman et al., ``Will I Spend
More in 12 Months or a Year? The Effects of Ease of Estimation and
Confidence on Budget Estimates,'' 35 J. of Consumer Research 245, at
249 (2008).
\564\ Jonathan Z. Berman et al., ``Expense Neglect in
Forecasting Personal Finances,'' at 5-6 (2014) (forthcoming
publication in J. of Marketing Res.), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2542805.
\565\ The foundational works on optimism bias come from the
behavioral economics literature on forecasting. See, e.g., Daniel
Kahneman & Amos Tversky, ``Intuitive Prediction: Biases and
Corrective Procedures,'' 12 TIMS Studies in Mgmt. Science 313
(1979); Roger Buehler et al., ``Exploring the ``Planning Fallacy'':
Why People Underestimate their Task Completion Times,'' 67 J.
Personality & Soc. Psychol. 366 (1994); Roger Buehler et al.,
``Inside the Planning Fallacy: The Causes and Consequences of
Optimistic Time Prediction, in Heuristics and Biases: The Psychology
of Intuitive Judgment,'' at 250-70 (Thomas Gilovich, Dale Griffin, &
Daniel Kahneman eds., 2002). Nonetheless, it is worth noting that
many of the same behaviors and outcomes can be derived from other
economic models based on the premise that consumers in similar
situations behave rationally in light of their circumstances.
---------------------------------------------------------------------------
As discussed in the proposal, each of these behavioral biases is
exacerbated when facing a financial crisis, and taken together they can
contribute to affecting the decision-making of consumers who are
considering taking out a payday loan, a single-payment vehicle title
loan, or some other covered short-term loan. The effect of these
behavioral biases may cause consumers to fail to make an accurate
assessment of the likely duration of indebtedness, and, consequently,
the total costs they will pay as a result of taking out the loan.
Tunneling also may cause consumers not to focus sufficiently on the
future implications of taking out a loan. To the extent consumers do
comprehend what will happen when the loan comes due--or when future
loans come due in extended loan sequences--underestimation of future
expenditures and optimism bias can cause them to misunderstand the
likelihood of repeated re-borrowing. These effects could be
attributable to their belief that they are more likely to be able to
repay the loan without defaulting or re-borrowing than they actually
are. And consumers who recognize at origination that they will have
difficulty paying back the loan and that they may need to roll the loan
over or re-borrow once or twice may still underestimate the likelihood
that they will wind up rolling over or re-borrowing multiple times and
the increasingly high costs of doing so.
Regardless of the underlying explanation, the empirical evidence
indicates that many borrowers who find themselves ending up in extended
loan sequences did not expect that outcome--with their predictive
abilities diminishing as the loan sequences become more extended. In
this regard, it is notable that one survey found that payday and
vehicle title borrowers were more likely to underestimate the cost and
amount of time in debt than borrowers of other products examined in the
survey, including pawn loans, deposit advance products, and installment
loans.\566\
---------------------------------------------------------------------------
\566\ Rob Levy & Joshua Sledge, ``A Complex Portrait: An
Examination of Small-Dollar Credit Consumers,'' (Ctr. for Fin.
Servs. Innovation, 2012), available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
---------------------------------------------------------------------------
The commenters on this discussion in the proposal expressed sharply
divergent views. Some industry commenters stated their belief that
consumers make rational decisions and many of them do expect to re-
borrow when they take out covered short-term loans. Others noted that
this argument fails to come to grips with the key problem that the
Bureau has focused on in its analysis--known to economists as a ``right
tail'' problem--which rests on the fact that a subset constituting a
substantial population of payday borrowers are the ones who do not seem
to expect but yet experience the most extreme negative outcomes with
these loans.
Other industry participants and trade associations criticized the
Bureau for not conducting its own surveys of payday and title
borrowers, and contended that such surveys would have shown that
borrowers are generally well informed about their decisions to obtain
such loans. And a large number of comments from individual users of
these loans were in accord with these views, presenting their own
experiences with such loans as positive and as having benefited their
financial situations.
Other industry commenters pointed out what they regarded as a low
volume of consumer complaints about this product, which they viewed as
inconsistent with the notion that many borrowers are surprised by
experiencing unexpected negative outcomes with these loans. Yet it is
equally plausible that those borrowers who find themselves in extended
loan sequences may be embarrassed and therefore may be less likely to
submit complaints about their situation. This is consistent with survey
results that show many confirmed borrowers nonetheless deny having
taken out a payday loan.\567\ Borrowers may also blame themselves for
having gotten themselves caught up in a cycle of debt authorized by
State law, which may also explain why they would be unlikely to file a
complaint with a government agency or a government official.
---------------------------------------------------------------------------
\567\ Gregory Elliehausen and Edward C. Lawrence, ``Payday
Advance Credit in America: An Analysis of Customer Demand,'' (Geo.
U., McDonough Sch. of Bus., Monograph No. 35, 2001).
---------------------------------------------------------------------------
In addition, the Bureau has noted previously that a relatively high
proportion of debt collection complaints it receives are about payday
loans--a much higher proportion, for example, than for mortgages or
auto loans or student loans.\568\ From its consumer complaint data, the
Bureau observed that from November 2013 through December 2016 more than
31,000 debt collection complaints cited payday loans as the underlying
debt. More than 11 percent of the complaints that the Bureau has
handled about debt collection stem directly from payday loans.\569\ And
in any event, it is not at all clear that the Bureau receives a low
number of consumer complaints about payday loans once they are
normalized in comparison to other credit products. For example, in
2016, the Bureau received approximately 4,400 complaints in which
consumers reported ``payday loan'' as the complaint product and about
26,600 complaints about credit cards.\570\ Yet there are only about 12
million payday loan borrowers annually, and approximately 156 million
consumers
[[Page 54572]]
have one or more credit cards.\571\ Therefore, by way of comparison,
for every 10,000 payday loan borrowers, the Bureau received about 3.7
complaints, while for every 10,000 credit cardholders, the Bureau
received about 1.7 complaints.
---------------------------------------------------------------------------
\568\ Bureau of Consumer Fin. Prot., ``Monthly Complaint Report,
Vol. 18,'' (Dec. 2016), available at https://www.consumerfinance.gov/data-research/research-reports/monthly-complaint-report-vol-18/.
\569\ Bureau of Consumer Fin. Prot., ``Monthly Complaint Report,
Vol. 18,'' at 12 (Dec. 2016), available at https://www.consumerfinance.gov/data-research/research-reports/monthly-complaint-report-vol-18/.
\570\ Bureau of Consumer Fin. Prot., ``Consumer Response Annual
Report, January 1-December 31, 2016,'' at 27, 33 (Mar. 2017),
available at https://www.consumerfinance.gov/documents/3368/201703_cfpb_Consumer-Response-Annual-Report-2016.PDF.
\571\ Bureau staff estimate based on finding that 63 percent of
American adults hold an open credit card and Census population
estimates. Bureau of Consumer Fin. Prot., ``The Consumer Credit Card
Market Report,'' at 36 (Dec. 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf; U.S. Census Bureau, ``Annual Estimates of Resident
Population for Selected Age Groups by Sex for the United States,
States, Counties, and Puerto Rico Commonwealth and Municipios: April
1, 2010 to July 1, 2016,'' (June 2017), available at https://factfinder.census.gov/bkmk/table/1.0/en/PEP/2016/PEPAGESEX. Other
estimates of the number of credit card holders have been higher,
meaning that 1.7 complaints per 10,000 credit card holders would be
a high estimate. The U.S. Census Bureau estimated there were 160
million credit card holders in 2012, and researchers at the Federal
Reserve Bank of Boston estimated that 72.1 percent of U.S. consumers
held at least one credit card in 2014. U.S. Census Bureau,
``Statistical Abstract of the United States: 2012,'' at 740 tbl.1188
(Aug. 2011), available at https://www.census.gov/library/publications/2011/compendia/statab/131ed.html; Claire Greene et al.,
``The 2014 Survey of Consumer Payment Choice: Summary Results,'' at
18 (Fed. Reserve Bank of Boston, No. 16-3, 2016), available at
https://www.bostonfed.org/-/media/Documents/researchdatareport/pdf/rdr1603.pdf. And as noted above in the text, additional complaints
related to both payday loans and credit cards are submitted as debt
collection complaints with ``payday loan'' or ``credit card'' listed
as the type of debt.
---------------------------------------------------------------------------
In addition, some faith leaders and faith groups of many
denominations from around the country collected and submitted comments,
which underscored the point that many borrowers may direct their
personal complaints or dissatisfactions with their experiences
elsewhere than to government officials. Indeed, some of the faith
leaders who commented on the proposal mentioned their intentions or
efforts to develop their own safer loan products in response to the
crises related to them by such borrowers.
Various commenters, including some academics such as Professor Mann
whose views are discussed above, also cited research that they viewed
as showing that such borrowers understand the nature of the product,
including the fact that they may remain indebted beyond the initial
term of the loan, with many able to predict accurately (within two
weeks) how long it will take to repay their loan or loans. They cited
various studies to make the point that consumers are in a better
position to understand and act in their own interests than are
policymakers who are more removed from the conditions of their daily
lives. Some of these commenters were particularly critical of what they
viewed as the erroneous assumptions and, even more broadly, the
misguided general approach taken by behavioral economists. They argued
that any such approach to policymaking is not well grounded and runs
counter to their preferred view that consumer behavior instead is
marked by rational expectations and clear insight into decision-making
about financial choices.
By contrast, many consumer groups and some researchers took a very
different view. They tended to agree with the points presented in the
proposal about how behavioral characteristics can undermine decision-
making for borrowers of these loans, especially for those in financial
distress. In their view, these factors can and often do lead to
misjudgments by many consumers of the likelihood that they may find
themselves caught up in extended loan sequences and experiencing many
of the harmful collateral consequences that were described in the
proposal. They suggested that both the research and the personal
experiences of many borrowers suggest that this picture of a
substantial number of consumers is generally accurate, especially for
those consumers who find that they have ended up in extended loan
sequences.
As the Bureau had noted in the proposal, the patterns of behavior
and outcomes in this market are broadly consistent with a number of
cognitive biases that are described and documented in the academic
literature on behavioral economics. Yet it is important to note that
the Bureau's intervention is motivated by the observed pattern of
outcomes in the market, and not by any settled viewpoint on the varying
theories about the underlying rationality of the decisions that may
lead to them. That is, the Bureau does not and need not take a position
here on the types of behavioral motivations that may drive the observed
outcomes, for it is the outcomes themselves that are problematic,
regardless of how economists may attempt to explain them. In fact, both
the rational agent models generally favored by industry comments and
the more behavioral models favored by consumer groups and some
researchers could very well lead to these same observed outcomes.
The Bureau has weighed these conflicting comments and concludes
that the discussion of these issues in the proposal remains generally
accurate and is supported by considerable research and data on how
payday and title loans operate in actual practice and how these loans
are experienced by consumers. The data do seem to indicate that a
significant group of consumers do not accurately predict the duration
of their borrowing. This is particularly true, notably, for the subset
of consumers who do in fact end up in extended loan sequences. These
findings, and not any definitive judgment about the validity of
behavioral economics or other theories of consumer behavior, provide
the foundation on which this rule is based. Finally, though certain
commenters have expressed concern that the Bureau had not heard
sufficiently from individual users of these loans, the Bureau has now
received and reviewed a high volume of individual comments that were
submitted as part of this rulemaking process.
e. Delinquency and Default
The proposal also addressed the specific topics of delinquency and
default on payday and single-payment vehicle title loans. In addition
to the various harms caused by unanticipated loan sequences, the Bureau
was concerned that many borrowers suffer other harms from unaffordable
loans in the form of the collateral costs that come from being
delinquent or defaulting on the loans. Many borrowers, when faced with
unaffordable payments, will be late in making loan payments, and may
ultimately cease making payments altogether and default on their
loans.\572\ They may take out multiple loans before defaulting, either
because they are simply delaying the inevitable or because their
financial situation deteriorates over time to the point where they
become delinquent and eventually default rather than continuing to pay
additional re-borrowing fees. For example, the evidence from the CFPB
Report on Supplemental Findings shows that approximately two-thirds of
payday loan sequences ending in default are multi-loan sequences in
which the borrower has rolled over or re-borrowed at least once before
defaulting. And nearly half of the consumers who experienced either a
default or a 30-day delinquency already had monthly fees exceeding $60
before their first default or 30-day delinquency occurred.
---------------------------------------------------------------------------
\572\ This discussion uses the term ``default'' to refer to
borrowers who do not repay their loans. Precise definitions will
vary across analyses, depending on specific circumstances and data
availability.
---------------------------------------------------------------------------
While the Bureau noted in the proposal that it is not aware of any
data directly measuring the number of late payments across the
industry, studies of what happens when payments are so late that the
lenders deposit the consumers' original post-dated checks
[[Page 54573]]
suggest that late payment rates are relatively high. For example, one
study of payday borrowers in Texas found that in 10 percent of all
loans, the post-dated checks were deposited and bounced.\573\ Looking
at the borrower level, the study found that half of all borrowers had a
check that was deposited and bounced over the course of the year
following their first payday loan.\574\ An analysis of data collected
in North Dakota showed a lower, but still high, rate of lenders
depositing checks that later bounced or trying to collect loan payment
via an ACH payment request that failed. It showed that 39 percent of
new borrowers experienced a failed loan payment of this type within a
year after their first payday loan, and 44 percent did so within the
first two years after their first payday loan.\575\ In a public filing,
one large storefront payday lender reported a lower rate (6.5 percent)
of depositing checks, of which nearly two-thirds were returned for
insufficient funds.\576\ In the Bureau's analysis of ACH payments
initiated by online payday and payday installment lenders, half of
online borrowers had at least one overdraft or NSF transaction related
to their loans over 18 months. These borrowers' depository accounts
incurred an average total of $185 in fees.\577\
---------------------------------------------------------------------------
\573\ Paige Marta Skiba and Jeremy Tobacman, ``Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default,'' at 33 tbl. 2 (Vand. L. and Econ., Research
Paper No. 08-33, 2008). The study did not separately report the
percentage of loans on which the checks that were deposited were
paid.
\574\ These results are limited to borrowers paid on a bi-weekly
schedule.
\575\ Susanna Montezemolo & Sarah Wolff, ``Payday Mayday:
Visible and Invisible Payday Defaults,'' at 4 (Ctr. for Responsible
Lending, 2015), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/finalpaydaymayday_defaults.pdf.
\576\ ``For the years ended December 31, 2011 and 2010, we
deposited customer checks or presented an Automated Clearing House
(``ACH'') authorization for approximately 6.7 percent and 6.5
percent, respectively, of all the customer checks and ACHs we
received and we were unable to collect approximately 63 percent and
64 percent, respectively, of these deposited customer checks or
presented ACHs.'' Advance America 2011 10-K. Borrower-level rates of
deposited checks were not reported.
\577\ CFPB Online Payday Loan Payments, at 10-11.
---------------------------------------------------------------------------
As the Bureau noted in the proposal, bounced checks and failed ACH
payments can be quite costly for borrowers. The median bank fee for an
NSF transaction is $34.00, which is equivalent to the cost of a
rollover on a $300 storefront loan.\578\ If the lender makes repeated
attempts to collect using these methods, this leads to repeated fees
being incurred by the borrower. The Bureau's research indicates that
when one attempt fails, online payday lenders make a second attempt to
collect 75 percent of the time but are unsuccessful in 70 percent of
those cases. The failure rate increases with each subsequent
attempt.\579\
---------------------------------------------------------------------------
\578\ CFPB Study of Overdraft Programs, at 52.
\579\ CFPB Online Payday Loan Payments, at 3-4; see generally
Market Concerns--Payments.
---------------------------------------------------------------------------
In addition to incurring NSF fees from a bank, in many cases when a
check bounces the consumer can be charged a returned check fee by the
lender. This means the borrower would be incurring duplicative and
additional fees for the same failed transaction. In this connection, it
should be noted that lender-imposed late fees are subject to certain
restrictions in some but not all States.\580\
---------------------------------------------------------------------------
\580\ Most States limit returned item fees on payday loans to a
single fee of $15-$40; $25 is the most common returned-item fee
limit. Most States do not permit lenders to charge a late fee on a
payday loan, although Delaware permits a late fee of five percent
and several States' laws are silent on the question of late fees.
---------------------------------------------------------------------------
The proposal also noted that default can also be quite costly for
borrowers. These costs vary with the type of loan and the channel
through which the borrower took out the loan. As discussed above,
default may come after a lender has already made repeated and expensive
attempts to collect from the borrower's deposit account, such that a
borrower may ultimately find it necessary to close the account. In
other instances, the borrower's bank or credit union may close the
account if the balance is driven negative and the borrower is unable
for an extended period of time to return the balance to positive. And
borrowers of single-payment vehicle title loans stand to suffer even
greater harms from default, as it may lead to the repossession of their
vehicle. In addition to the direct costs of the loss of an asset, the
deprivation of their vehicle can seriously disrupt people's lives and
put at risk their ability to remain employed or to manage their
ordinary affairs as a practical matter. Yet another consequence of
these setbacks could be personal bankruptcy in some cases.
Default rates on individual payday loans appear at first glance to
be fairly low. This figure is three percent in the data the Bureau has
analyzed, and the commenters are in accord about this figure.\581\ But
because so many borrowers respond to the unaffordability of these loans
by re-borrowing in sequences of loans rather than by defaulting
immediately, a more meaningful measure of default is the share of loan
sequences that end in default. The Bureau's data show that, using a 30-
day definition of a loan sequence, fully 20 percent of loan sequences
end in default. A recent report based on a multi-lender dataset showed
similar results, with a three percent loan-level default rate and a 16
percent sequence-level default rate.\582\
---------------------------------------------------------------------------
\581\ Default here is defined as a loan not being repaid as of
the end of the period covered by the data or 30 days after the
maturity date of the loan, whichever was later. The default rate was
slightly higher [four percent] for new loans that are not part of an
existing loan sequence, which could reflect an intention by some
borrowers to take out a loan and not repay, or the mechanical fact
that borrowers with a high probability of defaulting for some other
reason are less likely to have a long sequence of loans.
\582\ nonprime101, ``Report 3: Measure of Reduced Form
Relationship between the Payment-Income Ratio and the Default
Probability,'' at 6 (2015), available at https://www.nonprime101.com/wp-content/uploads/2015/02/Clarity-Services-Measure-of-Reduced-Form-Relationship-Final-21715rev.pdf. This
analysis defines sequences based on the pay frequency of the
borrower, so some loans that would be considered part of the same
sequence using a 30-day definition are not considered part of the
same sequence in this analysis.
---------------------------------------------------------------------------
Other researchers have found similarly high levels of default. One
study of Texas borrowers found that 4.7 percent of loans were charged
off, while 30 percent of borrowers had a loan charged off in their
first year of borrowing.\583\ Default rates on single-payment vehicle
title loans are higher than those on storefront payday loans; in
addition, initial single-payment vehicle title loans are more likely
than storefront payday loans to result in a default. In the data
analyzed by the Bureau, the default rate on all title loans is six
percent, and the sequence-level default rate is 33 percent.\584\ Over
half of all defaults occur in single-payment vehicle title loan
sequences that consist of three or fewer loans. Nine percent of single-
payment vehicle title loan sequences consist of single loans that end
in default, compared to six percent of payday loan sequences.\585\ The
Bureau's research suggests that title lenders repossess a vehicle
slightly more than half the time when a borrower defaults on a loan. In
the data the Bureau has analyzed, three percent of all single-payment
vehicle title loans lead to repossession, which represents
approximately 50 percent of loans on which the borrower defaulted. At
the sequence level, 20 percent of sequences end up with the borrower's
vehicle
[[Page 54574]]
being repossessed. In other words, one in five borrowers is unable to
escape their debt on these loans without losing their car or truck.
---------------------------------------------------------------------------
\583\ Paige Marta Skiba and Jeremy Tobacman, ``Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default,'' at 33 tbl. 2 (Vand. L. and Econ., Research
Paper No. 08-33, 2008). Again, these results are limited to
borrowers paid bi-weekly.
\584\ CFPB Single-Payment Vehicle Title Lending, at 23.
\585\ CFPB Single-Payment Vehicle Title Lending, at 11; CFPB
Report on Supplemental Findings, at 120.
---------------------------------------------------------------------------
Some industry and trade association commenters posited that the
Bureau had overstated the default and repossession rates on vehicle
title loans. Companies argued that the Bureau had erroneously stated a
higher repossession rate than their own data showed, with one commenter
estimating its own short-term title loan sequence repossession rate at
8.4 percent. Others contended that the Bureau's repossession rates were
much higher than those reported through other sources, such as
regulator reports in States like Idaho and Texas. In arguing that the
Bureau had overstated the default and repossession rates, one trade
group also cited a study which had concluded that the rates were lower.
The study relied on a handful of State regulator reports in addition to
``industry sources.'' Yet the difference seems to trace to the fact
that default and repossession rates are typically reported at the loan
level rather than the sequence level. The Bureau's loan-level data is
actually fairly similar to the figures cited by these commenters. But
the Bureau believes that sequence level is a more appropriate
indicator, since it captures experience at the level of the borrower.
Put differently, sequence level more appropriately indicates outcomes
for particular consumers, rather than for particular lenders; from this
standpoint, a loan that is rolled over three times before defaulting
should not be miscounted as three ``successfully'' repaid loans and one
default. As noted previously, over 80 percent of single-payment vehicle
title loans were re-borrowed on the same day as a previous loan was
repaid. Regardless, to the extent any one company has lower
repossession rates than the average, that fact does not put in question
the averages that the Bureau used, because inevitably there will be
companies that are both above and below the average. The Bureau also
notes that the study discussed above cited by a trade group, which
relies on undefined ``industry sources'' and a handful of State
regulator reports to criticize the Bureau's data on default and
repossession rates, relied on far less robust loan level data than the
Bureau used to arrive at the figures it cited in the Bureau's
supplemental research report and in the proposal.
One commenter noted that because the vehicles put up for collateral
on these loans are usually old and heavily used, lenders often do not
repossess the vehicle because it is not worth the trouble. This
commenter also argued that the impact of repossession is not
significant, based on a study indicating that less than 15 percent of
consumers whose vehicles are repossessed would not find alternative
means of transportation, which again is at odds with the information
presented in other studies that have been cited.\586\ Another commenter
asserted that the stress created by the threat of vehicle repossession
is no worse than other stresses felt by consumers in financial
difficulties, though it is difficult to know how much to credit this
claim.
---------------------------------------------------------------------------
\586\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013, at 1038 (2014).
---------------------------------------------------------------------------
The proposal further noted that borrowers of all types of covered
loans are also likely to be subject to collection efforts, which can
take aggressive forms. From its consumer complaint data, the Bureau
observed that from November 2013 through December 2016 more than 31,000
debt collection complaints cited payday loans as the underlying debt.
More than 11 percent of the complaints that the Bureau has handled
about debt collection stem directly from payday loans.\587\ These
collections efforts can include harmful and harassing conduct, such as
repeated phone calls from collectors to the borrower's home or place of
work, the harassment of family and friends, and in-person visits to
consumers' homes and worksites. Some of this conduct, depending on the
facts and circumstances, may be illegal. Aggressive calling to the
borrower's workplace can put at risk the borrower's employment and
jeopardize future earnings. Many of these practices can cause
psychological distress and anxiety for borrowers who are already under
the strain of financial pressure.
---------------------------------------------------------------------------
\587\ Bureau of Consumer Fin. Prot., ``Monthly Complaint Report,
Vol. 18,'' at 12 (Dec. 2016), available at https://www.consumerfinance.gov/data-research/research-reports/monthly-complaint-report-vol-18/.
---------------------------------------------------------------------------
In fact, the Bureau's enforcement and supervisory examination
processes have uncovered evidence of numerous illegal collection
practices by payday lenders, including practices of the kinds just
described. These have included: Illegal third-party calls, illegal home
visits for collection purposes, false threats to add new fees, false
threats of legal action or referral to a non-existent in-house
``collections department,'' and deceptive messages regarding non-
existent ``special promotions'' to induce borrowers to return
calls.\588\
---------------------------------------------------------------------------
\588\ See Bureau of Consumer Fin. Prot., ``Supervisory
Highlights,'' at 17-19 (Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
---------------------------------------------------------------------------
In addition, lenders and trade associations contended that the
Bureau had overstated the extent of harm, noting that they do not
typically report nonpayment of these kinds of loans to consumer
reporting agencies, which can interfere with the consumer's access to
credit, and that this lack of reporting would obviate any harm that the
borrower would suffer on that front. Nonetheless, debt collectors can
and do report unpaid debts to the consumer reporting companies even
when the original creditors do not, and the aggressive collection
tactics that the Bureau has identified with respect to unpaid payday
loans through its investigations and numerous enforcement actions
suggest that this may be a common collateral consequence of default on
these loans as well.\589\
---------------------------------------------------------------------------
\589\ See, e.g., In the Matter of Money Tree, Inc., No. 2016-
CFPB-0028; In the Matter of EZCORP, Inc., No. 2015-CFPB-0031; CFPB
v. NDG Financial Corp., No. 15-05211 (S.D.N.Y. 2015); In the Matter
of ACE Cash Express, Inc., No. 2014-CFPB-0008; In the Matter of
Westlake Servs., LLC, No. 2015-CFPB-0026. The Bureau has also taken
actions against debt collectors, some of which collect in part on
small-dollar loans. See, e.g., CFPB v. MacKinnon, et al., No. 16-
00880 (W.D.N.Y. 2016).
---------------------------------------------------------------------------
The potential consequences of the loss of a vehicle depend on the
transportation needs of the borrower's household and the available
transportation alternatives. According to two surveys of title loan
borrowers, 15 percent of all borrowers report that they would have no
way to get to work or school if they lost their vehicle to
repossession.\590\ Using an 8 percent repossession rate, one industry
commenter asserted that only about one percent of title loan borrowers
would thus lose critical transportation, by multiplying 15 percent
times 8 percent. However, the survey author specifically warns against
doing this, noting that ``a borrower whose car is repossessed probably
has lower wealth and income than a borrower whose car is not
repossessed, and is therefore probably more likely to lack another way
of getting to work.'' \591\ More than one-third (35 percent) of
borrowers pledge the title to the only working vehicle in the
household.\592\ Even those with a
[[Page 54575]]
second vehicle or the ability to get rides from friends or take public
transportation would presumably experience significant inconvenience or
even hardship from the loss of a vehicle. This hardship goes beyond
simply getting to work or school, and would as a practical matter also
adversely affect the borrower's ability to conduct their ordinary
household affairs, such as obtaining food or medicine or other
necessary services.
---------------------------------------------------------------------------
\590\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013, 1029-1030 (2014); Pew Charitable Trusts, ``Auto
Title Loans: Market Practices and Borrowers' Experiences,'' at 14
(2015), available at http://www.pewtrusts.org/~/media/Assets/2015/
03/AutoTitleLoansReport.pdf?la=en.
\591\ Kathryn Fritzdixon et al., ``Dude, Where's My Car
Title?,'' 2014 U. IL L. Rev. at 1038 n.137.
\592\ Pew Charitable Trusts, ``Auto Title Loans: Market
Practices and Borrowers' Experiences,'' (2015), available at http://
www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en.
---------------------------------------------------------------------------
In the proposal, the Bureau noted that it analyzed online payday
and payday installment lenders' attempts to withdraw payments from
borrowers' deposit accounts, and found that six percent of payment
attempts that were not preceded by a failed payment attempt themselves
fail, incurring NSF fees.\593\ Another six percent avoid failure,
despite a lack of sufficient available funds in the borrower's account,
but only because the borrower's depository institution makes the
payment as an overdraft, in which case the borrower was likely to be
charged a fee that is generally similar in magnitude to an NSF fee. The
Bureau could not determine default rates from these data.
---------------------------------------------------------------------------
\593\ The bank's analysis includes both online and storefront
lenders. Storefront lenders normally collect payment in cash and
only deposit checks or submit ACH requests for payment when a
borrower has failed to pay in person. These check presentments and
ACH payment requests, where the borrower has already failed to make
the agreed-upon payment, have a higher rate of insufficient funds.
---------------------------------------------------------------------------
As noted in the proposal, when borrowers obtain a payday or title
loan, they may fail to appreciate the extent of the risk that they will
default and the costs associated with default. Although consumers may
well understand the concept and possibility of default, in general,
they are unlikely, when they are deciding whether to take out a loan,
to be fully aware of the extent of the risk and severity of the harms
that would occur if they were to default or what it would take to avoid
default. They may be overly focused on their immediate needs relative
to the longer-term picture. The lender's marketing materials may have
succeeded in convincing the consumer of the value of a loan to bridge
financial shortfalls until their next paycheck. Some of the remedies a
lender might invoke to address situations of nonpayment, such as
repeatedly attempting to collect from a borrower's checking account or
using remotely created checks, may be unknown or quite unfamiliar to
many borrowers. Realizing that these measures are even a possibility
would depend on the borrower investigating what would happen in the
case of an event they typically do not expect to occur, such as a
default.
Industry commenters contended that consumers tend to be highly
knowledgeable about the nature, costs, and overall effects of payday
and single-payment vehicle title loans. Yet they generally did not
address the points raised here about the level of awareness and
familiarity that these consumers would tend to have about the risks and
costs of these other, more collateral consequences of delinquency and
default. Consumer groups, by contrast, supported the view that these
collateral consequences are part of the true overall cost of payday and
title loans and that they are largely unforeseen by most consumers.
f. Collateral Harms From Making Unaffordable Payments
The proposal further elucidated other harms associated with payday
and title loans, in addition to the harms associated with delinquency
and default, by describing how borrowers who take out these loans may
experience other financial hardships as a result of making payments on
unaffordable loans. These harms may occur whether or not the borrower
also experiences delinquency or default somewhere along the way, which
means they could in many cases be experienced in addition to the harms
otherwise experienced from these situations.
These further harms can arise where the borrower feels compelled to
prioritize payment on the loan and does not wish to re-borrow. This
course of action may result in defaulting on other obligations or
forgoing basic living expenses. If a lender has taken a security
interest in the borrower's vehicle, for example, and the borrower does
not wish to re-borrow, then the borrower is likely to feel compelled to
prioritize payments on the title loan over other bills or crucial
expenditures, because of the substantial leverage that the threat of
repossession gives to the lender.
The repayment mechanisms for other short-term loans can also cause
borrowers to lose control over their own finances. If a lender has the
ability to withdraw payment directly from a borrower's checking
account, the borrower may lose control over the order in which she
would prefer her payments to be made and thus may be unable to choose
to make essential expenditures before repaying the covered loan. This
is especially likely to happen when the lender is able to time the
withdrawal to align with the borrower's payday or with the specific day
when the borrower is scheduled to receive periodic income. Moreover,
even if a title borrower does not have her vehicle repossessed, the
threat of repossession in itself may cause tangible harm to borrowers.
It may cause them to forgo other essential expenditures in order to
make a payment they cannot afford in order to avoid repossession.\594\
And there may be psychological harm in addition to the stress
associated with the possible loss of a vehicle. Lenders recognize that
consumers often have a ``pride of ownership'' in their vehicle and, as
discussed above, one or more lenders are willing to exceed their
maximum loan amount guidelines by considering the vehicle's sentimental
or use value to the consumer when they are assessing the amount of
funds they will lend.
---------------------------------------------------------------------------
\594\ As the D.C. Circuit observed of consumers loans secured by
interests in household goods, ``[c]onsumers threatened with the loss
of their most basic possessions become desperate and peculiarly
vulnerable to any suggested `ways out.' As a result, `creditors are
in a prime position to urge debtors to take steps which may worsen
their financial circumstances.' The consumer may default on other
debts or agree to enter refinancing agreements which may reduce or
defer monthly payments on a short-term basis but at the cost of
increasing the consumer's total long-term debt obligation.'' AFSA,
767 F.2d at 974 (1985) (internal citation omitted).
---------------------------------------------------------------------------
The Bureau noted in the proposal that it is not able to directly
observe the harms that borrowers suffer from making unaffordable
payments. But it stands to reason that when loans are made without
regard to the consumer's ability to repay and the lender secures the
ability to debit a consumer's account or repossess a vehicle, many
borrowers are suffering harms from making unaffordable payments at
certain times, and perhaps frequently.
The commenters had vigorous reactions to this discussion in the
proposal. On the effects that vehicle title borrowers feel based on
their concern about losing their transportation, industry commenters
argued that the Bureau had overstated its points. They emphasized that
these loans are typically non-recourse loans in many States, which puts
some specific limits on the harm experienced by borrowers. In the
proposal, the Bureau had observed that this result would still expose
the borrower to consider threat of harm if they end up losing their
primary (and in many instances their sole) means of transportation to
work and to manage their everyday affairs. Moreover, the Bureau notes
these comments omit the issue of what harms exist in States where
vehicle title loans
[[Page 54576]]
are recourse. The Bureau notes the receipt of a comment letter from two
consumer advocacy groups that discussed in detail the laws and lender
practices in Arizona, where a robust vehicle title loan market exists.
They wrote that in Arizona lenders are permitted to sue for deficiency
balances after repossession; lenders can collect a ``reasonable
amount'' for the cost of collection and court and attorneys' fees
related to repossession; and that as of 2015, nine of out of 10 largest
title lenders still required borrowers to provide bank account access
to get loans secured by vehicles.\595\ Furthermore, these commenters
countered that borrowers often can find other means of transportation,
citing what they present as a supportive survey. Their interpretation
of the data is not convincing, however, as even the authors of the
survey cautioned against making simplistic calculations about factors
and probabilities that are intertwined in the analysis, and which thus
may considerably understate the incidence of hardship. One industry
commenter pointed to a survey which showed that though a majority of
title loan borrowers would prioritize their title loan payment over
that of a credit card, very few of these borrowers would prioritize a
title loan payment over rent, utilities, groceries, or other expenses.
However, the author of this survey clearly states that because of an
extremely small sample size, his findings are anecdotal and are not
representative of borrowers either in the local area surveyed or
nationally.\596\
---------------------------------------------------------------------------
\595\ The Bureau notes that an industry trade group argued that
lenders generally do not pursue deficiencies even when it is legal
to do so. However, in substantiating this assertion the trade group
essentially cites itself as evidence for the proposition (i.e., the
trade group cites language from a study that itself cites language
from the same trade group's Web site regarding best practices around
repossession).
\596\ Jim Hawkins, ``Credit on Wheels: The Law and Business of
Auto-Title Lending,'' 69 Wash. & Lee L. Rev. 535, 541 (2012).
---------------------------------------------------------------------------
The industry commenters further noted that as many as half of the
title borrowers who default do so on their first payment, and they
construed this occurrence as a strategic default which demonstrates
that these borrowers did not confront any particular hardship by facing
unaffordable payments that could cause them to lose their vehicle. Yet
the notion that a borrower would make the conscious decision to employ
this approach as a means of ``selling'' their vehicle, where they
likely will receive a sharply reduced price for it and expose
themselves to the other related risks discussed here, seems strained
and implausible. That is especially the case insofar as doing so would
needlessly incur the risks and costs of various potential penalty fees,
late fees, towing fees, and the like that could occur (depending on the
provisions of State law) when lenders carry out a repossession of the
vehicle.
Industry and trade association commenters also suggested that the
proposal is improperly paternalistic by attempting to substitute the
judgment of the Bureau for the judgments made by individual consumers
about how best to address the risks of collateral harms from making
unaffordable payments. Difficult choices that consumers have to make
about how to meet their obligations may be temporarily eased by the
ability to access these loans and utilize the proceeds, at least for
those consumers who do not end up experiencing the kinds of negative
collateral consequences described above from delinquencies and
defaults, and perhaps for some other borrowers as well. It also can
substitute a new creditor with more limited recourse for an existing
creditor with greater leverage, such as a landlord or a utility
company. Although the addition of a payday or title loan obligation to
the already-constrained mix of obligations can lead to the kind of
budgeting distortions described by the proposal, it might instead lead
to more immediate financial latitude to navigate those choices and
avoid the impending harms of delinquency or default on other pre-
existing obligations. This narrative was echoed by comments from a
large number of individual users of such loans, who described the
benefits they experienced by having access to the loan proceeds for
immediate use while finding various ways to avert the negative
collateral consequences described in the proposal.
Consumer groups, on the other hand, strongly urged the view that
payday and title loans often lead to harms similar to those described
in the proposal for a significant set of borrowers. This position was
buttressed by submissions from and about a sizeable number of
individual borrowers as well, which included narratives describing
extreme financial dislocations flowing directly from harms cause by
unaffordable payments. Although the proceeds of such loans do offer a
temporary infusion of flexibility into the borrower's financial
situation, that brief breathing spell is generally followed almost
immediately thereafter by having to confront similar financial
conditions as before but now with the looming or actual threat of these
harmful collateral consequences being felt as well. Again, in contrast
to the viewpoint that repeated re-borrowing may be consciously intended
as a means of addressing financial shortfalls over a longer period of
time, the consumer groups contended that extended loan sequences often
reflect the inherent pressures of the initial financial need, now
exacerbated by having to confront unaffordable payments on the new
loan. And many individual users of such loans described their own
negative experiences in ways that were consistent with the difficult
situations and outcomes that can result from having to deal with
unaffordable payments.
Once again, the factual observations presented in the proposal on
the kinds of collateral harms that can arise for payday and title
borrowers who struggle to pursue potential alternatives to making
unaffordable payments, as opposed to defaulting on these loans, were
not seriously contested. The disagreement among the commenters was
instead over the inferences to be drawn from these facts in context of
other facts and potential benefits that they presented as bearing on
their views of overall consumer welfare, and thus the broader
conclusions to be drawn for purposes of deciding whether or not to
support the proposed rule. Those contextual matters are important and
will be discussed further in Sec. 1041.4 below.
g. Harms Remain Under Existing Regulatory Approaches
As stated in the proposal, based on the Bureau's analysis and
outreach, the harms that it has observed from payday loans, single-
payment vehicle title loans, and other covered short-term loans persist
in these markets despite existing regulatory frameworks. This
formulation, of course, is something of a tautology, since if the harms
the Bureau perceives to exist do in fact exist, they clearly do so
despite the impact of existing regulatory frameworks that fail to
prevent or mitigate them. Nonetheless, in the proposal the Bureau
stated that existing regulatory frameworks in those States that have
authorized payday and/or title lending still leave many consumers
vulnerable to the specific harms discussed above relating to default,
delinquency, re-borrowing, and the collateral harms that result from
attempting to avoid these other injuries by making unaffordable
payments.
Several different factors have complicated State efforts to
effectively apply their regulatory frameworks to payday and title
loans. For example, lenders may adjust their product offerings or their
licensing status to
[[Page 54577]]
avoid State law restrictions, such as by shifting from payday loans to
vehicle title or installment loans or open-end credit or by obtaining
licenses under State mortgage lending laws.\597\ As noted earlier, the
State regulatory frameworks grew up around the pre-existing models of
single-payment payday loans, but have evolved in certain respects over
the past two decades. States also have faced challenges in applying
their laws to certain online lenders, including lenders claiming Tribal
affiliation or offshore lenders.\598\
---------------------------------------------------------------------------
\597\ As discussed in part II, payday lenders in Ohio began
making loans under the State's Mortgage Loan Act and Credit Service
Organization Act following the 2008 adoption of the Short-Term
Lender Act, which limited interest and fees to 28 percent APR among
other requirements, and a public referendum the same year voting
down the reinstatement of the State's Check-Cashing Lender Law,
under which payday lenders had been making loans at higher rates.
\598\ A recent report summarizes these legal actions and
advisory notices. See Diane Standaert & Brandon Coleman, Ending the
Cycle of Evasion: Effective State and Federal Payday Lending
Enforcement (2015), http://www.responsiblelending.org/payday-lending/research-analysis/crl_payday_enforcement_brief_nov2015.pdf.
---------------------------------------------------------------------------
As discussed above in part II, States have adopted a variety of
different approaches for regulating short-term loans. For example, 15
States and the District of Columbia have interest rate caps or other
restrictions that, in effect, prohibit payday lending and thereby limit
access to this form of credit. Although consumers in these States may
still be exposed to potential harms from short-term lending, such as
online loans made by lenders that claim immunity from these State laws
or from loans obtained in neighboring States, these provisions provide
strong protections for consumers by substantially reducing their
exposure to the harms they can incur from these loans. Again, as
discussed above, these harms flow from the term and the single-payment
structure of these loans, which along with certain lender practices
expose a substantial population of consumers to the risks and harms
they experience, such as ending up in extended loan sequences.
As explained in greater detail in part II above and in the section-
by-section analysis for Sec. 1041.5, the 35 States that permit payday
loans in some form have taken a variety of different approaches to
regulating such loans. Some States have restrictions on rollovers or
other re-borrowing. Among other things, these restrictions may include
caps on the total number of permissible loans in a given period, or
cooling-off periods between loans. Some States prohibit a lender from
making a payday loan to a borrower who already has an outstanding
payday loan.
Some States have adopted provisions with minimum income
requirements. For example, some States provide that a payday loan
cannot exceed a percentage (most commonly 25 percent) of a consumer's
gross monthly income. Some State payday or title lending statutes
require that the lender consider a consumer's ability to repay the loan
before making a loan, though none of them specifies what steps lenders
must take to determine whether the consumer has the ability to repay a
loan. Some States require that consumers have the opportunity to repay
a short-term loan through an extended payment plan over the course of a
longer period of time. And some jurisdictions require lenders to
provide specific disclosures in order to alert borrowers of potential
risks.
While the proposal noted that these provisions may have been
designed to target some of the same or similar potential harms
identified above, these provisions do not appear to have had a
significant impact on reducing the incidences of re-borrowing and other
harms that confront consumers of these loans. In particular, as
discussed above, the Bureau's primary concern about payday and title
loans is that many consumers end up re-borrowing over and over again,
turning what was ostensibly a short-term loan into a long-term cycle of
debt with many negative collateral consequences. The Bureau's analysis
of borrowing patterns in different States that permit payday loans
indicates that most States have very similar rates of re-borrowing,
with about 80 percent of loans followed by another loan within 30 days,
regardless of the terms of the specific restrictions that are in
place.\599\
---------------------------------------------------------------------------
\599\ CFPB Report on Supplemental Findings, at Chapter 4.
---------------------------------------------------------------------------
In particular, laws that prevent direct rollovers of payday loans,
as well as laws that impose very short cooling-off periods between
loans, such as Florida's prohibition on same-day re-borrowing, have had
very little impact on re-borrowing rates measured over periods longer
than one day. The 30-day re-borrowing rate in all States that prohibit
rollovers is 80 percent, and in Florida the rate is 89 percent. Some
States, however, do stand out as having substantially lower re-
borrowing rates than other States. These include Washington, which
limits borrowers to no more than eight payday loans in a rolling 12-
month period and has a 30-day re-borrowing rate of 63 percent, and
Virginia, which imposes a minimum loan length of two pay periods and
imposes a 45-day cooling-off period once a borrower has had five loans
in a rolling six-month period, and has a 30-day re-borrowing rate of 61
percent (though title loans have claimed much greater market share in
the wake of these restrictions on payday loans).
Likewise, the Bureau explained in the proposal the basis for its
view that disclosures would be insufficient to adequately reduce the
harm that consumers suffer when lenders do not reasonably determine
consumers' ability to repay the loan according to its terms, which
rested on two primary reasons. First, the Bureau noted that it is
difficult for disclosures to address the underlying incentives in this
market for lenders to encourage borrowers to re-borrow and take out
extended loan sequences. As the Bureau discussed in the proposal, the
prevailing business model in the short-term loan market involves
lenders deriving a very high percentage of their revenues from extended
loan sequences. The Bureau noted that while enhanced disclosures would
provide more information to consumers, the Bureau believed that the
single-payment structure of these loans, along with their high cost,
would cause them to remain unaffordable for most consumers. The Bureau
believed that, as a result, lenders would have no greater incentive to
underwrite them more rigorously, and lenders would remain dependent on
long-term loan sequences for revenues.
Second, the Bureau noted in the proposal that empirical evidence
suggests that disclosures may have only modest impacts on consumer
borrowing patterns for short-term loans generally and negligible
impacts on whether consumers re-borrow. The Bureau stated that evidence
from a field trial of several disclosures designed specifically to warn
of the risks and costs of re-borrowing showed that these disclosures
had a marginal effect on the total volume of payday borrowing.\600\ The
Bureau observed that its analysis of similar disclosures implemented by
the State of Texas showed a reduction in loan volume of 13 percent
after the disclosure requirement went into effect, relative to the loan
volume changes for the study period in comparison States, but further
showed that the probability of re-borrowing on a payday loan declined
by only approximately two percent once the disclosure was put in
[[Page 54578]]
place.\601\ The Bureau noted that the analysis thus tended to confirm
the fairly limited magnitude of the effects from the field trial.
---------------------------------------------------------------------------
\600\ Marianne Bertrand & Adair Morse, ``Information Disclosure,
Cognitive Biases and Payday Borrowing and Payday Borrowing,'' 66 J.
Fin. 1865 (2011), available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2011.01698.x/full.
\601\ See CFPB Report on Supplemental Findings, at 73.
---------------------------------------------------------------------------
For these reasons, the Bureau stated in the proposal that evidence
indicates the core harms to consumers in this credit market remain even
after a disclosure regime is put in place. The Bureau also repeated its
observation that consumers have a very high probability of winding up
in a very long loan sequence once they have taken out only a few loans
in a row.\602\ The Bureau noted that the contrast of the very high
likelihood that a consumer will wind up in a long-term debt cycle after
taking out only a few loans, with the nearly negligible impact of a
disclosure on consumer re-borrowing patterns, provides further evidence
of the insufficiency of disclosures to address what the Bureau
perceives to be one of the core harms to consumers here. The issues
around the sufficiency of disclosures, and whether it is likely that
further disclosures would adequately address the harms that the Bureau
has identified with payday and single-payment vehicle-title loans, are
discussed further in the section-by-section analysis for Sec. 1041.5.
---------------------------------------------------------------------------
\602\ As discussed above in Market Concerns--Underwriting, a
borrower who takes out a fourth loan in a sequence has a 66 percent
likelihood of taking out at least three more loans, for a total
sequence length of seven loans, and a 57 percent likelihood of
taking out at least six more loans, for a total sequence length of
10 loans.
---------------------------------------------------------------------------
The proposal also discussed the SBREFA process, and noted that many
participants urged the Bureau to reconsider the proposals under
consideration and to consider deferring to existing regulation of these
credit markets by the States or to adopt Federal regulations that are
modeled on the laws or regulations of certain States. In the Small
Business Review Panel Report, the Panel recommended that the Bureau
continue to consider whether regulations in place at the State level
are sufficient to address concerns about unaffordable loan payments.
The Panel also recommended that the Bureau consider whether existing
State laws and regulations could provide a model for elements of the
Federal regulation. The SBA Office of Advocacy raised similar issues
and suggested that the Bureau should defer to State payday lending
laws.
The Bureau has examined State laws closely in connection with its
work on the final rule, as discussed in part II above, and the Bureau
has taken guidance from what it has learned from its consideration of
those differing frameworks. The Bureau has also consulted with various
State regulators and State Attorneys General on these issues over the
course of its original research on these topics, its formulation of the
SBREFA framework, its conduct of the SBREFA process, its formulation of
the proposal, and its work since to finalize the rule. The Bureau has
also considered the comments that it has received from all parties,
including State regulators and State Attorneys General and the SBA
Office of Advocacy, which conflict with one another in a great many
respects on the topics and arguments that have already been addressed
in this discussion. All of this consideration of the State legal and
regulatory frameworks has been applicable to the Bureau's consideration
of how it should approach its formulation of underwriting processes,
restrictions on rollovers, and the use of cooling-off periods.
For those States with strong usury caps, of course, it bears
repeating that the Bureau is not authorized to mirror those provisions
because it is expressly barred by statute from imposing any usury cap
on these loans. The Bureau has recognized this explicit restriction and
carefully followed it in promulgating this rule, which does not
prohibit any loan from being made based on the interest rate charged on
the loan. Some of the industry commenters and trade associations have
disputed this point in connection with certain provisions of the
proposal, but have not explained how any loans are being prohibited on
that basis.
Industry participants and trade associations commented extensively
on the fact that payday and single-payment vehicle title loans are
subject to significant regulation already in the remaining States, even
without any new regulation being proposed by the Bureau. They pointed
to specific State frameworks as examples of how these products are
regulated adequately and as providing access to credit without posing
undue problems for borrowers. One trade association, for example,
specifically cited Florida's regulatory framework as allowing consumers
in that State to use such products productively and successfully, while
generating few complaints. Florida Congressional representatives made
the same point. Other commenters, including some of the State Attorneys
General, pointed to regulatory models in other States and drew similar
conclusions. The Bureau has carefully assessed these State frameworks
in considering how to respond to the comments received on the proposal
and whether and how to modify the proposal in formulating the
provisions of the final rule.
For example, despite Colorado's 2010 payday lending reforms that
set a six-month minimum loan term for payday loans and reduced the
annual percentage rates, concerns remain about sustained use and
ability to repay the loans. A recent report based on State regulator
data noted that in 2015, the average borrower ``took out 3.3 loans from
the same lender over the course of the year, with a growing percentage
of consumers (14.7 percent) being in debt every day for 12 consecutive
months. Also one in four payday loans show signs of distress by
delinquency or default.'' \603\
---------------------------------------------------------------------------
\603\ Delvin Davis, Center for Responsible Lending, ``Mile High
Money: Payday Stores Target Colorado Communities of Color,'' at 1
(Aug. 2017), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl-mile-high-money-aug2017.pdf.
---------------------------------------------------------------------------
In 2010, the State of Washington amended its payday lending law to
limit borrowers to no more than eight loans in a rolling 12-month
period, add an extended repayment plan that borrowers could take any
time before default, and add a database that all lenders must use to
report loans and check before new loans are made.\604\ The State
regulator has issued yearly reports; with the most recent report being
from calendar year 2015. There is no specific ability-to-repay
requirement other than the loan amount cannot exceed 30 percent of the
borrower's gross monthly income or a maximum of $700 with no review of
expenses.\605\ The 2015 report contains three highlights in particular.
First, borrowing patterns continue to reflect a small number of
borrowers responsible for most of the State's payday loans. For payday
loans originated in calendar year 2015, about one-quarter (25.38
percent) of borrowers took out about half (49.59 percent) of the total
loans.\606\ Second, about a quarter of borrowers--26.62 percent--
reached the eight-loan cap during 2015.\607\ Note that the cap is
[[Page 54579]]
based on a rolling 12-month period rather than a calendar year and some
of these loans may have been originated in 2014. Also, note that some
borrowers may be seeking loans online through unlicensed lenders that
are not included in the State's database. Third, 12.35 percent of loans
were converted to an extended repayment plan (known as an installment
loan plan) at some point in 2015. Borrowers may convert a payday loan
to an installment loan plan at any time prior to default at no charge,
with 90 to 180 days to repay based on the loan amount.\608\
---------------------------------------------------------------------------
\604\ All references are to the current Washington State
Department of Financial Institutions report except where otherwise
noted. Wash. State Dep't. of Fin. Insts., ``2015 Payday Lending
Report,'' at 4 (2015), available at http://www.dfi.wa.gov/sites/default/files/reports/2015-payday-lending-report.pdf.
\605\ Wash. State Dep't. of Fin. Insts., ``2015 Payday Lending
Report,'' at 4 (2015), available at http://www.dfi.wa.gov/sites/default/files/reports/2015-payday-lending-report.pdf.
\606\ Wash. State Dep't. of Fin. Insts., ``2015 Payday Lending
Report,'' at 8 (2015), available at http://www.dfi.wa.gov/sites/default/files/reports/2015-payday-lending-report.pdf; (Borrower Loan
Frequency table).
\607\ Wash. State Dep't. of Fin. Insts., ``2015 Payday Lending
Report,'' at 7 (2015), available at http://www.dfi.wa.gov/sites/default/files/reports/2015-payday-lending-report.pdf.
\608\ Wash. State Dep't. of Fin. Insts., ``2015 Payday Lending
Report,'' at 4, 7 (2015), available at http://www.dfi.wa.gov/sites/default/files/reports/2015-payday-lending-report.pdf.
---------------------------------------------------------------------------
Missouri's regulatory framework offers an illustrative example that
bears on the Bureau's decision to require specific underwriting
criteria under Sec. 1041.5, a set of requirements that many commenters
have criticized as unduly prescriptive and unnecessarily burdensome. By
contrast, Missouri law requires small-dollar lenders to consider the
borrower's financial ability to reasonably repay under the terms of the
loan contract, but does not specify how lenders may go about satisfying
this requirement.\609\ The unsatisfactory result of this law, which
fails to specify how lenders must satisfy the ability-to-repay
requirement and thus allows lenders to exercise latitude in this
regard, was starkly illustrated in a recent Missouri case that
addressed the practical results of this framework. In a debt collection
case, an appeals court judge concluded that the law, ``which was
designed for unsecured loans of five hundred dollars or less, has
through the allowance of practically unlimited interest rates charged
on the loans allowed the companies that provide these loans to use the
court system to collect amounts from debtors far beyond anything that
could be deemed consistent with the statute's original purpose,'' thus
providing ``a clear example of predatory lending.'' \610\ The judge
then presented examples from the factual record in the case as follows:
---------------------------------------------------------------------------
\609\ Mo. Rev. Stat. sec. 408.500(7).
\610\ Hollins v. Capital Solutions Investments, Inc., 477 SW.3d
19, 27 (Mo. Ct. App. 2015) (Dowd, J., concurring).
---------------------------------------------------------------------------
``Class member, D.W., took out a $100 loan from CSI. A judgment was
entered against him for $705.18; the garnishment is still pending. So
far, $3174.81 has been collected, and a balance of $4105.77 remains.
Class member, S.S., took out an $80 loan from CSI. A judgment was
entered against her for $2137.68; the garnishment is still pending. So
far, $5346.41 has been collected, and a balance of $19,643.48 remains.
Class member, C.R., took out a $155 loan from CSI. A judgment was
entered against her for $1686.93; the garnishment is still pending. So
far, $9566.15 has been collected, and a balance of $2162.07 remains.''
\611\
---------------------------------------------------------------------------
\611\ Id.
---------------------------------------------------------------------------
The judge went on to provide four other similar examples, all of
which were apparently deemed by the lender to satisfy its own
conception of an ability-to-repay standard, even though the judge found
that ``the amount the lenders are collecting or are attempting to
collect on these types of loans shocks the conscience'' and were
``beyond the ability of many debtors to ever pay off.'' \612\
---------------------------------------------------------------------------
\612\ Id. at 27-28.
---------------------------------------------------------------------------
In addition, many industry participants and trade associations
pointed out that payday and title lending are already regulated at the
Federal level to some degree. They noted, for example, that the
following laws already apply to such loans: the Truth in Lending Act,
the Electronic Transfer Act, the Equal Credit Opportunity Act, the Fair
Debt Collection Practices Act, and the Gramm-Leach-Bliley Act, among
others. Many of these statutes have implementing regulations as well,
thus adding to the pre-existing coverage of these loans under Federal
law. And as recounted in part III, the Bureau has, in fact, engaged in
extensive supervisory and enforcement activity with respect to payday
loans and payday lenders under various provisions of the Federal
consumer laws. These commenters often recognized that the Dodd-Frank
Act confers separate and additional authority on the Bureau to
promulgate rules to address unfair, deceptive, or abusive acts or
practices, but contended that this authority should be used sparingly
in light of the many statutes and regulations that already apply to
such loans.
In contrast, the consumer groups and other commenters drew a very
different conclusion from their review of the State regulatory
frameworks. They noted that more than 90 million people live in States
without payday loans--where the State usury caps are viewed as
effectively prohibiting such loans from being made as a practical
matter--and observed that many of these consumers manage to deal with
their cash shortfalls without resort to such loans. The same commenters
contended that these consumers are not harmed by the absence of payday
loans and instead are able to serve their financial needs through other
credit products that are less risky. In their view, the alternatives
available to potential borrowers in need of short-term credit are more
diverse and more extensive than industry commenters have suggested.
This market, as they describe it, is much broader than payday and
single-payment vehicle title loans; it also comprises products such as
credit cards, subprime credit cards, certain bank and credit union
products, non-recourse pawn loans, employer funds, charitable funds,
and payment plans that are often made available by utilities and
others. They also suggested that other non-credit strategies, such as
debt counseling and credit counseling, can be productive alternatives
to payday and title loans. There was a wide gap in perspectives between
these consumer groups and the industry commenters, who generally
contended that these borrowers have a very limited range of alternative
sources of credit available to them, other than payday and title loans,
and are adversely affected when they lack access to these types of
covered short-term loans. This disagreement is important and is
considered further in the section-by-section analysis for Sec. 1041.4
below in the discussions of unfairness and abusiveness.
In sum, the Bureau has considered all of the comments received
about the effects of the existing legal and regulatory frameworks,
including the State frameworks, on the issues addressed in the
proposal. Based on the Bureau's analysis of the factual data as noted
above, the regulatory frameworks in most States that allow and regulate
payday, title, and other covered short-term loans do not appear to have
had a significant impact on reducing the amounts of default,
delinquency, re-borrowing, and the other collateral harms from making
unaffordable payments that confront consumers of these loans. Nor have
other existing regulatory frameworks had a significant impact in
mitigating those harms to consumers. For these and the other reasons
discussed above, the Bureau concludes that federal intervention in
these markets is warranted at this time.
Longer-Term Balloon-Payment Loans
As stated in the proposal, some longer-term payday installment
loans and vehicle title loans are structured either to be repaid in a
single lump-sum payment or to require a large balloon payment, often as
a final payment of all principal due following a series of smaller
interest-only payments. Unsurprisingly, many consumers find making such
a payment as challenging as making the single payment under a
[[Page 54580]]
traditional, two-week payday loan, and such loans frequently result in
default or re-borrowing.
The Bureau concludes that consumers are likely to be adversely
affected by the practice of making these loans without reasonably
assessing the borrower's ability to repay the loan while paying for
basic living expenses and other major financial obligations. And while
there does not appear to be a large market of longer-term balloon-
payment loans today, the Bureau is concerned that the market for such
loans might grow if it only regulated the underwriting of covered
short-term loans. Based on the evolution in small-dollar loan markets
after the Military Lending Act was enacted and the initial regulations
implementing the MLA were adopted, the Bureau is concerned that lenders
would gravitate toward making non-underwritten balloon-payment loans
that slightly exceed the time limits in the definition for covered
short-term loans, resulting in similar risks and harms to consumers
from default, delinquency, re-borrowing, and the collateral
consequences of forgoing basic living expenses or major financial
obligations to avoid default.
The Bureau received comments specifically on covered longer-term
loans involving balloon payments. Several industry commenters stated
that the Bureau's concerns about re-borrowing for covered longer-term
loans should have focused primarily on loans with balloon payments, and
argued that any restrictions should thus be limited to balloon-payment
loans. The Bureau agrees with these commenters that the re-borrowing
concerns with these loans are similar to the Bureau's concerns
regarding covered short-term loans, and highlight similar problems from
making covered longer-term balloon-payment loans without reasonably
assessing the borrower's ability to repay. The thrust of these industry
comments thus has tended to reinforce the judgment the Bureau has now
made to address the underwriting of covered longer-term balloon-payment
loans in this rule.\613\
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\613\ The Bureau acknowledges that its determination to address
the underwriting of all covered longer-term balloon-payment loans in
the final rule does represent an expansion of coverage over the
proposal in certain respects, which are that it would cover all such
loans regardless of their cost, and regardless of whether the lender
obtained a leveraged payment mechanism or vehicle security. Given
that the prevalence of these kinds of loans with a balloon-payment
structure is limited, however, the Bureau finds from its experience
and analysis of these loan markets that the incidence of low-cost
longer-term balloon-payment loans (or high-cost longer-term balloon-
payment loans that do not have a leveraged payment mechanism or
vehicle security) is relatively insignificant.
---------------------------------------------------------------------------
As discussed more fully in the section-by-section analysis of
Sec. Sec. 1041.2(a)(7) and 1041.3(b)(2) of the final rule, the Bureau
had proposed to define a covered longer-term balloon-payment loan to
mean a covered longer-term loan that, in essence, is repayable either
in a single lump-sum payment or requires at least one payment that is
more than twice as large as any other payment.\614\ After consideration
of comments received concerning whether to maintain the proposal's
approach to limiting coverage of such balloon-payment structures to
those products that exceed a rate threshold and involved the taking of
a leveraged payment mechanism or vehicle security, the Bureau has
decided to adopt a more expansive definition that includes all such
payment structures regardless of price or other factors, unless they
are specifically excluded or exempted under Sec. 1041.3 of the final
rule.
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\614\ To be precise, the term ``covered longer-term balloon-
payment loan'' is defined in Sec. 1041.2(a)(7) of the final rule to
mean a loan described in Sec. 1041.2(b)(2) of the final rule, which
is a covered loan that is not a covered short-term loan and: for
closed-end credit, the consumer is required to repay the entire
balance of the loan in a single payment more than 45 days after
consummation, is required to repay substantially the entire amount
of any advance in a single payment more than 45 days after the
advance, or is required to pay at least one payment that is more
than twice as large as any other payment(s); or for open-end credit,
the consumer is required to repay substantially the entire amount of
any advance at the end of a payment billing cycle that exceeds 45
days, or the credit plan is structured such that paying the required
minimum payments may not fully amortize the outstanding balance by a
specified date or time, and the amount of the final payment to repay
the outstanding balance at such time could be more than twice the
amount of other minimum payments under the plan. Id.
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Because relatively few covered longer-term balloon-payment loans
appear in the market today, the Bureau is supplementing its analysis in
this section with relevant information it has on related types of
covered longer-term loans--such as hybrid payday loans, payday
installment loans, and vehicle title installment loans. Although these
types of loans would not necessarily involve balloon payments per se,
the Bureau finds no reason to expect that matters such as borrower
characteristics and circumstances of borrowing are likely to differ
substantially as between borrowers of longer-term title loans
generally, for example, and borrowers of such loans with a balloon-
payment structure. The Bureau concludes as follows:
Lower-income, lower-savings consumers in financial
difficulty. While there is less research available about the consumers
who use these products as compared to covered short-term loan products,
available information suggests that consumers who use hybrid payday,
payday installment, and vehicle title installment loans also tend to
come frequently from lower- or moderate-income households, have little
savings or available credit, and have been turned away from other
credit products. Their reasons for borrowing and use of loan proceeds
are also generally consistent with those of short-term borrowers.
Ability-to-collect business models. Lenders of most
covered longer-term loans have built their business model on their
ability to collect, rather than the consumers' ability to repay the
loans. Specifically, these lenders generally screen for fraud risk but
do not consider consumers' expenses to determine whether a loan is
tailored to what the consumers can actually afford. They tend to rely
heavily on pricing structures and on leverage over the consumer's bank
account or vehicle title to protect their own interests, even when the
loans prove unaffordable for consumers. Lenders may continue receiving
payments even when the consumer is left unable to meet her basic living
expenses or major financial obligations. Again, though this tends to be
the case for borrowers of covered longer-term loans, it is even more
likely to be true of such borrowers if their loans have a balloon-
payment structure.
Very high default rates. Defaults are a concern with
covered longer-term loans generally, and especially so if those loans
reflect a balloon-payment structure. In data from one lender that the
Bureau analyzed, about 60 percent of balloon-payment installment loans
result in default or refinancing. In general, borrowers experienced
very high levels of delinquency and default--in some cases the default
rate was over 50 percent at the loan sequence level. Prior to reaching
the point of default, borrowers can be exposed to a variety of harms
whose likelihood and magnitude are substantially increased because of
leveraged payment mechanisms or vehicle security relative to similar
loans without these features.
Re-borrowing. The combination of leveraged payment
mechanism or vehicle security with an unaffordable balloon payment can
compel consumers to re-borrow. They will often have to engage in costly
re-borrowing when they are unable to repay the entire loan all at once
and extraction of the unaffordable loan payment would leave them unable
to cover basic living expenses or major financial obligations.
Consumers do not understand the risks. The Bureau
concludes that borrowers do not fully understand or
[[Page 54581]]
anticipate the consequences that are likely to occur when they take out
covered longer-term balloon-payment loans, including both the high
likelihood of default and the degree of collateral damage that can
occur in connection with unaffordable loans.
a. Borrower Characteristics and Circumstances of Borrowing
Stand-alone data specifically about payday installment and vehicle
title installment borrowers is less robust than for borrowers of
covered short-term loans, as discussed above. Yet a number of sources
provide combined data for both categories. Both the unique and combined
sources suggest that borrowers in these markets generally have low-to-
moderate incomes and poor credit histories. Their reasons for borrowing
and use of loan proceeds are also generally consistent with those of
covered short-term borrowers.
1. Borrower Characteristics
As described above, typical payday borrowers have low average
incomes ($25,000 to $30,000), poor credit histories, and have often
repeatedly sought credit in the months leading up to taking out a
payday loan.\615\ Given the overlap in the set of firms offering these
loans, the similar pricing of the products, and certain similarities in
the structure of the products (e.g., the high cost and the
synchronization of payment due dates with borrower paydays or next
deposits of income), the Bureau finds that the characteristics and
circumstances of payday installment borrowers are likely to be very
similar to those of short-term payday borrowers. To the extent data is
available limited to payday installment borrowers, the data confirms
this view.
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\615\ Fed. Deposit Ins. Corp., ``2013 FDIC National Survey of
Unbanked and Underbanked Households'' at 15-17 (Oct. 2014),
available at https://www.fdic.gov/https://www.fdic.gov/householdsurvey/2013/householdsurvey/2013/. See also Gregory
Elliehausen, ``An Analysis of Consumers' Use of Payday Loans,'' at
27 (Geo. Wash. Sch. of Bus., Monograph No. 41, 2009), available at
https://www.researchgate.net/publication/237554300_AN_ANALYSIS_OF_CONSUMERS%27_USE_OF_PAYDAY_LOANS (61percent
of borrowers have household income under $40,000); Jonathan Zinman,
``Restricting Consumer Credit Access: Household Survey Evidence on
Effects Around the Oregon Rate Cap,'' (Dartmouth College, 2008),
available at http://www.dartmouth.edu/~jzinman/Papers/
Zinman_RestrictingAccess_oct08.pdf.
---------------------------------------------------------------------------
For example, from a study of over one million high-cost loans made
by four payday installment lenders, both storefront and online, median
borrower gross annual income was reported to be $35,057.\616\
Similarly, administrative data from Colorado and Illinois indicate that
60 percent of the payday installment borrowers in those States have
income of $30,000 or below. And a study of online payday installment
borrowers, using data from a specialty consumer reporting agency, found
a median income of $30,000 and an average VantageScore of 523; each of
these was essentially identical as between the levels for storefront
payday borrowers and for online payday borrowers.\617\
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\616\ Howard Beales & Anand Goel, ``Small Dollar Installment
Loans: An Empirical Analysis,'' at 12 tbl. 1 (Geo. Wash. Sch. of
Bus., 2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581667.
\617\ nonPrime101, ``Report 8: Can Storefront Payday Borrowers
Become Installment Loan Borrowers?,'' at 5, 7 (2015), available at
https://www.nonprime101.com/blog/can-storefront-payday-borrowers-become-installment-loan-borrowers/.
---------------------------------------------------------------------------
The information about vehicle title borrowers that the Bureau has
reviewed does not distinguish between single-payment and installment
vehicle title borrowers. For the same reasons that the Bureau concludes
that the demographic data with respect to short-term payday borrowers
can be extrapolated to payday installment borrowers, the Bureau also
finds that the demographic data is likely to be similar as between
short-term vehicle title borrowers and vehicle title installment
borrowers. As discussed above, vehicle-title borrowers across all
categories tend to be low-income or moderate-income, with 56 percent
having reported incomes below $30,000, and are disproportionately
racial and ethnic minorities or members of female-headed
households.\618\
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\618\ Fed. Deposit Ins. Corp., ``2013 FDIC National Survey of
Unbanked and Underbanked Households: Appendices,'' at appendix. D-
12a (Oct. 2014), available at https://www.fdic.gov/householdsurvey/2013/2013appendix.pdf.; Kathryn Fritzdixon et al., ``Dude, Where's
My Car Title?: The Law Behavior and Economics of Title Lending
Markets,'' 2014 U. IL L. Rev. 1013, at 1029-1030 (2014).
---------------------------------------------------------------------------
2. Circumstances of Borrowing
Again, less data is available that focuses specifically on the
circumstances of borrowing for users of payday installment and vehicle
title installment loans than is available for short-term loans, and the
data must be approached with some caution, since studies that seek to
examine why consumers took out liquidity loans or for what purpose face
a number of challenges. For example, any survey that asks about past
behavior or events runs the risk of recall errors, and the fact that
money is fungible makes this question even more complicated. For
example, a consumer who has an unexpected expense may not feel the full
effect until weeks later, depending on the timing of the unexpected
expense relative to other expenses and the receipt of income. In that
circumstance, a borrower may say that she took out the loan because of
an emergency or may say instead that the loan was taken out to cover
regular expenses.
A 2012 survey of over 1,100 users of alternative small-dollar
credit products asked borrowers separately about what precipitated the
loan and what they used the loan proceeds for.\619\ Responses were
reported for ``very short term'' and ``short term'' credit, with
``short term'' referring to non-bank installment loans and vehicle
title loans.\620\ The most common reason borrowers gave for taking out
``short term'' credit (approximately 36 percent of respondents) was ``I
had a bill for an unexpected expense (e.g., medical emergency, car
broke down).'' About 23 percent of respondents said ``I had a payment
due before my paycheck arrived,'' which the authors of the report on
the survey results interpret as a mismatch in the timing of income and
expenses, and a similar number said their general living expenses were
consistently more than their income. The use of funds most commonly
identified was to pay for routine expenses, with nearly 30 percent
reporting ``pay utility bills'' and about 20 percent reporting
``general living expenses,'' but about 25 percent said the use of the
money was ``car-related,'' either purchase or repair. In contrast,
participants who took out ``very short term'' products such as payday
and deposit advance products were somewhat more likely to cite ``I had
a bill or payment due before my paycheck arrived,'' or that their
general living expenses were consistently more than their incomes as
compared to respondents who took out ``short term'' products, though
unexpected expenses were also cited by about 30 percent of the ``very
short term'' respondents. More than 40 percent of ``very short term''
respondents also reported using the funds to pay for routine expenses,
including both paying utility bills and general living expenses.
---------------------------------------------------------------------------
\619\ Rob Levy & Joshua Sledge, ``A Complex Portrait: An
Examination of Small-Dollar Credit Consumers,'' (Ctr. for Fin.
Servs. Innovation, 2012), available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
\620\ ``Very short term'' referred to payday, pawn, and deposit
advance products offered by depository institutions. Rob Levy &
Joshua Sledge, ``A Complex Portrait: An Examination of Small-Dollar
Credit Consumers,'' at 4 (Ctr. for Fin. Servs. Innovation, 2012),
available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
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[[Page 54582]]
b. Lender Practices
1. Loan Structure
As stated in the proposal, some longer-term payday installment
loans and vehicle title loans are structured either to be repaid in a
single lump-sum payment or to require a large balloon payment, often as
a final payment of all principal due following a series of smaller
interest-only payments. Unsurprisingly, many consumers find making such
a payment as challenging as making the single payment under a
traditional, two-week payday loan, and such loans frequently result in
default or re-borrowing.
2. Failure To Assess Ability To Repay
Many lenders making longer-term balloon-payment loans--like lenders
making other types of longer-term loans--have constructed a business
model that allow them to offer loans profitably despite very high loan-
level and sequence-level default rates. Rather than assessing whether
borrowers will have the ability to repay the loans, these lenders
engage in limited up-front screening to detect potential fraud and
other ``first payment defaults,'' and otherwise rely heavily on loan
features and practices that result in consumers continuing to make
payments beyond the point at which they are affordable. These lenders
do not seek to prevent those with expenses chronically exceeding income
from taking on additional obligations in the form of payday installment
or similar loans. Lending to borrowers who cannot repay their loans
would generally not be profitable in a traditional lending market, but
the key features of these loans--leveraged payment mechanisms, vehicle
security, and high cost--turn the traditional model on its head. These
product features significantly reduce lenders' interest in ensuring
that payments under a covered longer-term balloon-payment loan are
within the consumer's ability to repay.
Some of these consumers may repay the entire loan at the expense of
suffering adverse consequences in their inability to keep up with basic
living expenses or major financial obligations. Others end up
defaulting on their loans at a point later than would otherwise be the
case, thus allowing lenders to extract additional revenue on the way
ultimately to the same adverse result. Product features that make this
possible include the ability to withdraw payments directly from a
borrower's deposit account or the leverage derived from the ability to
repossess the borrower's means of transportation to work and for other
everyday activities. The effect is especially strong when the lender
times the loan payments to coincide with deposits of the consumer's
periodic income into the account. In these cases, lenders can succeed
in extracting payments from the consumer's account even if they are not
affordable to the consumer. The lender's risk of default is reduced,
and the point at which default ultimately occurs is delayed. As a
result, the lender's incentive to invest time or effort into
determining whether the consumer will have the ability to make the loan
payments is greatly diminished.
c. Harms Spurred by Balloon-Payment Loan Structures
When these features are combined with a balloon-payment structure,
lenders can operate, presumably at a profit, even when borrowers are
defaulting on 50 percent of loan sequences. The circumstances of the
borrowers and the structure of the loans that require a large balloon
payment to be made all at once can lead to dramatic negative outcomes
for many borrowers who receive unaffordable loans because the lender
does not reasonably assess their ability to repay. The Bureau is
particularly concerned about the harms associated with re-borrowing and
refinancing; harms associated with default, including vehicle
repossession or the loss of a deposit account; and harms that flow from
borrowers forgoing basic living expenses or defaulting on other major
financial obligations as a result of making unaffordable payments on
such loans.
In the CFPB Report on Supplemental Findings, the Bureau analyzed
several aspects of the re-borrowing and refinancing behavior of
borrowers who take out vehicle title installment loans. For a longer-
term loan with a balloon payment due at the end, the data analyzed by
the Bureau demonstrated a large increase in borrowing around the time
of the balloon payment, relative to loans without a balloon-payment
feature. Further, for loans with a balloon payment, the re-borrowing
was much more likely to occur around the time the balloon payment came
due and consumers were less likely to take cash out, suggesting that
the unaffordability of the balloon payment is the primary or sole
reason for the re-borrowing or refinancing.
Specifically, about 60 percent of balloon-payment installment loans
resulted in refinancing, re-borrowing, or default. In contrast, nearly
60 percent of comparable fully-amortizing installment loans were repaid
without refinancing or re-borrowing. Moreover, the re-borrowing often
only deepened the consumer's financial distress.
Balloon payments were not only associated with a sharp uptick in
re-borrowing, but also with increased incidence of default. Notably,
the default rate for balloon-payment vehicle title installment loans
that the Bureau analyzed was about three times higher than the default
rate for comparable fully-amortizing vehicle title installment loans
offered by the same lender.
In addition to the harms discussed above, the Bureau is concerned
that borrowers who take out these loans may experience other financial
hardships as a result of making payments on unaffordable loans. Even if
there are sufficient funds in the account, extraction of the payment
through leveraged payment mechanisms or vehicle security places control
of the timing of the payment with the lender, leading to the risk that
the borrower's remaining funds will not cover their other expenses or
obligations. The resulting harms are wide-ranging and, almost by
definition, can be quite extreme. Consumers may experience knock-on
effects from their failure to meet these other obligations, such as
additional fees to resume utility services or late fees on other
obligations. This risk is further heightened when lenders time the loan
payment due dates to coincide with the consumer's receipt of income,
which is typically the case.
Furthermore, even if the consumer's account lacks sufficient funds
available to cover the required loan payment, the lender still may be
able to collect the payment from the consumer's bank by putting the
account into an overdraft position. Where that occurs, the consumer
will incur overdraft fees and, at many banks, extended overdraft fees.
When new funds are deposited into the account, those funds will go to
repay the overdraft and not be available to the consumer for other
expenses or obligations. Thus, at least certain types of covered
longer-term loans--in particular, long-term balloon-payment loans--
carry a high degree of risk that if the payment proves unaffordable,
the consumer will still be forced to repay the loan and incur further
adverse effects, such as penalty fees or legal actions such as vehicle
repossession or eviction.
The Bureau is not able to directly observe the harms borrowers
suffer from making unaffordable payments. The presence of a leveraged
payment mechanism or vehicle security, however, each make it highly
likely that borrowers who are struggling to pay back the loan will
suffer these harms. The very high rates of default on these
[[Page 54583]]
loans means that many borrowers do struggle to repay these loans, and
it is therefore reasonable to infer that many borrowers are also
suffering harms from making unaffordable payments.\621\
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\621\ Wage assignments represent a particularly extreme form of
a lender taking the control of a borrower's funds away from a
borrower. When wages are assigned to the lender, the lender does not
even need to go through the process of submitting a request for
payment to the borrower's financial institution; the money is simply
forwarded to the lender without ever passing through the borrower's
hands. The Bureau is concerned that where loan agreements provide
for wage assignments, a lender can continue to obtain payment as
long as the consumer receives income, even if the consumer does not
have the ability to repay the loan while meeting her major financial
obligations and basic living expenses. This concern applies equally
to contract provisions that would require the consumer to repay the
loan through payroll deductions or deductions from other sources of
income, as such provisions would operate in essentially the same way
to extract unaffordable payments. These approaches raise concerns
that go beyond the scope of this rule, and the Bureau will continue
to scrutinize the use of wage assignments in connection with longer-
term loans not addressed by the final rule, using its supervision
and enforcement authority to identify and address unfair, deceptive,
or abusive acts or practices.
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d. Consumer Expectations and Understanding
The Bureau is concerned about these negative consequences for
consumers that flow from covered longer-term balloon-payment loans made
without reasonably assessing the borrower's ability to repay, because
there is strong reason to believe that consumers do not understand the
likelihood of the risk that such loans will prove unaffordable or the
likelihood and extent of the adverse collateral consequences of such
unaffordable loans.
As an initial matter, the Bureau finds that many consumers fail to
understand that lenders making longer-term balloon-payment loans--like
lenders making other types of longer-term loans--do not evaluate their
ability to repay their loans and instead have built business models
that tolerate default rates well in excess of 30 percent, even after
many consumers have incurred the further costs of re-borrowing. While
the Bureau is unaware of any borrower surveys in these two markets,
these two conditions are directly contrary to the practices of lenders
in nearly all other credit markets--including other subprime lenders.
The Bureau has observed that most borrowers are unlikely to take
out a loan they expect to default on, and hence the fact that at least
one in three sequences ends in default strongly suggests that borrowers
do not understand the degree of risk to which they are exposed with
regard to such negative outcomes as default or loss of their vehicle,
re-borrowing in connection with unaffordable loans, or having to forgo
basic living expenses or major financial obligations. Even if consumers
did understand that lenders offering longer-term balloon-payment loans
were largely uninterested in their ability to repay, consumers would
still be hindered in their ability to anticipate the risks associated
with these loans. As discussed above, most borrowers taking out longer-
term loans are already in financial distress.\622\ Many have had a
recent unexpected expense, like a car repair or a decline in income, or
they may have chronic problems in making ends meet. Even when not
facing a crisis, research shows that consumers tend to underestimate
their near-term expenditures \623\ and, when estimating how much
financial ``slack'' they will have in the future, discount even the
expenditures they do expect to incur.\624\ Consumers also tend to
underestimate volatility in their own earnings and expenses, especially
the risk of unusually low income or high expenses. Such optimism bias
tends to have a greater effect when consumers are projecting their
income and expenses over longer periods.\625\ Finally, in addition to
gaps in consumer expectations about the likelihood that these loans
will generally prove unaffordable, the Bureau observes that consumers
underestimate the potential damage from default such as secondary fees,
loss of vehicle or loss of account, which may tend to cause consumers
to underestimate degree of harm that could occur if a loan proved
unaffordable.
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\622\ Rob Levy & Joshua Sledge, ``A Complex Portrait: An
Examination of Small-Dollar Credit Consumers,'' at 12 chart 3 (Ctr.
for Fin. Servs. Innovation, 2012), available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
\623\ Gulden Ulkuman et al., ``Will I Spend More in 12 Months or
a Year? The Effects of Ease of Estimation and Confidence on Budget
Estimates,'' 35 J. of Consumer Research 245, at 245-246 (2008).;
Johanna Peetz & Roger Buehler, ``Is the A Budget Fallacy? The Role
of Savings Goals in the Prediction of Personal Spending,'' 34
Personality and Social Psychol. Bull. 1579 (2009); Johanna Peetz &
Roger Buehler, ``When Distance Pays Off: The Role of Construal Level
in Spending,'' Predictions, 48 J. of Experimental Soc. Psychol. 395
(2012).
\624\ Jonathan Z. Bermann et al., ``2015 Expense Neglect in
Forecasting Personal Finances,'' 53 J. of Marketing Res. 535 (2016).
\625\ As noted elsewhere, this discussion is not dependent on a
particular endorsement of the tenets of behavioral economics and is
likewise consistent with economic models based on rational
expectations as applied in the circumstances of the kinds of
situations faced by the borrowers of such loans.
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In sum, the Bureau's analysis of longer-term balloon-payment loans,
as supplemented by its analysis of related types of longer-term loans,
indicates that many consumers are unable to appreciate the likelihood
of the risk and the magnitude of the harm they face from such loans if
they are made on unaffordable terms. This is likely to be the case, in
particular, with covered longer-term balloon-payment loans made without
reasonably assessing the borrower's ability to repay the loan according
to its terms.
Section 1041.4 Identification of Unfair and Abusive Practice--
Underwriting Preliminary Discussion on Covered Longer-Term Balloon-
Payment Loans
The bulk of the Bureau's analysis below is tailored toward covered
short-term loans because those loans are the Bureau's primary source of
concern, and the market for which the Bureau has the most evidence.
However, the Bureau's statement of the unfair and abusive practice in
Sec. 1041.4 of the final rule also encompasses covered longer-term
balloon-payment loans as defined in Sec. 1041.2(a)(7) of the final
rule. Accordingly, these loans, like covered short-term loans, are
subject to both the underwriting and payment requirements of the final
rule.
The Bureau does not believe that currently there is a particularly
large market for these loans, which is why most of the Bureau's
evidence is focused on covered short-term loans. But as described above
in Market Concerns--Underwriting, where the Bureau has observed covered
longer-term loans involving balloon payments for which the lender does
not assess borrowers' ability to repay before making the loan, it has
seen the same type of consumer harms and other circumstances that the
Bureau has observed when lenders fail to assess ability to repay before
making covered short-term loans. Indeed, the Bureau's analysis of
longer-term balloon-payment loans in the market for vehicle title loans
found that borrowers experienced high default rates--notably higher
than for similar loans with amortizing installment payments.\626\
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\626\ Rather than elongate the section-by-section analysis of
Sec. 1041.4 by engaging in a separate and distinct analysis of each
prong of unfairness and abusiveness for covered longer-term balloon-
payment loans, the Bureau would simply note that much of the general
analysis is basically the same, except that the substantial risks
and harms to consumers of high levels of re-borrowing with
unaffordable covered short-term loans would be analogized to the
substantial risks and harms to consumers of high levels of defaults
with unaffordable covered longer-term balloon-payment loans.
---------------------------------------------------------------------------
If the Bureau were to finalize this rule without including longer-
term balloon-payment loans, it also has great concern that the market
for longer-term balloon-
[[Page 54584]]
payment loans, which is currently quite small, could expand
dramatically if lenders were to begin to make efforts to circumvent its
provisions by making these loans without assessing borrowers' ability
to repay. The result would be that the same type of unfair and abusive
practice (just with a slightly different credit product) would persist
and impose similar harms on consumers.
This scenario is also more than mere speculation. The Military
Lending Act was enacted in 2006 and imposed a 36 percent interest-rate
cap on certain loans made to servicemembers and their dependents.\627\
Rules to implement its provisions were adopted,\628\ and the small-
dollar loan industry, in particular, went to some lengths to circumvent
the provisions of those rules by making changes in their loan products,
such as modifying terms and conditions and extending the duration of
such loans.\629\ The resulting evasion of the rules was successful
enough that Congress found it necessary to revisit the law and direct
that new rules be adopted to close loopholes that the prior rules had
created, which had undermined the purposes of the Act.\630\ The new
regulations were adopted in July 2015 and are now in effect.\631\
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\627\ Public Law 109-364, 120 Stat. 2266 (2006).
\628\ 72 FR 50580 (Aug. 31, 2007).
\629\ 79 FR 58602, 58602-06 (Sept. 29, 2014).
\630\ Public Law 112-239, 126 Stat. 1785 (2013).
\631\ 80 FR 43560 (July 22, 2015).
---------------------------------------------------------------------------
The fact of this recent experience in this very industry
underscores the Bureau's concern that applying the underwriting
criteria of this rule to covered longer-term balloon-payment loans is
necessary to effectuate its purpose to protect consumers. This point
reinforces the Bureau's view, based on the limited evidence of the
small size of the market currently existing for these loans, that the
analysis below would apply to covered longer-term balloon-payment loans
as well as to covered short-term loans if that market were to expand.
Thus, the Bureau has made the judgment to similarly regulate covered
longer-term balloon-payment loans.
The Bureau did not receive many comments on just the specific
portion of the Bureau's proposal about covered longer-term loans
involving balloon payments. However, the Bureau did receive a few.
Several industry commenters stated that the Bureau's concerns about re-
borrowing for covered longer-term loans should have focused primarily
on loans with balloon payments, and argued that any restrictions should
thus be limited to balloon-payment loans. These commenters were correct
that the Bureau's concerns regarding re-borrowing, which are similar to
the Bureau's concerns regarding covered short-term loans, were focused
primarily on covered longer-term balloon-payment loans. This is one of
the reasons why the Bureau is finalizing only this portion of the
proposal involving covered longer-term loans, and provides further
support for the Bureau's conclusion that the analysis below relating to
covered short-term loans is applicable to covered longer-term balloon-
payment loans as well. Having addressed this issue here, the remainder
of the discussion in this section of the unfair and abusive practice of
making loans without reasonably assessing the borrower's ability to
repay the loan according to its terms will focus exclusively on covered
short-term loans.
The Bureau's Approach in the Proposal
As the Bureau noted in the proposal, it is standard practice in
most consumer lending markets for lenders to assess whether a consumer
has the ability to repay a loan before making the loan. In certain
markets, Federal law requires this.\632\ The Bureau did not propose to
make a determination whether, as a general rule for all kinds of
credit, it is an unfair or abusive practice for any lender to make a
loan without making such a determination. Nor did the Bureau propose to
resolve that question in this rulemaking. Rather, the focus of the
subpart B of the proposed rule was on a more specific set of loans that
the Bureau has carefully studied, as discussed in more detail above in
part II and in Market Concerns--Underwriting. Based on the evidence
presented in the proposal, and pursuant to its authority under section
1031(b) of the Dodd-Frank Act, the Bureau proposed to identify it as
both an unfair practice and an abusive practice for a lender to make a
covered short-term loan without reasonably determining that the
consumer will have the ability to repay the loan under its explicit
authority to prescribe rules for ``the purpose of preventing [unfair
and abusive] acts or practices.'' \633\
---------------------------------------------------------------------------
\632\ See, e.g., Dodd-Frank Act section 1411, codified at 15
U.S.C. 1639c(a)(1); CARD Act, 15 U.S.C. 1665e; HPML Rule, 73 FR
44522, 44543 (July 30, 2008). In addition, the OCC has issued
numerous guidance documents about the potential for legal liability
and reputational risk connected with lending that does not take
account of borrowers' ability to repay. See OCC Advisory Letter
2003-3, Avoiding Predatory and Abusive Lending Practices in Brokered
and Purchased Loans (Feb. 21, 2003), available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2003/advisory-letter-2003-3.pdf; FDIC, Guidance on Supervisory Concerns
and Expectations Regarding Deposit Advance Products, 78 FR 70552
(Nov. 26, 2013); OCC, Guidance on Supervisory Concerns and
Expectations Regarding Deposit Advance Products, 78 FR 70624 (Nov.
26, 2013).
\633\ 12 U.S.C. 5531(b).
---------------------------------------------------------------------------
In this specific context, ``ability to repay'' was defined in the
proposal to mean that the consumer will have the ability to repay the
loan without re-borrowing and while meeting the consumer's major
financial obligations and basic living expenses. The Bureau had made
preliminary findings and reached preliminary conclusions about the
unfairness and the abusiveness of making these loans without such a
reasonable determination, based on the specific evidence cited in the
proposal, which is discussed further below as well as above in part II
and Market Concerns--Underwriting. The Bureau sought comment on the
evidence it had presented on these issues and on the preliminary
findings and conclusions it had reached in the proposal. It also sought
comment on whether making the kinds of loans that meet the conditions
set forth in the proposed exemption--conditions that are specifically
designed as an alternative means to protect consumers against the harms
that can result from unaffordable loans--should not be regarded as an
unfair or abusive practice.
General Comments
The Bureau received a number of general comments about the Bureau's
use of its authority to prohibit unfair, deceptive, or abusive acts or
practices (``UDAAP''). The Bureau addresses those more general comments
here, but specific comments on the prongs of unfairness or abusiveness
are found below.
Some industry participants suggested that an act or practice can
only be deemed unfair, deceptive, or abusive if there is a strong
element of wrongdoing or a sense that an unconscionable advantage has
been taken, which they asserted did not exist.
Many industry participants and trade associations attacked the
factual foundation set forth in the proposal as inadequate. And they
took particular issue with the framing of the proposal as resting on
what they viewed as mere assertions and presuppositions, not clearly
grounded in factual findings, as reflected in certain phrasings and
characterizations (or even ``slogans''). They further viewed this
preliminary foundation for the proposal as reflecting bias or
prejudgment on the part of the Bureau that improperly colored its
approach to these issues.
[[Page 54585]]
Industry participants and trade associations also highlighted the
Bureau's observation made in the proposal that ``the evidence on the
effects on consumers of access to storefront payday loans is mixed.''
They argued that the Bureau cannot rest any rulemaking that imposes a
substantial market intervention, including UDAAP rulemakings, on mixed
evidence that is not more clearly definitive of the key points at
issue. Accordingly, these commenters again contended that the Bureau
was resting its proposed rule on an insufficient factual threshold.
Bank and credit union commenters, among others, suggested that the
Bureau either lacked--or had failed to provide--data to support the
application of the abusiveness standard (or more broadly, the UDAAP
standard) in context of the kinds of short-term loans they provide,
which would be covered loans under the proposal. Here again, one
commenter cited the Bureau's reliance on ``a set of preliminary
findings'' and what it ``believes'' to be true as indicative of the
Bureau's lack of supporting data. Another suggested that loans made by
community banks that are covered under the proposed rule are not
predatory and do not perpetuate a cycle of indebtedness. This commenter
noted that community banks have developed a business model that does
not rely on rolling over loans and churning fees, that they underwrite
all of their own small loans, and that default and vehicle repossession
rates associated with these loans are very small. These commenters thus
asserted that the Bureau lacks evidence to demonstrate that their
practices associated with these loans are unfair, deceptive or abusive.
For these and other reasons, community bank and credit union commenters
strongly advocated for the Bureau to use its exemption authority to
ensure that their lending activities would not be covered under the
terms of any final rule, either in whole or in part.
Similarly, commenters asserted that the Bureau was acting
improperly by resting the proposed rule on its mere ``beliefs'' and
preliminary findings, rather than holding off until the Bureau was in a
position to render definitive conclusions on the main points at issue.
In particular, they contended that UDAAP rules governing these covered
loans could not validly be enacted until after the Bureau makes
definitive rulings based on evidence and fact.
Some commenters, comprising both industry participants and trade
associations, argued that the Dodd-Frank Act does not authorize the
Bureau to ban a ``product,'' but only to ``prescribe rules''
identifying unlawful UDAAP ``acts or practices.'' One industry
commenter argued that the Bureau had mischaracterized or ignored
relevant legal precedent that controls how the Bureau must interpret
its UDAAP authority under the Dodd-Frank Act, going so far as to say
that Bureau lawyers had a professional responsibility to correct the
record, and arguing that the Bureau does not have the authority to
invalidate entire contracts or whole products. Other commenters argued
that the proposed rule was overbroad insofar as it rested on the
sweeping conclusion that all alternative underwriting approaches would
be unable to pass muster under the unfair or abusive standards laid out
in the statute. Further, they contended that the proposed rule would
largely eliminate payday and title loans, which are sources of credit
that many consumers have long relied on, all of which would exceed the
Bureau's statutory mandate. One commenter also made the point that the
Bureau's proposal seemed inconsistent with the statutory objective of
leveling the playing field for all competitors of consumer financial
products by addressing the perceived unfairness of regulating just
these covered loans without addressing all of the products that may
have similar or equivalent features.
Many industry participants and trade associations submitted
comments that attacked the broader legal authority of the Bureau to
propose any rule governing these types of short-term loans, especially
a rule under its UDAAP authority. A few of them argued that the
Bureau's authority is narrowly constrained because the Truth in Lending
Act and its implementing regulations provide a pervasive regulatory
framework to govern consumer credit transactions. Others argued that
when Congress intended to impose ability-to-repay requirements on
specific lending markets, it did so explicitly by statute (as it did
with mortgages and credit cards), but it did not confer such explicit
authority on the Bureau to regulate payday and title loans in this
manner. As a consequence, these commenters maintained that the
expressio unius canon of statutory construction applies to deny the
Bureau any such regulatory authority.
Some commenters stated views that conflicted with those set out
above. One trade association, in particular, stated that Congress
plainly recognized the problems created by unregulated and less
regulated lenders, and for that reason conferred on the Bureau new
authority to supervise and write rules for the payday lending industry
for the first time ever at the Federal level. More generally, consumer
groups were strongly supportive of the Bureau's legal authority to
develop and finalize the proposed rule. Rather than viewing other
ability-to-repay provisions in Federal consumer law as implied negative
restrictions on the Bureau's authority, these commenters pointed to
them and others (such as the Military Lending Act) as embodying a
considerable trend of expanding public policy now supporting the
principle that consumer lending generally should be premised on the
borrower's ability to repay. They noted that, along with recent Federal
law on mortgage and credit card lending, certain States now embody this
principle in statute, and many more do so by judicial precedent. They
noted that general statements of this principle in Federal and State
law tend to define this approach as requiring the lender to establish
the borrower's ability to repay the loan while meeting basic living
expenses and without re-borrowing.
Approach in the Final Rule and Changes to Language in Sec. 1041.4
The terms ``unfair'' and ``abusive'' are defined terms in the Dodd-
Frank Act with multiple prongs. Under the Act, the Bureau cannot
determine an act or practice to be unlawful unless ``the Bureau has a
reasonable basis to conclude'' that the act or practice ``causes or is
likely to cause substantial injury to consumers which is not reasonably
avoidable by consumers'' and ``such substantial injury is not
outweighed by countervailing benefits to consumers or to competition.''
\634\ The Bureau is expressly authorized to ``consider established
public policies as evidence'' in ``determining whether an act or
practice is unfair.'' \635\ An ``abusive'' act or practice is defined,
among other things, as one that ``takes unreasonable advantage of (A) a
lack of understanding on the part of the consumer of the material
risks, costs, or conditions of the product or service; [or of] (B) the
inability of the consumer to protect the interests of the consumer in
selecting or using a consumer financial product or service.'' \636\
---------------------------------------------------------------------------
\634\ 12 U.S.C. 5531(c)(1).
\635\ 12 U.S.C. 5531(c)(2).
\636\ 12 U.S.C. 5531(d)(2)(A) and (B).
---------------------------------------------------------------------------
In the proposal, each of the specified prongs of these two terms
defined in the statute was discussed separately. Hence the comments
that were submitted on these specific legal grounds regarding the
Bureau's approach can be presented and addressed in this format as
well,
[[Page 54586]]
and that discussion is contained in the following sections. But the
more general comments on the Bureau's legal approach to developing
ability-to-repay rules under UDAAP to govern covered short-term loans,
as those comments were summarized above, can be directly addressed
here.
To begin with, the commenters' suggestion that an act or practice
can only be deemed unfair, deceptive, or abusive if there is a strong
element of wrongdoing or a sense that an unconscionable advantage has
been taken is a mischaracterization of the Bureau's UDAAP authority as
prescribed by law. Although public policy is a factor that the Bureau
may consider for purposes of identifying unfairness, both the
unfairness and abusiveness standards rest upon well-defined elements in
the Dodd-Frank Act, and a sense of wrongdoing or unconscionability is
not one of them. In fact, the FTC and Congress have explicitly rejected
the notion that agencies should be measuring whether an act is
``immoral, unethical, oppressive, or unscrupulous'' or consistent with
public policy to make unfairness findings.\637\ An abusive practice may
require that the person take ``unreasonable advantage'' of various
conditions,\638\ but that does not require any sense of
unconscionability. The commenters do not offer any compelling
justification for their position that the Bureau should, or even is
authorized to, supplement the specific statutory prongs that Congress
adopted to define the terms ``unfair'' and ``abusive'' with these
additional and loose concepts that were not incorporated in the
statute. Congress was undoubtedly aware of the unconscionability
standard when it passed the Consumer Financial Protection Act, and it
did not use the language of unconscionability to limit the unfairness
or abusiveness standards.
---------------------------------------------------------------------------
\637\ J. Howard Beales, Former Dir. of Bureau of Consumer Prot.,
``The FTC's Use of Unfairness Authority: Its Rise, Fall, and
Resurrection,'' The Marketing and Public Policy Conference (May 30,
2003).
\638\ Though taking ``unreasonable advantage'' is not a
prerequisite for an abusiveness finding if a company ``materially
interferes with the ability of a consumer to understand a term or
condition of a consumer financial product or service.'' 12 U.S.C.
5531(d)(1).
---------------------------------------------------------------------------
Some commenters attacked various preliminary findings and
conclusions set forth in the proposal by reacting to language in the
proposed rule conveying that, as is true of any proposed notice-and-
comment rulemaking, the Bureau always planned to wait to formulate and
support its final conclusions only after receiving feedback on its
proposal. The Bureau appropriately noted that various factual
statements, observations, or conclusions made in the proposal were to
be regarded as tentative until they could be and had been evaluated in
light of comments and supporting information received through the
entire rulemaking process. In fact, the Bureau is required by law to
consider and analyze the comments received before deciding whether and
how to finalize any regulations. As described in the section-by-section
analysis for Sec. 1014.4 and this preamble, now that the Bureau has
had the opportunity to consider the high volume of input that it has
received from all stakeholders, including extensive individual
involvement by members of the public, it is in a position to articulate
and justify the types of formal and definitive conclusions necessary to
support the final rule. The factual recitation presented above in the
discussion of Market Concerns--Underwriting embodies the Bureau's
presentation of and response to commenters' specific points that were
raised about these factual issues. The fact that the Bureau had
presented some of its views in the proposal as tentative thus is not
improper and was entirely appropriate at that preliminary stage of the
rulemaking process.
Some commenters took virtually the opposite tack, objecting to
statements made in the proposal, or made by the Bureau in the course of
wide-ranging discussions on other occasions, as suggesting bias and
prejudgment of certain issues underlying the proposed rule. These
objections seem to lack foundation or to be based on statements taken
out of context, given the considerable efforts the Bureau has
undertaken to process, analyze, and digest the heavy volume of comments
received and be responsive to them on the merits in formulating the
final rule. The Bureau bases its UDAAP findings on the evidence and
conclusions as discussed and now adopted in this section and in Market
Concerns--Underwriting. Those findings are more explicitly laid out
below when describing the comments and analysis that are applicable to
the distinct unfairness and abusiveness prongs.
As to the statement that the Bureau based its views on ``mixed''
evidence, in the proposal the Bureau stated that ``[i]n reviewing the
existing literature, the Bureau believes that the evidence on the
impacts of the availability of payday loans on consumer welfare is
mixed. A reasonable synthesis appears to be that payday loans benefit
consumers in certain circumstances, such as when they are hit by a
transitory shock to income or expenses, but that in more general
circumstances access to these loans makes consumer worse off. The
Bureau reiterates the point made earlier that the proposed rule would
not ban payday or other covered short-term loans, and believes that
covered short-term loans would still be available in States that allow
them to consumers facing a truly short-term need for credit.'' In other
words, the Bureau did not simply rest its preliminary findings on its
determination to take one side of a debate. Instead, the Bureau
analyzed the evidence, which naturally differed on methodology and
subjects studied, and synthesized it into a preliminary view that
payday loans benefit some consumers in certain circumstances, but
generally leave many other consumers worse off, while noting that many
of the consumers who benefited would still be able to access payday
loans under the provisions of the proposed rule.
The Bureau finds that the comments received from banks and credit
unions and their trade associations were generally well taken. Many
bank and credit union loans are likely not covered by the final rule,
because the Bureau is not finalizing the proposals on longer-term
small-dollar loans at this time. And to the extent that community banks
and credit unions make loans that would otherwise be covered on an
accommodation basis for their customers, the Bureau's use of its
exemption authority in the final rule assures that these loans also
will not be covered (of course, nonbanks making accommodation loans
would similarly be exempt).
The Bureau agrees that much of the evidence it reviewed related to
loans made by nonbanks, and not banks. However, the Bureau did review
evidence relating to Deposit Advance Products, made by banks, and
concluded that it was consistent with the evidence the Bureau had on
nonbank covered loans. Further, there appears to be no logical reason
to believe that covered short-term loans, made without assessing
borrowers' ability to repay, would impact consumers differently
depending on the lender's charter. The Bureau thus concludes that based
on the evidence it reviewed, it is appropriate to apply this rule to
the banks and credit unions that are engaged in making covered loans
that do not fall within the exemptions provided in the final rule.
Doing so is consistent with the Bureau's objective of ensuring that
``Federal consumer financial law is enforced consistently, without
regard to the status of a person
[[Page 54587]]
as a depository institution, in order to promote fair competition.''
\639\
---------------------------------------------------------------------------
\639\ 12 U.S.C. 5511(b)(4).
---------------------------------------------------------------------------
With respect to the commenter that viewed the Bureau's proposal as
inconsistent with the implicit statutory objective of leveling the
playing field for all competitors of consumer financial products
because it regulates covered loans without addressing every product
that may have similar or equivalent features, the objection is
unpersuasive. The Bureau is not required to write rules that cover
every product or market all at once, and has the authority to
prioritize taking action as it deems appropriate, so long as it has the
data and justification for doing so for each instance. For example, the
final rule does not cover the underwriting of longer-term loans. This
rulemaking also does not cover overdraft services on deposit accounts.
Both of those products are distinct from covered short-term loans and
may be the subject of separate rulemaking efforts, as well as remaining
subject to the Bureau's oversight through the exercise of its
supervisory and enforcement authority.
For commenters who argued that the proposed rule was a misuse of
the Bureau's prevention authority, or was too harsh and too
prescriptive so as to be disproportionate to the evidence of harm to
consumers that the Bureau presented in the proposal, several responses
are in order. The initial question is whether the Bureau can show in
this final rule that in identifying the practice described in Sec.
1041.4 as unfair and abusive, the Bureau acted within the scope of its
express legal authority to adopt rules to identify and prevent unfair
and abusive acts or practices--a topic that is covered in detail in the
following sections. Comments about whether the proposed ability-to-
repay requirements are consistent with the Bureau's prevention
authority are addressed in more detail below in the section-by-section
analysis of Sec. 1041.5.
The Bureau's determination that the failure of a lender to
reasonably determine the consumer's ability to repay a covered short-
term or longer-term balloon-payment loan according to its terms meets
the statutory prongs of the Bureau's ``unfair'' or ``abusive''
authority, as discussed further in the following sections, and thus the
Bureau is not imposing a ban on any ``product'' but instead is simply
prescribing rules to prevent the acts or practices so identified.
The Bureau does not agree with commenters who suggest that the
proposed underwriting rules would effectively have banned lenders from
making covered loans. The Bureau continues to believe that even under
the underwriting rules contained in the proposal, lenders would have
been able to continue to make loans to consumers who, in fact, had the
ability to repay those loans. In any event, the Bureau has reconsidered
certain aspects of the ability-to-repay underwriting provisions
presented in the proposal, in response to substantive comments that
were received on various details of the proposed underwriting approach,
which provisions are being implemented in a somewhat modified form in
Sec. 1041.5 below; and the Bureau is finalizing the alternative
framework that it has presented for making such loans without all the
underwriting criteria specified in Sec. 1041.5, subject to a cap on
how much lending could be achieved within this framework. For more
details, see the Section 1022(b)(2) Analysis in part VII below and the
section-by-section analysis for Sec. 1041.5 of the final rule.
More generally, the Bureau's rule does not invalidate whole
products.\640\ Section 1041.4 identifies an unfair and abusive practice
in the market--the making of covered short-term and longer-term loans
without reasonably determining borrowers' ability to repay the loans
according to their terms. Other sections of the rule, including
Sec. Sec. 1041.5 and 1041.6, are intended to prevent that existing
practice and the associated harms. This approach to UDAAP rulemaking
(identification and then prevention) is a consistent and
straightforward application of UDAAP precedent, as discussed further in
part IV above.
---------------------------------------------------------------------------
\640\ Commenters seem to believe that because section
1036(a)(1)(A) of the Dodd-Frank Act states it is unlawful to ``offer
or provide to a consumer any financial product or service not in
conformity with Federal consumer financial law,'' and section
1036(a)(1)(B) separately states that it is unlawful ``to engage in
any unfair, deceptive, or abusive act or practice,'' that Congress
intended to limit the Bureau's UDAAP authority such that it could
not be used to ban or invalidate products or services. This reading
ignores the definition of Federal consumer financial law, which
includes the Dodd-Frank Act itself and ``any rule or order
prescribed by the Bureau under [the Dodd-Frank Act],'' which
includes the prohibition against UDAAP as well as UDAAP rules. 12
U.S.C. 5481(14). Thus, the clear meaning of section 1036(a)(1)(A) is
to make it unlawful to ``offer or provide to a consumer any
financial product or service not in conformity'' with the
prohibition against unfair, deceptive, or abusive acts or practices
in section 1036(a)(1)(B).
---------------------------------------------------------------------------
As to whether the specified components of the ability-to-repay
determinations are disproportionate to the risks posed by such lending,
the law does not impose any such proportionality test, as long as the
statutory prongs of unfairness and abusiveness are met and the remedy
imposed bears a reasonable relationship to addressing the identified
practice. Nonetheless, it is again relevant here that, as explained in
detail below in the section-by-section analysis of Sec. 1041.5, the
final rule has incorporated changes in the specified underwriting
criteria to harmonize them more closely with those applicable to credit
cards and to render them less demanding than the ability-to-repay test
used for making mortgage loans. In particular, the Bureau has
reconsidered certain aspects of the ability-to-repay underwriting
criteria presented in the proposal in response to substantive comments
that were received on various details of its proposed approach, and as
a result these criteria are being implemented in a somewhat modified
form in Sec. 1041.5 below to take account of and respond to these
particular concerns raised by the commenters. In addition, the Bureau's
proposal presented an alternative framework for making such loans,
subject to a cap on how much lending could be achieved within this
framework. That alternative framework is being adopted in the final
rule, subject to certain modifications, as discussed further below in
Sec. 1041.6. For these reasons, the Bureau concludes that the approach
set forth in the final rule imposes a remedy that bears a reasonable
relationship to addressing the unfair and abusive practice identified
by the Bureau so that it does not persist in this market.
With respect to the commenters who asserted that the TILA or any
combination of Federal statutes and regulations impliedly divest the
Bureau of the authority to propose any rule governing these types of
short-term loans under its UDAAP authority, those provisions do not
seem able to bear the weight of the argument. On the contrary, the
Dodd-Frank Act plainly gave the Bureau the authority to ``prescribe
rules'' identifying ``unfair, deceptive, or abusive acts or practices''
that violate Federal law,\641\ even though Congress was well aware that
the TILA, in particular, already was applicable to consumer financial
products, such as the covered short-term loans addressed by this rule.
---------------------------------------------------------------------------
\641\ 12 U.S.C. 5531(b).
---------------------------------------------------------------------------
Nor has Congress given any indication that it intended to restrict
the Bureau from adopting an underwriting approach for this loan market
(ability-to-repay underwriting, which is based on the lender making a
reasonable determination that the borrower will have the ability to
repay the loan) that has found increasing Congressional
[[Page 54588]]
favor in other markets. The Bureau agrees with the commenters who took
the view that Congress has plainly recognized the importance of these
measures as a means of protecting consumers in two major consumer loan
markets (credit cards and mortgages), which tends to support rather
than undermine a finding that lending should be premised on the
borrower's ability to repay in the market for these covered loans as
well. Commenters arguing otherwise did not provide any case law in
support of this argument, and the cases cited by a few commenters
involved Congress expressly articulating its intent to limit an
agency's authority in a particular manner, or an agency acting in a
manner inconsistent with an express Congressional mandate. Neither
applies here. Further the Bureau's action is not without precedent, as
at least one other agency has issued rules to prevent unfair or
deceptive practices through an ability-to-repay requirement. Before the
Consumer Financial Protection Act was passed into law, the Federal
Reserve Board issued a rule under the Home Ownership and Equity
Protection Act imposing ability-to-repay requirements for mortgage
lenders ``to prevent unfairness, deception, and abuse.'' \642\
---------------------------------------------------------------------------
\642\ 73 FR 44522, 44522-23 (July 30, 2008).
---------------------------------------------------------------------------
For these reasons, and as discussed further in the Bureau's
analysis of each of the prongs of the statute addressed below, the
Bureau is finalizing its conclusion that it is an unfair and abusive
practice for a lender to make a covered short-term or longer-term
balloon-payment loans without reasonably determining that the borrowers
will have the ability to repay the loans according to their terms. The
Bureau made four modifications to proposed Sec. 1041.4. The Bureau has
added to the phrase ``ability to repay the loan'' the phrase
``according to its terms,'' such that the final statement of the unfair
and abusive practice is, in part, the failure to assess that the
consumer ``will have the ability to repay the loan according to its
terms.'' The addition was meant to address a common misimpression
conveyed by commenters. Many commenters claimed that borrowers who
cannot pay an originated loan nonetheless do have an ability to repay
because they can repay after some amount of re-borrowing. To further
reflect the Bureau's intent, both now and at the stage of the proposal,
that lenders should assess the borrower's ability to repay without re-
borrowing, the Bureau has added the phrase ``according to its terms.''
Second, the Bureau has added covered longer-term balloon-payment
loans to the statement of the unfair and abusive practice, as noted
above.
Third, the Bureau added official commentary, at comment 4-1,
clarifying that a lender who complies with Sec. 1041.5 in making a
covered short-term loan or a covered longer-term balloon-payment loan
has not committed the unfair and abusive practice under Sec. 1041.4.
The comment further clarifies that a lender who complies with Sec.
1041.6 in making a covered short-term loan has not committed the unfair
and abusive practice under Sec. 1041.4 and is not subject to Sec.
1041.5. This comment is added to clarify that the combination of
Sec. Sec. 1041.5 and 1041.6 are the Bureau's intended method for
preventing the practice in Sec. 1041.4, that loans made under Sec.
1041.6 are exempt from Sec. 1041.5, and thus, that if a lender
complies with Sec. 1041.5 or Sec. 1041.6, a lender would not be in
violation of Sec. 1041.4.
Fourth, during inter-agency consultations, the Bureau received
input from a Federal prudential regulator about the singular nature of
the statement of the unfair and abusive practice. The regulator
believed that supervisory or enforcement actions of this particular
rule should be based on a pattern or practice of activity, rather than
an isolated and inadvertent instance, which the regulator believed
could deter responsible lenders from making covered loans. In the
interest of inter-agency cooperation, the Bureau is adopting the
suggestion to pluralize the statement of the unfair and abusive
practice. Relatedly, the Bureau does not intend to bring supervisory or
enforcement actions against a lender for a single isolated violation of
Sec. 1041.5.
In the discussion that follows, the Bureau responds to the core
arguments raised in comments that were submitted on the Bureau's
proposal. The Bureau has organized the comments received such that all
of the core arguments presented by the commenters are addressed in the
following analysis of the statutory prongs of whether the identified
practice constitutes an ``unfair'' practice and an ``abusive''
practice.
Unfairness
As discussed in the proposal, under section 1031(c)(1) of the Dodd-
Frank Act, an act or practice is unfair if it causes or is likely to
cause substantial injury to consumers which is not reasonably avoidable
by consumers and such injury is not outweighed by countervailing
benefits to consumers or to competition. Under section 1031(c)(2), the
Bureau may consider established public policies as evidence in making
this determination. The proposal preliminarily found that it is an
unfair practice for a lender to make a covered short-term loan without
reasonably determining that the consumer will have the ability to repay
the loan. After issuing the proposal and receiving and reviewing
comments, the Bureau is now finalizing that conclusion for covered
short-term loans. The Bureau concludes that the practice causes
substantial injury in the form of default, delinquency, re-borrowing,
and collateral consequences associated with attempts to avoid the other
injuries by making unaffordable payments. The data that the Bureau
analyzed suggest that, particularly with respect to re-borrowing, the
incidence of injury is quite high. The Bureau also concludes that this
injury is not reasonably avoidable because a substantial population of
borrowers who incur injury--from default, delinquency, re-borrowing, or
other collateral consequences from making unaffordable payments--do not
anticipate the harm. Lastly, the Bureau concludes that the injury to
these borrowers outweighs the countervailing benefits to those and
other borrowers benefited by the practice and to competition. The most
notable benefit would be greater access to credit for borrowers who
lack an ability to repay, but for all the reasons discussed below, the
Bureau believes that the harms associated with getting unaffordable
credit for a substantial population of consumers outweigh any such
benefit. In addition, the Bureau reasonably anticipates that even these
borrowers are likely to retain access to some covered short-term loans
that comply with the terms of final Sec. 1014.6, subject to the
conditions that are imposed in that provision to prevent the risks and
harms associated with extended loan sequences.
Commenters presented feedback on the Bureau's preliminary
conclusions for each of the three prongs of unfairness. The Bureau
addresses the comments on those prongs in turn below.
Practice Causes or Is Likely To Cause Substantial Injury
The Bureau's Proposal
The proposal noted that the Bureau's interpretation of the various
prongs of the unfairness test is informed by the FTC Act, the FTC
Policy Statement on Unfairness, and FTC and other Federal agency
rulemakings and related case
[[Page 54589]]
law.\643\ Under these authorities, as discussed in part IV,
``substantial injury'' may consist either of a small amount of harm to
a large number of individuals or of a larger amount of harm to a
smaller number of individuals. In this case, the proposal stated that
the practice at issue causes or is likely to cause both--a substantial
number of consumers suffer a high degree of harm, and a large number of
consumers suffer a lower but still meaningful degree of harm.
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\643\ Over the past several decades, the FTC and Federal banking
regulators have promulgated a number of rules addressing acts or
practices involving financial products or services that the agencies
found to be unfair under the FTC Act (the 1994 amendments to which
codified the FTC Policy Statement on Unfairness). For example, in
the Credit Practices Rule, the FTC determined that certain features
of consumer-credit transactions were unfair, including most wage
assignments and security interests in household goods, pyramiding of
late charges, and cosigner liability. 49 FR 7740 (March 1, 1984)
(codified at 16 CFR part 444). The D.C. Circuit upheld the rule as a
permissible exercise of unfairness authority. AFSA, 767 F.2d at 957.
The Federal Reserve Board adopted a parallel rule applicable to
banks in 1985. The Federal Reserve Board's parallel rule was
codified in Regulation AA, 12 CFR part 227, subpart B. Regulation AA
has been repealed as of March 21, 2016, following the Dodd-Frank
Act's elimination of the Federal Reserve Board's rule writing
authority under the FTC Act. See 81 FR 8133 (Feb. 18, 2016). In
2009, in the HPML Rule, the Federal Reserve Board found that
disregarding a consumer's repayment ability when extending a higher-
priced mortgage loan or HOEPA loan, or failing to verify the
consumer's income, assets, and obligations used to determine
repayment ability, is an unfair practice. See 73 FR 44522 (July 30,
2008). The Federal Reserve Board relied on rulemaking authority
pursuant to TILA section 129(l)(2), 15 U.S.C. 1639(l)(2), which
incorporated the provisions of HOEPA. The Federal Reserve Board
interpreted the HOEPA unfairness standard to be informed by the FTC
Act unfairness standard. See 73 FR 44529 (July 30, 2008). That same
year, the Federal Reserve Board, the OTS, and the NCUA issued the
interagency Subprime Credit Card Practices Rule, in which the
agencies concluded that creditors were engaging in certain unfair
practices in connection with consumer credit card accounts. See 74
FR 5498 (Jan. 29, 2009). One commenter suggested that the Bureau
should not rely on AFSA but instead on Katharine Gibbs School v.
FTC, 612 F.2d 658 (2d Cir. 1979), a ruling that AFSA effectively
distinguished in a discussion of how the agency should properly go
about identifying and specifying unfair acts or practices. The
Bureau agrees with the D.C. Circuit's treatment in AFSA of the
ruling in Katharine Gibbs.
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In the proposal, the Bureau stated its judgment that the practice
of making a covered short-term loan without assessing the consumer's
ability to repay the loan according to its terms causes or is likely to
cause substantial injury. When a loan is structured to require
repayment within a short period of time, the Bureau noted that the
payments may outstrip the consumer's ability to repay since the type of
consumers who turn to these products cannot absorb large loan payments
on top of their major financial obligations and basic living expenses.
If a lender nonetheless makes such loans without determining that the
loan payments are within the consumer's ability to repay, the Bureau
stated that it appears the lender's conduct causes or is likely to
cause the injuries described below.
The proposal stated that, in the aggregate, the consumers who
suffer the greatest injury are those consumers who find it necessary to
re-borrow repeatedly and end up in exceedingly long loan sequences. As
discussed in the proposal, consumers who become trapped in long loan
sequences pay substantial fees for re-borrowing, and they usually do
not reduce the principal amount owed when they re-borrow. For example,
roughly half of payday loan sequences consist of at least three loans,
at which point, in a typical two-week loan, a storefront payday
borrower will have paid over a period of eight weeks charges equal to
60 percent or more of the loan amount--and will still owe the full
amount originally borrowed. Roughly one-third of consumers re-borrow at
least six times, which means that, after three-and-a-half months with a
typical two-week loan, the consumer will have paid to the lender a sum
equal to 100 percent of the loan amount and made no progress whatsoever
in repaying the principal. Almost one-quarter of loan sequences \644\
consist of at least 10 loans in a row, and 50 percent of all loans are
in sequences of 10 loans or more. And looking just at loans made to
borrowers who are paid weekly, biweekly, or semi-monthly, approximately
21 percent of loans are in sequences consisting of at least 20 loans.
For loans made to borrowers who are paid monthly, 42 percent of loans
are in sequences consisting of at least 10 loans. Similarly, for
single-payment vehicle title loans, the Bureau found that more than
half (56 percent) of loan sequences consist of at least four loans in a
row; over a third (36 percent) consist of seven or more loans in a row;
and about one-fourth (23 percent) had 10 or more loans.
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\644\ Note that the one-third of borrowers who re-borrow six
times and the one quarter of borrowers who re-borrow 10 times are
not separate populations. All of the borrowers who re-borrowed 10
times also re-borrowed six times.
---------------------------------------------------------------------------
The proposal further stated that consumers whose loan sequences are
shorter may still suffer meaningful injury from re-borrowing, albeit to
a lesser degree than those in longer sequences. Even consumers who re-
borrow only once or twice--and, as described in the proposal, 22
percent of payday and 23 percent of vehicle title loan sequences show
this pattern--will still incur significant costs related to re-
borrowing or rolling over the loans.
The proposal stated that the injuries resulting from default on
these loans also appeared to be significant in magnitude. As described
in the proposal, 20 percent of payday loan sequences end in default,
while 33 percent of single-payment vehicle title sequences end in
default. Because covered short-term loans (other than vehicle title
loans) are usually accompanied by some specific means of payment
collection--typically a postdated check for storefront payday loans and
an authorization to submit electronic debits to the consumer's account
for online payday loans--a default means that the lender was unable to
secure payment despite using those tools. That means a default is
typically preceded by failed attempts to secure payment, which generate
bank fees (such as NSF fees) that can put the consumer's account at
risk and lender fees (such as late fees or returned check fees) that
add to the consumer's total indebtedness. Additionally, as discussed in
the proposal, where lenders' attempts to extract money directly from
the consumer's account fail, the lender often will resort to other
collection techniques, some of which--such as repeated phone calls, in-
person visits to homes and worksites, and lawsuits leading to wage
garnishments--can inflict significant financial and psychological
damage on consumers.\645\
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\645\ As noted in part IV (Legal Authority), the D.C. Circuit
held that psychological harm can form part of the substantial injury
along with financial harm. See AFSA, 767 F.2d at 973-74, n.20
(1985).
---------------------------------------------------------------------------
The proposal stated that for consumers with a single-payment
vehicle title loan, the injury from default can be even greater. In
such cases, lenders do not have access to the consumers' bank account
but instead have the ability to repossess the consumer's vehicle. As
discussed in the proposal, almost one in five title loan sequences end
with the consumer's vehicle being repossessed. Consumers whose vehicles
are repossessed and who do not have another vehicle may end up either
wholly dependent upon public transportation or family or friends to get
to work, to shop, or to attend to personal needs. In many personal
situations and in many areas of the country, such as rural areas and
urban areas without public transportation that is reasonably available,
this means they may end up without any effective means of
transportation at all.
Finally, the proposal stated that the Bureau believes many
consumers,
[[Page 54590]]
regardless of whether they ultimately manage to pay off the loan,
suffer collateral consequences as they struggle to make payments that
are beyond their ability to repay. For instance, they may be unable to
meet their other major financial obligations or may be forced to forgo
basic living expenses as a result of prioritizing a loan payment and
other loan charges--or having it prioritized for them, in ways they
cannot control, by the lender's exercise of its leveraged payment
mechanism.
Comments Received
The Bureau received many comments from stakeholders on all sides of
these issues about whether the identified practice causes or is likely
to cause substantial injury to consumers. As an initial matter, the
Bureau received a number of comments from industry participants and
trade associations on how the Bureau should measure injury before
making a determination that a given act or practice is unfair. Several
commenters stated that injury should be measured in relation to
consumer outcomes in the absence of the act or practice (here payday
lending without assessing the borrower's ability to repay). Commenters
argued that the Bureau's identified injuries should be compared to the
alternatives without such loans, including defaulting on other
financial obligations, failing to afford basic living expenses,
forgoing the purchase of goods and services, and bouncing checks. One
commenter argued that the psychological injury from stress caused by
the threat of repossession should be offset by the injury of the stress
caused by losing electricity, heat, water, or the actual vehicle
(assuming the borrower must sell or pawn the vehicle to cover the
expense). Another commenter argued that the Bureau failed to identify
any ``metric'' for measuring harm at all, and that without doing so,
the Bureau was unable to estimate the scope of harm. Yet another
commenter argued that injury should be measured by comparing the cost
of covered loans against the cost of alternative loans.
A number of industry commenters made the similar argument that
covered loans cannot cause substantial injury because they do not hurt,
and perhaps improve, overall financial health. They presented various
surveys and studies that they viewed as providing support for this
point. They also contended that the Bureau had erred by assuming that
re-borrowing was necessarily injurious and that sustained and repeated
use of these loans was necessarily injurious. Another commenter
reported having used the Bureau's financial well-being survey to
compare the scores of its customers with the scores of similarly
situated consumers in States that restrict payday lending, and reported
finding that its customers had similar or better financial well-being
scores.
The Bureau also received a number of comments arguing that the
Bureau had overstated the scope of harm resulting from and frequency of
the re-borrowing, defaults, and repossessions caused by the practice.
Similarly, commenters argued that there was no evidence that covered
loans cause account closures or NSF fees, as stated in the proposed
rule. Those comments are addressed above in Market Concerns--
Underwriting.
Some commenters suggested that because certain small-dollar loan
products usually are underwritten, they have a much lower re-borrowing
and default rate.
Other industry commenters objected to the premise that repeat
borrowing constitutes an injury to consumers at all. They argued that
the evidence shows extended borrowing is a net benefit to consumers
because borrowers get a temporary reprieve from financial difficulty,
or because cash-strapped consumers are able to satisfy necessary
expenses. Another commenter pointed to a study finding that borrowers
who engage in protracted refinancing have higher credit scores than
borrowers who use shorter sequences. Still another commenter claimed
that re-borrowing for title loans should not be regarded as causing an
injury because re-borrowing allows consumers to avoid defaulting on
other obligations along with such harms as vehicle repossession.
Industry commenters also argued that the Bureau should only count
re-borrowing as an injury where consumers did not anticipate that
outcome. These commenters cited Professor Mann's study to suggest that
many consumers do anticipate they will need to re-borrow to the degree
that they end up actually re-borrowing. Consumer groups, by contrast,
disputed that premise both conceptually and factually. In particular,
they criticized the Mann study by noting that the harm to consumers
that results from paying ``exorbitant fees'' is incurred most acutely
by re-borrowers who pay multiple fees, whether or not they end up
defaulting.
The Bureau received a number of comments on its conclusion that
harm results from default. Some of the industry commenters argued that
the Bureau overstated the consequences of default. They contended that
many payday loans do not affect credit scores because payday lenders do
not furnish information to consumer reporting agencies. Commenters also
argued that because some payday lenders may not refer accounts to debt
collection, the Bureau overstated the harm of default in that manner as
well. Some commenters argued that the adverse effects of debt
collection practices should not be considered harm for purposes of this
rule because harmful collection practices are addressed separately in
the Fair Debt Collections Practices Act. One commenter even argued that
borrowers benefit from defaulting on these loans, because it means they
were able to get free funds that they never ended up having to repay,
supposedly without ever experiencing any other negative consequences.
Still another commenter argued that for certain title loans the injury
resulting from default can be lower than the injury resulting from
default on other types of credit, because many title loans are non-
recourse loans, which limits the extent of the injury solely to the
impact of vehicle repossession.
The Bureau received comments contending that it did not have
sufficient evidence to substantiate the collateral consequences
associated with payday and title loans that have not been underwritten,
in particular the frequency and magnitude of other collateral harms
from making unaffordable payments, which the Bureau cited as one of the
adverse consequences associated with these loans.
Commenters also argued that the Bureau's claim that consumers are
injured because they are not able to absorb loan payments on top of
major financial obligations and basic living expenses is circular. They
argue that consumers use covered loans because they are unable to pay
major financial obligations and basic living expenses, and thus the
injury the Bureau identified is pre-existing. In other words,
commenters argue that the identified injuries are not caused by the
identified practice of making such loans without reasonably assessing
the borrower's ability to repay the loan according to its terms, and
are instead, caused by borrowers' preexisting hardship. Commenters
similarly suggested that making ability-to-repay assessments does not
correlate to the identified injuries and thus the failure to make such
assessments is not the cause of those injuries.
The Final Rule
After reviewing the comments received, and on further
consideration, the Bureau is now concluding that the practice of making
covered short-term loans without making a reasonable
[[Page 54591]]
determination of the consumer's ability to repay the loan according to
its terms causes or is likely to cause substantial injury to consumers.
As noted in the proposal, borrowers subject to this practice experience
injury when covered short-term loans are made without making a
reasonable assessment of their ability to repay and they are unable to
cover the loan payment on top of major financial obligations and basic
living expenses. These injuries include those associated with default,
delinquency, and re-borrowing, as well as the negative collateral
consequences of being forced to forgo major financial obligations or
basic living expenses to cover the unaffordable loan payment. The
frequency and magnitude of these types of harms experienced by
consumers was discussed at greater length above in Market Concerns--
Underwriting. As stated in that discussion, the Bureau does not find
that every borrower is necessarily harmed by this practice, because
some portion of borrowers may successfully repay these loans after
little or no re-borrowing and without incurring collateral harms from
so doing (though it bears noting that many of these successful
borrowers presumably would qualify for a loan if the lender first made
a reasonable assessment that they have the ability to repay it
according to its terms). But the Bureau finds that a substantial
population of borrowers is harmed, many severely, when they suffer the
kinds of injuries just mentioned, which are discussed at greater length
above in Market Concerns--Underwriting, as a result of the identified
practice of failing to make a reasonable assessment of the borrower's
ability to repay before making the loan.
As noted previously, several commenters asserted that the Bureau
should only consider that a practice causes substantial injury after
discounting certain benefits that borrowers may get from taking out
these loans, or after comparing these loans to all other possible
alternatives. That approach is not required by the legal standards
regarding unfair practices set forth in the statute, FTC precedent, or
case law, and the Bureau has concluded that it is not appropriate here.
Adopting the suggested approach would over-complicate the analysis and
risk ``double-counting'' certain countervailing benefits (here first in
minimizing the nature of the injury and then again in considering the
countervailing benefits for consumers or competition). Following the
long history of FTC and other judicial precedent, the Bureau has
assessed ``substantial injury'' and ``countervailing benefits''
separately, and then weighed the two against each other. In this way,
the Bureau will fully comply with the statutory requirements because it
will not conclude that the identified practice is unfair until after it
has concluded that the practice is ``injurious in its net effects''
because countervailing benefits for consumers or competition do not
outweigh the substantial injury.\646\ The Bureau conducts that analysis
and reaches that conclusion below.
---------------------------------------------------------------------------
\646\ FTC, Policy Statement on Unfairness, Appended to
International Harvester Co., 104 F.T.C. 949, 1070 (1984).
---------------------------------------------------------------------------
Generally, the Bureau measures substantial injury by assessing the
aggregate injurious consequences that the specific practice causes or
is likely to cause for consumers. So, for the practice at issue in this
rule, the magnitude of injury is the aggregate total injurious impact
of default, delinquency, re-borrowing, and the collateral consequences
caused by making unaffordable payments, all of which are the result of
lenders failing to assess borrowers' ability to repay before making
covered short-term loans. Injury is weighed in the aggregate, rather
than simply on a consumer-by-consumer basis; and the practice need not
injure every consumer if it affects any substantial number of them or
if it imposes severe harm on a smaller number of them. In fact, as
acknowledged above, the Bureau recognizes that some consumers do not
suffer harm from the practice, and for some consumers who are harmed,
the benefits to that one consumer might outweigh the harm. This may be
true even of some consumers who could not satisfy the ability-to-repay
standard. For example, there may be consumers who encounter a windfall
after taking out the loan, but before repaying, such that none of the
injuries occurs even though at the time the loan was originated the
borrower would not have had an ability to repay. There also could be
some consumers whose particular circumstances are such that the
benefits of having immediate access to funds outweigh the harms
resulting from being unable to repay the loan. The Bureau nonetheless
includes the injury associated with those borrowers. Of course, the
countervailing benefits to consumers are also measured in the
aggregate, and the Bureau includes the benefits even to those consumers
who, on net, were injured.
As to the specific argument that a practice may only be considered
injurious if it is worse than all alternatives, this argument is
inconsistent with the statute and not grounded in any precedent. Such a
requirement would be akin to the view that as long as an alternative
practice can be identified that causes even more injury to consumers,
then the practice cannot cause substantial injury.
As commenters noted, the Bureau has not calculated a precise total
dollar figure for the aggregate injury caused by the practice of making
covered loans without making a reasonable determination of the
borrower's ability to repay the loan according to its terms. That
calculation would be impractical, and it represents a level of
exactitude that has never been required of or attained by the FTC and
the prudential regulators in regulating identifiable consumer harms
under the terms of their UDAP authorities. However, in assessing the
aggregate weight of injury, the Bureau was informed by all of the
factual background, data, and evidence canvassed above in Market
Concerns--Underwriting. When the impact of default, delinquency, re-
borrowing, and other negative collateral consequences of making
unaffordable payments is aggregated among all borrowers for whom
lenders do not assess ability to repay before making a covered short-
term loan, the sum of that injury is very substantial.
It is worth noting what is not included in the Bureau's weighing of
substantial injury. Several commenters believed that the Bureau was
considering all covered short-term loans to be injurious. That is not
so. The Bureau has determined, more narrowly, that substantial injury
is caused or likely to be caused by making a covered short-term loan
without reasonably assessing the consumer's ability to repay according
to its terms. Thus, the Bureau is only counting injury to consumers
where the lender did not make a reasonable assessment of the borrower's
ability to repay, which as discussed above leads many consumers to
experience the harms from default, delinquency, re-borrowing, and other
collateral consequences from attempting to avoid these other injuries
by making unaffordable payments.\647\
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\647\ The Bureau notes that some commenters claimed that certain
short-term loans made by community banks and credit unions are
underwritten and have much lower re-borrowing and default rates.
This is consistent with the logic behind the rule, and provides
further evidence that a lender's failure reasonably to assess
ability to repay causes the types of harms that the Bureau has
identified.
---------------------------------------------------------------------------
The Bureau concludes that, contrary to some commenters' assertions,
re-borrowing should be considered
[[Page 54592]]
consumer injury when the borrower is forced to do so owing to an
inability to cover the unaffordable payment, basic living expenses, and
major financial obligations. The costs of re-borrowing are not a part
of the original loan agreement. When a lender makes a loan without
assessing ability to repay, and the borrower ultimately does not have
enough funds to cover the unaffordable payment, basic living expenses,
and major financial obligations, the consumer is forced to choose
between three outcomes (default, re-borrowing, or the default avoidance
costs of having to forgo basic living expenses or major financial
obligations). Each of these outcomes involves ``monetary harm,'' which
is the most traditional form of injury for unfairness analyses.\648\
---------------------------------------------------------------------------
\648\ FTC Statement on Unfairness, 104 F.T.C. 949 (1984).
---------------------------------------------------------------------------
Injury can be acute for borrowers when the lender's failure to
assess ability to repay sets off a chain reaction of multiple rounds of
re-borrowing, which incur additional fees and perhaps penalty fees as
well. After each new loan, the borrower faces an unrepayable balloon
payment that leads the borrower to incur additional fees that were not
a part of the original agreement. That the borrower incurs the cost of
re-borrowing instead of other injuries as perhaps a least-bad option at
that juncture (when compared with default, repossession, or forgoing
basic living expenses or major financial obligations), does not make
the re-borrowing non-injurious. When the loan comes due, the borrower
may be able to incur one type of injury over another, but the borrower
does not thereby avoid being injured at all. One commenter provided an
illustrative example of a borrower who paid $12,960 to borrow $1,020 in
principal because the borrower continued to re-borrow the original
principal. Each instance of re-borrowing was the result of a new choice
between re-borrowing, default, or forgoing expenses, and each of those
decisions was forced upon the consumer because the original loan was
made without assessing the borrower's ability to repay the loan
according to its terms.
Note that the Bureau is not, as some commenters stated, addressing
in this rulemaking the sustained use of credit, or long-term
indebtedness, standing alone. Such matters could bear scrutiny in
particular instances under the Bureau's supervision or enforcement
authority. But for purposes of this rulemaking, continued or
repetitious re-borrowing is considered injurious for unfairness
purposes here because it imposes new costs on the borrower that were
not specified in the original loan agreement, and these costs are
caused by the lender's failure to make a reasonable assessment of the
borrower's ability to repay the original loan according to its terms.
The Bureau is unpersuaded by commenters' claims that protracted
refinancing is not harmful because credit scores may actually improve
for some borrowers. The study that these commenters cite compares
borrowers who roll over covered short-term loans with borrowers who do
not. Again, the fact that some borrowers may have positive experiences
or some particular form of positive outcomes with these loans is not
immaterial, but it fails to address the core point of the data about
this market, which shows that for a further substantial population of
borrowers, the harms experienced from repeated re-borrowing can be
quite severe.
Moreover, the possibility that one form of the identified injury
may be less injurious than another in one particular respect does not
prove that the injury identified is not in fact injurious in other
respects. When a lender makes covered loans without assessing ability
to repay the loan according to its terms, borrowers may be able to
incur one form of injury rather than another from amongst the likely
set of injuries--again, default, delinquency, re-borrowing, and the
collateral consequences of making unaffordable loan payments--and some
may be able to mitigate that injury to an appreciable extent or even to
nullify its effects, but many borrowers who have taken out an
unaffordable loan will not be able to avoid being gravely injured in
this situation.\649\
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\649\ Of course, the Bureau notes that all studies comparing
credit score outcomes are subject to the caveat that different
creditors use different credit scoring models, which are always
changing.
---------------------------------------------------------------------------
Similarly, the argument that re-borrowing on title loans is not
injurious because it allows borrowers to avoid default, and thus
repossession, is unpersuasive. The potential injuries that consumers
face in these situations include default, delinquency, re-borrowing,
and the collateral consequences of forgoing other basic living expenses
or major financial obligations. In these instances, re-borrowing may be
less injurious than another greater injury, but many borrowers will
still be injured by the impact of re-borrowing as described at greater
length above in Market Concerns--Underwriting, including the collateral
consequences of attempting to avoid these other injuries by making
unaffordable payments.
The Bureau recognizes, as commenters suggest, that some borrowers
will be able to anticipate, before they take out the first covered
short-term loan, that they may have to re-borrow. These industry
commenters argue that re-borrowing should not be considered harmful to
the extent that borrowers could anticipate it happening. But the most
relevant data analyzing borrowers' ability to anticipate re-borrowing
supports the conclusion that a high number of borrowers are not, in
fact, able to accurately predict the length of their indebtedness to
lenders that offer payday loan products.
The 2014 study by Professor Mann that asked borrowers about their
expectations for re-borrowing then compared those with their actual
borrowing experience, yielded insights directly relevant for this
rule.\650\ As described in the proposal and the Section 1022(b)(2)
Analysis, the study found that borrowers who wound up with very long
sequences of loans had very rarely expected those long sequences. See
the discussion regarding reasonable avoidability below, and the Section
1022(b)(2) Analysis, for more on the Bureau's interpretation of the
Mann study.
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\650\ Robert Mann, Assessing the Optimism of Payday Loan
Borrowers, 21 Sup. Ct. Econ. Rev. 105 (2014), and correspondence
between prof. Mann and Bureau staff described above in Market
Concerns--Underwriting.
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Thus, the Bureau continues to believe that the response from these
industry commenters glosses over the point that many borrowers are not
able to anticipate the nature and the likelihood and the magnitude of
the harms that may occur through re-borrowing. To the extent that re-
borrowing imposes new costs on the borrower that were not part of the
costs specified in the original loan agreement--including additional
fees and the other collateral consequences of attempting to avoid
default by making unaffordable payments while forgoing basic living
expenses and major financial obligations--the re-borrowing that occurs
can create unexpected harm once the borrower has taken out an initial
unaffordable loan. Indeed, many consumers who may anticipate some re-
borrowing also seem likely to be unable to anticipate the likelihood
and severity of these harms, which is a point the Bureau addresses more
fully in the section below on whether injury is reasonably avoidable.
Moreover, just as the two prongs of ``substantial injury'' and
``reasonably avoidable'' are set out as distinct and independent in the
statute, the Bureau concludes that even if some borrowers
[[Page 54593]]
do accurately predict their length of re-borrowing, this would not
change the broader conclusion that the practice causes substantial
injury in the aggregate. The Bureau also concludes, as addressed above
in Market Concerns--Underwriting, that, contrary to the assertions made
by some commenters, it did not significantly overestimate the types of
injury caused by default, delinquency, re-borrowing, and the negative
collateral consequences of making unaffordable payments when it issued
the proposed rule.
The Bureau is highly dubious of the claim made by some industry
commenters that consumers suffer no harm in the event of a default on a
covered loan. The Bureau has seen many examples of payday lenders that
engage in strenuous efforts, either on their own behalf or by
contracting with debt collectors (or selling the debt to debt buyers),
to pursue borrowers for payment in the event of default.\651\ And the
commenters did not present any evidence to show the extent to which
lenders of covered short-term loans actually do refrain from seeking to
collect on overdue debts. Moreover, nothing prevents such third-party
debt collectors or debt buyers from reporting the negative information
to consumer reporting agencies, which is a technique some collectors
use to facilitate collection.\652\ In any event, the underlying premise
is quite implausible. If there were no real consequences to defaulting
on these loans, it is difficult to understand why so many borrowers
would engage in repeat re-borrowing, rather than simply defaulting.
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\651\ The Bureau has engaged in many investigations that have
led to taking a number of enforcement actions against small-dollar
lenders for their illegal debt collection practices that were found
to be violations of the statutory prohibition against unfair,
deceptive, or abusive acts or practices. See, e.g., In the Matter of
Money Tree, Inc., File No. 2016-CFPB-0028; In the Matter of EZCORP,
Inc., File No. 2015-CFPB-0031; CFPB v. NDG Financial Corp., Case No.
1:15-cv-05211-CM (S.D.N.Y.); In the Matter of ACE Cash Express,
Inc., File No. 2014-CFPB-0008; In the Matter of Westlake Servs.,
LLC, File No. 2015-CFPB-0026. The Bureau has also taken actions
against debt collectors, some of which collect in part on small-
dollar loans. See, e.g., CFPB v. MacKinnon, et al., Case No. 1:16-
cv-00880 (W.D.N.Y.).
\652\ As for whether harmful debt collection practices can
constitute cognizable injury here, it would seem that they can if
they flow from the identified practice of making covered short-term
loans without reasonably assessing the borrower's ability to repay
the loan according to its terms. Although those practices can be
addressed through enforcement or rulemaking under the Fair Debt
Collection Practices Act, they are also a natural consequence of the
harms that consumers experience from receiving unaffordable loans
that they are unable to repay.
---------------------------------------------------------------------------
The Bureau also finds that its assessment of injury should include
repossessions resulting from failing to assess ability to repay before
making covered vehicle title loans. As noted above, some industry
commenters claimed that repossession is not harmful, or not as harmful
as the Bureau indicated in its proposal. They rest this argument on two
claims. First, they contend that most borrowers can find other means of
transportation, citing what they present as a supportive survey, and
thus would not be harmed by the loss of their vehicle. Second, they
contend that the extent of the direct economic loss that borrowers
sustain by having their vehicle repossessed is relatively
insignificant.
On the first point, the potential consequences of the loss of a
vehicle depend on the transportation needs of the borrower's household
and the available transportation alternatives. According to two surveys
of title loan borrowers, 15 percent report that they would have no way
to get to work or school if they lost their vehicle to
repossession.\653\ For these borrowers, the effects of repossession
could thus be catastrophic from an economic standpoint, particular in
rural areas or in urban areas where public transportation is not
reasonably available. And more than one-third (35 percent) of borrowers
pledge the title to the only working vehicle in the household.\654\
Even those with a second vehicle or who are able to get rides from
friends or take public transportation would presumably experience
significant inconvenience or even hardship from the loss of a vehicle.
This hardship goes beyond simply getting to work or school, and would
as a practical matter also adversely affect the borrower's ability to
conduct their ordinary household affairs, such as obtaining food or
medicine or other necessary services. The commenters countered that
borrowers often can find other means of transportation, citing what
they present as a supportive survey. Their interpretation of the data
is not convincing, however, as even the authors of the survey cautioned
against making simplistic calculations about factors and probabilities
that are intertwined in the analysis, and which thus may considerably
understate the incidence of hardship, especially for more economically
vulnerable populations.
---------------------------------------------------------------------------
\653\ Fritzdixon, et al., at 1029-1030; Pew Charitable Trusts,
Auto Title Loans: Market Practices and Borrowers' Experiences, at 14
(2015), http://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf.
\654\ Pew 2015.
---------------------------------------------------------------------------
As to the second point about the extent of the direct economic
loss, the commenters rest this argument either on the low average value
of collateralized vehicles or on their claim that some borrowers
deliberately choose to liquidate the value of the vehicle by taking out
a title loan and then promptly abandoning the vehicle to repossession.
While some vehicles used for collateral may not have high value, they
still can be crucial as the consumer's principal means of
transportation to and from work or to conduct everyday affairs such as
obtaining medical care or buying groceries, medicine, and other
essentials. The Bureau describes the harms of repossession in more
detail both in Market Concerns--Underwriting and the section-by-section
analysis for Sec. 1041.6.
The Bureau also finds unpersuasive the assertion made by some
commenters that a significant population of consumers would take out a
title loan and then intentionally abandon the vehicle instead of just
selling it, especially in light of the observations made in Market
Concerns--Underwriting that title lenders usually only make loans where
the value of the collateral exceeds the principal. Indeed, it appears
implausible that consumers would choose to dispose of a vehicle by this
means rather than simply selling the vehicle, as the latter approach
very likely would usually yield more funds without involving the
consumer in any adverse risks or costs of collections activities or
repossession fees. It may be that some borrowers take out a title loan
and immediately default on it, perhaps even intentionally, and such
borrowers may not necessarily experience all of the same harms as other
borrowers whose vehicles are repossessed. But no evidence plausibly
suggests that this alleged population is at all significant, and thus
this fact does not change the Bureau's overarching conclusion. As for
the commenter who argued that the stress associated with repossession
is no worse than other forms of financial stress, this argument is
speculative and unpersuasive, and at least implicitly acknowledges the
fact that potential psychological injury does accompany the threat of
repossession.
The Bureau also rejects the claim made by some commenters that its
arguments about substantial injury are circular because the injuries
identified were primarily caused by the original financial hardship
that induced the borrower to seek a covered loan, rather than by the
covered loan itself. This is a variant on the argument that the real
harm to consumers does not flow from the identified practice of failing
to underwrite these loans in a reasonable manner but from the fact that
many
[[Page 54594]]
consumers lack the money to meet their obligations. First, to the
extent this argument seeks to rely on the benefits provided by access
to credit through covered loans in order to cover the borrower's
expenses, or is an exercise in weighing those benefits against the
injuries associated with the harm, it is most appropriately treated in
the section below on ``countervailing benefits.'' But more to the
point, the Bureau finds that the specific injuries which flow from
default, delinquency, re-borrowing, and the collateral consequences of
making unaffordable payments, including forgoing major financial
obligations or basic living expenses in order to avoid default, are not
caused by the borrower's pre-existing financial hardship for one key
reason: These injuries flow from the loan itself and the fact that it
was made without reasonably assessing the borrower's ability to repay
the loan according to its terms. These outcomes would not have occurred
without the lender engaging in the identified practice of making such
loans in such manner. The borrower would have faced other difficulties
flowing from her distressed circumstances, but not the harms identified
here.
In other words, the fact that many consumers are in financial
difficulty when they seek out a covered loan--a fact the Bureau has
repeatedly recognized--does not mean they are not injured by the
identified practice. For certain individual borrowers in particular
situations, being able to replace a default on a different obligation
with the injury identified in this section might seem to be worthwhile.
But the right place to address that potential trade-off is when the
analysis turns to assessing whether countervailing benefits outweigh
the injury, in the aggregate rather than on an individual borrower
basis--matters that are discussed further below.
In any event, the pre-existing financial stress of many consumers
does not relieve lenders of responsibility for engaging in practices
that are unfair or abusive. As the court in FTC v. Neovi stated, the
contribution of ``independent causal agents . . . do[es] not magically
erase the role'' of lenders' in causing the harm.\655\ When lenders do
not assess ability to repay before making loans, they end up making
loans to some borrowers who lack the ability to repay. The fact that
these borrowers who obtain unaffordable loans will default, become
delinquent, re-borrow, or experience negative collateral consequences
is a natural result of the practice that lenders should expect.
---------------------------------------------------------------------------
\655\ FTC v. Neovi, 604 F.3d 1150, 1155 (9th Cir. 2010). In
fact, the argument here is even weaker than that rejected in Neovi,
where the claim was that intervening causal factors had rendered the
cause identified by the agency insufficiently proximate. Here the
alleged causal factor cited by the commenters is not even an
intervening factor.
---------------------------------------------------------------------------
In sum, based on the analysis presented here and above in the
section on Market Concerns--Underwriting, and upon further
consideration after reviewing the high volume of comments received from
the public, the Bureau concludes that the identified practice causes or
is likely to cause substantial injury.
Injury Not Reasonably Avoidable
The Bureau's Proposal
The second prong of the statutory definition of unfairness is that
the ``substantial injury'' to consumers ``is not reasonably avoidable
by consumers.'' The Bureau proposed to interpret this requirement to
mean that unless consumers have reason generally to anticipate the
likelihood and severity of the injury and the practical means to avoid
it, the injury is not reasonably avoidable. Under the proposed rule,
the Bureau stated that in a significant proportion of cases, consumers
appear to be unable to reasonably avoid the substantial injuries caused
or likely to be caused by the identified practice. Prior to entering
into a payday, single-payment vehicle title, or other covered short-
term loan, many consumers do not reasonably anticipate the likelihood
and severity of the injuries that frequently result from such
unaffordable loans, and after entering into the loan, consumers do not
have the practical means to avoid the injuries that result from being
unable to repay it.
As stated in the proposal, many consumers seem unable to reasonably
anticipate the likelihood and severity of the consequences of being
unable to repay a loan that is unaffordable according to its terms. As
discussed in the proposal, the typical consumer is likely generally
aware that taking out any loan can lead to adverse consequences if the
loan is not repaid, but is not likely to be familiar with all of the
harms that can flow from a loan that is made without a reasonable
assessment that the borrower will be able to repay it according to its
terms. Some additional harms beyond the costs incurred on the loan can
include, for example, the risk of accumulating penalty fees on their
bank account, the potential loss of their account, or (for title
loans), or the risk of aggressive collections. Moreover, even if
consumers recognize these harms as possibilities, many are likely not
to have sufficient information to understand the frequency with which
these adverse effects may occur to borrowers who are affected by the
identified practice or the severity of the consequences befalling a
typical borrower who obtains an unaffordable loan. An especially
compelling example of how consumers may be prone to error in making
reasonable evaluations about the injuries to which they are exposed by
the identified practice is the substantial number of consumers who re-
borrow, many of them repeatedly, prior to eventually defaulting on
these loans. But unless consumers are reasonably aware of the
likelihood and severity of these injuries, it would not be reasonable
for them to make special efforts to avoid such injuries where they are
not in position to accurately evaluate the risks. This may be
especially the case where the lender qualifies them for a loan without
making a reasonable assessment of their ability to repay, as many
consumers would be unlikely to expect that lenders would intentionally
offer them an unaffordable loan that they would likely be unable to
repay.
That is not to say that every consumer must understand everything
about the potential risks or must be able to anticipate these risks
with mathematical precision. Instead, it is only to say that consumers
must have a sense of the order of magnitude of the risk, both in terms
of its likely frequency and its likely severity. Yet the Bureau also
noted in the proposal that in analyzing reasonable avoidability under
the FTC Act unfairness standard, the FTC and other agencies have at
times focused on factors such as the vulnerability of affected
consumers,\656\ as well as those
[[Page 54595]]
consumers' perception of the availability of alternative products.\657\
Likewise, the Bureau stated that the substantial injury from covered
short-term loans may not be reasonably avoidable in part because of the
precarious financial situation of many consumers at the time they take
out such loans and their belief that searching for potential
alternatives will be fruitless and costly. As discussed in the
proposal, consumers who take out payday or single-payment vehicle title
loans typically have tried and failed to obtain other forms of credit
before turning to these covered loans as a last resort. Thus, based on
their prior negative experience with attempting to obtain credit, they
may reasonably perceive that alternative options would not be
available. Consumers facing an imminent liquidity crisis may also
reasonably believe that their situation is so dire that they do not
have time to shop for alternatives and that doing so could prove
costly.
---------------------------------------------------------------------------
\656\ See, e.g., FTC Policy Statement on Unfairness, 104 FTC at
1074 (noting that the FTC may consider the ``exercise [of] undue
influence over highly susceptible classes of purchasers''); Mortgage
Assistance Relief Services Rule, 75 FR 75092, 75117 (Dec. 1, 2010)
(emphasizing the ``financially distressed'' condition of consumers
``who often are desperate for any solution to their mortgage
problems and thus are vulnerable to providers' purported
solutions''); Telemarketing Sales Rule, 75 FR 48458, 48487 (Aug. 10,
2010) (concluding that injury from debt relief programs was not
reasonably avoidable in part because ``purchasers of debt relief
services typically are in serious financial straits and thus are
particularly vulnerable'' to the ``glowing claims'' of service
providers); Funeral Industry Practices Rule, 47 FR 42260, 42262
(Sept. 24, 1982) (citing characteristics which place the consumer in
a disadvantaged bargaining position relative to the funeral
director, leaving the consumer vulnerable to unfair and deceptive
practices, and causing consumers to have little knowledge of legal
requirements and available alternatives). The Funeral Industry
Practices Rule and amendments were upheld in the Fourth and Third
Circuits. See Harry and Bryant Co. v. FTC, 726 F.2d 993 (4th Cir.
1984); Pennsylvania Funeral Directors Ass'n, Inc. v. FTC, 41 F.3d 81
(3d Cir. 1994). In the Subprime Credit Card Practices Rule--in which
three Federal banking regulators identified as unfair certain
practices being routinely followed by credit card issuers--the
Federal Reserve Board, OTS, and NCUA noted their concern that
subprime credit cards ``are typically marketed to vulnerable
consumers whose credit histories or other characteristics prevent
them from obtaining less expensive credit products.'' 74 FR 5498,
5539 (Jan. 29, 2009).
\657\ In the HPML Rule, the Federal Reserve Board discussed how
subprime consumers ``accept loans knowing they may have difficulty
affording the payments because they reasonably believe a more
affordable loan will not be available to them,'' how ``taking more
time to shop can be costly, especially for the borrower in a
financial pinch,'' and how because of these factors ``borrowers
often make a reasoned decision to accept unfavorable terms.'' 73 FR
44522, 44542 (July 30, 2008).
---------------------------------------------------------------------------
The Bureau also stated in the proposal that consumer predictions
about their experience with covered short-term loans may be overly
optimistic, especially if they are unaware of the risks posed by
lenders making these loans without reasonably assessing the borrower's
ability to repay the loan according to its terms. In particular,
consumers who experience long sequences of loans often do not expect
those long sequences to occur when they make their initial borrowing
decision. As detailed above in Market Concerns--Underwriting, empirical
evidence suggests that consumers are best able to predict accurately
the duration of their borrowing if they repay after little or no re-
borrowing, though many underestimate the expected duration while others
overestimate it. Notably, borrowers who end up in extended loan
sequences are especially likely to err in their predictions of how long
their loan sequences will last, usually taking the form of
underestimating the expected duration. So consumers are particularly
poor at predicting long sequences of loans, a fact that does not appear
to differ for those borrowers who have past borrowing experience.\658\
---------------------------------------------------------------------------
\658\ As noted in Market Concerns--Underwriting, it appears that
some consumers are able to accurately predict that they will need to
re-borrow one or two times, and decide to take out the loan
regardless of the additional cost of this limited amount of re-
borrowing. Accordingly, such costs do not count as substantial
injury that is not reasonably avoidable.
---------------------------------------------------------------------------
As discussed in the proposal, the Bureau observes other factors
that prevent consumers from reasonably anticipating and avoiding the
substantial injury caused by unaffordable short-term loans. Such loans
involve a basic mismatch between how they appear to function as short-
term credit and how they are actually designed and intended by lenders,
as part of their business model, to function in long sequences of re-
borrowing for a substantial population of consumers. Lenders present
these loans as short-term, liquidity-enhancing products that consumers
can use to bridge an income shortfall until their next paycheck. But in
practice, across the universe of borrowers, these loans often do not
operate that way. The term of the loan, its balloon-payment structure,
and the common use of leveraged payment mechanisms, including vehicle
security, all tend to magnify the risks and harms to the borrower. The
disparity between how these loans appear to function and how they
actually function creates difficulties for consumers in estimating with
any accuracy how long they will remain in debt and how much they will
ultimately pay for the initial extension of credit.
Lenders who make covered short-term loans without reasonably
assessing the borrower's ability to repay the loan according to its
terms, to borrowers who often do not reasonably anticipate the
likelihood and severity of the risks posed, often further magnify these
risks through the way they market the option of repeat borrowing.
Payday lenders and title lenders typically present only two options:
the re-borrowing option, with its costs limited to another set of fees
but no repayment of principal, and the full repayment option of
requiring the entire balloon payment to be repaid all at once, with no
options offered in between these two. Low-cost repayment or
amortization options are typically not presented or are obscured, even
where they may be required to be available under State law. Even
consumers who are delinquent and have further demonstrated their
inability to repay the loan according to its terms are encouraged to
re-borrow, which leads many consumers to engage in extensive re-
borrowing even where they eventually wind up in default. For many re-
borrowers, the upshot is that they end up making repeated payments that
become increasingly unaffordable in the aggregate over time, even
though a substantial number of them still will sustain the harms
associated with default.
The proposal stated that not only are consumers unable to
reasonably anticipate the likelihood and severity of many of these
potential harms before entering into a payday or title loan, but after
they have entered into a loan, they do not have any practical means to
avoid the injuries that will occur if the loan proves to be
unaffordable. Consumers who obtain a covered short-term loan that is
beyond their ability to repay confront the harms of default,
delinquency, re-borrowing, or the collateral consequences of making
unaffordable payments that would cause them to miss payments on their
major financial obligations and basic living expenses. They can make
choices among these competing harms, but once they are facing an
unaffordable payment, some form of substantial injury is almost
inevitable regardless of what actions they take in that situation. And
as discussed in the proposal, lenders engage in a variety of practices
that further increase the likelihood and degree of harm, for instance
by encouraging additional re-borrowing with its attendant costs even
for consumers who are already experiencing substantial difficulties as
they are mired in extended loan sequences, and by engaging in payment
collection practices that are likely to cause consumers to incur
substantial additional fees beyond what they already owe on the terms
of the existing loan.
Comments Received
The Bureau received many comments on whether the substantial injury
identified was reasonably avoidable by consumers. A number of
commenters opined on the legal standards the Bureau should use when
assessing reasonable avoidability. One commenter argued that the proper
standard for assessing whether injury is reasonably avoidable is
whether the consumer has the ability to anticipate the impending harm
and has means to avoid it. In other words, even if consumers do not
actually tend to anticipate the likelihood and severity of the
impending harm, it could still be viewed as reasonably avoidable as
long
[[Page 54596]]
as knowledge of the impending harm is conceptually attainable.
Various parties submitted comments to the Bureau arguing that
borrowers can in fact accurately predict the consequences of getting a
covered loan. This point is addressed more fully above in the Market
Concerns--Underwriting. One commenter claimed that a study showed
borrowers who have previously used title loans are more capable of
anticipating how long they will be indebted, predicting six or more
additional months of indebtedness as compared to consumers who had
never used title loans.
Some industry commenters also claimed that borrowers must be able
to anticipate the consequences of failing to repay a title loan because
title loans are simple products, and the use of vehicles as collateral
to secure the loan is a defining and obvious feature of these loans.
Commenters made similar arguments about payday loans.
Various industry commenters claimed that consumers do have the
means to avoid the injuries that are caused or likely to be caused by
the identified practice. Many of these commenters argued that consumers
have the means to avoid the injury simply by forgoing the first covered
loan altogether. Commenters argued that such consumers could turn
instead to friends and family. They also argued that consumers could
instead obtain other forms of credit, such as a traditional non-
recourse pawn loan. Others noted that there are further ways to avoid
these injuries even after having taken out the first covered loan. Some
argued that borrowers could simply budget carefully to ensure timely
payment, could take advantage of legal protections that may be
available in some States that allow them to lower or extend payments,
or could obtain credit counseling or other assistance. Others contended
that borrowers could minimize or avoid the harms they experience from
these loans by engaging in strategic default, asserting that defaults
on such loans do not lead to any further negative consequences for the
borrower. Similarly, some commenters claimed that where consumers have
consented to leveraged payment mechanisms such as post-dated checks or
automatic account withdrawals, they could avoid consequent harms by
simply withdrawing their consent at a later point.
One commenter asserted that the Bureau falsely assumed that any re-
borrowing was a consequence of borrowers having no other credit
options. This commenter regarded the data as establishing instead that
borrowers do have other options and may have reasons why they would
choose to re-borrow even where they can afford to repay the prior loan.
In response to the Bureau's claim that it is reasonable for many
consumers in typical circumstances to fail to shop for alternative
forms of credit, one commenter argued that whenever alternatives are
available, a reasonable consumer would shop for them and obtain them.
In other words, even if borrowers do not generally tend to shop for
alternatives, any injury could still be reasonably avoidable if
consumers could have exercised the ability to shop.
Other commenters argued that acts or practices can only be unfair
if the lender's actions alone caused the injury not to be avoidable. In
other words, if any of the reasons that consumers could not avoid the
harm caused by a lender was not itself also caused by the lender, the
act or practice cannot be unfair. Commenters also argued that injury is
reasonably avoidable when consumers have a ```free and informed choice'
not to purchase the product,'' citing FTC v. Neovi.\659\ At least one
commenter took the opposite position, arguing that consumers' financial
situations can give rise to a reasonable conclusion that an injury from
the identified practice is not reasonably avoidable.
---------------------------------------------------------------------------
\659\ 604 F.3d 1150, 1158 (9th Cir. 2010).
---------------------------------------------------------------------------
Alternatively, consumer groups observed that whether consumers
could have anticipated the injury is irrelevant to whether the injury
is reasonably avoidable if consumers lack the means to avoid the injury
even if it were to be anticipated. They argued that even if some
borrowers can more accurately anticipate the length of their
indebtedness, they might nonetheless fail to understand the full range
of injuries that can often occur at the end of the sequence, which the
Bureau noted in its proposed rule, and which are discussed at greater
length above in Market Concerns--Underwriting. Where consumers do not
understand that full range of potential harms, such injury is not
reasonably avoidable.
The Final Rule
After reviewing the comments received and taking into account the
factual analysis of how such loans work in practice as set forth above
in Market Concerns--Underwriting, the Bureau concludes that the
substantial injury caused by the identified practice is not reasonably
avoidable by consumers.
The specific question here is whether the practice at issue causes
substantial injury to consumers ``which is not reasonably avoidable by
consumers.'' \660\ Starting with the established point, already
discussed, that there is substantial injury to consumers from making
covered short-term loans without reasonably assessing the borrower's
ability to repay the loan according to its terms. In approaching the
``reasonably avoidable'' criterion, the Bureau is tasked by Congress to
ask whether, if lenders engage in the practice of making these loans
available without assessing ability to repay, the resulting injuries
are reasonably avoidable by consumers acting on their own. As noted
above, the Bureau interprets this criterion to mean that unless
consumers have reason generally to anticipate the likelihood and
severity of the injury, and the practical means to avoid it, the injury
is not reasonably avoidable. As also noted earlier, the D.C. Circuit
has held that the presence of a market failure or imperfection is
highly relevant to the ``reasonably avoidable'' inquiry, as it may
hinder consumers' free-market decisions and prevent the forces of
supply and demand from maximizing benefits and minimizing costs.
---------------------------------------------------------------------------
\660\ 12 U.S.C. 5531(c)(1)(A).
---------------------------------------------------------------------------
In addressing this issue, the Bureau does not accept, and the FTC
and prudential regulators have never been satisfied with, the notion
that injury is avoidable just because a consumer has the right not to
enter the market in the first place. No precedent supports the idea
that the existence of such a right is by itself an answer to the
``reasonably avoidable'' issue. Indeed, a consumer generally has a
right to decline to initiate the purchase of any product or service,
and if the mere existence of that right were the end of the
``reasonably avoidable'' question, then no act or practice by a seller
would ever be subject to regulation on unfairness grounds.
The Bureau specifically rejects the arguments advanced by some
commenters who contended that acts or practices can only be unfair if
the lender's actions alone caused the injury not to be reasonably
avoidable. The practice at issue is the making of covered short-term
loans without reasonably assessing the borrower's ability to repay the
loan according to its terms. The making of such loans in this manner--
which is an action that is entirely within the lender's control--is the
act that causes injury to consumers, which, as discussed above, is not
reasonably avoidable by consumers. The lender need not also be the
source that has created all the reasons why that injury is not
reasonably avoidable, given
[[Page 54597]]
the ordinary circumstances of typical consumers, including their
general understanding of the likelihood and severity of the risks
posed. Nonetheless, as discussed in the proposal and above, as well as
in the section on Market Concerns--Underwriting, the Bureau has
concluded that the manner in which lenders structure these products--
including the term of the loan, its balloon-payment structure, and the
common use of leveraged payment mechanisms, and vehicle security--
likely contributes significantly to the market failure \661\ and market
imperfections that the Bureau has observed.
---------------------------------------------------------------------------
\661\ See Section 1022(b)(2) Analysis in part VII.
---------------------------------------------------------------------------
Commenters opposing the proposed rule who addressed the
``reasonably avoidable'' criterion generally took the position that the
consumers who seek these loans are nonetheless fully capable of
reasonably avoiding these injuries in order to protect their own self-
interest. Many of these positions were based on their intuitive
descriptions or stories about what consumers understand about the risks
of loans that they do not have the ability to repay, and how consumer
decision-making works. Their intuition is inconsistent with the
evidence on which the Bureau has based its findings that the injury is
not reasonably avoidable, including survey data showing that past
borrowing experience is not indicative of increased understanding of
product use. Indeed, those who had borrowed the most in the past did
not do a better job of predicting their future use, and as Professor
Mann noted, ``heavy users of the product tend to be those that
understand least what is likely to happen to them.'' \662\
---------------------------------------------------------------------------
\662\ Mann, Assessing the Optimism, 21 Supreme Court Econ. Rev.
at 127.
---------------------------------------------------------------------------
Whereas various commenters cited Professor Mann's study to show
that most consumers are able to make accurate predictions about their
extent of re-borrowing, as noted above in Market Concerns--
Underwriting, this was mostly driven by borrowers who anticipate and
experience relatively short sequences and manage to repay very quickly.
The Bureau appreciates that, as commenters pointed out, Mann's
study, discussed below and in the Section 1022(b)(2) Analysis, suggest
that some borrowers are better able to predict their likelihood of re-
borrowing. Nonetheless, the Bureau's primary concern is for those
longer-term borrowers who find themselves in extended loan sequences
and thereby experience the various harms that are associated with a
longer cycle of re-borrowing. For those borrowers, the picture is quite
different, and their ability to estimate accurately what will happen to
them when they take out a payday loan is quite limited. As Mann noted,
very few of those borrowers who experienced the longest sequences
anticipated that they would end up in a period of prolonged
indebtedness, and in fact ``both the likelihood of unexpectedly late
payment and the proportionate size of the error increase substantially
with the length of the borrower's prediction.'' \663\ Nor does their
accuracy appear to improve with more experience; as he noted in his
paper, ``heavy users of the product tend to be those that understand
least what is likely to happen to them.'' \664\ The further discussion
in the comments of Professor Mann's study, including his own
submission, did not alter these results, for as he noted, ``the
absolute size of the errors is largest for those with the longest
sequences,'' and ``the borrowers who have borrowed the most are those
who are in the most dire financial distress, and consequently least
able to predict their future liquidity.''
---------------------------------------------------------------------------
\663\ Id.
\664\ Id.
---------------------------------------------------------------------------
And as the Bureau discusses at length in Market Concerns--
Underwriting, and in the Section 1022(b)(2) Analysis, multiple
different conclusions can be made based on Mann's findings. Certainly,
it is possible that many borrowers accurately anticipate their debt
durations, as Mann asserts in both his 2013 paper and comment to the
proposed rule. However, Mann's study supports the conclusions that most
of those borrowers with long duration sequences did not accurately
anticipate this outcome; that a large share of borrowers who
anticipated no re-borrowing remain in debt for multiple loans, with
many being unable to even offer a guess as to the duration of their
indebtedness, let alone a precise prediction; and that there appears to
be no discernable relationship between borrowers' individual
expectations, and their ultimate outcomes.
Indeed, the 2013 Mann study showed that of the borrowers who
remained in debt at least 140 days (10 bi-weekly loans), a hundred
percent had underestimated their times in debt, with the average
borrower in this group spending 119 more days in debt than anticipated
(i.e., the equivalent to eight and half unanticipated rollovers.\665\
Meanwhile, over 95 percent of the borrowers who spent 90 or more days
in debt had underestimated their time in debt, spending an average of
92 more days in debt than anticipated (i.e., the equivalent to six and
a half unanticipated rollovers). And as described in the proposal, Mann
(2014) found that borrowers who wound up with very long sequences of
loans had rarely expected those long sequences; that only 40 percent of
respondents expected to re-borrow at all even though over 70 percent
would actually re-borrow; and, that borrowers did not appear to become
better at predicting their own borrowing. Thus, while many individuals
appear to have anticipated short durations of use with reasonable
accuracy, the Bureau is persuaded that virtually none anticipated long
durations with anything approaching reasonable accuracy. The harms
associated with the long durations outside the scope of the consumers'
anticipation capabilities are precisely the market failure that the
final rule seeks to address.
---------------------------------------------------------------------------
\665\ Mann, Ronald. 2013. ``Assessing the Optimism of Payday
Loan Borrowers.'' Sup. Ct. Economic Rev., 21(1): 105-132.
---------------------------------------------------------------------------
The heart of the matter here is consumer perception of risk, and
whether borrowers are in position to gauge the likelihood and severity
of the risks they incur by taking out covered short-term loans in the
absence of any reasonable assessment of their ability to repay those
loans according to their terms. It appears based on the evidence that
many consumers do not understand or perceive the probability that
certain harms will occur, including the substantial injury that can
flow from default, re-borrowing, and the negative collateral
consequences of making unaffordable payments as described above in
Market Concerns--Underwriting. Other features of these loans--including
their term, balloon-payment structure, and the common use of leveraged
payment mechanisms or vehicle security--tend to magnify the risks posed
when they are obliged to repay the full amount when the loan comes due,
on top of all their other existing obligations. Whether consumers can
``reasonably avoid'' the injuries that flow from the identified
practice will depend, in the first instance, on whether they understand
the likelihood and the severity of these risks so that they are able to
make a reasoned judgment about whether to incur or to forgo such risks.
As the Bureau perceives the matter, based on its experience and
expertise in addressing consumer financial behavior, the observed
evidence described more fully in the Section 1022(b)(2) Analysis and
Market Concerns--Underwriting indicates that a large number of
consumers do not understand even
[[Page 54598]]
generally the likelihood and severity of these risks.
There are a variety of explanations why consumers will take out
covered short-term loans that they actually lack the ability to repay
without fully appreciating the nature and magnitude of the risks
involved. As the Bureau discussed in connection with the proposed rule,
and as described further in Market Concerns--Underwriting and the
paragraphs above, the way the product is marketed and presented to them
is calculated to obscure the risks. And while many consumers may
operate as fully informed rational actors, and thus be able to predict
their repayment capacity, those consumers who lack the ability to repay
(and thus are most likely to be harmed by the identified practice) tend
to be overly optimistic, at least when they are operating under short-
term financial stress. The data available from Professor Mann, for
example, tends to confirm that a substantial proportion of borrowers--
those in extended loan sequences, who are the most vulnerable to harm--
have great difficulty in predicting their own repayment capability. And
the widespread industry practice of framing covered loans as short-term
obligations, even though lenders know that their business model depends
on these loans becoming long-term cycles of debt for many consumers,
likely exacerbates these misimpressions among borrowers.
Some of the particular behavioral obstacles to consumers' ability
to fully understand the magnitude and likelihood of the risks they
face, including the difficulties of assessing their likelihood of
nonpayment and of appreciating the severity of injury they would face
in such an event, are discussed at greater length above in Market
Concerns--Underwriting and the Section 1022(b)(2) Analysis. Once again,
the economic literature, including studies in the field of behavioral
economics but also those modeled on rational expectations, suggests
that these considerations are particularly acute for consumers who are
under financial stress (such as consumers who lack the ability to repay
a covered loan) and under acute time pressure. These considerations,
which are well known to economists, may especially degrade the
borrower's ability to reliably evaluate the risks presented in their
circumstances.
Each of the multiple factors listed in the proposal and above in
Market Concerns--Underwriting that may limit consumers' ability to
appreciate the magnitude and severity of risks may operate differently,
and to different degrees, on particular consumers. Whether borrowers do
not actually have any alternatives, do not perceive any alternatives,
do not have time to shop for alternatives, or cannot otherwise
anticipate the probability or extent of the harm, it is demonstrably
true that a substantial population of consumers to whom industry has
traditionally marketed these loans, and who lack the ability to repay,
will sign up for a covered loan and, in the aggregate, will suffer
substantial injury as a consequence of the identified practice. Stated
differently, it is a plausible inference that the substantial injury
many reasonable consumers sustain, as actually observed in the
marketplace for covered short-term loans, is not in fact avoided by
normal consumer decision-making. In its current form, the market does
not appear to be self-correcting.
Furthermore, once borrowers find themselves obligated on a loan
they cannot afford to repay, the resulting injury is generally not
reasonably avoidable at any point thereafter. But the Bureau
acknowledges that there are limited exceptions to this rule. For
example, there may be consumers who encounter a windfall after taking
out the loan, but before repaying, such that none of the injuries
occurs even though at the time the loan was originated the borrower
would not have had an ability to repay. The most common injury is re-
borrowing, which operates as a mechanism that is intended (though often
unsuccessfully) to manage the potential injuries caused by the
identified practice, rather than as an effective escape from injury.
Most consumers, after having taken out a covered short-term loan they
cannot afford to repay, are confronted with a choice of which injury to
incur--default, delinquency, re-borrowing, or collateral consequences
of making unaffordable payments, including forgoing essential
expenses--or how to minimize the accumulated harm from more than one
such injuries. Merely having a choice among an array of injuries does
not give borrowers the ability to reasonably avoid any injury.
Some industry commenters argued that consumers have other options
available to them, so those who re-borrow are choosing to do so. It
bears note that this argument is to some extent inconsistent with those
made elsewhere by the same and other industry commenters, who argue
that borrowers would be left worse off if they did not have access to
covered loans because they lack other plausible options. In addition,
the Bureau has found that many such alternatives are not widely
available to these borrowers, who may not find them to be desirable
alternatives in any event. Moreover, here again the Bureau notes that
once a consumer has taken out an unaffordable loan, the decision to re-
borrow becomes an unsatisfactory choice among the injuries produced by
such loans, as just discussed above, rather than an unfettered choice
among various alternatives, as might have been the case before the
first unaffordable loan was obtained.
As for the commenters who suggested consumers can avoid harm by
simply defaulting on the loan, this approach would not achieve that
objective because the Bureau has identified default as an injury for
all the reasons discussed above in Market Concerns--Underwriting.
Again, a choice between types of injury is not a mechanism for
reasonably avoiding all injury. And the commenters who suggested that
such consumers could avoid any further harm by withdrawing their
consent to a leveraged payment mechanism they previously granted to the
lender are equally wide of the mark. First, for storefront payday loans
and other covered short-term loans that require the borrower to give
the lender a post-dated check, it is impractical for the consumer to
withdraw consent to that payment mechanism after the loan has been
made. Because that mechanism is a condition precedent to making the
loan, attempting to withdraw consent later would either be ineffectual
or would lead directly to default. As for the leveraged payment
mechanism of automated withdrawals from the borrower's account, such as
are commonly granted with on-line covered loans, as discussed in Market
Concerns--Payments, consumers experience many practical difficulties in
successfully withdrawing their consent after-the-fact. Even for those
borrowers who do manage to avoid that harm, there are other harms
attributable to default, as laid out above in Market Concerns--
Underwriting.
Accordingly, the Bureau concludes that the practice of making
covered short-term loans without reasonably assessing the borrower's
ability to repay the loan according to its terms causes substantial
injury to consumers, which is not reasonably avoidable by them.
Injury Not Outweighed by Countervailing Benefits to Consumers or to
Competition
The Bureau's Proposal
As noted in part IV and in the proposal, the Bureau's
interpretation of the various prongs of the unfairness test is informed
by the FTC Act, the FTC
[[Page 54599]]
Policy Statement on Unfairness, and FTC and other Federal agency
rulemakings and related case law. Under those authorities, it is
generally appropriate for purposes of the ``countervailing benefits''
prong of the unfairness standard to consider both the costs of imposing
a remedy and any benefits that consumers enjoy as a result of the
practice, but the determination does not require a precise quantitative
analysis of the benefits and the costs.\666\
---------------------------------------------------------------------------
\666\ FTC Policy Statement on Unfairness; Am. Fin. Svcs. Assoc.
v. FTC, 767 F.2d 957, 986 (D.C. Cir. 1985) (``Petitioners would
require that the Commission's predictions or conclusions be based on
a rigorous, quantitative economic analysis. There is, however, no
basis for imposing such a requirement.'').
---------------------------------------------------------------------------
The Bureau stated in the proposal that it appears that the practice
of making payday, single-payment vehicle title, and other covered loans
without reasonably assessing that the consumer will have the ability to
repay the loan according to its terms does not result in benefits to
consumers or competition that outweigh the substantial injury that
consumers cannot reasonably avoid. As discussed in the proposal and for
the reasons stated here, the amount of injury that is caused by the
unfair practice, in the aggregate, appears to be quite substantial.
Although some consumers may be able to avoid the injury, as noted
above, a significant number of consumers who end up in very long loan
sequences can incur severe financial injuries that are not reasonably
avoidable. Moreover, the proposal stated that some consumers whose
short-term loans turn into short- to medium-length loan sequences incur
various degrees of injury ranging from modest to severe depending on
the particular consumer's circumstances (such as the specific loan
terms, whether and how much the consumer expected to re-borrow, and the
extent to which the consumer incurred any collateral harms from making
unaffordable payments). In addition, many borrowers who default or
become delinquent on the loan also may experience substantial injury
that is not reasonably avoidable as a result of the identified
practice.
Against this very significant amount of harm, the Bureau recognized
that it must weigh several potential countervailing benefits to
consumers or competition of the practice in assessing whether the
practice is unfair. Accordingly, in the proposal the Bureau divided
consumers into several groups of different borrowing experiences to
analyze whether the practice of extending covered loans without
determining that the consumer has the ability to repay the loan yielded
countervailing benefits to consumers.
The first group consisted of borrowers who repay their loans
without re-borrowing. The Bureau referred to these borrowers as
``repayers'' for purposes of this countervailing benefits analysis. As
discussed in the proposal, 22 percent of payday loan sequences and 12
percent of single-payment vehicle title loan sequences end with the
consumer repaying the initial loan without re-borrowing. The Bureau
stated that many of these consumers may reasonably be determined,
before getting a loan, to have the ability to repay their loan, such
that the ability-to-repay requirement in the proposed rule would not
have a significant impact on their eligibility for this type of credit.
The Bureau stated that, at most, it would reduce somewhat the speed and
convenience of applying for a loan under the current practice, though
it was not clear that any such differential would be a material factor
for any prospective borrowers. The Bureau stated that, under the status
quo, the median borrower lives five miles from the nearest payday
store. Consumers generally can obtain payday loans simply by traveling
to the store and showing a pay stub and evidence of a checking account;
online payday lenders may require even less of a showing in order to
extend a loan. For title loans, all that is generally required is that
the consumer owns their vehicle outright without any encumbrance.
The proposal stated that there could be a significant contraction
in the number of payday stores if lenders were required to assess
consumers' ability to repay in the manner required by the proposal, but
the Bureau projected that 93 to 95 percent of borrowers would not have
to travel more than five additional miles to get a loan. Lenders likely
would have to require more information and documentation from the
consumer. Indeed, under the proposed rule consumers would have been
required in certain circumstances to provide documentation of their
income for a longer period of time than their last pay stub. Under the
proposal, consumers would also be required to complete a written
statement with respect to their expected future income and major
financial obligations.
Moreover, when a lender makes a loan without determining a
consumer's ability to repay the loan according to its terms, the lender
can make the loan upon obtaining a consumer's pay stub or vehicle
title. The Bureau acknowledged in the proposal that lending under the
proposed rule may not be so immediate, though automated underwriting
systems could achieve similar levels of speed. If lenders assessed
consumers' ability to repay as stated in the proposal, they would
secure extrinsic data, such as a consumer report from a nationwide
consumer reporting agency, which could slow the process down somewhat.
Indeed, under the proposed rule lenders would be required to review the
consumer's borrowing history using the lender's own records and a
report from a registered information system, and lenders would also be
required to review a credit report from a nationwide consumer reporting
agency. Using this information, along with verified income, under the
proposed rule lenders would have to project the consumer's residual
income.
As discussed in the analysis contained in the proposal, the
proposed rule was designed to enable lenders to obtain electronic
income verification, to use a model to estimate rental expenses, and to
automate the process of securing additional information and assessing
the consumer's ability to repay. The Bureau anticipated that consumers
who are able to demonstrate the ability to repay under the proposed
rule would be able to obtain credit to a similar extent as they did in
the current market. While the speed and convenience fostered by the
current practice may be somewhat reduced for these consumers, the
Bureau concluded in the proposal that the proposed requirements would
not be overly burdensome in these respects. In particular, the Bureau
estimated that the required ability-to-repay determination would take
essentially no time for a fully automated electronic system and between
15 and 20 minutes for a fully manual system.
While the Bureau stated in the proposal that most repayers would be
able to demonstrate their ability to repay under the proposed rule, the
Bureau recognized there may be a sub-segment of repayers who could not
demonstrate their ability to repay if required to do so by a lender.
For them, the current lender practice of making loans without
determining their ability to repay could enables them to obtain credit
that, by hypothesis, they may actually be able to afford to repay. The
Bureau acknowledged that this group of ``false negatives'' may benefit
by being able to obtain covered loans without having to demonstrate
their ability to repay in the manner prescribed by the proposed rule.
However, the Bureau judged that under the proposed rule lenders
would generally be able to identify consumers who are able to repay and
that the size of any residual ``false negative'' population would be
small. It assessed this to be especially true to the extent that this
class of consumers is
[[Page 54600]]
disproportionately drawn from the ranks of those whose need to borrow
is driven by a temporary mismatch in timing between their income and
expenses rather than those who have experienced an income or expense
shock or those with a chronic cash shortfall. The Bureau inferred that
it is very much in the interest of these borrowers to attempt to
demonstrate their ability to repay in order to receive the loan they
are seeking, and that lenders will have every incentive to err on the
side of finding such ability. Moreover, even if these consumers could
not qualify for the loan they would have obtained absent an ability-to-
repay requirement, they may still be able to get different credit
within their demonstrable ability to repay, such as a smaller loan or a
loan with a longer term. For these reasons, the Bureau did not conclude
that any ``false negative'' population resulting from lenders making
ability-to-repay assessments would represent a significant amount of
countervailing benefit.
Finally, the proposal stated that some repayers may not actually be
able to afford to repay the loan, but choose to repay it nonetheless,
rather than re-borrow or default--which may result in their incurring
ancillary costs in connection with another obligation, such as a late
fee on a utility bill. Such repayers would not be able to obtain the
same loan under the proposed rule that they would have obtained absent
an ability-to-repay requirement, but the proposal stated that any
benefit they receive under the current practice would appear to be
small at most.
The second group identified in the proposal consisted of borrowers
who eventually default on their loan, either on the first loan or later
in a loan sequence after having re-borrowed, perhaps multiple times.
The Bureau referred to these borrowers as ``defaulters'' for purposes
of its analysis of countervailing benefits in the proposal. As
discussed in the proposal, borrowers of 20 percent of payday and 33
percent of single-payment vehicle title loan sequences fall within this
group. For these consumers, the current lender practice of making loans
without regard to their ability to repay the loan according to its
terms may enable them to obtain what amounts to a temporary
``reprieve'' from their current situation. They can obtain some ready
cash, which may enable them to pay a current bill or current expense.
However, the proposal stated that for many consumers, the reprieve can
be exceedingly short-lived: 31 percent of payday loan sequences that
default are single-loan sequences, and an additional 27 percent of loan
sequences that default are two or three loans long (meaning that 58
percent of defaults occur in loan sequences that are one, two, or three
loans long). The proposal stated that 29 percent of single-payment
vehicle title loan sequences that default are single-loan sequences,
and an additional 26 percent of loan sequences that default are two or
three loans long (meaning that 55 percent of defaults occur in loan
sequences that are one, two, or three loans long).
The proposal stated that these consumers thus are merely
substituting a payday lender or vehicle title lender for a pre-existing
creditor, and in doing so, they end up in a deeper hole by accruing
finance charges, late fees, or other charges that are imposed at a high
rate. Title loans can have an even more dire consequence for
defaulters: 20 percent of them have their vehicle repossessed. The
Bureau stated in the proposal that it therefore did not find that
defaulters obtain significant benefits from the current lender practice
of making loans to them without determining their ability to
repay.\667\
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\667\ The Bureau recognizes that some defaulters may not default
because they lack the ability to repay, but the Bureau estimates
that the percentage of consumers who default despite having the
ability to repay the loan is small. Moreover, any benefit such
borrowers derive from the loan would not be diminished by the
provisions of Sec. 1041.4 precisely because these borrowers do have
the ability to repay and thus would qualify for such loans.
---------------------------------------------------------------------------
The final and largest group of consumers identified in the proposal
consisted of those who neither default nor repay their loans without
re-borrowing. Instead, this group of consumers will re-borrow some
number of times before eventually repaying the loan. In the proposal,
the Bureau referred to consumers with such loan sequences as ``re-
borrowers'' for purposes of its discussion of countervailing benefits.
These consumers represent 58 percent of payday loan sequences and 56
percent of title loan sequences. For these consumers, as for the
defaulters, the practice of making loans without regard to their
ability to repay the loan according to its terms enables them to obtain
a temporary reprieve from their current situation. But for this group,
the proposal stated that such a reprieve can come at a greater cost and
pose a higher likelihood of risk than they would have initially
expected, and for many consumers it will come at a substantially
greater cost and a much higher likelihood of risk.
The proposal stated that some re-borrowers are able to end their
borrowing after a relatively small number of additional loans; for
example, approximately 22 percent of payday loan sequences and 23
percent of title loan sequences are repaid after the consumer re-
borrows once or twice. But even among this group, many consumers do not
anticipate before taking out a loan that they will need to re-borrow at
all. These consumers cannot reasonably avoid their injuries, and while
their injuries may be less severe than the injuries suffered by
consumers with extremely long loan sequences, their injuries can
nonetheless be substantial, particularly in light of their already
precarious finances. Conversely, some of these consumers may expect to
re-borrow and may accurately predict how many times they will have to
re-borrow. For consumers who accurately predict their re-borrowing, the
Bureau did not count their re-borrowing costs on the ``injury'' side of
the countervailing benefits scale.
The proposal stated that while some re-borrowers end their
borrowing after a relatively small number of additional loans, a large
majority of re-borrowers end up in significantly longer loan sequences.
Of storefront payday loan sequences, for instance, one-third contain
seven or more loans, meaning that consumers pay finance charges equal
to or greater than 100 percent of the amount borrowed. About a quarter
of loan sequences consist of 10 or more loans in succession and even
larger aggregate finance charges. For single-payment vehicle title
borrowers, the consequences described in the proposal were similarly
dramatic: Only 23 percent of loan sequences taken out by re-borrowers
on title loans are repaid after two or three successive loans, whereas
23 percent of the loan sequences are for 10 or more loans in
succession. The Bureau did not find that any significant number of
consumers anticipated such lengthy loan sequences, and such empirical
research as is available indicates that borrowers who end up in
extended loan sequences are the least accurate in predicting the
duration of their borrowing.
Thus, the Bureau stated its view in the proposal that the
substantial injury suffered by the defaulters and those re-borrowers
who incurred unanticipated injury--the categories that represent the
vast majority of overall borrowers of covered loans--dwarfs any
benefits these consumers may receive in terms of a temporary reprieve
and also dwarfs the speed and convenience benefits that the repayers
may experience. The Bureau acknowledged that any benefits derived by
any aforementioned ``false negatives'' may be reduced under the
proposed rule, but it judged that the
[[Page 54601]]
limited benefits that may be received by this relatively small group
are far outweighed by the substantial injuries sustained by the
defaulters and re-borrowers, as discussed above. Further, the Bureau
stated that under the proposed rule, many borrowers could be led to
find more sustainable loan options, such as underwritten credit on
terms that are more affordable and better tailored to their budget
needs.
Turning to the benefits of the practice for competition, the Bureau
acknowledged in the proposal that the current practice of lending
without regard to consumers' ability to repay has enabled the payday
industry to build a distinctive business model. Under this model, fully
half or more of the revenue on these kinds of loans comes from
consumers who borrow 10 or more times in succession. This, in turn, has
enabled a substantial number of firms to extend such loans from a
substantial number of storefront locations. The Bureau estimated that
the top 10 storefront payday lenders controlled only about half of the
market, and that 3,300 storefront payday lenders were small entities as
defined by the SBA. The Bureau also acknowledged that the anticipated
effect of limiting lenders to making loans that consumers can actually
afford to repay would be to shrink the number of loans per consumer
fairly substantially, which may, in turn, result in a more highly
concentrated market in some geographic areas. Moreover, the Bureau
acknowledged that the practices underlying their current business model
enabled lenders to avoid many of the procedural costs that the proposed
rule would impose.
However, the Bureau did not believe the proposed rule would
materially reduce the competitiveness of the payday or title loan
markets as a practical matter. As discussed in the proposal, most
States in which such lending takes place have established a maximum
price for these loans. Although in any given State there are a large
number of lenders making these loans, located typically in close
proximity to one another, the Bureau preliminarily found from existing
research that there is generally no meaningful price competition among
these firms. Rather, the Bureau stated that lenders generally charge
the maximum possible price allowed in any given State. Lenders that
operate in multiple States typically vary their prices from State to
State to take full advantage of the parameters that are allowed by
local law. Thus, for example, lenders operating in Florida are
permitted to charge $10 per $100 loaned, and they do; when those same
lenders are lending in South Carolina, they are permitted to charge $15
per $100, and they do that instead. In addition, despite some amount of
consolidation that could be expected in the industry, the Bureau
preliminarily found that under the proposed rule, based on experience
of recent legislative reforms in various States, lenders would likely
remain in relatively close proximity to the vast majority of borrowers.
In sum, the Bureau stated in the proposal that the benefits of the
identified unfair practice for consumers and competition--failing to
underwrite covered loans by making a reasonable assessment of the
borrower's ability to repay the loan according to its terms--do not
appear to outweigh the substantial injury that is caused or likely to
be caused by the practice, and which is not reasonably avoidable by
consumers. On the contrary, the Bureau preliminarily determined that
the very significant injury caused by the practice outweighs the
relatively modest benefits of the practice for consumers or for
competition.
Comments Received
The Bureau received a number of comments on its proposed analysis
of whether the substantial injury was outweighed by countervailing
benefits to consumers or competition. Several industry participants and
trade association commenters contended that this test was simply not
met, arguing that the negative effects of the proposed rule would
exceed its benefits. They argued that all consumers would be deprived
of loans precluded by the rule, not just the ``false negatives'' or
those who may be harmed by them.
Some commenters stated their point in a more general way,
complaining that the Bureau had failed to present any objective metric
or provide hard quantitative evidence to determine the costs and
benefits of the identified practice to consumers or to competition in a
more rigorous manner. Aside from attacking the general framework of the
Bureau's analysis, commenters also maintained that the Bureau
underestimated the costs that the rule would impose on lenders, greatly
impeding the industry's ability to make appropriate covered loans. Some
argued that the Bureau should have considered the costs of complying
with the rule aggregated with the costs associated with complying with
State law requirements.
Commenters listed a variety of potential benefits to consumers
associated with covered short-term loans, and suggested that the Bureau
both understated the benefits and overstated the extent of injury for
re-borrowers. The list included that such loans help consumers cope
with income shocks, achieve income smoothing, realize an overall
improvement in their ability to manage accumulated debt, avoid bounced
checks and problems with debt collection firms, reduce delinquency or
defaults on other accounts, reduce unemployment, and reduce
bankruptcies. Others emphasized that covered short-term loans can allow
consumers to avoid riskier and more costly forms of credit, and thus
these loans are simply the best and least expensive choice available
for cash-strapped consumers with limited credit options. These
commenters maintained that such loans allow consumers to avoid the
inferior substitutes of even more costly alternatives, such as
pawnbrokers, bank overdraft services, credit card cash advances, over-
limit credit-card fees, and late-payment fees. As for vehicle title
loans, commenters noted that they have the advantage of allowing
consumers to tap into an asset to meet current needs and are structured
to limit the potential harms to consumers because they are largely non-
recourse loans; yet the restrictions posed by mandatory ability-to-
repay underwriting would constrict the market for such loans and
correspondingly impair the benefits to consumers.
Some commenters asserted that studies show that consumer access to
payday loans has no negative effect on various measures of consumer
financial health. They suggested that credit scores were better for
longer-term borrowers as compared to borrowers who engaged in less re-
borrowing and for borrowers in States with fewer payday loan
restrictions as compared to States with greater restrictions, and that
some studies conclude that payday lending bans lead to more bounced
checks and overdraft fees as well as increased bankruptcy filings. They
therefore surmised that covered loans improve the financial well-being
of consumers. Several commenters cited as evidence of customer
satisfaction the small proportion of complaints submitted to the Bureau
about the product, the many positive accounts of covered loan usage in
the ``Tell Your Story'' portion of the Bureau's Web site, and
substantial product use without substantial levels of complaints to
State regulators.
Similarly, as stated above in the substantial injury section, a
number of commenters believed the identified practice was net
beneficial. Many of these commenters argued that borrowers
[[Page 54602]]
were merely replacing other obligations with a covered short-term loan,
and thus the harm of the one was offset by the benefit of being able to
pay the other. Some commenters argued that borrowers were not harmed,
or were only minimally affected, by defaulting on these loans because
those defaults generally do not affect consumers' credit reports and
some lenders do not pursue collection efforts on defaulted loans. The
Bureau received a large volume of comments from consumers who attested
to the benefits of payday lending from their own personal experiences,
though it also received many other comments from individual borrowers
and consumer groups complaining about the injuries identified in the
proposed rule.
One respected academic in the field commented that while economists
have generally concluded that payday loans may destroy consumer welfare
in some situations and may improve consumer welfare in others, there is
disagreement over how many consumers fall in each category. This
commenter asserted that the Bureau would only have to resolve this
debate about consumer welfare if it were choosing whether to ban payday
lending entirely.
Many industry commenters, and other commenters including a group of
State Attorneys General, argued that by eliminating or limiting access
to covered loans, the proposed rule would make consumers worse off
because they would be forced to seek more expensive or otherwise more
harmful alternatives, and that the Bureau had failed to factor the
benefit of being able to avoid these harmful alternatives into its
preliminary analysis of unfairness (i.e., countervailing benefits). A
number of commenters including a trade group and a university-
affiliated research center, among others, argued that consumer demand
for credit will continue while the rule will only restrict supply.
These comments were made about all of the proposed restrictions on
making all three types of covered loans: Covered short-term loans,
covered longer-term balloon-payment loans, and other covered longer-
term loans (i.e., certain high-cost installment loans). And many
comments in this vein focused on particular proposed restrictions, with
particular emphasis on the 30-day cooling-off periods after a sequence
of three loans made under Sec. 1041.5 or Sec. 1041.6, and the
limitation on the total number of conditionally exempt covered short-
term loans under proposed Sec. 1041.6 to six loans or 90 days of
indebtedness in a 12-month period. These commenters asserted that these
restrictions would force consumers to substitute alternative forms of
credit that are more costly and harmful than covered loans, claiming
this to be true of loans ranging from pawn loans, to overdraft, to
loans from unlicensed and unregulated online lenders, and even to loans
from neighborhood loan sharks. Numerous consumers writing as part of
organized letter-writing campaigns raised similar issues, expressing
concern about the possibility of not having unlimited access to covered
loans and the lack of alternative options. Some commenters referenced
or submitted research studies, law review articles, or other analyses
of these issues, some of which are described in detail below in the
responses to the comments.
Some commenters raised one countervailing benefit to the Bureau's
attention that was not included in the proposed rule--that borrowers do
not have to undergo a credit check when taking out a covered loan that
is originated without underwriting. Others noted that the current
practices of many lenders, which do not engage in ability-to-repay
underwriting of covered loans, avoids the additional privacy and
security risks of maintaining more documentation on borrowers.
In addition to the points they made about countervailing benefits
for consumers, industry commenters also objected to the Bureau's
analysis of the countervailing benefits to competition. The Bureau
received some comments arguing that the Bureau's statement that there
is ``generally no meaningful price competition'' was inaccurate.
Lenders provided assessments of their own market experience that
purported to rebut that claim and indicated that covered loans create
additional competition for other types of credit. They also argued that
the Bureau had not appropriately included in the countervailing
benefits the efficiencies of not having to assess the borrower's
ability to repay, which reduce procedural costs to the entity and thus
the prices offered to consumers. Commenters further asserted that the
Bureau had failed sufficiently to take account of how the identified
practice fosters non-price competition among lenders. They also noted
that the proposal impedes consumer free choice and that it fails to
consider the negative effects it may have on rural consumers. Some
commenters emphasized that the proposed rule would lead to market
concentration, eliminating thousands of jobs while denying access to a
form of credit that millions of consumers currently rely on. Others
suggested that lack of clarity over the application of the proposed
rule to banks and credit unions could lead them to stop making small-
dollar loans to their customers.
A coalition of consumer groups commented that the market for short-
term small-dollar credit is much broader than the payday and single-
payment vehicle title loans covered by this rule. In their analysis,
the broader market comprises substitute products they viewed as more
advantageous than covered short-term loans, including credit cards,
subprime credit cards, certain bank and credit union products, non-
recourse pawn loans, employer funds, charitable funds, and payment
plans that are often made available by utilities and others. They also
suggested that other non-credit strategies, such as debt counseling and
credit counseling, should be viewed as preferable alternatives to
taking out payday and title loans. They went even further by arguing
that payday loans should not even be considered as ``credit'' to be
accessed, as in their view most of these loans generate their own
demand through repeated rollovers, rather than meeting the independent
credit needs of consumers.
The Final Rule
After having reviewed and analyzed the comments submitted in
response to the proposed rule, the Bureau concludes that though the
identified practice of making covered loans without reasonably
assessing the borrower's ability to repay the loan according to its
terms presents some countervailing benefits to consumers and
competition, those benefits do not outweigh the substantial injury that
consumers are unable reasonably to avoid and that stems from the
identified practice.
Methodology
Again, the Bureau approaches this determination by first weighing
substantial injury in the aggregate, then weighing countervailing
benefits in the aggregate, and then assessing which of the two
predominates. If the benefits predominate, then the practice is not
unfair. If the benefits do not predominate, then the practice is
unfair. As described above, the substantial injury is incurred through
default, delinquency, re-borrowing, and the collateral consequences of
making unaffordable payments, including harms from forgoing major
financial obligations or basic living expenses in an attempt to avoid
these other injuries.
It is important to start by recognizing that the Bureau is not
assessing the benefits and injury of covered short-term loans. As one
academic commenter noted, this would only be necessary if the Bureau
were seeking to ban all
[[Page 54603]]
payday lending in its entirety. Rather, the Bureau is weighing the
benefits and injury of the identified practice, which is making such
loans without reasonably assessing that borrowers have an ability to
repay the loan according to its terms. In other words, the
countervailing benefits to consumers consist of the benefits that
consumers receive as a result of lenders making these loans without
assessing ability to repay (i.e., not having to comply with any of the
underwriting criteria of this rule). In weighing the countervailing
benefits, the Bureau considers the various costs that a remedy would
entail. Costs not incurred to remedy the practice, like costs of
complying with independent State law requirements, are not included in
the analysis.
As the Bureau noted in the proposal, unfairness determinations do
not require an exact quantification of costs and benefits. To do so
would be impracticable, despite the suggestion made by some commenters
that a specific metric or objective quantification was needed to meet
the requirements of the statute--a suggestion that was made without any
specificity as to methodology and in reliance on no existing precedent.
And, in fact, the Bureau has quantified such data as are available
about the frequency and extent of re-borrowing, the frequency of
default, the frequency of payment failures, the severity of the
resulting harms, and various other relevant items, even if some factors
(such as the frequency and extent of default avoidance, for example)
are not subject to being quantified as a practical matter.
At the proposal stage, the Bureau believed that the injury caused
by the practice outweighed the benefits to consumers or competition,
the latter of which includes the costs associated with complying with
the remedy to the extent they would be passed on to consumers (and thus
the absence of which is a benefit to consumers). The Bureau has had the
chance to process and digest over a million comments that were
submitted on the proposed rule and now concludes that this assessment
was correct. However, in light of the considerable volume of input
received from the public, the Bureau has decided to modify certain
parameters of the proposed rule so as to simplify its scope, reduce the
potential impact on access to credit, streamline the underwriting
process, and add more flexibility within the existing framework. The
effect of these adjustments is to reduce the costs associated with
complying with the rule and reduce the impact it will have on access to
credit, thereby reducing the weight on the countervailing benefits side
of the scale.
This is so because in assessing the identified practice, the Bureau
weighs the injury against the countervailing benefits, and according to
the FTC Statement on Unfairness, the costs associated with implementing
the remedy (i.e., assessing ability to repay) are included in the
benefits that lenders could avoid if they did not have to comply with
the underwriting criteria of the final rule. The Bureau's efforts to
ensure that its remedy does not overly restrict access to credit,
including adjustments made in Sec. 1041.5 of the final rule that
simplify and streamline some of the underwriting criteria that had been
contained in the proposal, decrease the costs of the remedy, which in
turn reduces the weight that is attributed to the countervailing
benefits side of the scale. And the allowance of loans that can be made
pursuant to Sec. 1041.6 of the final rule without having to meet those
specific underwriting criteria further reduces the weight on this side
of the scale. In other words, the Bureau has reacted to commenters who
feared the proposed rule was too complex and overly burdensome by
reducing complexity and burden. These adjustments affect the balance
between consumer injury and countervailing benefits, which results in
the injury from the identified practice outweighing the countervailing
benefits to consumers by even more than it did at the proposal stage.
With these changes, which are described more specifically in the
relevant explanation of Sec. 1041.5 of the final rule, the Bureau is
reinforced in its conclusion that the substantial injury is not
outweighed by countervailing benefits to consumers or to competition.
Assessing Benefits to Consumers
To evaluate this assessment in light of the points made by the
commenters, it is useful again to divide consumers into several groups
of different borrowing experiences, in order to analyze whether and how
the practice of making covered short-term loans without reasonably
assessing whether the consumer has the ability to repay the loan
according to its terms yields countervailing benefits to consumers.
Those groups, once again, can be characterized as ``repayers,''
``defaulters,'' and ``re-borrowers'' for purposes of this analysis.
To begin with ``repayers,'' several commenters stated that the
proposed rule would have such a substantial financial impact on lenders
that even borrowers who have an ability to repay would not have access
to covered loans as a result of the rule. The Bureau acknowledges that
some borrowers who might end up repaying their loans because of
windfalls or other unexpected developments would be unable to obtain a
loan if they cannot meet the ability-to-repay criteria, though it does
not anticipate there are large numbers of such consumers. Yet the
Bureau stands by its analysis in the proposed rule on how the market
will likely consolidate and thus survive as a result of the proposed
rule, and thus that lenders will continue to make loans to borrowers
who have the ability to repay. Any other conclusion would require the
industry to concede that it cannot execute on a successful business
model for making these loans unless it can be assured of a relatively
large number of borrowers who find themselves caught up in extended
loan sequences. The Bureau addresses more specific comments about its
analysis of this point in part VII, which considers the benefits,
costs, and impacts of the final rule on consumers and covered persons
pursuant to section 1022(b)(2)(A) of the Dodd-Frank Act.\668\
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\668\ 12 U.S.C. 5512(b)(2)(A).
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As to whether the rule will drive up prices for borrowers with the
ability to repay, the Bureau does not believe it will do so. The Bureau
noted in the proposal, and above in Market Concerns--Underwriting, that
many covered loans are already offered at the maximum price allowed
under State law. Instead of increasing prices, which they typically
cannot do, lenders will likely address additional compliance costs and
reduced volume by consolidating to some degree, as the Bureau
anticipated.
The Bureau also has no reason to believe that lenders will be
overly conservative and restrictive by lending to an even smaller group
of people than the rule would allow. Without evidence to the contrary,
the Bureau expects that the industry will act rationally and make those
loans that are allowed by the rule. It may be that some lenders will
choose to take a conservative approach and decline to lend to borrowers
who would be eligible under the rule due to concerns about compliance
risk; if so, that would be an unfounded and imprecise reaction to the
rule, yet it is a possible outcome in some instances. Even so, the
effect on the countervailing benefits determination should be marginal
at best. Nonetheless, as set out in the relevant explanation of Sec.
1041.5 of the final rule, the Bureau has made certain adjustments to
streamline and simplify the final rule's underwriting criteria with the
intent of reducing the
[[Page 54604]]
number of industry participants that would restrict access to credit
based on overly conservative assessments of compliance risk.
Thus, the Bureau continues to be persuaded that lenders will be
able to make covered short-term loans to the population of consumers
who have the ability to repay them, and that the ``false negative''
category of borrowers will be low, especially in light of the
adjustments that are made in the final rule to respond to these
comments to streamline the underwriting criteria in certain respects.
Further, the Bureau notes that the proposed rule, and now the final
rule, allows lenders to make some covered loans under the terms set
forth in Sec. 1041.6, without all the specific underwriting criteria
that would otherwise apply under Sec. 1041.5 because other conditions
are imposed that effectively prevent extended loan sequences. Based on
the lack of persuasive evidence demonstrating otherwise--and in light
of the further changes to the rule that simplify, reduce burden, add
flexibility, and ensure broader access to credit--the Bureau concludes
that the lending industry should be able to adjust to the rule, and
consumers who can afford to repay covered short-term loans according to
their terms will generally continue to have access to them. The Bureau
thus concludes that restrictions on access to credit for borrowers who
have the ability to repay will be minimal.
The Bureau also finds that it did not underestimate other benefits
to these consumers, such as the speed and convenience associated with
lenders not having to underwrite loans by making ability-to-repay
determinations. The Bureau continues to maintain the view that the
underwriting process for these loans can be largely automated. But as a
matter of caution and in response to the comments received, the Bureau
decided to make adjustments to further streamline some of the
underwriting criteria contained in the proposed rule. For example, as
discussed above and in contrast to the proposal, the Bureau has removed
some of the complexity around the residual income test, changed the
documentation requirements in a variety of ways (including by allowing
lenders to rely on consumer statements to authenticate rental
expenses), and allowed lenders to take account of income from someone
other than the borrower if the borrower has a reasonable expectation of
access to that income. Lenders also will be able to assess ability to
repay, in the alternative, by using a debt-to-income ratio. And rental
expenses can now be based solely on a borrower's statement without the
need to validate such statements through survey or other data. In fact,
under the final rule, most borrowers who have the ability to repay
typically should be able to get a covered loan without having to
present any more documentation of income than a pay stub or a
paycheck,\669\ which commenters indicated is the kind of income
documentation that is already required by many lenders.
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\669\ This should be true for borrowers unless they wish to rely
on matters other than income to demonstrate the ability to repay a
covered loan, such as income from another person that is reasonably
available for use by the borrower. More specific description of the
adjustments made in the final rule to the underwriting requirements
contained in the proposed rule can be found in the explanation of
Sec. 1041.5 below.
---------------------------------------------------------------------------
The second group of consumers consists of borrowers who eventually
default on their loans, either on the first loan or later in a loan
sequence after having re-borrowed, perhaps multiple times. As for these
``defaulters'' who lack the ability to repay the loan according to its
terms, the Bureau did not underestimate the countervailing benefits to
them. It is apparent, as a number of commenters attested, that these
borrowers typically would not be able to obtain loans under the terms
of the final rule. Put another way, the current practice of failing to
make a reasonable assessment of whether a borrower can repay a covered
loan results in this population of borrowers obtaining loans they do
not have the ability to repay, which leads either immediately or
eventually to default. As industry commenters noted, losing access to
non-underwritten credit may have consequences for some consumers,
including the inability to pay for other needs or obligations or the
need to seek out alternative credit options or budgeting strategies.
The Bureau considered the impact of the identified practice on access
to credit in the proposal, which inherently included the natural
consequences of losing access to such non-underwritten credit. The
Bureau continues to regard the current access to credit that would be
foreclosed under the ability-to-repay requirement as not an
insignificant countervailing benefit.
While the vast majority of borrowers who would eventually become
defaulters will not be able to obtain covered short-term loans, this
forgone benefit must be weighed against the forgone injury. Again, the
figures presented in the proposal are instructive in terms of the
comparison at issue here. As discussed in the proposal, borrowers of 20
percent of payday and 33 percent of single-payment vehicle title loan
sequences fall within this group of ``defaulters.'' For these
consumers, their current access to non-underwritten credit may enable
them to obtain a temporary ``reprieve'' from their current situation by
obtaining the cash to pay a current bill or expense. But for many
consumers, this reprieve is exceedingly brief: 31 percent of payday
loan sequences that default are single-loan sequences, and an
additional 27 percent of loan sequences that default are two or three
loans long (meaning that 58 percent of defaults occur in loan sequences
that are one, two, or three loans long). The proposal also stated that
29 percent of single-payment vehicle title loan sequences that default
are single-loan sequences, and an additional 26 percent of loan
sequences that default are two or three loans long (meaning that 55
percent of defaults occur in loan sequences that are one, two, or three
loans long). Thus these consumers are merely substituting a payday
lender or title lender for a pre-existing creditor, and they quickly
find themselves in a new and potentially deeper hole by accruing
finance charges, late fees, or other charges that are imposed at a high
rate as well as the adverse consequences of ultimate default. Title
loans can have an even more dire consequence for defaulters: 20 percent
of them have their vehicle repossessed, with further adverse
consequences, which may be take a severe toll on the consumer's
economic situation if it affects their ability to get to work or carry
on a variety of everyday household affairs. The Bureau thus finds that
most defaulters do not obtain any significant benefits from the current
lender practice of making loans to them without reasonably assessing
their ability to repay the loan according to its terms.
There is another important point here about the calculus of
benefits and injury with respect to ``defaulters'' that was not
discussed in the proposal, yet which underscores the fact that their
current access to non-underwritten credit does not benefit them and in
fact leads to considerable harm. That is the adverse economic effect of
the unsuccessful struggle to repay the unaffordable loan on the
remaining population of ``defaulters'' that were omitted from the above
discussion. Note that 58 percent of defaults on payday loans, and 55
percent of defaults on title loans, occur in loan sequences that are
one, two, or three loans long. What this leaves aside is that fully 42
percent of default on payday loans, and 45 percent of defaults on title
loans, occur after the borrower has already had an extended loan
[[Page 54605]]
sequence of four or more loans, and then defaults. In many instances,
this scenario is strong evidence of consumer mistake, since a consumer
who anticipates defaulting should not also incur the high and
accumulating costs of re-borrowing (which, for a sequence of at least
four loans, amounts to more than half of the principal of the original
loan, with the total mounting as the sequence extends even further). It
is thus quite implausible that these borrowers, who constitute a
substantial segment of all ``defaulters,'' obtain any significant
benefits from the current lender practice of making loans to them
without reasonably assessing their ability to repay the loan according
to its terms. Indeed, quite the contrary is very likely to be the case
for the vast majority of these borrowers, and the harm they suffer in
these circumstances will generally amount to a very substantial injury.
This account provides a strong refutation of the claim by certain
commenters that borrowers who default on covered short-term loans do
not sustain any substantial injury in light of the corresponding
benefits, or that they experience a net benefit because they are able
to keep the proceeds of the defaulted loan and perhaps avoid defaulting
on some other obligation with more severe consequences. Although that
might conceivably be true in some instances, it is implausible in any
functioning market that it is likely to be true very often, and that is
particularly the case in the context of title loans, where the damaging
consequences of vehicle repossession multiply the potential harm even
further. So even if there is a small number of such borrowers, it is
unlikely to have any material impact on the analysis here. As for the
commenters who asserted that default does not affect consumers' credit
reports and sometimes does not lead to debt collection efforts, these
are marginal matters when compared to the core harms associated with
unaffordable loans that end in default. But in any event, the Bureau's
experience from engaging in supervisory oversight and investigations of
these types of lenders have led to numerous enforcement actions
demonstrating that many such lenders do seek to collect debts that are
due on defaulted loans, which have led to findings of illegal conduct
in aggressively seeking to pursue collection of such loans.\670\ And
nothing prevents third party debt collectors or debt buyers from
reporting negative information to consumer reporting agencies, which
some collectors do to facilitate collection.
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\670\ See, e.g., In the Matter of Money Tree, Inc., File No.
2016-CFPB-0028; In the Matter of EZCORP, Inc., File No. 2015-CFPB-
0031; CFPB v. NDG Financial Corp., Case No. 1:15-cv-05211-CM
(S.D.N.Y.); In the Matter of ACE Cash Express, Inc., File No. 2014-
CFPB-0008; In the Matter of Westlake Servs., LLC, File No. 2015-
CFPB-0026. The Bureau has also taken actions against debt
collectors, some of which collect in part on small-dollar loans.
See, e.g., CFPB v. MacKinnon, et al., Case No. 1:16-cv-00880
(W.D.N.Y.).
---------------------------------------------------------------------------
The third category of consumers is the ``re-borrowers'' who find
themselves in extended loan sequences but eventually manage to find
some way to repay the loan, even if only nominally. They are a majority
of all borrowers--representing 58 percent of payday loan sequences and
56 percent of title loan sequences. For these consumers, as with the
``defaulters,'' the identified practice of making loans without
reasonably assessing their ability to repay can allow them to obtain a
temporary reprieve from the difficulties of their current financial
situation. Some commenters suggested that many of them may benefit by
literally buying time and to pay off some of their cumulative
obligations later rather than sooner and that some financial indicia
such as credit scores and bankruptcy filings appear to be more positive
for these re-borrowers.
It is undoubtedly true that some borrowers who lack the ability to
repay may gain an overall benefit from having access to covered short-
term loans. Again, these could be borrowers who incur some sort of
windfall or positive change in circumstances, or accurately anticipate
the extent of their re-borrowing, and may be engaged in either income
smoothing or spreading an unexpected cost across a longer time span. In
some cases, these borrowers may be substituting a payday lender for
some other creditor, such as a landlord or a utility company. It is
however, the Bureau's judgment that the injury to other ``re-
borrowers'' who do not accurately anticipate the length of re-
borrowing, and many who find themselves unexpectedly trapped in
extended loan sequences, is so substantial as to outweigh the benefits
to these other consumers. This point is bolstered by comments received
from individual borrowers, consumer groups, and faith groups who
related many similar stories about the financial harms sustained by
borrowers who found themselves caught up in extended loan sequences--
whether or not those sequences ultimately ended in default, as some but
not all do.
In this regard, it is notable that any such reprieve can pose a
higher likelihood of risk and come at a greater cost than many
borrowers may have initially expected, and a substantial population of
``re-borrowers'' can be expected to find that it will come at a much
higher likelihood of risk and a substantially greater cost. It is worth
restating why this is so. Once again, the dynamic of covered short-term
loans is such that once the first loan has been made to a borrower who
lacks the ability to repay it, the range of choices open to the
borrower is sharply constrained. At the point of taking out the initial
loan, the borrower can make a direct choice among competing
alternatives as a means of meeting their immediate financial needs, and
it is plausible that for some borrowers the decision to take out a
covered short-term loan may seem or be superior to other available
means of coping with the difficulties of their situation. But after the
first loan has been made, the circumstances change significantly. When
this first loan comes due, and for any and all subsequent loans, the
borrower is no longer at liberty to make an unencumbered choice among
competing alternatives. Instead, the borrower now must confront the
range of risks and harms that are by now familiar, as they have been
set out at length and discussed so often in the proposal and above--
default, delinquency, re-borrowing, and the negative collateral
consequences of making unaffordable payments, including harms from
forgoing major financial obligations or basic living expenses in an
attempt to avoid these other injuries.
This is the changed situation that borrowers confront as they find
themselves facing the constrained choices that lead many of them into
extended loan sequences, often unexpectedly, and cause them to bear the
high costs of repeatedly rolling over their loans (which, by the time
an extended loan sequence reaches seven loans, as one-third of
storefront payday loan sequences actually do, means the borrower will
have paid charges equal to 100 percent of the original amount borrowed
and still owe the full amount of the principal). So while it is
certainly likely that some borrowers may choose to take out these loans
intentionally to spread a large, unexpected expense across a longer
time span, it is equally apparent that many others find themselves in
significant trouble if they have taken out such an unaffordable loan as
an initial matter, even though they do find a way to manage to pay it
back eventually after experiencing the types of harm that accompany the
[[Page 54606]]
experience of an extended loan sequence. For those borrowers who
accurately predict the length of their re-borrowing, the Bureau does
not count these costs on the ``injury'' side of the ledger as against
countervailing benefits.
In evaluating whether most consumers would or would not be likely
to make this choice intentionally and based on accurate predictions, it
is relevant here that the evidence suggests that consumers seem to be
best able to gauge the expected duration of re-borrowing when the loan
sequences are shorter, and such empirical research as is available
indicates that borrowers who end up in extended loan sequences are the
least accurate in predicting their duration of re-borrowing. Again,
about one-quarter of storefront payday loan sequences consist of 10 or
more loans taken out in succession, and 23 percent of title loan
sequences consist of 10 or more loans in succession. The Bureau does
not find evidence that any significant number of consumers anticipated
such lengthy loan sequences.
Another set of considerations that is germane to the circumstances
of ``re-borrowers'' is the effect of lender practices in the market for
covered short-term loans. Although these loans are presented and
marketed as stand-alone short-term products, lenders are aware (though
many consumers likely are not) that only a relatively small number of
borrowers repay such loans without any re-borrowing, and their core
business model relies on that fact. Moreover, the decision that many
lenders have made to offer these loans without reasonably assessing the
borrower's ability to repay the loan according to its terms is the
identified practice that causes injury to consumers, which, as
discussed above, is not reasonably avoidable by consumers who are often
likely to fail to fully understand the likelihood and severity of the
risks posed. The Bureau also has concluded that the manner in which
lenders structure these products--including the term of the loan, its
balloon-payment structure, and the common requirement that the borrower
provide a cancelled check or ACH access or provide vehicle security--
likely contributes significantly to the result that many borrowers have
no good alternatives to ending up in extended loan sequences of
repeated re-borrowing that often extend well beyond their initial
expectations.
It is also worth emphasizing that even these ``re-borrowers'' who
would not have access to most covered short-term loans under Sec.
1041.5 of the final rule, because they lack the ability to repay the
loan according to its terms, would have access to loans made subject to
the protections found in Sec. 1041.6, with a corresponding reduction
in the weight that falls on the countervailing benefits side of the
scale. In the end, after aggregating the injury and benefits of these
three populations of borrowers, the Bureau believes that the aggregate
injury clearly outweighs the aggregate benefits. Substantial groups of
consumers suffer acute harm as a result of the various scenarios
analyzed above. These outcomes are bolstered by commenters who provided
examples of consumers who ended up in extremely long loan sequences and
ultimately were required to pay many multiples of the original
principal of the loan. Based on the Bureau's research, 62 percent of
these loans were in loan sequences of seven or more, and 15 percent of
loan sequences involved 10 or more loans.\671\ The scope of that injury
is quite substantial across the entire market for these loans. The
Bureau concludes that this aggregate injury to many ``re-borrowers''
outweighs the countervailing access-to-credit benefits that other ``re-
borrowers'' may receive as a result of lenders not reasonably assessing
the borrower's ability to repay the loan according to its terms, in
light of all the provisions of the final rule, including the effect
that Sec. 1041.6 will have in reducing the magnitude of those
benefits.
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\671\ And again, the research shows those in longer sequences
are less likely to anticipate the extent of re-borrowing.
---------------------------------------------------------------------------
As for the commenters who cited studies purporting to show that
payday loans improved financial outcomes, the Bureau notes that all of
the studies varied in their empirical rigor and the connection of their
causal inferences to their documented findings. Based on its experience
and expertise, the Bureau finds some studies to be more compelling than
others. For example, several of these studies predicated their
conclusions on comparisons of financial outcomes for consumers with and
without access to payday loans, relying on access to payday loans based
on geographic location as a proxy for actual use.\672\ Others that
reached conclusions about better or similar financial outcomes for
these groups relied on changes in credit scores, a narrow measure of
financial well-being for the population of payday loan borrowers, whose
credit scores are already strongly skewed toward the bottom of the
customary ranges.\673\ The Bureau discussed many of these studies in
the proposal; additional studies are mentioned here in light of
comments received and are also discussed in further depth in the
Section 1022(b)(2) Analysis in part VII below.
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\672\ Adair Morse, Payday Lenders: Heroes or Villains?, 102 J.
of Fin. Econ. 28 (2011); Jonathan Zinman, Restricting Consumer
Credit Access: Household Survey Evidence on Effects Around the
Oregon Rate Cap, at 5 (2008); Kelly D. Edmiston, Could Restrictions
on Payday Lending Hurt Consumers?, Fed. Reserve Bank of K.C., Econ.
Rev. 31, 37-38 (1st Qtr. 2011).
\673\ Ronald Mann, Do Defaults on Payday Loans Matter?, (working
paper Dec. 2014); Neil Bhutta, Payday Loans and Consumer Financial
Health (April 27, 2014), Journal of Banking and Finance, Vol. 47,
No. 1; Jennifer Priestley, Payday Loan Rollovers and Consumer
Welfare (Dec. 4, 2014).
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Findings based on the access proxy, which are possible largely due
to State-level variation in payday lending laws, do not demonstrate
better financial outcomes for actual payday loan borrowers. While
certainly instructive, the Bureau finds these studies are generally
less compelling than those based on individual-level data that can
identify actual payday borrowers and their use. Further, this research
has focused almost exclusively on the question of what happens when all
access to a given form of credit is eliminated, as opposed to when it
is merely restricted (or, as in this rule, restricted only as to
borrowers who cannot demonstrate an ability to repay). The evidence
available from States that have imposed strong restrictions on lending,
but not outright or de facto bans, suggests that, even after large
contractions in this industry, loans remain widely available, and
access to physical locations is not unduly limited.\674\
---------------------------------------------------------------------------
\674\ See Section 1022(b)(2) Analysis, part VII below.
---------------------------------------------------------------------------
One such study cited by commenters attempted to determine how
households in North Carolina and Georgia fared following State actions
to restrict payday lending. They reported an increase in the rate of
bounced checks, Chapter 7 bankruptcy filings, and complaints against
debt collectors and creditors.\675\ In an update to that paper, the
authors expanded the time frame, analyzed more State-level payday bans,
and considered the effects of enabling payday lending as well.\676\
They again found evidence that in response to limits on payday
borrowing, bounced checks increased, as did complaints about debt
collectors to the FTC, whereas Chapter 13 bankruptcy filings
[[Page 54607]]
decreased. Numerous industry comments cited these studies, along with a
related study that is no longer available.\677\ However, these studies
each rely on a methodology that severely undermines their conclusions.
Specifically, the original study's assertion that checks are returned
more frequently from States without payday lending--notably Georgia and
North Carolina--relies on data that intermingles data from those States
with data from numerous authorizing States (such as Louisiana, Alabama,
Tennessee, and others), which makes the conclusions dubious at best.
Indeed, in the original paper, more than half of the checks processed
at the Charlotte, North Carolina check processing center actually came
from States with payday loans. Additionally, the complaint data they
cited are limited by the fact that the FTC is unlikely to receive
complaints about payday lending (at the time, State regulators were
more likely to receive such complaints). As such, the measure of
complaints that the authors employ may not indicate the actual rate of
credit-related complaints, let alone overall consumer satisfaction.
While the later study improves on the previous studies by including
more States, a longer period of analysis, and additional outcome
measures, they still do not adequately address the shortcomings of
their previous studies. This study also relies on data sources that
commingle returned checks from States with payday bans with those from
States that permit payday lending, which undermines its conclusions,
and again relies on the simplistic measure of complaints received by
the FTC.
---------------------------------------------------------------------------
\675\ Donald P. Morgan & Michael R. Strain, Payday Holiday: How
Households Fare after Payday Credit Bans, FRB of New York Staff
Reports, No. 309, (Revised Feb. 2008).
\676\ Donald P. Morgan, Michael R. Strain & Ihab Selani, How
Payday Credit Access Affects Overdrafts and Other Outcomes, Journal
of Money, Credit, and Banking, 44(2-3): 519-531 (2012).
\677\ Donald P. Morgan, Defining and Detecting Predatory
Lending,'' Federal Reserve Bank of New York Staff Reports No 273
(2007). FRBNY Web page indicates report was ``removed at the request
of the author.''
---------------------------------------------------------------------------
Other studies, rather than using differences across States in the
availability of payday loans, have used data on the actual borrowers
who apply for loans and are either offered loans or are rejected. One
study used this approach to find that taking out a payday loan
increases the likelihood that the borrower will file for Chapter 13
bankruptcy.\678\ The authors found that initial approval for a payday
loan essentially doubled the bankruptcy rate of borrowers. Another
study used a similar approach to measure the causal effects of
storefront borrowing on borrowers' credit scores.\679\ The authors
found that obtaining a loan had no impact on how the consumers' credit
scores evolved over the following months. The authors noted, however,
that applicants generally had very poor credit scores both prior to and
after borrowing (or being rejected for) a payday loan. In each of these
studies, the authors were unable to determine whether borrowers who
were rejected by the lender from which they had data were able to take
out a loan from another lender.\680\
---------------------------------------------------------------------------
\678\ Paige Skiba and Jeremy Tobacman. Do Payday Loans Cause
Bankruptcy?, Working Paper (2015).
\679\ Neil Bhutta, Paige Marta Skiba & Jeremy Tobacman, Payday
Loan Choices and Consequences, Journal of Money, Credit and Banking,
47(2-3): 223-260 (2015). doi: 10.1111/jmcb.1275
\680\ As noted, some commenters had made dire predictions that
the proposed rule might cause borrowers to turn to illegal lenders
or ``loan sharks.'' As noted below in part VII, the Bureau is
unaware of any data on the current prevalence of illegal lending in
the United States, nor of data suggesting that such illegal lending
is more prevalent in States where payday lending is not permitted
than in States which permit it.
---------------------------------------------------------------------------
Two other studies have used data on payday borrowing and repayment
behavior to compare changes over time in credit scores for different
groups of borrowers. One measured changes over time in credit scores
for borrowers who re-borrowed different numbers of times, and found
that in some cases it appeared that borrowers who re-borrowed more
times had slightly more positive changes in their credit scores.\681\
These differences were not economically meaningful, however, with each
additional loan being associated with less than one point in credit
score increase.\682\ The other compared the changes in credit scores of
borrowers who defaulted on their loans with borrowers who did not, and
also found no difference.\683\ Neither study found a meaningful effect
of payday loan borrowing behavior on credit scores.
---------------------------------------------------------------------------
\681\ Jennifer Priestly, Payday Loan Rollovers and Consumer
Welfare (Dec. 5, 2014). Available at SSRN.
\682\ The Priestley study also compared changes over time in
credit scores of payday borrowers in different States, and
attributed those differences to differences in the States' payday
regulations. This ignores differences in who chooses to take out
payday loans in different States, given both the regulatory and
broader economic differences across States, and ignores the
different changes over time in the broader economic conditions in
different States.
\683\ Mann, Ronald, Do Defaults on Payday Loans Matter, December
2014, Working Paper.
---------------------------------------------------------------------------
Commenters also cited a laboratory experiment in which
undergraduate students completed a novel computer exercise designed to
test whether access to payday loans increased or decreased the
likelihood of financial survival in the face of expense shocks. The
experiment found that while subjects who used payday loans sparingly
were more likely to survive the simulated 30-month period than those
with no payday loans, heavy users that took out 10 payday loans or more
over the course of the 30 months were less likely to survive than those
who had no access to payday loans.\684\
---------------------------------------------------------------------------
\684\ Bart J. Wilson and David W. Findlay, and James W. Meehan,
and Charissa P. Wellford, and Karl Schurter, An Experimental
Analysis of the Demand for Payday Loans (April 28, 2010).
---------------------------------------------------------------------------
One comment described the lender's use of the Bureau's financial
well-being scale to compare the scores of its borrowers to those of
consumers deemed by the commenter to be ``similarly situated'' who did
not use payday loans or did not have access to payday loans due to
their State prohibiting the product. However, the commenter's analytic
methods cannot be used to determine causality, and their findings do
not appear fully consistent with their conclusions. Furthermore, the
comment noted that customers were more likely than non-customers to
have incomplete surveys. It is unclear whether the survey may therefore
have been affected by non-response bias by customers in greater
financial distress. Non-customers may also have had characteristics
that make them ineligible for a payday loan despite being ``similarly-
situated'' based on other metrics. These factors, such as being
unbanked or not having documented income, may also have influenced
well-being scores.
In the commenter's first analysis, they report the median and mean
financial well-being scale scores by State and overall for its payday
customers and non-customer population and found that, in 11 States in
which a high response rate was achieved, its median customer scored one
point lower than a non-customer, and that the average customer scored
2.3 points lower than the average non-customer. The lender concluded
this result showed no real negative effect of payday borrowing.
However, the commenter also highlighted the findings from Texas, where
customers had a higher score than non-customers, although the
differences were the same or smaller than those reported nationally
where the commenter surmised there was no significant effect. The
Bureau recently conducted a national study of American consumers which
found that the adults who reported using products such as payday, non-
recourse pawn, and vehicle title loans in the previous 12 months had an
average financial well-being score of 42, which was 13 points lower
than adults who did not report using
[[Page 54608]]
these products.\685\ Additionally, there is little overlap in the
distribution of financial well-being scores among those consumers who
have and have not used payday, non-recourse, and vehicle title
loans.\686\
---------------------------------------------------------------------------
\685\ CFPB, Financial Well-Being in America, 57 (Sept. 2017),
available at http://files.consumerfinance.gov/f/documents/201709_cfpb_financial-well-being-in-America.pdf.
\686\ Financial Well-Being in America, 57-58.
---------------------------------------------------------------------------
A second analysis conducted by the lender compared the scores of
customers across different levels of payday loan usage and borrowing
outcomes. Customers within the last year were grouped into five
categories by the number of transactions they had, and grouped into
four categories based on the outcome they experienced. Based on the
median scores for each of the 20 categories a customer could be placed
in given their borrowing and outcome status, the commenter concluded
that there is no correlation between borrowers' financial well-being
score and the number of transactions. However, the commenter also
acknowledged finding lower scores for those that have their balances
written off. Despite this finding, the lender still concluded that
there is no evidence to support a theory that payday loan use has a
negative effect on financial well-being.
More generally, the Bureau notes that all of these studies sought
to measure the impact of payday loans, or eliminating payday lending,
on all consumers generally. The Bureau is not opining on whether the
payday industry, generally, is beneficial to consumers taken as a
whole. Rather, the Bureau is assessing the impact of the identified
practice of making payday loans (and other covered short-term loans and
covered longer-term balloon-payment loans) to borrowers without making
reasonable determinations that the borrowers have the ability to repay
the loans according to their terms. In fact, the Bureau believes that
covered short-term loans will still be available to consumers facing a
truly short-term need for credit in those States that allow them. More
specifically, the Bureau believes the vast majority of consumers would
be able to get at least six covered short-term loans in any 12-month
period, with those borrowers who are able to satisfy an ability-to-
repay assessment being able to get some number of additional loans.
Notably, however, none of these studies was focused on the impact that
payday lending has on the welfare of the sub-population of borrowers
who do not have the ability to repay their loans.
Industry commenters also suggested that consumers seem to be
satisfied with covered short-term loan products, as shown by low
numbers of complaints and the submission of positive stories about them
to the ``Tell Your Story'' function on the Bureau's Web site. In
response, as noted earlier, the Bureau observed from its consumer
complaint data that from November 2013 through December 2016 more than
31,000 debt collection complaints cited payday loans as the underlying
debt, and over 11 percent of the complaints the Bureau has handled
about debt collection stem directly from payday loans.\687\ And when
complaints about payday loans are normalized in comparison to other
credit products, the numbers do not turn out to be low at all. For
example, in 2016, the Bureau received approximately 4,400 complaints in
which consumers reported ``payday loan'' as the complaint product and
about 26,600 complaints about credit cards.\688\ Yet there are only
about 12 million payday loan borrowers annually, and about 156 million
consumers have one or more credit cards.\689\ Therefore, by way of
comparison, for every 10,000 payday loan borrowers, the Bureau received
about 3.7 complaints, while for every 10,000 credit cardholders, the
Bureau received about 1.7 complaints. In addition, faith leaders and
faith groups of many denominations from around the country collected
and submitted comments, which suggested that many borrowers may direct
their personal complaints or dissatisfactions with their experiences
elsewhere than to government officials.
---------------------------------------------------------------------------
\687\ Bureau of Consumer Fin. Prot., Monthly Complaint Report,
at 12 (Dec. 2016), https://www.consumerfinance.gov/data-research/research-reports/monthly-complaint-report-vol-18/.
\688\ Bureau of Consumer Fin. Prot., Consumer Response Annual
Report, Jan. 1-Dec. 31, 2016, at 27, 33, (March 2017), available at
https://www.consumerfinance.gov/documents/3368/201703_cfpb_Consumer-Response-Annual-Report-2016.PDF.
\689\ Bureau staff estimate based on finding that 63 percent of
American adults hold an open credit card and Census population
estimates. Bureau of Consumer Fin. Prot., Consumer Credit Card
Market Report, at 36 (Dec. 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf; U.S. Census Bureau, Annual Estimates of Resident
Population for Selected Age Groups by Sex for the United States,
States, Counties, and Puerto Rico Commonwealth and Municipios: April
1, 2010 to July 1, 2016 (Jun. 2017), available at https://factfinder.census.gov/bkmk/table/1.0/en/PEP/2016/PEPAGESEX. Other
estimates of the number of credit card holders have been higher,
meaning that 1.7 complaints per 10,000 credit card holders would be
a high estimate. The U.S. Census Bureau estimated there were 160
million credit card holders in 2012, and researchers at the Federal
Reserve Bank of Boston estimated that 72.1 percent of U.S. consumers
held at least one credit card in 2014. U.S. Census Bureau,
Statistical Abstract of the United States: 2012, at 740 tbl.1188,
(Aug. 2011), available at https://www.census.gov/library/publications/2011/compendia/statab/131ed.html; Claire Greene, Scott
Schuh, and Joanna Stavins, The 2014 Survey of Consumer Payment
Choice: Summary Results, at 18 (Aug. 15, 2016), available at https://www.bostonfed.org/-/media/Documents/researchdatareport/pdf/rdr1603.pdf. And as noted above in the text, additional complaints
related to both payday loans and credit cards are submitted as debt
collection complaints with ``payday loan'' or ``credit card'' listed
as the type of debt.
---------------------------------------------------------------------------
In addition, though the Bureau did receive a large number of
comments from individual consumers relating their general satisfaction
with these loan products, it also received a sizable number of comments
to the contrary, where consumers or persons writing on their behalf
detailed that many consumers experience negative effects with extended
loan sequences.
Furthermore, based on the analysis set forth above in Market
Concerns--Underwriting, the Bureau did not overstate the extent of the
injury to ``re-borrowers'' who receive single-payment vehicle title
loans, which were found to pose similar harms to consumers. Even though
such loans may be non-recourse, which limits the extent of some harms,
the injury to consumers of the risks of vehicle repossession often are
extremely consequential on top of the other harms that flow from the
structure and term of these loans, all of which leads to similar
conclusions about the risks and harms of these loans.
In the proposal, the Bureau did not address one countervailing
benefit to consumers resulting from the identified practice--some
commenters noted that some borrowers, even ones with an ability to
repay, are currently able to obtain a non-underwritten loan without
inquiries showing up on the borrower's credit report. The Bureau
acknowledges this can be a benefit to some consumers. However, the
Bureau notes that the impact that a credit check will have on a
borrower's overall credit profile is limited and uncertain, given that
every consumer's consumer report differs and different creditors use
different credit scoring models. One of the most experienced scoring
companies, FICO, says the following about the impact of credit
inquiries on a consumer's score: ``The impact from applying for credit
will vary from person to person based on their unique credit histories.
In general, credit inquiries have a small impact on one's FICO Scores.
For most people, one additional credit inquiry will take less than five
points off their FICO Scores. For perspective, the full range of FICO
Scores is 300-850.'' \690\
[[Page 54609]]
Thus this minor effect has little bearing on the Bureau's overall
assessment of benefits and injury to consumers, especially in light of
the adjustments made to the underwriting criteria in Sec. 1041.5 of
the final rule.
---------------------------------------------------------------------------
\690\ http://www.myfico.com/credit-education/credit-checks/credit-report-inquiries/.
---------------------------------------------------------------------------
Substitute Products
The Bureau has several responses to the commenters asserting that
the proposed rule's restrictions would make consumers worse off by
forcing them to substitute more expensive and harmful credit products,
and that the Bureau failed to account--or at least fully account--for
the countervailing benefit that borrowers of covered loans do not incur
the harms caused by these substitute products.
As noted above, the Bureau has decided not to finalize proposed
Sec. Sec. 1041.8 to 1041.10. These proposed sections would have
required lenders making covered longer-term loans, including both high-
cost installment loans and loans with balloon-payment features, to
comply with the ability-to-repay requirements. The proposed rules as
applied to longer-term installment loans were one focus of the comments
described above. Accordingly, to the extent those comments were
predicated on such restrictions applying to covered longer-term
installment loans, they have been rendered largely moot by the Bureau's
decision. The following discussion is thus limited to comments about
the effects of the proposed restrictions on the making of covered
short-term loans and covered longer-term balloon-payment loans.
As a threshold matter, it is important to put the effects of the
final rule's restriction on borrowing in the proper context. A consumer
would be denied an additional covered short-term or longer-term
balloon-payment loan only if the consumer was neither able to
demonstrate an ability to repay the loan nor eligible for a
conditionally exempt covered short-term loan. Bureau simulations
described in the Section 1022(b)(2) Analysis indicate the final rule
would restrict only six percent of borrowers from initiating a sequence
they would have started absent the rule. Furthermore, even if the
impact of the decline in lending results in the closure of a
substantial number of storefronts offering covered short-term or
longer-term balloon-payment loans, the Bureau expects that the vast
majority of consumers will not see a sizable increase in the distance
to the nearest storefront. As discussed in more detail in the Section
1022(b)(2) Analysis, the Bureau's analysis of the impact of storefront
closures in several States after the imposition of State restrictions
on payday lending found that over 90 percent of payday borrowers had to
travel no more than five additional miles to access their nearest
payday lending storefront.\691\ This is in addition to the option of
obtaining a covered loan online.
---------------------------------------------------------------------------
\691\ CFPB Report on Supplemental Findings, at 79.
---------------------------------------------------------------------------
It is equally important to note that predicting how this relatively
limited number of consumers will react to a particular restriction on
covered loans in a particular circumstance is an imprecise matter given
that, as noted above, the particular suite of restrictions imposed by
the final rule has not been imposed by any State. The best that can be
done is to make reasonable predictions about how consumers will react
to these restrictions based on research concerning similar restrictions
imposed by various States and other types of research, and the Bureau
accordingly relies on such research in this discussion to the extent
possible.
In addition, even assuming that each of the alternatives identified
by the commenters is in fact more expensive or harmful than covered
short-term or longer-term balloon-payment loans, to the extent that a
given consumer who cannot obtain a loan under Sec. 1041.5 or Sec.
1041.6 has access to other alternatives that are as or less expensive
than other alternatives, that consumer could use those less expensive
substitutes rather than one or more of the allegedly worse
alternatives.
In this regard, it is important to note that the Bureau's decision
not to finalize proposed Sec. Sec. 1041.8 to 1041.10 means that
covered longer-term installment loans will be at least as available
after the rule goes into effect as they are in current market. Thus
consumers who cannot obtain a covered short-term or longer-term
balloon-payment loan may be able to turn to a longer-term installment
loan which, in the view of the commenters who were concerned about
inferior alternatives, is not injurious. The Bureau emphasizes,
however, that it remains concerned about potential consumer harms from
longer-term installment loans where loan pricing and structure may
reduce the incentive for lenders to engage in careful underwriting, and
the Bureau will monitor evolution of the market and take action under
its supervisory and enforcement authorities as necessary to address
identified consumer harms.
In addition, the Bureau observes that some consumers may have
access to some forms of credit that are typically less harmful than
covered short-term loans and covered longer-term balloon-payment loans.
These include some of the types of loans excluded from the final rule,
including non-recourse pawn loans (discussed further below), no-cost
advances, and advances made under wage advance programs that enable
employees to access earned and accrued wages ahead of their payday.
These options also include loans made by lenders who choose to comply
with the conditional exemptions for alternative loans (akin to the PAL
products administered by the NCUA) and accommodation loans.
The Bureau now turns to a consideration of evidence and arguments
concerning each of the alleged inferior alternatives identified by
industry commenters.
Non-recourse pawn loans. As noted in the section-by-section
analysis for Sec. 1041.3(d)(5), which excludes non-recourse pawn loans
from the scope of coverage of the final rule, the Bureau believes that
non-recourse pawn loans do not pose the same risks to consumers as
covered loans because consumers are more likely to understand and
appreciate the risks associated with non-recourse pawn loans, and the
loss of a pawned item that the lender has physical possession of is
less likely to affect the consumer's other finances. In addition, a
consumer who cannot afford to repay a non-recourse pawn loan at the end
of the loan term has the option not to return for the previously-
surrendered household item, thus ending his indebtedness to the lender
without defaulting, re-borrowing, or impacting his ability to meet
other financial obligations. A study described in the Section
1022(b)(2) Analysis found that non-recourse pawn lending increased in
States that banned payday lending; a similar substitution effect may
occur to some degree for consumers who are unable to obtain additional
covered loans.\692\
---------------------------------------------------------------------------
\692\ Brian Baugh, ``What Happens When Payday Borrowers Are Cut
Off from Payday Lending? A Natural Experiment,'' (Fisher College of
Bus., Ohio State U. 2015).
---------------------------------------------------------------------------
Overdraft. Industry commenters and some individual consumer
commenters expressed concern that consumers who are unable to access
additional covered loans after exhausting the options permitted under
the proposal will overdraw their bank accounts more frequently. Before
considering whether there is likely to be a substitution effect towards
overdraft, the Bureau notes that because many lenders of covered loans
obtain access to a consumer's bank account for repayment, these loans
are often the cause of overdrafts for consumers who are unable to
repay, and
[[Page 54610]]
they contribute to account closures. See Market Concerns--Payments and
the section-by-section analysis for Sec. Sec. 1041.7 and 1041.8 for
more details. Thus, even if overdrafts and bounced checks were to serve
as a substitute for covered loans among some consumers, there still
might be a net reduction in overdraft usage as a result of the rule.
Further, Bureau research discussed in the proposal and the
Supplemental Report calls into question certain commenters' assumptions
that consumers who cannot obtain covered short-term or longer-term
balloon-payment loans will overdraw their bank accounts more
frequently. The Bureau analyzed substitution patterns among former
users of the deposit advance product (DAP) offered by several
depository institutions when the offering of this product was
discontinued in the wake of the prudential regulator guidance.\693\
With discontinuation of DAP, consumers who had previously taken DAP
advances did not discernably substitute towards other credit products
or exhibit sustained negative outcomes compared to their non-user
counterparts. Specifically, the former DAP users did not overdraw their
bank accounts more frequently relative to non-users after the
discontinuance of DAP, nor did they experience long-term increases in
bank account charge-off rates following DAP's discontinuation. In
addition, the analysis also found that former DAP users did not change
their use of payday loans offered by non-depository institutions in any
meaningful way relative to those that did not use DAP. Additionally, an
academic paper exploring the relationship between payday loan access
and overdrafts shows that reduced access to payday loans leads to a
decrease in the number of days a household experiences overdrafts or
bounced checks.\694\
---------------------------------------------------------------------------
\693\ CFPB Report on Supplemental Findings, part 2.
\694\ Brian Baugh, ``What Happens When Payday Borrowers Are Cut
Off From Payday Lending? A Natural Experiment,) Payday Lending? A
Natural Experiment,) (Ph.D. dissertation, Ohio State University,
2015), available at http://fisher.osu.edu/supplements/10/16174/Baugh.pdf.
---------------------------------------------------------------------------
The Bureau notes, however, that if demand for short-term liquidity
is inelastic and outside options were limited, a decrease in access to
one option will necessarily increase the demand for its
substitutes.\695\ The Bureau also notes the 2008 Morgan and Strain
study discussed in the Section 1022(b)(2) Analysis and cited by several
commenters, updated in 2012, which found that bounced checks and
complaints about debt collectors to the FTC increase, and Chapter 13
bankruptcy filings decrease, in response to limits on payday lending.
The updated study found that the service fees received on deposit
accounts by banks operating in a single State tend to increase with
limits on payday lending, and the authors interpreted this as an
indication that payday loans help to avoid overdraft fees. The Bureau
reiterates its critiques of the Morgan and Strain study as described
the Section 1022(b)(2) Analysis.
---------------------------------------------------------------------------
\695\ See Romeo, Charles. 2017. ``Estimating the Change in
Surplus from the Elimination of Deposit Advance Products.'' Working
Paper, Office of Research, Consumer Financial Protection Bureau.
---------------------------------------------------------------------------
Unregulated Loans. As noted, some commenters argued that limiting
the number of covered loans a consumer could obtain may result in a
consumer who cannot obtain a loan under Sec. 1041.5 or Sec. 1041.6
using unregulated or illegal loans. Evidence does not suggest that
additional regulation of covered loans leads to more borrowing of these
loans. The Bureau notes that the comments often conflate two distinct
things. The first is unregulated loans made over the Internet
(sometimes from Tribal lands or offshore locations) to consumers who
may live in States where payday loans are prohibited by usury
restrictions. The second loans made by individuals associated with
local criminal enterprises (i.e., neighborhood loan sharks). For
instance, commenters sometimes describe in vivid terms the possibility
of the rule resulting in criminal loan sharking accompanied by violent
behavior, but then go on to present as evidence for that possibility
some data or anecdotes about unregulated lenders operating online. The
Bureau treats these cases differently in turn below.
One study compared usage of online payday loans in States with
restrictive payday lending regulations to usage in States with
permissive payday lending regulations, since some unlicensed lenders of
online payday loans may offer such loans without regard to the law of
the State in which the consumer resided.\696\ The study concludes that
usage rates of online payday loans do not significantly differ between
States with restrictive and permissive payday loan laws, calling into
question the notion that more consumers would turn to illegal lending
sources if covered loans offered by compliant lenders were curtailed.
Similarly, another analysis examined the market penetration of non-
licensed lending in States with varying payday lending regulations and
found that the presence of non-licensed lenders was relatively minimal
in all States, though somewhat higher in States with restrictive payday
lending regulations overall in some years and somewhat lower in States
with restrictive regulations in other years. However, States with
restrictive payday lending regulations that also vigorously enforced
those laws consistently had very low market penetration for non-
licensed payday lending.\697\
---------------------------------------------------------------------------
\696\ PEW, Payday Lending in America: Who Borrows, Where They
Borrow, and Why, p. 19-24, available at http://www.pewtrusts.org/~/
media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf.
\697\ See NonPrime101, Report 2, Does State Regulation of Small-
Dollar Lending Displace Demand to Internet Lenders?, p. 7 (2015),
available at https://www.nonprime101.com/wp-content/uploads/2013/10/Does-State-Regulation-of-Small-Dollar-Lending-Displace-Demand-to-Internet-Lenders2.pdf.
---------------------------------------------------------------------------
A trade group critical of the proposal submitted a comment
referencing a study that it stated ``confirms that where payday credit
has been restricted, consumers turn to online and unlicensed lenders.''
\698\ The Bureau has reviewed the underlying study and does not believe
that it confirms the commenter's premise. The analysis posits that
after Texas enacted its payday and vehicle title regulations in 2012,
there was an increase in online payday lending applications and at the
same time a subsequent decrease in storefront payday lending
applications--which the author takes to mean that borrowers turned to
online lenders when storefront loans became less available. However,
the Texas regulations involved a licensing and disclosure regime that
did not limit access to payday lending. An alternative explanation may
be that these developments reflect the general market trends of
storefront payday lending decreasing relative to online lending, which
was experiencing large national growth during this period. Relatedly,
the study's finding that non-licensed lenders increased their online
lending market share in Texas between 2011 and 2012 is likely similar
to what happened nationally and was not caused by Texas law. The author
also found that payday lending occurs to some degree in all States,
regardless of how intensely it is regulated. If the author's hypothesis
held true that payday demand is inelastic and non-licensed lenders
would step in to fill a void that licensed lenders could not, the
Bureau would expect the usage rates to be fairly similar in each of
these groups of States, since they are all indexed to the subprime
population. But it should be
[[Page 54611]]
noted that use in restrictive and banned States is lower than in
permissive States.
---------------------------------------------------------------------------
\698\ Anna Ellison, Policis. The Outcomes for Consumers of
Differing Approaches to the Regulation of Small Dollar Lending. See
https://www.nonprime101.com/wp-content/uploads/2016/05/A_Ellison_nonPrime101_051016.pdf.
---------------------------------------------------------------------------
Illegal lenders/loan sharks. Finally, the Bureau believes the risk
that consumers will be denied access to credit due to the impacts of
the final rule and will be forced to turn to illegal lenders such as
loan sharks is not supported by available evidence. Although a number
of commenters made this argument, they offered little to no specific
evidence about the prevalence of loan sharking in States that
restricted payday and vehicle title lending.
The Bureau notes the receipt of a comment letter from a trade group
referencing a paper that discusses, among other issues, analyses of
loan sharking activity in other countries. The Bureau does not find
this analysis to be persuasive, since the regulatory context, access to
credit for subprime populations, and characteristics of unlicensed
lending are quite different in those jurisdictions than in the United
States, as the author of the study acknowledges.\699\ In addition, as
noted above, under the final rule credit-impaired borrowers could still
obtain credit through various alternatives discussed above (including
conditionally exempt loans provided for in the rule and longer-term
installment loans which are not subject to the ability-to-repay
requirements of the final rule).
---------------------------------------------------------------------------
\699\ The trade group letter cites Todd J. Zywicki, ``The Case
Against New Restrictions on Payday Lending,'' Mercatus Center,
George Mason Univ., No. 09-28 (July, 2009), available at https://www.mercatus.org/system/files/WP0928_Payday-Lending.pdf. The author
of the study wrote that, ``The flexibility of consumer credit
markets in the United States has substantially reduced the
importance of illegal loan-shark lending,'' and goes on to describe
unregulated internet lending--rather than neighborhood loan
sharking--as where credit-constrained consumers would turn. Id. at
20. The Bureau discusses issues relating to unregulated loans above.
Moreover, the author notes that Japan and Germany both had strict
price caps, which the Bureau is not authorized to impose. See id. at
18-19.
---------------------------------------------------------------------------
Similarly, a State trade group commenter argued that the Bureau had
not properly accounted for the possibility of loan sharking in its
assessment of costs and benefits, arguing that racketeering actions
related to lending are more highly concentrated in jurisdictions that
do not allow alternative forms of credit such as Pennsylvania, New
York, and New Jersey. However, the Bureau views what was cited as
supposed support to be anecdotal, non-specific, and lacking evidentiary
weight.\700\ Even if the Bureau assumed the commenter was correct that
loan sharking activities are prevalent in those jurisdictions, the
Bureau believes the evidence cited fails to establish even a basic
correlation between loan sharking and State differences in authorizing
small-dollar lending, let alone a causal link.
---------------------------------------------------------------------------
\700\ The commenter asserts a mere search of FBI or DOJ records
or Google Scholar cases, or a general internet search, ``all
demonstrate the prevalence of loan shark and racketeering actions
related to lending more highly concentrated in jurisdictions that do
not allow alternative forms of credit.'' However, the commenter then
provides an example of a single case of loan sharking in
Philadelphia in 2013, without citation to news articles, court
records, or any other evidence. The commenter also mentions ``other
examples'' in New York and New Jersey without any specification.
---------------------------------------------------------------------------
The Bureau also notes receipt of a comment letter attaching a law
review article analyzing the history of loan sharking in the consumer
credit markets and the relationship between loan sharking and usury
caps in the United States. The article argues that the ``loan-shark
thesis'' offered by proponents of deregulating the credit markets is
``seriously flawed.'' Among the evidence cited was that in Vermont,
which has one of the lowest interest rate caps in the nation, no
Federal indictments have been recorded in the State during the 20-year
period prior to 2012 (when the article was published) for engaging in
an extortionate credit transaction, nor had the local press published a
single story in that time about local black-market lending.\701\
---------------------------------------------------------------------------
\701\ Robert Mayer, ``Loan Sharks, Interest-Rate Caps, and
Deregulation,'' 69 Wash. & Lee L. Rev. 807, 841 (2012).
---------------------------------------------------------------------------
The Bureau further notes that the U.K. Financial Conduct Authority
(the FCA) recently issued a report summarizing feedback it had received
in assessing the impacts of the FCA's 2015 price cap on high-cost
short-term credit.\702\ The FCA wrote, ``We do not see strong evidence
of a rise in illegal money lending because of the price cap.'' The
report explains the basis for the prediction it had made, in imposing
the price cap, that less than 5 percent of declined applicants would
consider turning to illegal money sources, and in the recent report the
FCA stated that the results from their recent survey confirmed this
prediction. The FCA cautioned that the individuals who use illegal
money lenders are difficult to reach and reluctant to talk about their
experience, but noted that they gleaned information through discussions
with social service organizations and other individuals who could speak
with authority on the prevalence of illegal lending behavior in the
United Kingdom. If the hypothesis was that regulating payday and
vehicle title lending in ways that restrict access would lead to an
increase in illegal lending, then a nationwide price cap is the type of
broad, substantive restriction on small-dollar lending that one may
surmise would cause such a rise. Given the difficulty in generalizing
across different legal systems and credit markets, the Bureau does not
view such findings as dispositive, but does view them as instructive.
At the very least, they cast doubt on the assertions made by the trade
group that had cited the study about illegal lending in Germany and
Japan discussed above.
---------------------------------------------------------------------------
\702\ Financial Conduct Authority, High-cost credit: Including
review of the high-cost short-term credit price cap, Feedback
Statement FS17/2 (July 2017) at 5 https://www.fca.org.uk/publication/feedback/fs17-02.pdf.
---------------------------------------------------------------------------
Finally, the Bureau reemphasizes that the various types of
alternatives described above will remain available. Thus, the Bureau
concludes that the number of consumers who would seek these illegal
options as a first resort is next to zero, and as a last resort is
still quite low.\703\
---------------------------------------------------------------------------
\703\ The Bureau notes that other government entities have the
authority to prosecute such actors under applicable criminal
statutes at the State and Federal level.
---------------------------------------------------------------------------
Assessing Benefits to Competition
In the proposal, the Bureau concluded that the rule would not have
a significant impact on competition, in part because the Bureau had
observed, as discussed above, that when lenders make covered short-term
loans they typically charge the maximum price permitted under State
law. Many lenders objected to that claim in their comments, and some
provided examples of how prices can differ--including statistics on the
difference between State-regulated lender prices and online lender
prices, and differences between nationwide average prices versus
industry medians. Other commenters noted that lenders compete on non-
price terms. The Bureau acknowledges that a certain amount of market
consolidation may impact the competition involved in non-price terms,
meaning consumers may be presented with fewer choices as to where to go
to obtain a loan. The impact that market consolidation has on pricing,
however, is generally capped by existing State law requirements.
Another point made by industry commenters was that the Bureau's own
analysis showed that the proposed rule would lead to increased
concentration in the market for covered short-term loans, thereby
undermining competition. Indeed, these commenters asserted that the
Bureau had understated the amount of decline in revenue that would
follow from its
[[Page 54612]]
proposal and thus had underestimated the impact of the proposal in
reducing competition. These comments, however, largely misunderstood
the Bureau's analysis of the actual effects on competition. The Bureau
did believe that the requirement to underwrite covered loans by making
a reasonable assessment of the borrower's ability to repay the loan
according to its terms would cause consolidation in the market, which
the Bureau attempted to estimate to the extent feasible. Yet the Bureau
presented preliminary findings, based on its observed experience of the
markets in States that had adopted modifications to their own payday
lending regulations, which indicated that market consolidation would
not reduce meaningful access to credit among consumers. As discussed
above, the upshot of such consolidation was that lenders remained
almost as proximate and available to consumers as before. To the extent
the industry commenters present different estimates, the Bureau is not
persuaded of their likely accuracy, and these issues are addressed
further in part VII, which presents the Bureau's consideration of the
benefits, costs, and impacts of the final rule on consumers and covered
persons pursuant to section 1022(b)(2)(A) of the Dodd-Frank Act.\704\
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\704\ 12 U.S.C. 5512(b)(2)(A).
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Moreover, as discussed above, in light of the comments received,
the Bureau has adjusted certain parameters of the proposed rule to
simplify its scope, streamline the underwriting process, and add more
flexibility within the existing framework, as described more fully
below in the explanation of Sec. 1041.5 of the final rule. The effect
of these adjustments is to reduce the costs associated with complying
with the rule, which likely will reduce the estimated amount of
consolidation in the market for covered short-term loans.
For all of these reasons, the Bureau concludes, based on its
judgment and expertise, the comments it received on all sides of these
issues, and the data on injury and the effects of the identified
practice set forth above in Market Concerns--Underwriting and the
analysis in part VII below, which presents the Bureau's consideration
of the benefits, costs, and impacts of the final rule on consumers and
covered persons, that the practice of making covered loans without
reasonably assessing the borrower's ability to repay the loan according
to its terms is injurious to consumers, on net and in the aggregate,
taking into consideration the countervailing benefits of the identified
practice.
Consideration of Public Policy
The Bureau's Proposal
Section 1031(c)(2) of the Dodd-Frank Act allows the Bureau to
``consider established public policies as evidence to be considered
with all other evidence'' in determining whether a practice is unfair,
as long as the public policy considerations are not the primary basis
of the determination. In the proposal, the Bureau stated that public
policy supports the proposed finding that it is an unfair practice for
lenders to make covered loans without determining that the consumer
will have the ability to repay the loan according to its terms.
Specifically, as noted in the proposal, several consumer financial
statutes, regulations, and guidance documents require or recommend that
covered lenders must assess the customer's ability to repay before
extending credit. These include the Dodd-Frank Act provisions on
closed-end mortgage loans,\705\ the CARD Act provisions on credit
cards,\706\ guidance from the OCC on abusive lending practices,\707\
guidance from the FDIC on small-dollar lending,\708\ and guidance from
the OCC \709\ and FDIC \710\ on deposit advance products. In addition,
the Federal Reserve Board promulgated a rule requiring an ability-to-
repay determination for higher-priced mortgages, although that rule has
since been superseded by the Dodd-Frank Act's ability-to-repay
requirement and the Bureau's implementing regulations, which apply
generally to mortgages regardless of price.\711\ In short, the Bureau
stated in the proposal that Congress, State legislatures,\712\ and
other agencies have found consumer harm to result from lenders failing
to determine that consumers have the ability to repay before extending
credit to them. The Bureau stated that these established policies
provide support for its preliminary finding that it is unfair for a
lender to make covered loans without determining that the consumer will
have the ability to repay; and they likewise were seen as supporting
the Bureau's proposed imposition of the consumer protections in the
proposed rule. The Bureau gave weight to the policy contained in these
Federal consumer laws, and based its preliminary finding that the
identified practice is unfair, in part, on that significant body of
public policy. Yet the Bureau did not make this consideration the
primary basis for its preliminary determination of unfairness.
---------------------------------------------------------------------------
\705\ Dodd-Frank Act section 1411, codified at 15 U.S.C.
1639c(a)(1) (providing that no creditor may make a residential
mortgage loan unless the creditor ``makes a reasonable and good
faith determination'' based on verified and documented information
that, at the time the loan is consummated, the consumer has a
``reasonable ability to repay the loan, according to its terms, and
all applicable taxes, insurance (including mortgage guarantee
insurance), and assessments'').
\706\ 15 U.S.C. 1665e (credit card issuer must ``consider[] the
ability of the consumer to make the required payments'').
\707\ OCC Advisory Letter 2003-3, Avoiding Predatory and Abusive
Lending Practices in Brokered and Purchased Loans (Feb. 21, 2003),
available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2003/advisory-letter-2003-3.pdf (cautioning banks
not to extend credit without first determining that the consumer has
the ability to repay the loan).
\708\ FDIC Financial Institution Letter FIL-50-2007, Affordable
Small-Dollar Loan Guidelines (June 19, 2007).
\709\ OCC, Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Products, 78 FR 70624, 70629 (Nov. 26,
2013) (``Deposit advance loans often have weaknesses that may
jeopardize the liquidation of the debt. Customers often have limited
repayment capacity. A bank should adequately review repayment
capacity to assess whether a customer will be able to repay the loan
without needing to incur further deposit advance borrowing.'').
\710\ FDIC, Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Products, 78 FR 70552 (Nov. 26, 2013)
(same as OCC guidance).
\711\ Higher-Priced Mortgage Loan Rule, 73 FR 44522, 44543 (July
30, 2008) (``the Board finds extending higher-priced mortgage loans
or HOEPA loans based on the collateral without regard to the
consumer's repayment ability to be an unfair practice. The final
rule prohibits this practice.'').
\712\ See, e.g., 815 Ill. Comp. Stat. Ann. 137/20 (lender must
assess ATR in making ``high risk home loan''); Nev. Rev. Stat. Ann.
Sec. 598D.100 (it is unfair practice to make home loan without
determining ATR); Tex. Educ. Code Ann. Sec. 52.321 (State board will
set standards for student-loan applicants based in part on ATR).
---------------------------------------------------------------------------
Comments Received
The Bureau received comments relating to the public policy
implications of the proposed rule. One industry commenter argued that
because the Bureau lacked substantial evidence for its other
determinations, it was essentially basing the unfairness determination
primarily on public policy, which is prohibited by the Dodd-Frank Act.
Other industry commenters contended that public policy considerations
militate against promulgating a rule that restricts access to credit to
the extent described in the proposal. For example, some commenters
claimed that restricting access to credit for certain borrower
populations conflicts with public policy considerations underlying fair
lending laws.
Industry commenters also cited perceived conflicts with other
sources of law as contravening public policy. One commenter made a
similar argument about the proposal's coverage of the
[[Page 54613]]
furnishing and review of credit information, which it viewed as
inconsistent with the Fair Credit Reporting Act and thus as
inconsistent with public policy. Other commenters more simply argued
that in addressing the perceived issues with covered loans, the Bureau
should be required to defer to existing State regulatory approaches.
Some commenters stated quite different views, as discussed
previously. One trade association, in particular, stated that Congress
plainly recognized the problems created by unregulated and less
regulated lenders, and for that reason conferred on the Bureau new
authority to supervise and write rules for the payday lending industry
for the first time ever at the Federal level. More generally, consumer
groups were strongly supportive of the Bureau's legal authority to
develop and finalize the proposed rule. Rather than viewing other
ability-to-repay provisions in Federal consumer law as implied negative
restrictions on the Bureau's authority, these commenters pointed to
them and others (such as the Military Lending Act) as embodying a
considerable trend of expanding public policy now supporting the
principle that consumer lending generally should be premised on the
borrower's ability to repay. They also noted that some States now
embody this principle in statute, and many more do so by judicial
precedent. They noted that general statements of this principle in
Federal and State law tend to define this approach as requiring the
lender to establish the borrower's ability to repay the loan while
meeting basic living expenses and without re-borrowing.
One commenter argued that the proposed rule contradicts other
recent Federal policy that authorizes and even promotes mortgages, auto
loans, and other types of long-term lending. Several commenters argued
that the rule violates the public policy of federalism because it would
prohibit certain lending practices that are otherwise allowed and
regulated by State laws, which reinforce the structure of such loans
and mitigate harms to consumers. On the other side of the issue,
commenters argued that the Bureau's rule is increasingly consistent
with the evolving direction of State law.
The Final Rule
As an initial matter, the Bureau notes that public policy is only
one factor that it uses to inform its unfairness assessments; it is not
a prerequisite or an element of the legal determination or its primary
basis. The Bureau has concluded that this rule is consistent with
public policy, but commenters' argument that the rule is primarily
based on public policy is inaccurate. As stated in the proposal, the
identified practice of making covered loans without reasonably
assessing the borrower's ability to repay the loan according to its
terms is unfair because it meets the three legal elements of
unfairness, and the rule is also supported by public policy.
The rule does not conflict with Federal fair lending laws. The
Bureau will continue to expect creditors to treat borrowers of
protected classes equally. Additionally, the rule does not conflict
with the Fair Credit Reporting Act. Lenders can comply with the
provisions of both this rule and the FCRA and will be expected to do
so.
To the extent that Federal policy is intended to promote long-term
lending, this rule does not conflict with that objective. First, the
Bureau is unaware of any Federal policy that specifically prefers long-
term lending simply for the sake of long-term indebtedness. Certain
Federal policies may allow longer-term installment lending in order to
reduce payment amounts, but the covered short-term loans at issue in
this rule do not involve reduced payment amounts as a result of re-
borrowing.
The Bureau does not agree with the commenters who claimed that this
rule conflicts with general principles of federalism, even though some
loans that would not be permissible under the rule would currently be
permissible under State law. If the commenters' argument were to be
accepted, then any Federal regulation (other than rules prohibiting
only the exact conduct already prohibited by the States) would create
an impermissible conflict with principles of federalism. Yet that is
not how our system of federalism works. Under the Constitution, both
the States and the Federal government have coexisting, overlapping
authority. This rule preserves that settled framework by stating
explicitly that it does not preempt any State law that is more
restrictive in its effects than the provisions of this rule. Existing
State regulatory frameworks will continue to exist alongside this rule,
in a version of cooperative federalism that is analytically similar to
the way parallel State and Federal laws have long operated in such
fields as securities law, antitrust law, environmental law, and many
others. The Bureau is unaware of any State laws that a lender of
covered short-term loans cannot comply with as a consequence of this
rule.
Indeed, the making of covered short-term loans pursuant to State
regulatory frameworks is already subject to significant Federal laws
and regulations, as many commenters acknowledge. Those Federal laws
include the Truth in Lending Act, the Equal Credit Opportunity Act, the
Fair Credit Reporting Act, and others. To the extent those laws control
or modify various aspects of the covered loans made pursuant to State
law, they do not thereby contravene the principles of federalism. In
fact, the final rule adopted by the Bureau also provides support for
those States that effectively prohibit the making of certain types of
covered loans by imposing a hard usury cap on such lending, insofar as
the rule will restrict lenders from offering non-underwritten covered
loans on-line or by other avenues of cross-border lending into those
States, which are also empowered to enforce their usury caps against
cross-border loans that violate those caps.
The Bureau disagrees with the contention that it only has the
authority to issue rules based on unfairness that incorporate an
ability-to-repay standard if Congress expressly specified the use of
such a standard. On the contrary, Congress created the Bureau and
chartered it with the responsibility to identify and prevent unfair
practices, employing general statutory definitional criteria as set
forth in the Dodd-Frank Act. Congress did not explicitly preclude the
issuance of rules based on unfairness that incorporate an ability-to-
repay standard, and the Bureau has not found in the statute, its
legislative history, or other authoritative sources any implied
preclusion of rules based on unfairness that incorporate an ability-to-
repay standard. And the Bureau is authorized to adopt appropriate rules
when it has determined that an ability-to-repay standard is appropriate
to address a practice that it has identified as meeting the definition
of ``unfair'' under the criteria enunciated by Congress in the statute.
Indeed, Congress reinforced the Bureau's authority to engage in
rulemaking in this particular market by providing in section
1024(a)(1)(E) of the Dodd-Frank Act that this was one of three
specified markets (along with mortgages and private student loans)
where the Bureau had broad authority to adopt regulations that apply to
``any covered person who . . . offers or provides to a consumer a
payday loan.'' \713\
---------------------------------------------------------------------------
\713\ 12 U.S.C. 5514(a)(1)(E).
---------------------------------------------------------------------------
As for those commenters who stated that the Bureau is obliged to
consider and defer to State-law regimes for regulating covered loans,
it suffices to note that this approach does not square with the terms
of Federal law as
[[Page 54614]]
prescribed in the Dodd-Frank Act. It also fails to recognize that even
in light of varying State regulatory structures, the injury caused by
covered loans persists in those States where it is permitted to exist.
And those States, of course, are the sources of all the data that the
Bureau has compiled on the harms of covered loans in the United States
(since the so-called ``prohibition States'' cannot, by definition, be
the source of any current data on the making or effects of those
loans).
Finally, commenters who criticized the Bureau as violating some
version of public policy by acting too aggressively to limit or even
eliminate covered short-term loans altogether were overstating their
point while at the same time missing the point. Again, the approach
proposed by the Bureau and now adopted in the final rule does not
eliminate such loans. Rather, it merely imposes a requirement that they
be underwritten by the lender making a reasonable assessment that the
borrower will be able to repay the loan according to its terms. And
especially in light of various adjustments the Bureau has now made to
simplify and streamline the underwriting provisions in Sec. 1041.5 of
the final rule, along with some ability to make covered loans under the
alternative provisions of Sec. 1041.6, the notion that the final rule
will eliminate these loans altogether is not well grounded in any
factual analysis.
Abusiveness
Under sections 1031(d)(2)(A) and (B) of the Dodd-Frank Act,\714\
the Bureau may find an act or practice to be abusive in connection with
a consumer financial product or service if the act or practice takes
unreasonable advantage of: (A) A lack of understanding on the part of
the consumer of the material risks, costs, or conditions of the product
or service or of (B) the inability of the consumer to protect the
interests of the consumer in selecting or using a consumer financial
product or service. In the proposal, the Bureau stated that it appeared
that a significant population of consumers does not understand the
often-hidden risks and costs of taking out payday, single-payment
vehicle title, or other covered loans, and further lack the ability to
protect their interests in selecting or using such loans. It also
stated that it appeared that lenders take unreasonable advantage of
these consumer vulnerabilities by making loans of this type without
reasonably determining that the consumer will have the ability to repay
the loan.
---------------------------------------------------------------------------
\714\ 12 U.S.C. 5531(d)(2)(A) & (B).
---------------------------------------------------------------------------
After considering the comments received, for the reasons described
below, the Bureau concludes that it is an abusive practice to make
covered short-term loans without reasonably assessing that the borrower
will have the ability to repay the loan according to its terms. The
Bureau concludes that many borrowers lack an understanding of the
material risks and costs of these loans, based on evidence that many
borrowers do not seem to understand the likelihood or the severity of
the harms that can result from such unaffordable loans. The Bureau
concludes that borrowers are unable to protect their interests based on
the circumstances of many borrowers, such as their typically urgent
need of credit, their perception that they often lack a realistic
ability to shop for alternatives, and above all the difficulties they
face after origination of the first unaffordable loan based on various
features of the loan product that create and magnify the potential
risks and harms. And finally, by making covered short-term loans
without reasonably assessing the borrower's ability to repay the loan
according to its terms, and based on various features of the structure
of such loans, lenders are taking unreasonable advantage of these
vulnerabilities.
General Comments
Before turning to its analysis of the statutory prongs of the
abusiveness standard, the Bureau can first address a small set of
general comments on its use of the abusiveness standard generally. Some
commenters asserted that the proposed rule improperly amounts to a
``ban'' on certain products, instead of focusing on the identified
practice of making covered loans without reasonably assessing
consumers' ability to repay. Other commenters asserted that when a
practice is expressly permitted by some applicable law, including State
law, it cannot also be abusive. One commenter pointed to statements
made in the Bureau's own exam manual as ostensible support for opposing
the Bureau's use of its abusive authority to impose this rule.
The suggestions that the rule effectuates a ``ban'' on products
rather than a prohibition against acts or practices are inaccurate. The
Bureau did not propose, and this final rule does not provide, that any
covered short-term loans are prohibited. The practice of failing to
make such an assessment has been identified by the Bureau as the
practice that is both unfair and abusive. In response, the rule simply
requires that such loans must be underwritten with a reasonable
assessment of the borrower's ability to repay the loan according to its
terms. Further analysis on the effect of this rule on the market for
such loans can be found above in the discussion of the statutory
unfairness prong, as well as in part VII, where the Bureau presents its
assessment of the costs, benefits, and impacts of the final rule on
consumers and covered persons pursuant to section 1022(b)(2)(A) of the
Dodd-Frank Act.\715\
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\715\ 12 U.S.C. 5512(b)(2)(A).
---------------------------------------------------------------------------
As to the assertion that a practice cannot be abusive when it is
expressly permitted by some applicable law, this statement seems
overbroad and inaccurate, for when a new rule is promulgated, it would
often be the case that the conduct it now addresses would previously
have been permitted, and perhaps even explicitly permitted, before the
law was changed by the new rule.\716\ By the same token, the
observation made about the Bureau's examination manual is irrelevant,
because the manual would only have been describing the existing state
of the law prior to the promulgation of this new rule. Many if not most
new rules adopted by the Bureau that add new substantive requirements
may not be anticipated by examination manuals written to guide
examiners in applying the pre-existing legal landscape before the rule
was adopted. As is common when new rules are adopted, the Bureau plans
to produce new examination procedures to reflect the new substantive
requirements of this final rule.
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\716\ Without undermining this general point, it should be noted
that where, as here, the Bureau is adopting rules pursuant to its
authority to identify and prevent unfair and abusive practices, such
rules are not necessarily creating new law so much as clarifying
that these practices, which could have been addressed previously by
the Bureau pursuant to its supervision and enforcement authority,
are now addressed independently by essentially codifying them in the
terms of the new rule.
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Moreover, the Bureau may properly exercise its statutory authority
at any time to consider whether an identified practice meets the
definitional prongs of unfairness or abusiveness, based on substantial
evidence and research. When it does so, it reaches an appropriate
conclusion that the identified practice is illegal under the provisions
of the Federal statute, regardless of whether lenders had been engaging
in the practice prior to the time the Bureau completed its new
analysis. Furthermore, the fact that State laws on the same subject may
be less restrictive in some respects than Federal law does not prohibit
the promulgation of a regulation that is authorized by Federal statute,
even though it may be more restrictive in some respects than those
State laws. This is typical of how
[[Page 54615]]
federalism traditionally works in other areas of parallel Federal and
State law, such as securities, antitrust, environmental law, and many
other areas.
Consumers Lack an Understanding of Material Risks and Costs
The Bureau's Proposal
As discussed in the proposal, covered short-term loans, including
payday and title loans, can and frequently do lead to a number of
negative consequences that can pose serious financial problems for
consumers. These effects flow from the identified practice of failing
to underwrite such loans by making a reasonable assessment of the
borrower's ability to repay the loan according to its terms. The harms
that borrowers tend to experience once they have taken out an
unaffordable loan of this kind include default, delinquency, re-
borrowing, and the collateral consequences of making unaffordable
payments, including forgoing basic living expenses and major financial
obligations to avoid the other injuries. All of these potentially
harmful effects--including the direct costs that the borrower has to
pay to the lender, as well as other costs that often are incurred as
well--are among the ``material risks and costs'' of these loans, as the
Bureau understood and reasonably interpreted that phrase.
In the proposal, the Bureau recognized that borrowers who take out
a payday, title, or other covered short-term loan typically understand
that they are incurring a debt which must be repaid within a prescribed
period of time and that if they are unable to do so, they will either
have to make other arrangements or suffer adverse consequences. The
Bureau stated, however, that it did not believe that such a generalized
understanding suffices to establish that consumers actually understand
the material risks and costs of these products, and in particular the
magnitude and severity of the risks and harms. Rather, the Bureau
stated that it believed it was reasonable to interpret
``understanding'' in this context to mean more than a mere awareness
that it was within the realm of possibility that a negative consequence
could be experienced as a result of using the product. For example,
consumers may not understand that a certain risk is very likely to
materialize or that--even though relatively rare--the impact of a
particular risk would be severe.
As discussed in the proposal, the single largest risk to a consumer
of taking out an initial covered short-term loan is that it will lead
to an extended cycle of indebtedness that poses material risks and
costs to the consumer. This occurs in part because of the identified
practice, which can lead to lenders making unaffordable loans. It also
occurs, in large part, because the term and structure of the loan
generally require the consumer to make a lump-sum balloon payment
within a short period, typically two weeks or a month after the loan is
made, often absorbing such a large share of the consumer's disposable
income as to leave the consumer unable to pay basic living expenses and
major financial obligations.
As the Bureau stated in the proposal, in States where it is
permitted, lenders often offer borrowers the enticing--but ultimately
costly--alternative of paying a fee and rolling over the loan or taking
out a new loan to pay off the previous one, leaving the principal
amount intact. Many borrowers choose this option, and a substantial
population of them ends up in extended loan sequences because when the
loan next comes due, they are in exactly the same situation all over
again. Alternatively, borrowers may repay the loan in full when it
comes due, but find it necessary to take out another loan over the
course of the ensuing expense cycle because the large amount of money
needed to repay the first loan, relative to their income, leaves them
without sufficient funds to meet their other obligations and expenses.
This also can often lead to an extended cycle of debt, posing material
risks and costs to the consumer's financial situation.
This cycle of indebtedness affects a large segment of borrowers: As
described above in Market Concerns--Underwriting, half of all
storefront payday loan sequences contain at least four loans.\717\ One-
third contain seven loans or more, by which point consumers will have
paid charges equal to 100 percent of the original amount borrowed and
still owe the full amount of the principal.\718\ Almost one-quarter of
loan sequences contain at least 10 loans in a row.\719\ And looking
just at loans made to borrowers who are paid weekly, bi-weekly, or
semi-monthly, more than one-fifth (21 percent) of those loans are in
sequences consisting of at least 20 loans.\720\ For loans made to
borrowers who are paid monthly, almost half (46 percent) of the loans
are in sequences consisting of at least 10 loans.\721\
---------------------------------------------------------------------------
\717\ CFPB Report on Supplemental Findings.
\718\ Id.
\719\ Id.
\720\ Id.
\721\ Id.
---------------------------------------------------------------------------
The evidence summarized in the proposal and reinforced above in
Market Concerns--Underwriting and again in the section on unfairness
also shows that many consumers who take out these loans appear not to
understand, when they first take out the loan, how long they are likely
to remain in debt and how costly and harmful that situation could be
for them. Many borrowers tend to overestimate their likelihood of
repaying the loan without re-borrowing and do not understand the
likelihood that they will end up in an extended loan sequence. As the
Bureau stated in the proposal, empirical evidence shows that a
substantial population of borrowers, and especially those who end up in
extended loan sequences, are not able to predict accurately how likely
they are to re-borrow and thus how much they will end up paying over
time. One study, in particular, found that consumers who end up re-
borrowing numerous times--which are the consumers who suffer the most
harm--are particularly bad at predicting the number of times they will
need to re-borrow. Thus, many consumers who find themselves in a
months-long cycle of indebtedness do not understand the material risks
and costs of that consequence, and end up paying hundreds of dollars in
fees above what they expected, while struggling to meet their other
financial obligations.
As recounted in the same sections identified above and in the
proposal, the Bureau has observed similar outcomes for borrowers of
single-payment vehicle title loans. For example, 83 percent of title
loans are re-borrowed on the same day that a prior loan was due, and 85
percent of vehicle title loans are re-borrowed within 30 days of a
previous vehicle title loan.\722\ Fifty-six percent of vehicle title
loan sequences consist of more than three loans, 36 percent consist of
at least seven loans, and almost one quarter--23 percent-- consist of
more than 10 loans.\723\ While there is no comparable research on the
subjective expectations of title borrowers, the Bureau preliminarily
found that the research in the payday context can be extrapolated to
these other single-payment short-term products, given the significant
similarities in the product structures, the characteristics of the
borrowers, and the outcomes that many borrowers experience, as detailed
above in part II and in Market Concerns--Underwriting.
---------------------------------------------------------------------------
\722\ CFPB Single-Payment Vehicle Title Lending.
\723\ Id.
---------------------------------------------------------------------------
Consumers are also exposed to other material risks and costs in
connection with these kinds of loans. As discussed
[[Page 54616]]
in more detail in Market Concerns--Underwriting, the unaffordability of
the payments creates, for many consumers, a substantial risk of
default. Indeed, 20 percent of payday loan sequences and 33 percent of
title loan sequences end in default.\724\ And 69 percent of payday loan
defaults occur in loan sequences in which the consumer re-borrows at
least once.\725\ For a payday borrower, the cost of default generally
includes the cost of at least one, and often multiple, NSF fees
assessed by the borrower's bank when the lender attempts to cash the
borrower's postdated check or debit the consumer's account via ACH
transfer and the attempt fails. It is also known that NSFs on on-line
payday loans are associated with a high rate of bank account closures,
further jeopardizing the financial health and stability of these
consumers. Defaults often expose consumers to other adverse
consequences, such as aggressive debt collection activities. The
consequences of default can be even more dire for a title borrower,
including repossession of the consumer's vehicle--which is the result
in 20 percent of single-payment vehicle title loan sequences and can
greatly complicate the borrower's ability to earn the funds needed to
repay such loans.\726\
---------------------------------------------------------------------------
\724\ CFPB Report on Supplemental Findings; CFPB Single-Payment
Vehicle Title Lending.
\725\ CFPB Report on Supplemental Findings.
\726\ CFPB Single-Payment Vehicle Title Lending.
---------------------------------------------------------------------------
The Bureau stated in the proposal that it believed a substantial
population of consumers who take out payday, title, or other covered
short-term loans do not understand the magnitude of these additional
risks. The proposal also stated that borrowers--at least at the point
where they are first deciding whether to take out the loan--are not
likely to factor into their decision-making the severity of the harms
they may suffer from default, delinquency, re-borrowing, and the
collateral consequences of making unaffordable payments in an attempt
to avoid these other injuries. Further adverse effects can include
expensive bank fees, the potential loss of their bank account,
aggressive debt collection efforts, and, with title loans, the risks
and costs of losing their basic transportation to get to work or
conduct their ordinary personal affairs.
As discussed in the proposal, several factors can impede consumers'
understanding of the material risks and costs of these loans. At the
outset, as discussed above, there is a mismatch between how payday and
single-payment vehicle title loans are structured and marketed to
consumers and how they operate in practice to support a business model
based on repeated re-borrowing. Although the loans are presented and
marketed as stand-alone short-term products, lenders know and rely on
the fact that only a minority of payday loans are repaid without any
re-borrowing. As discussed above, these loans often, instead, produce
lengthy cycles of indebtedness through extended loan sequences of
repeat re-borrowing. This is influenced by the term and the balloon-
payment structure of the loans, which offer the limited options of
either re-borrowing by paying additional fees without paying down the
principal amount or requiring a large payment to be made all at once,
which can lead to severe consumer harm if the lender makes an
unaffordable loan without reasonably determining that the borrower has
the ability to repay the loan according to its terms.
In addition, consumers in extreme financial distress tend to focus
on their immediate liquidity needs, rather than potential future costs,
in a way that makes them highly susceptible to lender marketing. Payday
and title lenders are generally aware of this vulnerability and often
advertise the speed with which the lender will provide funds to the
consumer, which may further cloud consumers' ability to understand the
risks and costs.\727\ But while covered short-term loans are marketed
as being intended for short-term or emergency use,\728\ a substantial
percentage of consumers do not repay the loan quickly and thus confront
the harms of default, delinquency, re-borrowing, and the collateral
consequences of making unaffordable payments in an attempt to avoid
these other injuries. Many consumers find themselves caught in a cycle
of re-borrowing that is both very costly and very difficult to escape.
---------------------------------------------------------------------------
\727\ In fact, during the SBREFA process for this rulemaking,
numerous SERs commented that the Bureau's contemplated proposal
would slow the loan origination process and thus negatively impact
their business model, though these points may be addressed by the
development of automated underwriting, as discussed earlier.
\728\ For example, as noted above, the Web site for a national
trade association representing storefront payday lenders analogizes
a payday loan to a ``cost-efficient `financial taxi' to get from one
payday to another when a consumer is faced with a small, short-term
cash need.''
---------------------------------------------------------------------------
Comments Received
The Bureau received many comments relating to this prong of the
abusiveness definition concerning consumers' lack of understanding of
material risks and costs associated with the kinds of loans covered by
the rule. Industry participants, trade associations, and others who
criticized the Bureau for proposing the rule in response to this
concern maintained that consumers do understand the terms of the loans
and the possible outcomes, making a more detailed understanding of the
risks unnecessary, and making the rule unnecessary as well. They argue
that it is unrealistic to require, as they believed the Bureau's
proposed rule did, that consumers develop an expert understanding of
the characteristics of covered short-term loans.
Those commenters who maintained that the risks and costs are
sufficiently understood by consumers claimed that the proposed rule
improperly substitutes the Bureau's own judgments for those of
consumers, denying them the ability to make a free choice to purchase
products about which they do, in fact, know and appreciate how they
work. Many commenters, including individual users of covered short-term
loans, asserted that consumers use them effectively to cope with
unexpected temporary expenses or shortfalls in income, to manage uneven
income and cash flow challenges, and to avoid more expensive
alternatives for handling other debt. They cited various studies to
support the proposition that consumers understand the challenges and
disadvantages of these loans, but opt for them as the best choice
available among unappealing alternatives. Other commenters stated that
no evidence suggests borrowers of covered loans generally suffer from
infirmity or ignorance, but rather are well-educated and sophisticated
in how they use financial services.
Several commenters pointed to the relatively small number of
consumer complaints submitted to the Bureau about these kinds of loans,
and to the high volume of positive comments submitted about such loans
in response to the proposal, which were viewed as showing that
consumers who use these loans understand them. Many individual users of
such loans likewise commented that they use these products advisedly to
meet their particular needs.
In the alternative, industry commenters contended that the Bureau's
method for determining that consumers do not understand these risks is
flawed, such as by relying too heavily on concepts of behavioral
economics, which would leave an essential premise for the rule
unproven. Other commenters argued that consumers are generally accurate
in predicting the duration of their borrowing, citing the Mann study
and Professor Mann's response to the Bureau's proposal, a point that
was raised and discussed earlier in Market
[[Page 54617]]
Concerns--Underwriting, as well as in the section on unfairness.
Other commenters such as consumer groups agreed with the Bureau's
assessment in the proposal that many consumers do not understand the
material risks and costs associated with these kinds of loans, which
they viewed as resting on sound underpinnings of the facts and data
marshaled by the Bureau. Once again, the commenters said this was
especially true of borrowers who end up in extended loan sequences, and
the financial circumstances of these consumers are materially
undermined by their experience with such loans. They are unable to
repay the loans when they come due, which leads them to re-borrow
repeatedly and, in many instances, to suffer the injuries associated
with being trapped in extended loan sequences. Consumer groups
expressly agreed with the weight placed by the Bureau on concepts from
behavioral economics such as ``tunneling risk'' and ``optimism bias,''
which they stated are well-established phenomena. Another commenter
noted that their experiences with legal assistance clients showed
consistent confusion about the risks, costs, and conditions of these
loans, as well as the excessive optimism many consumers have about
their expected ability to pay off the loans as they come due. This
perspective was supported by many comments by and about individual
users of such loans, whose experiences contrasted sharply with other
cohorts of borrowers who commented on the proposal in more critical
terms.
Some industry commenters argued that lack of understanding must be
evaluated at the level of each consumer and thus cannot serve as the
basis for a broad rulemaking of general applicability. Some commenters
pointed to prior statements by the Bureau's Director, who stated that
abusiveness cases are ``unavoidably situational'' and depend on an
individualized inquiry of the facts and circumstances presented. Other
commenters noted that the abusiveness standard is worded in the
singular--``a lack of understanding on the part of the consumer''--to
support this assertion.\729\
---------------------------------------------------------------------------
\729\ 12 U.S.C. 5531(d).
---------------------------------------------------------------------------
Another commenter suggested that measures should be taken to combat
advertising and marketing problems rather than accepting the
restrictions on access to credit that would result from the proposed
rule. Yet another industry commenter took a different approach,
objecting that there was no evidence that the proposed rule could
prevent the harms to consumers that it purported to address.
The Final Rule
After careful consideration of the comments received, the Bureau
has concluded that when lenders make covered short-term loans without
reasonably assessing whether borrowers have the ability to repay the
loans according to their terms, consumers often lack understanding of
the material risks and costs of these loans, which are often
unaffordable and lead to the risks and harms of default, delinquency,
re-borrowing, and the negative collateral consequences of forgoing
basic living expenses and major financial obligations in order to avoid
defaulting on their loans.
Many of the points made by commenters objecting to whether the rule
satisfies this prong of the definition of abusive practices rely on
arguments that conflict with credible evidence cited by the Bureau in
support of the proposed rule. That evidence is discussed more
thoroughly in Market Concerns--Underwriting, the Section 1022(b)(2)
Analysis, and the preceding section on unfairness. After consideration
of the evidence and perspectives propounded by commenters, the Bureau
generally adopts the evidentiary basis it had preliminarily set forth
in the proposed rule as the basis for meeting this prong of the
definition of abusiveness for purposes of the final rule.
As stated in the proposal, the section on unfairness, Market
Concerns--Underwriting, and the Section 1022(b)(2) Analysis, the Bureau
has evidence showing that a significant proportion of consumers do not
understand the kinds of harms that flow from unaffordable loans,
including those imposed by default, delinquency, re-borrowing, and the
collateral consequences of making unaffordable payments to attempt to
avoid these other injuries. As noted above, the adverse effects for
many consumers who find themselves caught up in extended loan sequences
constitute severe harm, the likelihood of which is not understood by
many consumers in advance. The Bureau thus concludes that a substantial
population of borrowers lacks understanding of the material risks or
costs of these loans.
The Bureau does not dispute that many consumers may be
knowledgeable about covered short-term loans and use them effectively,
including making accurate predictions about their duration of
borrowing. Yet for all the reasons discussed previously, the Bureau
concludes that a significant population of consumers does not
understand the material risks and costs of unaffordable loans that are
made without reasonably assessing the borrower's ability to repay the
loan according to its terms. This does not mean that consumers are
required to be experts in all aspects of how such loans function as a
practical matter. But it does mean that if borrowers do not understand
either their likelihood of being exposed to the risks of these loans or
the severity of the kinds of costs and harms that may occur, then it is
quite difficult to maintain the position that those same borrowers in
fact understand the material risks and costs associated with
unaffordable short-term loans. And the kinds of harms involved in the
risks of default, delinquency, re-borrowing, and the collateral
consequences of making unaffordable payments to avoid these other
injuries--including the interrelations among these injuries--can pose
complex dynamics that are not likely to be well understood by many
consumers.
A number of commenters supported this view as well. Some noted that
while some consumers might have a generalized understanding of how the
debt associated with a covered loan can affect their economic
circumstances, that understanding cannot be presumed to include an
understanding of the broader risks and harms of such loans. These
commenters also agreed with the Bureau that behavioral issues such as
``tunneling'' and ``optimism bias'' could have effects on decision-
making that may affect consumers' ability to use and manage covered
loans successfully. Although some commenters criticized this approach
as ``novel'' and relying too heavily on behavioral economics, the
Bureau has no reason to believe that these theories and methodologies
are particularly unconventional at this point of their development in
the field of economics. Regardless, however, the Bureau concludes that
these behavioral phenomena are equally consistent with economic
analyses that would rest on models of rational behavior, given the
particular circumstances of the consumers of these kinds of loans.
The claim made here by industry commenters that payday loans have
generated few consumer complaints, which mirrors the same claim made
elsewhere by these commenters, is unpersuasive for reasons that have
already been laid out in Market Concerns--Underwriting and the section
on unfairness. When payday complaints are normalized, for example, in
comparison to credit card complaints in view of the user population for
each product, payday complaints occurred
[[Page 54618]]
more than twice as frequently.\730\ In any event, the volume of
consumer complaints received by the Bureau is by no means an effective
measure, by itself, to establish the presence or absence of consumer
understanding. The Bureau believes there are a number of reasons why
borrowers who find themselves in extended loan sequences do not submit
a complaint to the Bureau about their negative experience with such
loans. First, some borrowers may be embarrassed and thus less likely to
submit complaints about their situation. Second, they may blame
themselves for having gotten themselves caught up in a cycle of debt
authorized by State law. Third, as some commenters indicated and the
Bureau has observed around the country, faith leaders and faith groups
may seem a more natural audience for some borrowers to appeal in
relating their dissatisfactions with these experiences.
---------------------------------------------------------------------------
\730\ Bureau of Consumer Fin. Prot., Consumer Response Annual
Report, Jan. 1-Dec. 31, 2016, at 27, 33, (March 2017), available at
https://www.consumerfinance.gov/documents/3368/201703_cfpb_Consumer-Response-Annual-Report-2016.PDF.
---------------------------------------------------------------------------
The claim that abusiveness claims are ``unavoidably situational,''
and therefore the Bureau must make an individualized determination of
abusiveness for each consumer, is unfounded. All decisions consumers
make are individualized, but that fact does not preclude the Bureau
from developing a general rule based on the statutory definitions of
unfairness or abusiveness, as Congress clearly contemplated in section
1031(b) of the Dodd-Frank Act. It is true that the abusiveness standard
is expressed in the statute in the singular. However, the Bureau also
notes that it has the authority to declare ``acts or practices''
abusive, and it would be a reasonable interpretation of the statute to
assume that Congress would not label abusive conduct aimed at a single
consumer a ``practice.'' Further, it is true that each practice must be
assessed based on the specific facts and circumstances before coming to
an abusiveness conclusion, yet the Bureau has done so here, and this
does not mean it must assess the facts and circumstances as to each
consumer.
Comments suggesting that the Bureau did not prove borrowers were
either infirm or ignorant are beside the point. The Bureau did not
reach that conclusion, nor is it relevant under the terms of the
statute applicable here. Rather, this prong of abusiveness only
requires a lack of understanding.
The final point raised by many industry and trade association
commenters was that any lack of consumer understanding could be
addressed by improved disclosures. They reinforced this point by
asserting that the Bureau is obligated to seek reformed disclosures as
a more modest intervention than requiring new underwriting criteria.
These comments urging that the rule should mandate disclosures rather
than adopt ability-to-repay requirements are addressed in more detail
below in the section-by-section analysis of Sec. 1041.5.
For these reasons, the Bureau finds that many consumers lack an
understanding of the material risks and costs associated with covered
short-term loans made according to the identified practice of failing
reasonably to assess the borrower's ability to repay the loan according
to its terms.
Consumer Inability To Protect Interests
The Bureau's Proposal
Under section 1031(d)(2)(B) of the Dodd-Frank Act, an act or
practice is abusive if it takes unreasonable advantage of the inability
of the consumer to protect the interests of the consumer in selecting
or using a consumer financial product or service.\731\ As the Bureau
stated in the proposal, consumers who lack an understanding of the
material risks and costs of a consumer financial product or service
often will also lack the ability to protect their interests in
selecting or using that product. Nonetheless, if a consumer lacks
understanding of the risks and costs of taking out such loans and yet
could still find it easy to protect against them, then the consumer
might be judged able to protect her interests. The Bureau also noted in
the proposal that the structure of section 1031(d) is in the
disjunctive, separately declaring it to be abusive to take unreasonable
advantage either of consumers' lack of understanding of material risks
and costs or of their inability to protect their interests in using or
selecting a product or service. As a matter of logic, then, Congress
has determined that there could be situations where consumers do
understand the material risks and costs of covered short-term loans yet
are nonetheless unable to protect their interests in selecting or using
these products.
---------------------------------------------------------------------------
\731\ 12 U.S.C. 5531(d)(2)(B).
---------------------------------------------------------------------------
In particular, the Bureau stated in the proposal that consumers who
take out covered short-term loans may be unable to protect their
interests in selecting or using such loans, given their immediate need
for credit and their inability in the moment to search out or develop
alternatives that would enable them either to avoid the need to borrow
or to borrow on terms within their ability to repay. As discussed in
Market Concerns--Underwriting, consumers who take out these loans
typically are financially vulnerable and have very limited access to
other sources of credit. Their need is often acute. And consumers
facing an immediate liquidity shortfall may believe that a covered loan
is their only choice; a Pew study found that 37 percent of borrowers
say they have been in such a difficult financial situation that they
would take a payday loan on almost any terms offered.\732\ They may not
have the time or resources to seek out, develop, or take advantage of
alternatives. These factors may place them in such a vulnerable
position when taking out these loans that they are unable to protect
their interests.
---------------------------------------------------------------------------
\732\ Pew Charitable Trusts, How Borrowers Choose and Repay
Payday Loans, at 20 (2013), http://www.pewtrusts.org/~/media/assets/
2013/02/20/pew_choosing_borrowing_payday_feb2013-(1).pdf. It bears
note that commenters correctly pointed out that the Bureau
overstated the results of the Pew study by recounting a question as
asking consumers whether they would take out a payday loan on ``any
terms,'' rather than on ``almost any terms.'' Yet the Bureau does
not find that this changes the fundamental point made in the Pew
study.
---------------------------------------------------------------------------
The Bureau also stated in the proposal that once consumers have
commenced a loan sequence by taking out an unaffordable loan, they are
likely to be unable to protect their interests in selecting or using
subsequent loans. After they take out the initial loan, consumers are
no longer able to protect their interests as a practical matter because
they are already face to face with the competing injuries of default,
delinquency, re-borrowing, or the collateral consequences of making
unaffordable payments, with no other way to opt out of the situation.
An unaffordable first loan can thus ensnare consumers in a cycle of
debt from which they cannot extricate themselves without incurring some
form of injury, rendering them unable to protect their interests in
selecting or using these kinds of loans.
Comments Received
One commenter began by making a linguistic point that questioned
whether the Bureau had conflated this prong of the abusive standard
with the prior prong, suggesting that it was simply assuming that
consumers taking out covered short-term loans inherently demonstrate an
inability to protect their own interests, whereas many other consumers
adequately protect their interests by deciding not to take out covered
loans. More generally,
[[Page 54619]]
commenters argued that lack of understanding is not enough to prove
that a borrower has an inability to protect his interests. Rather,
these commenters asserted that the Bureau must show that it is actually
impossible for consumers to protect their interests. In the same vein,
an industry commenter argued that the Bureau's claim in the proposal
that consumers believe there are no better alternatives or that it
would be too costly to shop for them fails to show inability to protect
where such alternatives actually exist.
Others repeated points they had made about the prior prong,
observing that users of covered loans are not vulnerable or
unsophisticated or irrational, but rather they do understand the terms
and costs of those loans. One commenter analogized the language of this
prong to the prohibition against unconscionable contracts in the
Uniform Consumer Sales Practices Act, and asserted that the Bureau must
therefore find consumers to be infirm, illiterate, or ignorant in order
to satisfy this prong.
Industry commenters also repeated their arguments that consumers
tend to be accurate in their estimates of the duration of borrowing,
and contended that re-borrowing is simply a preference for many
consumers, rather than indicating an inability to protect their
interests. These commenters also questioned the Pew study relied on by
the Bureau, noting that the fact that 37 percent of short-term
borrowers acknowledge they have been in an ``immediate liquidity
shortfall,'' which they would pay off with payday loans on almost any
terms offered, does not demonstrate consumers' inability to protect
their own interests. On the contrary, they argued that both competition
and State laws protect consumers against problematic loan features and
the study showed that the other 63 percent of consumers seek
alternatives to covered loans when they perceived such loans to be
harmful or problematic to them.
Commenters also asserted that no ``seller behavior'' occurs in
making covered loans that deprives consumers of their ability to make
informed decisions about their use of such loans.
By contrast, consumer groups commented that covered loan borrowers
are faced with an array of bad options, none of which provides them
with the ability to protect their own interests. They described the
significant difficulties that consumers regularly face when they are
using covered short-term loans, which are traceable directly to the
initial decision to take out loans that may prove to be unaffordable.
And they urged that this consistent pattern is a reasonable
demonstration of the proposition that a substantial portion of
consumers using covered short-term loans are unable to protect their
own interests.
The Final Rule
After consideration of the comments received, the Bureau now
concludes that when borrowers of covered loans are subjected to the
identified lender practice of making such loans without reasonably
assessing the borrower's ability to repay, they are unable to protect
their interests in selecting or using the loan product given the
dynamics of this market and the structure and terms of these loans as
described above and in Market Concerns--Underwriting.
Once again, under section 1031(d)(2)(B) of the Dodd-Frank Act, an
act or practice is abusive if it takes unreasonable advantage of the
inability of the consumer to protect the interests of the consumer in
selecting or using a consumer financial product or service.\733\
Consumers who lack an understanding of the material risks and costs of
a consumer financial product or service often will be unable to protect
their interests in selecting or using covered short-term loans because
if they misunderstand the likelihood and extent of those material
risks, they may not be aware that they should undertake efforts to
protect their interests against those risks. And if they cannot
reasonably estimate the nature and magnitude of the costs they could
incur from unaffordable loans made in accordance with the identified
practice, then they may not, as a practical matter, have the ability to
protect their interests in the face of those material costs. To this
extent, the provisions of section 1031(d)(2)(B) of the Dodd-Frank Act
flow from the provisions of section 1031(d)(2)(A) on consumers who lack
understanding, as noted in the proposal.
---------------------------------------------------------------------------
\733\ 12 U.S.C. 5531(d)(2)(B).
---------------------------------------------------------------------------
But there are further reasons why consumers may be unable to
protect their interests in using these loan products even if they
largely understand the risks and costs involved. As discussed in the
proposal and above in the section on unfairness, consumers who take out
covered short-term loans may be unable to protect their interests in
selecting or using such loans because many of them typically have an
immediate need for credit and they cannot, in the moment, effectively
identify or develop alternatives that would vitiate the need to borrow,
allow them to borrow on terms within their ability to repay, or even
allow them to borrow on terms not within their ability to repay but
nonetheless on terms more favorable than those of a covered short-term
loan. And as discussed in Market Concerns--Underwriting, many borrowers
of these loans are financially vulnerable and have very limited access
to other sources of credit. Confronted with an immediate liquidity
problem, they may determine that a covered loan is the only option they
have, as shown by the Pew study cited in the proposal, which found that
37 percent of borrowers say they have been in such a difficult
financial situation that they would take a payday loan on almost any
terms offered.\734\ Because they find themselves in such vulnerable
circumstances when they are deciding whether to take out an initial
covered short-term loan, they are unable, as a practical matter, to
protect their interests.
---------------------------------------------------------------------------
\734\ Pew Charitable Trusts, How Borrowers Choose and Repay
Payday Loans, at 20 (2013), http://www.pewtrusts.org/~/media/assets/
2013/02/20/pew_choosing_borrowing_payday_feb2013-(1).pdf. It bears
note that commenters correctly pointed out that the Bureau
overstated the results of the Pew study by recounting a question as
asking consumers whether they would take out a payday loan on ``any
terms,'' rather than on ``almost any terms.'' Yet the Bureau does
not find that this changes the fundamental point made in the Pew
study.
---------------------------------------------------------------------------
At this point, moreover, the dynamic changes even more
dramatically, as described earlier in Market Concerns--Underwriting.
Borrowers who take out an initial loan on unaffordable terms are
generally unable to protect their interests in selecting or using
further loans. After the first loan in a sequence has been consummated,
the borrower is legally obligated to repay the debt. Consumers who lack
the ability to repay that initial loan are faced with making a choice
among competing injuries: default, delinquency, re-borrowing, or making
unaffordable payments in an effort to avoid these other injuries while
forgoing basic living expenses or major financial obligations in order
to repay the loan. At this juncture, the consumer has no way out of the
situation other than by deciding among competing harms. Having taken
out the unaffordable first loan, borrowers generally will be not be
able to protect their interests in selecting or using these kinds of
loans. But the Bureau acknowledges that there are exceptions to this
rule. For example, there may be consumers who encounter a windfall
after taking out the loan but before repaying, such that none of the
injuries occurs even though at the time the loan was originated the
borrower would not have had an ability to repay.
[[Page 54620]]
In addition, the set of problems faced by consumers who have
already taken out an unaffordable loan can result in increased costs to
consumers--often very high and unexpected costs--that harm their
interests. Sometimes these harms can occur in combination at different
points in a single loan sequence, and the dynamics of how they interact
with one another in their effects on the consumer can be complex. An
unaffordable first loan can thus ensnare consumers in a cycle of debt
with no reasonable means to extricate themselves without incurring
further harm, rendering them unable to protect their interests in
selecting or using these kinds of loans.
The Bureau disagrees with the commenters who suggested that its
determination that consumers taking out these loans are very often
unable to protect their interests relied on the proposition that taking
out such a loan is inherently demonstrative of an inability to protect
oneself. Instead, the Bureau based its conclusions on the evidence that
borrowers of these loans often have an urgent need and do not perceive
any other options, especially once they have taken out an unaffordable
loan and must confront the types of injury that they face when the next
unaffordable payment comes due on their loan. A stark example of how
consumers are unable to protect their interests by avoiding the
injuries to which they are exposed by the identified practice is the
substantial number of consumers who re-borrow--many of them repeatedly,
and then eventually default--an outcome that is not in the interests of
such consumers and thus one from which they would protect themselves if
they were able.
Other factors also hinder consumers in being able to protect their
interests, such as the mismatch between how these loans are presented
to consumers--as short-term, liquidity-enhancing products that they can
use to bridge an income shortfall until their next paycheck--and how
they are actually designed and intended by lenders, as part of their
business model, to function in long sequences of re-borrowing for a
substantial population of consumers. Lenders offer a product whose term
and balloon-payment structure, along with the common use of leveraged
payment mechanisms or vehicle security all tend to magnify the risks
and harms to the borrower who fails to avoid the injuries that occur
with extended loan sequences. Many consumers are unlikely to be able to
protect their interests if they are extended an unaffordable loan and
are rigidly confined within the limited options of repaying in full or
re-borrowing, with no low-cost repayment or amortization options being
extended. Consumers in this situation have the ability to make choices
among the competing harms of default, delinquency, re-borrowing, or the
collateral consequences of making unaffordable payments--though even
the dynamics of these interrelated harms can become complex--but they
are unable to protect their interests in avoiding those harms.
The Bureau thus takes strong exception to the comment that re-
borrowing is simply a preference for many consumers. If each loan in an
extended loan sequence was itself an initial loan, such that it could
be entered into simply with a view to the considerations moving the
borrower to decide to take out a new credit obligation, then the
comment would have more force. But a large volume of covered short-term
loans is not at all of that kind: Many of these loans are repeat re-
borrowing that occurs in a setting where consumers generally face an
unavoidable choice among different harms, including potentially severe
harms from unaffordable loans and thus are unable to protect their
interests.
Therefore, the Bureau concludes that though borrowers of covered
loans are not irrational and may generally understand their basic
terms, these facts does not put borrowers in a position to protect
their interests, given the nature of these loans if they are made on
unaffordable terms. The Bureau again finds the comment that consumers
accurately estimate their duration of borrowing to be a misleading
account of the evidence it relies on here and elsewhere, which in fact
shows that consumers who are best able to predict accurately the
duration of their borrowing are those who repay after little or no re-
borrowing, and borrowers who end up in extended loan sequences are
especially likely to err in estimating how long their loan sequences
will last, though they are least able to protect their interests. Here
as elsewhere, the key point is not that all consumers are unable to
protect their interests, but that a substantial population of borrowers
is unable to protect their interests in these circumstances.
The Bureau does not agree that the language in the Dodd-Frank Act
should be construed in light of the very different language of the
Uniform Consumer Sales Practices Act, which one commenter urged should
be interpreted as synonymous. The Dodd-Frank Act does not limit the
instances in which a lender can take advantage of consumers' inability
to protect their interests to those where that inability is caused by
infirmity, ignorance, illiteracy, or inability to understand the
language of an agreement.
Nor does the Bureau agree with commenters that asserted, in effect,
that to satisfy the inability to protect condition, the Bureau must
show there is no possible way for consumers to protect their interests.
Rather, the Bureau reasonably interprets ``inability to protect'' in a
practical manner under the circumstances. Thus, as the Bureau explained
in the proposal and above, consumers who take out a covered short-term
loan in the circumstance of their urgent need for funds, lack of
awareness or availability of better alternatives, and no time to shop
for such alternatives, are unable to protect their interests in
selecting and using such a loan.
The claim that no ``seller behavior'' occurs in making covered
short-term loans that causes consumers to be unable to protect their
interests is both incorrect and beside the point. First, it is
incorrect because the identified practice of making these loans without
reasonably assessing the borrower's ability to repay the loan according
to its terms is itself seller behavior that causes some consumers--
those who have been extended a loan--to be unable to protect their
interests when the loan comes due and the consumer is unable to repay.
Second, though seller behavior does bear on the ``takes unreasonable
advantage'' prong of the definition and will be discussed further
below, it has no relevance to the question of whether consumers lack
the ability to protect their interests in the selection or use of the
product.
The Bureau does not find anything in the comments that undermines
the soundness of the Pew study, which demonstrates that, by their own
admission, consumers who take out these loans often find themselves in
circumstances where they are not able to protect their interests.
Moreover, the Bureau disagrees with the commenter that interpreted the
negative answer to the survey question as meaning that 63 percent of
respondents would seek alternatives to payday loans if the terms were
perceived by them as harmful. This is pure speculation. One could
likewise speculate that a negative response meant that the respondent
would not seek an alternative loan and address their dire situation in
some other manner. Moreover, there are many other reasons why a
substantial majority of consumers may have opted not to utilize a
covered loan, including that some do not need a loan at all. In
contrast, there is only one plausible
[[Page 54621]]
interpretation of an affirmative answer to the survey question, which
is the one the Bureau has provided.
The suggestion that consumers are adequately protected from the
risks and consequences of covered short-term loans by industry
competition and State laws is inaccurate in light of the data and
analysis the Bureau has presented about the substantial risks and costs
of these loans, which exist despite industry competition and the
existing provisions of State laws.
Having considered the comments submitted, the Bureau has concluded
that many consumers are unable to protect their interests in selecting
or using covered short-term loans made in accordance with the
identified practice of failing to make a reasonable assessment of the
borrower's ability to repay the loan according to its terms.
Practice Takes Unreasonable Advantage of Consumer Vulnerabilities
The Bureau's Proposal
Under section 1031(d)(2) of the Dodd-Frank Act, a practice is
abusive if it takes unreasonable advantage of any of several consumer
vulnerabilities, including lack of understanding of the material risks,
costs, or conditions of such loans or inability to protect their
interests in selecting or using these loans.\735\ The Bureau stated in
the proposal that the lender practice of making these loans without
reasonably assessing that the consumer will have the ability to repay
may take unreasonable advantage of both types of consumer
vulnerabilities, though either would suffice to meet this prong of the
abusiveness definition.
---------------------------------------------------------------------------
\735\ 12 U.S.C. 5531(d)(2).
---------------------------------------------------------------------------
The Bureau recognized that in any transaction involving a consumer
financial product or service there is likely to be some information
asymmetry between the consumer and the financial institution. Often the
financial institution will have superior bargaining power as well.
Section 1031(d) of the Dodd-Frank Act does not prohibit financial
institutions from taking advantage of their superior knowledge or
bargaining power to maximize their profit. Indeed, in a market economy,
market participants with such advantages generally pursue their self-
interests. However, section 1031 of the Dodd-Frank Act makes plain that
there comes a point at which a financial institution's conduct in
leveraging its superior information or bargaining power becomes
unreasonable advantage-taking and thus is abusive.\736\
---------------------------------------------------------------------------
\736\ A covered person taking unreasonable advantage of one or
more of the three consumer vulnerabilities identified in section
1031(d) of the Dodd-Frank Act in circumstances in which the covered
person lacks such superior knowledge or bargaining power may still
be engaging in an abusive act or practice.
---------------------------------------------------------------------------
The Dodd-Frank Act delegates to the Bureau the responsibility for
determining when that line has been crossed. Several interrelated
considerations led the Bureau to believe that the practice of making
payday, vehicle title, and other covered short-term loans without
regard to the ability to repay may cross the line and take unreasonable
advantage of consumers' lack of understanding and inability to protect
their interests.
First, the Bureau noted in the proposal that the practice of making
loans without regard to the consumer's ability to repay the loan
according to its terms stands in stark contrast to the practice of
lenders in virtually every other credit market, and upends traditional
notions of responsible lending enshrined in safety-and-soundness
principles as well as in a number of other laws.\737\ The general
principle of credit markets is that the interests of lenders and
borrowers are closely aligned: Lenders succeed (i.e., profit) only when
consumers succeed (i.e., repay the loan according to its terms). For
example, lenders in other markets, including other subprime lenders,
typically do not make loans without first making an assessment that
consumers have the capacity to repay the loan according to the loan
terms. Indeed, ``capacity'' is one of the traditional three ``Cs'' of
lending and is often embodied in tests that look at debt as a
proportion of the consumer's income or at the consumer's residual
income after repaying the debt.
---------------------------------------------------------------------------
\737\ Dodd-Frank Act section 1411, codified at 15 U.S.C.
1639c(a)(1); CARD Act, 15 U.S.C. 1665e; HPML Rule, 73 FR 44522,
44543 (July 30, 2008); OCC Advisory Letter 2003-3, Avoiding
Predatory and Abusive Lending Practices in Brokered and Purchased
Loans (Feb. 21, 2003), available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2003/advisory-letter-2003-3.pdf;
OCC, Guidance on Supervisory Concerns and Expectations Regarding
Deposit Advance Products, 78 FR 70624 (Nov. 26, 2013); FDIC Guidance
on Supervisory Concerns and Expectations Regarding Deposit Advance
Products, 78 FR 70552 (Nov. 26, 2013).
---------------------------------------------------------------------------
In the markets for covered loans, however, lenders have built a
business model that--unbeknownst to borrowers--depends on repeated re-
borrowing, and thus on the consumer's lack of capacity to repay such
loans without needing to re-borrow. As explained in the proposal and in
part II and Market Concerns--Underwriting above, the costs of
maintaining business operations (which include customer acquisition
costs and overhead expenses) often exceed the revenue that could be
generated from making individual short-term loans that would be repaid
without re-borrowing. Thus, in this market the business model of the
lenders depends on a substantial percentage of consumers not being able
to repay their loans when they come due and, instead, taking out
multiple additional loans in quick succession. Indeed, upwards of half
of all payday and single-payment vehicle title loans are made to--and
an even higher percentage of revenue is derived from--borrowers in a
sequence of 10 loans or more. This dependency on revenue from long-term
cycles of debt has been acknowledged by industry stakeholders. For
example, as noted in Market Concerns--Underwriting, an attorney for a
national trade association representing storefront payday lenders
asserted in a letter to the Bureau that ``[i]n any large, mature payday
loan portfolio, loans to repeat borrowers generally constitute between
70 and 90 percent of the portfolio, and for some lenders, even more.''
\738\
---------------------------------------------------------------------------
\738\ See Miller letter, cited in footnote 53, supra.
---------------------------------------------------------------------------
Also relevant in assessing whether the practice identified here--of
making covered short-term loans without reasonably assessing the
borrower's ability to repay the loan according to its terms--involves
unreasonable advantage-taking is the vulnerability of the consumers
seeking these types of loans. As discussed above in Market Concerns--
Underwriting, payday and vehicle title borrowers--and by extension
borrowers of similar covered short-term loans--generally have modest
incomes, little or no savings, and have tried and failed to obtain
other forms of credit. They generally turn to these products in times
of need as a ``last resort,'' and when the loan comes due and threatens
to take a large portion of their disposable income, their situation
becomes, if anything, even more desperate.
In addition, the evidence described above in Market Concerns--
Underwriting suggests that lenders engage in practices that further
exacerbate the risks and costs to the interests of consumers. In
addition to the identified practice of making such loans without any
underwriting to gauge their affordability, lenders rely on the term and
balloon-payment structure of these loans to yield the intended result
of extensive re-borrowing. Lenders market these loans as being for use
``until next payday'' or to ``tide over'' consumers until they receive
income, thus encouraging overly optimistic thinking about how the
consumer is
[[Page 54622]]
likely to use the product. Lenders also make this re-borrowing option
easy and salient to consumers in comparison to repayment of the full
loan principal. Moreover, lenders typically limit the options available
to borrowers by not offering or not encouraging borrowers to make use
of alternatives that would reduce the outstanding principal over the
course of a loan sequence, which would help consumers extricate
themselves from the cycle of indebtedness more quickly and reduce their
costs from re-borrowing. Storefront lenders, in particular, encourage
extended loan sequences by encouraging or requiring consumers to repay
in person in an effort to frame the consumer's experience in such a way
to promote re-borrowing. Lenders often give financial incentives to
employees to produce this outcome and thus reward them for maximizing
loan volume.
Comments Received
One trade association commented that lenders are allowed to take
advantage of their superior knowledge and bargaining power and doing so
is not contrary to law. In their view, the Bureau's perspective that
the re-borrowing model undergirding the market for covered loans stands
in contrast to other markets is attributable to the restrictions
imposed by State laws rather than by borrower needs and expectations.
They also maintained that lenders have little incentive to take
advantage of borrowers who they hope will return to them for subsequent
loans after repaying those which are outstanding.
By contrast, although consumer groups agreed with the general
proposition that lenders can take advantage of superior knowledge and
bargaining power, they emphasized that the proposed rule would prevent
lenders from taking unreasonable advantage of consumers. They also
noted that the financial vulnerability of many consumers who are likely
to seek covered short-term loans is relevant to this inquiry.
One commenter noted that a lender cannot take unreasonable
advantage of a borrower through ``acts of omission,'' such as by
failing to ask for pay stubs or other verification evidence or failing
to check with consumer reporting agencies for information about the
borrower's credit history. Others asserted that an unreasonable
advantage is not taken when lenders make loans to consumers with
damaged credit or in need of cash, or advertise their loans as
``quick'' or ``speedy'' to cater to borrower needs, or offer terms that
are readily and easily understood by borrowers. Some argued that the
rule simply substitutes the Bureau's judgment and risk tolerance for
that of consumers. Still others argued that a lender cannot take
unreasonable advantage of a consumer when the benefits of a loan exceed
its costs.
The Final Rule
The Bureau now concludes, after consideration of the comments
received, that when lenders make covered short-term loans without
reasonably assessing whether the borrower has the ability to repay the
loan according to its terms, lenders take unreasonable advantage of
consumers' lack of understanding of the material risks, costs, and
conditions of these loans, and also take advantage of their inability
to protect their interests in selecting or using these loans.
The Bureau does not dispute the proposition that lenders may take
reasonable advantage of their superior knowledge and bargaining power.
Nonetheless, in the proposal the Bureau preliminarily found that many
lenders who make such loans have crossed the threshold to take
impermissible and unreasonable advantage of those to whom they lend.
The suggestion that these lenders have little incentive to take
advantage of borrowers who are likely to be repeat customers is
unfounded--there is an enormous difference between a scenario in which
a borrower successfully repays a loan and later returns to apply for
another loan (i.e., a true ``repeat customer''), as compared to a
scenario in which a borrower is forced to re-borrow again and again to
cope with the problems posed by an unaffordable loan. Given that such a
large majority of covered loans (over 80 percent) consist of loans
procured through re-borrowing, and given that this is the core of the
business model, it is evident that lenders have very significant
incentives to take advantage of consumers' lack of understanding of the
material risks and their inability to protect themselves in the choice
of the product. And once a consumer has taken a loan, lenders have at
least equally significant incentives to take advantage of their
inability to protect themselves with respect to the choice of the next
loan in order to encourage re-borrowing. The factual background for the
core elements of the Bureau's conclusion that the ``taking unreasonable
advantage'' prong is met in these circumstances have been discussed at
length in the section on unfairness and above in Market Concerns--
Underwriting. For the sake of convenience, however, much of that
analysis will be restated here.
First, many consumers may not be able to protect their interests or
to understand either the likelihood or the extent of the risks and
costs of loans made in accordance with the identified practice of
failing to make a reasonable assessment of the borrower's ability to
repay the loan according to its terms. In the face of these
vulnerabilities, the general practice in this market is that lenders
nonetheless make it their practice not to assess the borrower's ability
to repay. As a result, they typically have a significant volume of
loans that are unaffordable from the outset in accordance with their
terms.
As discussed above in part II and in Market Concerns--Underwriting,
this approach is in fact the core of the business model for most such
lenders and reflects a deliberate decision on their part. Nothing in
State or Federal law prohibits these lenders from engaging in
meaningful underwriting on the loans they make. In this respect, the
direction taken in this market is, in fact, out of step with
traditional lender-borrower relationships in other loan markets, where
the success of the lender is intertwined with the success of the
borrower and determinations about loans that will be offered and
accepted are preceded by underwriting assessments and determinations of
this kind. Instead, the profitability of these lenders is built on, and
depends upon, repeat re-borrowing by consumers.
This model of lending premised on very minimal underwriting--often
limited to screening only for potential fraud--is exacerbated by
another common practice of these lenders once the initial loan, often
unaffordable according to its terms, has been made. At this point,
these lenders typically provide the borrower with few or no repayment
options other than either full repayment all at once or continued re-
borrowing (which incurs another set of fees but provides no reduction
of the loan principal). The array of repayment options provided in many
other lending markets are virtually nonexistent here. Low-cost
repayment or amortization options are typically not presented at all or
are minimized or obscured in various ways. This again is a deliberate
choice made by lenders in this market, not compelled by either State or
Federal law. Indeed, the Bureau's close experience over the past five
years from exercising its supervision and enforcement authority over
this market indicates that, even when such options are supposed to be
afforded under provisions of some State laws, lenders often find ways
to mask or obscure them or otherwise impede borrowers from availing
themselves of them. Indeed,
[[Page 54623]]
even consumers who are delinquent and have further demonstrated their
inability to repay the loan according to its terms are encouraged to
re-borrow, which leads many consumers to engage in extensive re-
borrowing even where they eventually wind up in default. For many re-
borrowers, the upshot is that they end up making repeated payments that
become increasingly unaffordable in the aggregate over time, even
though a substantial number of them still will sustain the harms
associated with default.
The Bureau also has observed other lender conduct that greatly
increases the risks and harms to consumers in these circumstances.
Covered short-term loans, in particular, involve a basic mismatch
between how they appear to function as short-term credit and how they
are actually designed and intended by lenders, as part of their
business model, to function in long sequences of re-borrowing for a
substantial population of consumers. Lenders present these loans as
short-term, liquidity-enhancing products that consumers can use to
bridge an income shortfall until their next paycheck. But in practice,
across the universe of borrowers, these loans often do not operate that
way. Lenders have designed the term of the loan, its balloon-payment
structure, and the common use of leveraged payment mechanisms,
including vehicle security, so as to magnify the risks and harms to the
borrower. The disparity between how these loans appear to function and
how they actually function increases the difficulties that consumers
experience with these loans.
Once consumers have taken out a loan, they have no practical means
to avoid the injuries that will occur if the loan proves to be
unaffordable. Consumers who obtain a covered short-term loan that is
beyond their ability to repay confront the harms of default,
delinquency, re-borrowing, or the collateral consequences of making
unaffordable payments that would cause them to forgo basic living
expenses or major financial obligations. They can make choices among
these competing harms but not avoid them. And as discussed above in
Market Concerns--Underwriting, and below in Market Concerns--Payments,
lenders engage in other practices that further increase the likelihood
and degree of harm, for instance by encouraging additional re-borrowing
and its attendant costs even for consumers who are already experiencing
substantial difficulties as they are mired in extended loan sequences,
and by engaging in payment collection practices that are likely to
cause consumers to incur substantial additional fees beyond what they
already owe on the terms of the existing loan. Further adverse effects
can include expensive bank fees, the potential loss of their bank
account, aggressive debt collection efforts, and, with title loans, the
risks and costs of having their vehicle repossessed, causing them to
lose their transportation to work or conduct their ordinary personal
affairs.
As discussed earlier, this practice of making loans without regard
to the consumer's ability to repay contrasts sharply with the regular
practice of lenders in virtually every other credit market, and upends
traditional notions of responsible lending enshrined in safety-and-
soundness principles as well as in a number of other laws.\739\ The
general principle of credit markets is that the interests of lenders
and borrowers are aligned and lenders benefit only when their customers
are successful in repaying their loans in accordance with the terms.
For this reason, lenders in other markets, including other subprime
lenders, typically do not make loans without first making an assessment
that consumers have the capacity to repay the loan according to the
loan terms.
---------------------------------------------------------------------------
\739\ Dodd-Frank Act section 1411, codified at 15 U.S.C.
1639c(a)(1); CARD Act, 15 U.S.C. 1665e; HPML Rule, 73 FR 44522,
44543 (July 30, 2008); OCC Advisory Letter 2003-3, Avoiding
Predatory and Abusive Lending Practices in Brokered and Purchased
Loans (Feb. 21, 2003), available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2003/advisory-letter-2003-3.pdf;
OCC, Guidance on Supervisory Concerns and Expectations Regarding
Deposit Advance Products, 78 FR 70624 (Nov. 26, 2013); FDIC Guidance
on Supervisory Concerns and Expectations Regarding Deposit Advance
Products, 78 FR 70552 (Nov. 26, 2013).
---------------------------------------------------------------------------
Yet the set of effects found in the market for covered short-term
loans has the cycle of indebtedness at its core, as intended and
effectuated by lenders in this market. And it affects a large segment
of borrowers: As described above in Market Concerns--Underwriting, half
of all storefront payday loan sequences contain at least four
loans.\740\ One-third contain seven loans or more, by which point
consumers will have paid charges equal to 100 percent of the original
amount borrowed and still owe the full amount of the principal.\741\
Almost one-quarter of loan sequences contain at least 10 loans in a
row, and looking just at loans made to borrowers who are paid weekly,
biweekly, or semi-monthly, more than one-fifth (21 percent) of those
loans are in sequences consisting of at least 20 loans.\742\ For loans
made to borrowers who are paid monthly, almost half (46 percent) of the
loans are in sequences consisting of at least 10 loans.\743\ The
figures for title loans are similar, and also are premised on a
business model built around repeated re-borrowing: 56 percent of
vehicle title loan sequences consist of more than three loans, 36
percent consist of at least seven loans, and almost one quarter--23
percent--consist of more than 10 loans.\744\
---------------------------------------------------------------------------
\740\ CFPB Report on Supplemental Findings.
\741\ Id.
\742\ Id.
\743\ Id.
\744\ Id.
---------------------------------------------------------------------------
Regardless of what the outer bounds of ``taking unreasonable
advantage'' may be, the Bureau concludes that the ways lenders have
structured their lending practices here fall well within any reasonable
definition of that concept. Here the identified practice of making
loans without reasonably assessing the borrower's ability to repay the
loan according to its terms leads to unaffordable loans and all the
harms that follow upon them. At a minimum, lenders take unreasonable
advantage of borrowers when they develop lending practices that are
atypical in the broader consumer financial marketplace, take advantage
of particular consumer vulnerabilities, rely on a business model that
is directly inconsistent with the manner in which the product is
marketed to consumers, and eliminate or sharply limit feasible
conditions on the offering of the product (such as underwriting and
amortization, for example) that would reduce or mitigate harm for a
substantial population of consumers. The Bureau now affirms that
lenders take such unreasonable advantage in circumstances where they
make covered short-term loans or covered longer-term balloon-payment
loans without reasonably assessing the consumer's ability to repay the
loan according to its terms.
The Bureau does not disagree with the commenters who noted that
lenders do not take unreasonable advantage of consumers when they make
loans to consumers with damaged credit or in need of cash, or they
advertise their loans as quick or speedy to cater to borrower needs, or
they offer terms that are readily and easily understood by borrowers.
Neither in isolation nor taken together do these particular acts or
practices constitute abusive behavior. The Bureau concludes instead
that, by engaging in the identified practice, lenders take unreasonable
advantage of consumer vulnerabilities.
Moreover, the rule does not substitute the Bureau's judgment and
risk tolerance for those of consumers. Instead, it simply seeks to
assure that lenders do not take unreasonable
[[Page 54624]]
advantage of consumers' lack of understanding or inability to protect
their interests through use of the identified practice. Even well-
educated and sophisticated consumers can lack understanding of a loan
product whose structural effects are complex and opaque, leading many
of them to the negative consequences that flow from an extended cycle
of indebtedness.
The Bureau disagrees with the commenters who noted that a lender
cannot take unreasonable advantage of a borrower by failing to
underwrite appropriately, such as by failing to ask for pay stubs or
other verification evidence or failing to check with consumer reporting
agencies for information about the borrower's credit history. The
thrust of these comments is that the lender cannot ``take unreasonable
advantage'' by seeking to reduce burdens and make life easier for
consumers and, in particular, cannot do so by ``acts of omission.'' On
the contrary, the Bureau has shown that lenders utilize these and
related practices to position a substantial population of borrowers to
take out unaffordable loans that lead directly to debt cycles of long-
term re-borrowing. And as the law has long recognized in various
contexts, there is no material distinction to be made between acts of
omission and acts of commission, particularly here where these aspects
of the identified practice take unreasonable advantage of consumer
vulnerabilities.
With respect to the comments that a lender cannot take unreasonable
advantage of a consumer when the benefits of a loan exceed its costs,
as stated above in the unfairness section, the Bureau has concluded
that the countervailing benefits of the identified practice, rather
than of the product itself, do not outweigh the substantial injury. In
determining whether the lender takes unreasonable advantage, the
Bureau's focus is not on the variable experiences of the entire
heterogeneous borrower universe, but rather on the adverse effects that
the identified practice has on a substantial population of consumers
where lenders are taking unreasonable advantage of their
vulnerabilities by making unaffordable loans to them. Thus, for the
sake of argument, even if it were true that a practice that is net
beneficial for consumers cannot be found to take unreasonable
advantage, that would not stand as an impediment to finding the
practice at issue here to be abusive. Further, nothing in the final
rule prevents any lender from offering loans whose benefits exceed
their costs, regardless of the specific population for which that
judgment is being made, as long as the lender does not engage in the
identified practice of failing to make a reasonable assessment of
ability to repay when making such loans.
In sum, the Bureau concludes that where a borrower lacks
understanding of the material risks and costs of covered short-term
loans, or where the borrower lacks an ability to protect his own
interests by using or selecting these loans, the lender takes
unreasonable advantage of these consumer vulnerabilities by making a
covered short-term loan without reasonably assessing the borrower's
ability to repay the loan according to its terms, where the natural
result of that practice is that a substantial number of consumers will
be caught up in extended loan sequences, with the adverse consequences
that have been amply canvassed above and in Market Concerns--
Underwriting. The Bureau does not take issue with the comment that it
should take into consideration the array of State laws governing
covered short-term loans. The Bureau has carefully considered the
effects of those laws and concludes that the laws in those States that
authorize such loans do not adequately protect consumers, because the
negative effects for consumers that are described at length in Market
Concerns--Underwriting continue to exist despite those State laws.
Having considered the comments submitted, the Bureau has concluded
that there is substantial evidence and a sufficient basis to determine
that the identified practice of making covered short-term and longer-
term balloon-payment loans, without reasonably assessing the borrower's
ability to repay the loan according to its terms, takes unreasonable
advantage either of the borrower's lack of understanding of the
material risks and costs of these loans or of the borrower's inability
to protect his own interests by using or selecting these loans.
Section 1041.5 Ability-to-Repay Determination Required
General Approach in Proposed Rule
As discussed in the section-by-section analysis of Sec. 1041.4
above, the Bureau tentatively concluded in the proposed rule that it is
an unfair and abusive act or practice to make a covered short-term loan
without reasonably determining that the consumer will have the ability
to repay the loan. Section 1031(b) of the Dodd-Frank Act provides that
the Bureau's rules may include requirements for the purpose of
preventing unfair or abusive acts or practices. The Bureau thus
proposed to prevent the abusive and unfair practice by including in
proposed Sec. Sec. 1041.5 and 1041.6 certain minimum requirements for
how a lender may reasonably determine that a consumer has the ability
to repay a covered short-term loan.
Proposed Sec. 1041.5 set forth the prohibition against making a
covered short-term loan (other than a loan that satisfies the
protective conditions in proposed Sec. 1041.7) without first making a
reasonable determination that the consumer will have the ability to
repay the covered short term loan. It also, in combination with
proposed Sec. 1041.6, specified the minimum elements of a baseline
methodology that would be required for determining a consumer's ability
to repay, using a residual-income analysis and an assessment of the
consumer's prior borrowing history. In particular, proposed Sec.
1041.6 would have required that a presumption of unaffordability
applied if a consumer sought a new covered short-term loan within 30
days of a prior outstanding covered short-term loan, and applied a
mandatory 30-day cooling-off period after the third such loan in a
sequence.
The Bureau proposed similar ability-to-repay requirements for
covered longer-term loans, including covered longer-term balloon-
payment loans, in proposed Sec. Sec. 1041.9 and 1041.10. Given the
parallel nature of proposed Sec. Sec. 1041.5 and 1041.6 for covered
short-term loans and proposed Sec. Sec. 1041.9 and 1041.10 for covered
longer-term loans, the Bureau will generally refer just to proposed
Sec. Sec. 1041.5 and 1041.6 to describe the proposed ability-to-repay
framework, but will note where proposed Sec. Sec. 1041.9 and 1041.10
differed from the framework for covered short-term loans.
The baseline methodology in proposed Sec. 1041.5 rested on a
residual-income analysis--that is, an analysis of whether, given the
consumer's projected income and major financial obligations, the
consumer will have sufficient remaining (i.e., residual) income to
cover the payments on the proposed loan and still meet basic living
expenses. The proposal also would have required lenders to track the
timing of inflows and outflows of funds to determine whether there
would be periods of shortfall that might prompt consumers to re-borrow
soon after a previous covered short-term loan. In the proposal, the
Bureau recognized that, in other markets and under other regulatory
regimes, financial capacity is more typically measured by establishing
a maximum debt-to-income (DTI)
[[Page 54625]]
ratio.\745\ DTI tests generally rest on the assumption that as long as
a consumer's debt burden does not exceed a certain threshold percentage
of the consumer's income, the remaining share of income will be
sufficient for a consumer to be able to meet non-debt obligations and
other expenses. By its nature, DTI must be calculated by dividing total
income and total expenses for the relevant time period, and does not
permit the tracking of a consumer's individual income inflows and major
financial obligation outflows on a continuous basis over a period of
time.
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\745\ The Bureau noted in the proposal that, for example, DTI is
an important component of the Bureau's ability-to-repay rule for
mortgages in 12 CFR 1026.43. It is a factor that a creditor must
consider in determining a consumer's ability to repay and also is a
component of the standards that a residential mortgage loan must
meet to be a qualified mortgage under that rule.
---------------------------------------------------------------------------
For low- and moderate-income consumers, the Bureau expressed
concern in the proposal that a DTI ratio would not be sufficiently
sensitive to determine re-borrowing risk in the markets for covered
loans. In particular, the Bureau noted that a DTI ratio that might seem
quite reasonable for the ``average'' consumer could be quite
unmanageable for a consumer at the lower end of the income spectrum and
the higher end of the debt burden range.\746\ Ultimately, the Bureau
posited in the proposal, whether a particular loan is affordable will
depend upon how much money the consumer will have left after paying
existing obligations and whether that amount is sufficient to cover the
proposed new obligation while still meeting basic living expenses.
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\746\ The Bureau stated in the proposal that, for example, under
the Bureau's ability-to-repay requirements for residential mortgage
loans, a qualified mortgage results in a DTI ratio of 43 percent or
less. But for a consumer with a DTI ratio of 43 percent and low
income, the 57 percent of income not consumed by payments under debt
obligations is unlikely to indicate the same capacity to handle a
new loan payment of a given dollar amount, compared to consumers
with the same DTI and higher income. The Bureau further stated in
the proposal that this is especially true if the low-income consumer
also faces significant non-debt expenses, such as high rent
payments, that may consume significant portions of the remaining 57
percent of her income.
---------------------------------------------------------------------------
The Bureau additionally stated in the proposal that, in contrast
with other markets in which there are long-established norms for DTI
levels that are consistent with sustainable indebtedness, the Bureau
did not believe that there existed analogous norms for sustainable DTI
levels for consumers taking covered short-term loans. The Bureau stated
in the proposal that it thus believed that residual income was a more
direct test of ability to repay than DTI and a more appropriate test
with respect to the types of products covered in this rulemaking and
the types of consumers to whom these loans are made.
The Bureau emphasized in the proposal that it had attempted to
design the residual income methodology specified in proposed Sec. Sec.
1041.5 and 1041.6 to ensure that ability-to-repay determinations can be
made through scalable underwriting models. While it was proposing that
the most critical inputs into the determination rest on documentation,
the Bureau noted that its proposed methodology would allow for various
means of documenting major financial obligations and also permit
alternatives to documentation where appropriate. The Bureau recognized
in particular that rent often cannot be readily documented and
therefore would have allowed for estimation of rental expense based on
the housing expenses of consumers with households in the locality of
the consumer. The Bureau's proposed methodology also would not have
mandated verification or detailed analysis of consumers' expenditures
for basic living expenses. The Bureau stated in the proposal that it
believed that such detailed analysis may not be the only method to
prevent unaffordable loans and was concerned that it would
substantially increase costs to lenders and consumers.
Finally, the Bureau emphasized that the proposed methodology would
not dictate a formulaic answer to whether, in a particular case, a
consumer's residual income is sufficient to make a particular loan
affordable. For instance, the Bureau did not propose a specific minimum
dollar threshold for adequate residual income. Instead, the proposed
methodology would have allowed lenders to exercise discretion in
arriving at a reasonable determination with respect to that question.
Proposed Sec. 1041.5 outlined the methodology for assessing the
consumer's residual income as part of the assessment of ability to
repay. Proposed Sec. 1041.5(a) set forth definitions used throughout
proposed Sec. Sec. 1041.5 and 1041.6.
Proposed Sec. 1041.5(b) set forth the proposed requirement for a
lender to determine that a consumer will have the ability to repay a
covered short-term loan and set forth minimum standards for a
reasonable determination that a consumer will have the ability to repay
such a covered loan. In the standards in proposed Sec. 1041.5(b), the
Bureau generally proposed to require a lender to determine that the
consumer's income will be sufficient for the consumer to make payments
under a covered short-term loan while accounting for the consumer's
payments for basic living expenses and major financial obligations.
Proposed Sec. 1041.5(c) set forth standards for verification and
projections of a consumer's income and major financial obligations on
which the lender would be required to base its determination under
proposed Sec. 1041.5.
Proposed Sec. 1041.6 would have augmented the basic ability-to-
repay determination required by proposed Sec. 1041.5 in circumstances
in which the consumer's recent borrowing history or current difficulty
in repaying an outstanding loan provides important evidence with
respect to the consumer's financial capacity to afford a new covered
short-term loan. For example, proposed Sec. 1041.6 would have imposed
a presumption of unaffordability in various circumstances suggesting
that a consumer lacked the ability to repay a current or recent loan,
so that a lender would have been permitted to extend a new covered
short-term loan under proposed Sec. 1041.5 only if there was
particular evidence of a sufficient improvement in financial capacity.
In addition, where a consumer took out a sequence of three covered
short-term loans, each within 30 days of the prior outstanding loan,
proposed Sec. 1041.6 would have imposed a mandatory 30-day cooling-off
period. The Bureau believed that these requirements would help
consumers to avoid getting stuck in long cycles of debt. See section-
by-section analysis for Sec. 1041.5(d), below, for further discussion
of proposed Sec. 1041.6.
The Bureau explained in the proposal that as an alternative to the
proposed ability-to-repay requirement, it had considered whether
lenders should be required to provide disclosures to consumers warning
them of the costs and risks of re-borrowing, default, and collateral
harms from unaffordable payments associated with taking out covered
short-term loans. However, the Bureau stated in the proposal that it
believed that such a disclosure remedy would be significantly less
effective in preventing the identified consumer harms, for three
reasons. First, the Bureau stated that disclosures would not address
the underlying incentives in the market for lenders to encourage
consumers to re-borrow and take out long sequences of loans. As
discussed in the proposal's section on Market Concerns--Short-Term
Loans, the prevailing business model involves lenders deriving a very
high percentage of their revenues from extended loan sequences. The
Bureau stated in the proposal that while enhanced
[[Page 54626]]
disclosures would provide additional information to consumers, the
loans would remain unaffordable for consumers, lenders would have no
greater incentive to underwrite more rigorously, and lenders would
remain dependent for revenue on extended loan sequences of repeat re-
borrowing by many consumers.
Second, the Bureau stated in the proposal that empirical evidence
had led it to believe that disclosures would have only modest impacts
on consumer borrowing patterns for short-term loans generally and
negligible impacts on whether consumers re-borrow. In the proposal, the
Bureau discussed evidence from a field trial of several disclosures
designed specifically to warn of the risks of re-borrowing and the
costs of re-borrowing that showed that these disclosures had a marginal
effect on the total volume of payday borrowing.\747\ Further, the
Bureau discussed in the proposal its analysis of the impact of a change
in Texas law (effective January 1, 2012) requiring payday lenders and
short-term vehicle title lenders to provide a new disclosure to
prospective consumers before each payday loan transaction.\748\ The
Bureau observed in the proposal that, using the Bureau's supervisory
data, it had found that, with respect to payday loan transactions,
there was an overall 13 percent decline in loan volume in Texas after
the disclosure requirement went into effect, relative to the loan
volume changes for the study period in comparison States.\749\ As
discussed in the proposal, the Bureau noted that its analysis of the
impacts of the Texas disclosures also showed that the probability of
re-borrowing on a payday loan only declined by approximately 2 percent
once the disclosure was put in place.\750\
---------------------------------------------------------------------------
\747\ Marianne Bertrand and Adair Morse, ``Information
Disclosure, Cognitive Biases and Payday Borrowing,'' 66 J. of Fin.
1865, at 1866 (2011).
\748\ See CFPB Report on Supplemental Findings, at Chapter 3.
\749\ See CFPB Report on Supplemental Findings, at 73.
\750\ See CFPB Report on Supplemental Findings, 78-79.
---------------------------------------------------------------------------
The Bureau stated in the proposal that this finding indicates that
high levels of re-borrowing and long sequences of payday loans remain a
significant source of consumer harm even with a disclosure regime in
place.\751\ Further, the Bureau stated in the proposal that, as
discussed in the proposal's section on Market Concerns--Short-Term
Loans, the Bureau has observed that consumers have a very high
probability of winding up in very long loan sequences once they have
taken out only a few loans in a row. The Bureau stated in the proposal
that the extremely high likelihood that a consumer will wind up in a
long-term debt cycle after taking out only a few loans contrasts
sharply with the nearly negligible impact on consumer re-borrowing
patterns of a required disclosure, which the Bureau viewed as providing
further evidence that disclosures tend to be ineffective in addressing
what the Bureau considered to be the core harms to consumers in this
credit market.
---------------------------------------------------------------------------
\751\ The Bureau stated in the proposal that the empirical data
suggests that the modest loan volume reductions are primarily
attributable to reductions in originations; once a consumer has
taken out the initial loan, the disclosure has very little impact on
re-borrowing.
---------------------------------------------------------------------------
Third, the Bureau stated in the proposal that it believed that
behavioral factors made it more likely that disclosures to consumers
taking out covered short-term loans would be ineffective in warning
consumers of the risks and preventing the harms that the Bureau sought
to address with the proposal. The Bureau stated in the proposal that
due to general optimism bias and the potential for tunneling in their
decision-making, as discussed in more detail in the proposal's section
on Market Concerns--Short-Term Loans, consumers are likely to dismiss
warnings of possible negative outcomes as not applying to them, and not
to focus on disclosures of the possible harms associated with
outcomes--re-borrowing and default--that they do not anticipate
experiencing themselves. The Bureau stated in the proposal that to the
extent consumers have thought about the likelihood that they themselves
will re-borrow or default (or both) on a loan, a general warning about
how often people re-borrow or default (or both) is unlikely to cause
them to modify their approach by revising their own expectations about
what the chances are that they themselves will re-borrow or default (or
both).
Legal Authority
As noted above in the section-by-section analysis for Sec. 1041.4,
the Bureau has authority to prescribe rules applicable to a covered
person or service provider identifying as unlawful unfair, deceptive,
or abusive acts or practices in connection with any transaction with a
consumer for a consumer financial product or service, or the offering
of a consumer financial product or service.\752\ The Bureau has done so
in Sec. 1041.4. Additionally, the Bureau may include in such rules
requirements for the purpose of preventing such acts or practices.\753\
It is based on that authority that the Bureau issues Sec. 1041.5.
---------------------------------------------------------------------------
\752\ 12 U.S.C. 5531(b).
\753\ Id.
---------------------------------------------------------------------------
A number of commenters, including several industry trade
associations and lenders, challenged the Bureau's authority to enact a
prescriptive ability-to-repay requirement because Congress did not
specifically authorize such a requirement with respect to payday loans
and other loans the Bureau proposed to cover, in contrast to the
mortgage and credit card markets. Consumer advocates and some other
commenters, however, argued that the Bureau had ample authority to
impose the proposed ability-to-repay requirement under the UDAAP
authority granted to the Bureau under the Dodd-Frank Act. These
comments are addressed in the section-by-section analysis for Sec.
1041.4, above (``Identification of Unfair and Abusive Practice--Covered
Loans'').
More generally, the Bureau received a number of comments asserting
that its proposed rule had exceeded its authority to prevent the unfair
and abusive practice identified in Sec. 1041.4, by prescribing more
detailed underwriting requirements than would be required to avoid
engaging in the identified unfair or abusive practice.
By its terms, section 1031 of the Dodd-Frank Act authorizes the
Bureau not only to ``prescribe rules applicable to a covered person or
service provider identifying as unlawful unfair, deceptive or abusive
acts of practices'' but also provides that ``Rules under this section
may include requirements for the purpose of preventing such acts or
practices.'' This latter phrase would be surplusage if the Bureau's
rulemaking authority were as circumscribed as these commenters suggest.
Furthermore, as discussed above in part IV, courts have long held that
rulemakings to remedy and prevent unfair acts and practices may include
preventative requirements so long as those requirements have a
``reasonable relation to the unlawful practices found to exist.'' \754\
The Bureau believes that the final underwriting requirements as set
forth in Sec. 1041.5 are reasonably related to, and crafted adequately
to prevent, the abusive and unfair practice identified in Sec. 1041.4.
The unfair and abusive practice is making covered short-term and
longer-term balloon-payment loans without reasonably determining that
consumers will have an ability to repay the loans according to their
terms. Section 1041.5 sets forth a balanced approach, providing
flexibility in some areas and
[[Page 54627]]
bright-line guidance in others, that is aimed at ensuring that lenders
account for net income, major financial obligations, and basic living
expenses, and make a reasonable determination about whether a consumer
will be able to repay the loan according to its terms, using those
variables in a residual income or debt-to-income ratio calculation. And
other provisions in Sec. 1041.5, such as the cooling-off periods in
paragraph (d), are likewise reasonably related to the identified
practice in that they temporarily prohibit continued lending to
consumers who have already received a sequence of three covered short-
term loans or covered longer-term balloon-payment loans in quick
succession, to both protect them from further unaffordable loans and
potentially enable them to escape from a cycle of indebtedness.
---------------------------------------------------------------------------
\754\ AFSA, 767 F.2d at 988.
---------------------------------------------------------------------------
General Comments Received
In this general section, before describing the details of proposed
Sec. 1041.5, comments, and changes in the final rule on specific
paragraphs of Sec. 1041.5 below, the Bureau is addressing comments
about the Bureau's general proposed approach, including the overall
burden of the proposed ability-to-repay requirements and general
methodology proposed, the specificity of the rule, the comparison of
the proposed approach to underwriting in other markets, the
predictiveness of residual income methodologies, the decision not to
adopt a disclosure-only remedy to the identified unfair and abusive
practice, the decision not to permit a payment-to-income underwriting
model and other alternatives suggested by commenters, and assertions
that the rule will conflict with the interests of fair lending law.
The Bureau received a significant number of comments from a variety
of stakeholders, including lenders of different types and sizes,
industry trade associations, some service providers, some State and
local elected officials, the SBA Office of Advocacy, a joint letter
from five Members of Congress,\755\ and others asserting that the
Bureau's proposed ability-to-repay regime would, in the aggregate, be
too burdensome, rigid, and complicated. One commenter stated that one
of the chief virtues of payday and other covered loans is their lack of
underwriting, and if underwriting were required, it is unlikely that
businesses would make nearly as many covered short-term loans. Many
commenters believed that the burden would be so high that it would
significantly reduce access to credit, including even to consumers who
do have the ability to repay. One commenter stated that some in the
industry have estimated an increase in cost for each loan of about $30,
and several commenters asserted that lenders would need to increase
prices to cover the additional costs. Others argued that while the more
burdensome underwriting requirements proposed in the rule may be common
for banks making other types of loans; they would be new and quite
difficult for non-bank lenders to implement. Relatedly, some commenters
noted that the small balances of covered loans, particularly covered
short-term loans which often are $500 or less, might not allow lenders
to offset the additional costs required to comply with the underwriting
requirements. Some commenters suggested that only large lenders would
be able to survive the additional compliance cost. Several commenters,
including a SER and five Members of Congress, cited a presentation by
representatives of four specialty consumer reporting agencies which
appeared to suggest that the proposed ability-to-repay requirements
would disqualify any consumer who earned under $40,000 per year,
asserting that would effectively result in denial of credit access to
140 million Americans.\756\
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\755\ In their letter, the Members made several critiques of the
proposed ability-to-repay requirements along the lines of those made
by other commenters as discussed below--that the proposed
requirements would have been too complex, burdensome, and
prescriptive; that they did not align with the underwriting rules in
other credit markets; and that they would potentially constrict
access to credit. However, unlike many of the other commenters who
made similar arguments, the Members expressed general support for
the proposal and expressed particular appreciation for the Bureau's
approach to addressing long-term re-borrowing.
\756\ A comment letter by a SER attached the presentation from
the specialty consumer reporting agency officials. The Bureau did
not receive a copy of this presentation directly from the specialty
consumer reporting agencies, three of whom submitted individual
comment letters. Nor did any of them make the specific negative
claims about the impacts of the proposal as had been made in the
slides, although one indirectly alluded to similar statistics cited
in the presentation. The presentation is undated, although it
appears from the context to have been developed during the comment
period.
---------------------------------------------------------------------------
Some commenters also suggested that the burdensome and complex
underwriting requirements would significantly increase the time needed
to underwrite a loan, and did not agree with the Bureau that lenders
would be able to automate sufficiently to keep origination times short.
The Bureau received a number of estimates on the time it would take to
originate a loan. For example, one commenter asserted that it would
take more than 10 minutes. Another said it would take 15-20 minutes to
originate a loan manually. One estimated that it would increase
transaction time by 15-45 minutes, while another said it would increase
the time by 6-25 minutes. Another commenter wrote that origination
already takes 20 minutes, and the new documentation requirements would
add to that timing. And one trade association asserted that it would
take three hours.
Many of these commenters specifically focused on the Bureau's
proposal to require a residual income underwriting requirement, which
they argued was overly burdensome and prescriptive. Commenters argued
that prescribing such an underwriting methodology would be a novel
approach that is not common in other credit markets, and would be
inconsistent with the general merits of preserving flexibility in
underwriting models. Several commenters cited the preamble discussion
to the Bureau's final ability-to-repay rule for mortgages as evidence
of its novelty as an underwriting methodology.\757\ Several commenters
asserted that the proposed residual income methodology would not
prevent the default and re-borrowing injuries identified in the
Bureau's analysis, relying on studies that the commenters believed
showed that residual income is not predictive of such outcomes.
---------------------------------------------------------------------------
\757\ Commenters cited a passage of the preamble from the
mortgage ability-to-repay rule where the Bureau wrote that, ``Except
for one small creditor and the [U.S. Department of Veterans
Affairs], the Bureau is not aware of any creditors that routinely
use residual income for underwriting, other than as a compensating
factor.'' 78 FR 6407, 6486 (Jan. 30, 2013).
---------------------------------------------------------------------------
Commenters also stated that they believed that the proposed
underwriting requirements were not specific enough with regard to such
issues as estimates for basic living expenses, the general
reasonableness standard for lenders' ability-to-repay analyses, the
lack of a numeric threshold or other guidance for what constitutes
sufficient residual income, and what kinds of loan performance patterns
would be evidence that a lender's ability-to-repay analysis was
inadequate. These commenters recognized that the Bureau had attempted
to leave some amount of flexibility and discretion to lenders, but
argued that more clarity was needed to reduce compliance risk
associated with choices made in the ``grey area.'' One commenter noted
that the underwriting model for mortgage loans from the U.S. Department
of Veterans Affairs involves a more prescriptive methodology based on
residual income that sets forth
[[Page 54628]]
precise dollar figures for required residual income based on various
variables,\758\ and that if a residual income approach was going to be
adopted, the commenter believed this was a more workable model.
---------------------------------------------------------------------------
\758\ 38 CFR 36.4340.
---------------------------------------------------------------------------
Relatedly, a number of commenters, including several lenders and
industry trade associations, suggested the Bureau permit use of a debt-
to-income ratio as an alternative to residual income, citing the
Bureau's mortgage and credit card regulations (12 CFR 1026.43 and 12
CFR 1026.51, respectively) as precedent for that approach. They also
discussed how the DTI ratio is a more familiar and time-tested concept
for lenders across other credit markets. Some of these commenters
argued that the Bureau should permit, instead of require, a residual
income underwriting model, and also allow lenders to use a more
traditional method premised on a DTI ratio.
A number of commenters, including several lenders and industry
trade associations, argued that the proposed rule set forth ability-to-
repay requirements that were more rigorous and burdensome than that set
forth in the Bureau's ability-to-pay rules for credit cards (12 CFR
1026.51) and ability-to-repay rules for mortgages (12 CFR 1026.43), and
asserted that the inconsistency was unwarranted. The Bureau's
regulations under the CARD Act generally require underwriting that
considers the consumer's ability to make the required minimum periodic
payments under the terms of the account based on the consumer's income
or assets and the consumer's current obligations; provides that card
issuers must establish and maintain reasonable written policies and
procedures to consider the consumer's ability to make the required
minimum payments; and provides that reasonable policies and procedures
include consideration of at least one of the following: The ratio of
debt obligations to income; the ratio of debt obligations to assets; or
the income the consumer will have after paying debt obligations.\759\
The Bureau's regulation on mortgage underwriting requires that a lender
of covered transactions must make a reasonable and good faith
determination at or before consummation that the consumer will have a
reasonable ability to repay the loan according to its terms, and allows
lenders to use either the consumer's monthly debt-to-income ratio or
residual income in making that determination.\760\ These commenters
argued that the Bureau's underwriting regulations for these other
markets were more flexible than the regulation proposed here. Some
commenters believed it was illogical and unjustified to impose more
prescriptive and restrictive underwriting and verification requirements
for small-dollar loans when the Bureau imposes, in their view, less
prescriptive and restrictive underwriting and verification requirements
for other loans of much larger size (e.g., mortgages). Several
commenters noted that the proposal would require a determination of the
consumer's ability to repay the entire principal amount while the
credit card rules require a determination regarding the consumer's
ability to make minimum payments, stating or implying that this was a
difference in legal standards for ability to repay and questioning the
basis for it; one commenter suggested the Bureau was imposing a
different standard because it did not ``trust'' consumers in this
market to make decisions for themselves. On a similar note, some
commenters stated that the underwriting requirements would be greater
than those in the student loan and automobile loan (for purchase money)
markets.
---------------------------------------------------------------------------
\759\ 12 CFR 1026.51(a)(1).
\760\ 12 CFR 1026.43(c).
---------------------------------------------------------------------------
Other commenters, including consumer advocates and at least some
industry stakeholders (including several installment lenders),
generally supported the underlying principle of the rule requiring
lenders to make a reasonable determination that consumers have an
ability to repay, noting that it is a fundamental, common-sense tenet
of responsible lending in most loan markets. These commenters noted the
precedent in the Bureau's regulations relating to mortgages and credit
cards, as well as the other Federal precedent noted above in Market
Concerns--Underwriting. Some consumer groups agreed that an
underwriting methodology based on residual income was the most
appropriate underwriting model for determining whether consumers have
an ability to repay and asserted that alternative approaches were too
permissive. Consumer advocates writing jointly suggested a number of
specific changes to the proposal which in their view would strengthen
elements of the ability-to-repay requirement, which are described in
more detail below.
Some commenters argued that the Bureau should allow an approach
that would permit lenders to lend up to a prescribed payment-to-income
ratio (generally suggested by commenters as 5 percent) as an
alternative to a residual income underwriting approach, an approach the
Bureau had contemplated in the Small Business Review Panel Outline and
on which it specifically solicited comment in the proposal. During
inter-agency consultations on the final rule, a fellow financial
regulator also expressed support for this concept. These commenters
argued that a payment-to-income approach would provide a streamlined
compliance option for lower-cost lenders for whom the proposed ability-
to-repay requirements would prove too cumbersome and expensive. These
commenters cited positively the Bureau's consideration of such a policy
at the SBREFA process stage and criticized the Bureau's failure to
include the option as an alternative in the proposed rule. One research
and public policy organization discussed in its comment letter
potential additional policy suggestions that it believed would address
criticisms of the approach raised by other stakeholders, including
restricting lenders from using the payment-to-income approach if they
experience high default rates (over 10 percent) and limiting the total
loan cost to 50 percent of the amount borrowed. This commenter also
sent a separate comment letter in conjunction with a number of large
and mid-sized banks and other stakeholders endorsing the payment-to-
income concept, arguing it would provide a streamlined and more cost-
effective approach for depository institutions to make small-dollar
loans. That letter also provided a number of additional policy
suggestions containing changes to the payment-to-income approach
described in the Small Business Review Panel Outline, such as
clarifying that evidence of regular deposits represents sufficient
verification of income. The commenters also urged the Bureau to work
with the federal prudential regulators to ensure sensible, streamlined
regulatory oversight for small-dollar loans.
In contrast, a number of consumer groups and other commenters
strongly urged the Bureau not to adopt a payment-to-income approach and
supported the Bureau's decision not to propose it as an alternative.
The consumer groups stated that they disagreed with a payment-to-income
approach because it would not take into account consumer expenses,
arguing that even a loan that is 5 percent of income could be
unaffordable if the remaining income is allocated to expenses and
emergency costs. One of these commenters noted that the
[[Page 54629]]
Bureau's study found that more than 40 percent of loans made under a 5
percent payment-to-income ratio would still default or be re-
borrowed.\761\
---------------------------------------------------------------------------
\761\ CFPB Report on Supplemental Findings, at 25.
---------------------------------------------------------------------------
The Bureau also received a number of comments objecting to its
proposal to remedy the identified unfair and abusive practice through
an underwriting requirement instead of disclosures alone. In
particular, commenters stated that disclosure was a more appropriate
remedy for any perceived lack of consumer understanding rather than
complicated new underwriting requirements. They also argued that
disclosures were a less restrictive alternative to the proposed
ability-to-repay requirements and that the Bureau had not taken the
disclosure option seriously. They pointed to model disclosures
developed by industry trade associations as sufficient already to
inform consumers of the high costs of using payday loans for an
extended period. They also stated that the Bureau had not presented
evidence that disclosures cannot adequately address the issue. One
commenter specifically objected to the conclusions the Bureau derived
from its analysis of the impact of the new Texas disclosures, which
showed that following their introduction the disclosures decreased
lending by 13 percent and the probability of re-borrowing by only 2
percent. The commenter argued that the appropriate conclusion is not
that disclosure is ineffective, but rather, that consumers understand
the costs and risks of payday loans and choose to take them out anyway.
This commenter argued that the Bureau should have instead studied the
impact the disclosures had on consumer understanding.
Commenters raised other substantive and procedural arguments
related to a disclosure alternative. An industry trade association
argued that the Bureau had failed to respond to the trade association's
proposals to study and test enhanced disclosures, including a plan to
partner with a firm that assisted the Bureau with the form design on
the Bureau's Know Before You Owe mortgage rulemaking. Several industry
commenters argued that the Bureau's discussion in the proposal of the
marginal impacts of disclosures contradicted statements by the Bureau's
own researchers who had analyzed the impact of the Texas disclosures,
noting that they had stated at a research conference in 2015 that
enhanced disclosures can have economically meaningful impacts and that
consumers who are more likely to end up in long-term debt cycles may be
more responsive to disclosures.\762\ A large non-bank lender commenter
cited the Bureau's acknowledgment in a 2013 study that the Regulation E
opt-in disclosures resulted in a majority of heavy over-drafters
choosing not to opt-in to continued overdraft, as well as the lender's
own data indicating that its customers use extended payment plans at a
higher rate (17.25% vs. 5.67%) in States that require disclosure, as
evidence that disclosure produces successful outcomes. This comment
also suggested that the Bureau should use TILA authority to create
disclosures comparing the ``all in'' cost of credit to other
alternatives and to apply the requirement across all consumer loan
products including overdrafts. A trade group criticized the reliance on
``dubious theories of behavioral economics'' as a reason for rejecting
the efficacy of disclosures. Finally, a separate trade group suggested
that a disclosure requirement could be dynamic and require consumers to
fill out a form that would demonstrate how much residual income they
have each month based on projected income and expenses.
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\762\ One lender commenter included a slide deck from this
presentation in its comment letter as an attachment.
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Industry commenters, a joint letter from a number of State
Attorneys General, letters from other attorneys general, SERs, and
others argued that the Bureau had not considered as alternatives the
less onerous approaches to regulating payday lending that many States
have adopted. Commenters cited a variety of State laws, including laws
about collection practices, disclosures, limits on the size and
duration of loans, grace periods, limiting rollovers, principal
repayment requirements, cooling-off periods, gross monthly income
requirements, and even different ability-to-repay requirements. They
also urged the Bureau to consider mixing and matching particular
elements of the different State laws to find the right regulatory
approach.\763\ Others argued that the Bureau should exempt entities
operating in States that have payday laws.
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\763\ For example, one SER commenting proposed a hybrid of
various State laws and other policy suggestions, calling for
adoption of the Illinois gross monthly income requirement, a three-
loan cap with provision of a fourth loan for emergencies with an
off-ramp, and provision of reporting repayment of the off-ramp to
nationwide consumer reporting agencies. An auto title lender
suggested that the rule should permit the consumer to take advantage
of all rollovers allowed by company policy and State law and require
additional TILA disclosures.
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Other commenters urged the Bureau to consider additional less
restrictive alternatives to the proposed ability-to-repay requirements,
such as requiring lenders to offer extended payment plans, implementing
a nationwide licensing and registration system, using existing
enforcement authority to continue addressing ``bad actors'' or focus on
unregulated or online lenders, or addressing consumer demand for payday
loans by adopting measures to encourage consumer savings, similar to
the Bureau's ``tools for saving.'' \764\
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\764\ Bureau of Consumer Fin. Prot., ``Tools for saving: Using
Prepaid Accounts to set aside funds; Innovation Insights,'' (2016),
available at https://www.consumerfinance.gov/data-research/research-reports/tools-saving-using-prepaid-accounts-set-aside-funds/.
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Lastly, the Bureau received a number of comments asserting that the
proposed rule conflicts with the Equal Credit Opportunity Act. They
asserted that the proposal would have a disparate impact on women and
minorities because they are more likely to be paid in cash, which is
less documentable and would mean, as a result, that women and minority
applicants for covered loans would be less likely to qualify for the
loans under the ability-to-repay requirements. Additionally, some
commenters argued that the proposal would prevent non-working
consumers, such as stay-at-home spouses, from receiving covered loans
because they would not have their own individual income on which to
rely for underwriting. They criticized the fact that the proposal did
not permit consumers to rely on income from another person to which the
consumer has a reasonable expectation of access, which may be
considered under the Bureau's credit card ability-to-pay rules. They
noted, additionally, that the Bureau had amended those ability-to-pay
rules in 2013 specifically to address a similar policy concern
regarding access to credit for stay-at-home spouses, and questioned why
the Bureau would apply a different standard in the proposal. Commenters
further argued that the proposal's allowance of estimates for rental
housing expenses using locality-based data could create a disparate
impact and look similar to more traditional ``red-lining''
discrimination. Commenters also argued that the proposal's definition
of basic living expenses, which would have included expenses of any
dependents of the consumer, would run afoul of Regulation B's
prohibition on seeking information about the consumer's spouse. And
more generally, some commenters argued that because covered loans are
disproportionately used by minorities and women, the proposed rule
would affect minority
[[Page 54630]]
communities more significantly than other consumers.
Final Rule
As detailed below and in the discussion of specific parts of Sec.
1041.5, the Bureau is finalizing the proposed ability-to-repay
requirements for covered short-term loans and covered longer-term
balloon-payment loans with substantial changes. These changes are
designed to address various concerns raised by commenters, while still
requiring lenders to engage in robust upfront underwriting procedures
and providing targeted back-end protections to prevent consumers from
getting stuck in long cycles of debt. In particular, the Bureau has
made four substantial changes designed to make the final rule more
flexible for both consumers and lenders, in order to facilitate
efficient implementation and access to responsible credit: (1) The
final rule permits use of a simplified underwriting calculation using
either a residual income or debt-to-income methodology; (2) the final
rule provides additional flexibility as to verification requirements,
including permitting increased reliance by lenders on consumers'
written statements in appropriate circumstances; (3) the final rule
permits consideration of situations in which the consumer has a
reasonable expectation of access to others' income or in which others
regularly pay for certain of the consumer's expenses; and (4) the final
rule does not apply presumptions that a consumer will not be able to
repay the second or third covered short-term loan or covered longer-
term balloon-payment loan within a sequence.
The final rule thus consolidates, with modifications, parts of
proposed Sec. Sec. 1041.5 and 1041.6 for covered short-term loans and
Sec. Sec. 1041.9 and 1041.10 for covered longer-term balloon-payment
loans in final Sec. 1041.5. The conditional exemption for covered
short-term loans originated under the separate requirements contained
in proposed Sec. 1041.7 is thus now renumbered as Sec. 1041.6 in the
final rule, and discussed separately below. The Bureau details its
analysis for the individual elements of Sec. 1041.5 below, after
providing an overview of its response to the high-level issues
summarized above and discussing the overall balance struck in the final
rule.
Burden, prescriptiveness, and complexity. As noted above, the
Bureau received a significant number of comments from industry arguing
that the underwriting requirements in the proposed rule would be too
costly, take too much time to administer, be too restrictive, and
require too much document verification. These commenters argued that
the compliance burdens and underwriting restrictions would dramatically
reduce loan origination volume, causing major impacts not only on
lenders but on consumers as well through reduced access to credit,
increased prices, and market consolidation. They also argued (as
discussed separately further below) that the proposal unfairly imposed
more rigorous underwriting requirements than the Bureau's rules for
other credit markets.
As a general matter, the Bureau is sensitive to the concerns raised
by many commenters regarding the burdens, prescriptiveness, and
complexity of the proposal. The Bureau took some steps to address
similar concerns that had been raised in response to the Small Business
Review Panel Outline. For example, among the changes relative to the
Outline, the proposal would have allowed lenders to use estimates of
rental housing expenses instead of requiring verification of lease
documents, and included a 30-day, rather than a 60-day, definition of
loan sequence and cooling-off period after a three-loan sequence.
The Bureau also specifically sought comment in the proposal about
automation and scalability, balancing the need for flexibility and
innovation with the desire for regulatory certainty and related
concerns. At the same time, the Bureau explained in the proposal that
it believed that merely establishing a general requirement to make a
reasonable determination that a consumer will have the ability to repay
would provide insufficient protection for consumers and insufficient
certainty for lenders. Rather, in light of stakeholder feedback to the
Outline, Bureau experience, the experience with more general standards
in some State laws, and the fact that lenders' current screening is
designed for more limited purposes, the Bureau believed that it was
important to specify minimum elements of a baseline methodology for
evaluating consumers' individual financial situations.
After careful consideration, the Bureau continues to believe that
specifying a baseline underwriting methodology is not just reasonably
related to preventing the unfair and abusive practices identified
above, but also is necessary to a successful regulatory regime, as are
targeted back-end protections to prevent consumers from becoming stuck
in long cycles of debt. By requiring common-sense underwriting steps
that incorporate both certain activities that are routine in other
credit markets and tailored measures for the specific market, the
Bureau believes that the baseline methodology substantially reduces the
risk that consumers will obtain an initial unaffordable loan and
provides greater regulatory certainty to lenders. At the same time, in
light of the back-end protections, concerns about impacts on consumers
who may have difficulty documenting certain income sources, and the
need to leave room for lenders to innovate and refine their methods
over time, the Bureau believes that it possible to reduce the burdens,
prescriptiveness, and complexity of the underwriting requirements in
various ways relative to the proposal while still preserving the core
of the essential consumer protections from the proposal. The four most
significant changes to effectuate this revised framework, listed above,
are summarized in the following discussion, with the section-by-section
analysis of specific paragraphs within Sec. 1041.5 below providing
further elaboration and detail. Beyond the four significant areas of
change from the proposal, the Bureau has also taken a number of smaller
steps to calibrate the ability-to-repay analysis in ways that differ
from the proposal, which are described in the more detailed section-by-
section analysis.
First, as an initial matter, the Bureau agrees with commenters that
the specific residual income methodology contained in the proposal for
covered short-term loans would have been quite prescriptive in
requiring lenders to track both the amount and timing of the consumer's
receipt of net income and payment of major financial obligations, as
well as to project the consumer's ability to cover major financial
obligations and basic living expenses both during the loan term and for
30 days after the single highest payment.\765\
[[Page 54631]]
The proposal would not have required lenders to engage in detailed
tracking of basic living expenses, but the analysis during the 30 days
after the highest loan payment in particular would have required
specific attention to the timing of the consumer's net income inflows
and major financial obligation outflows.\766\ Upon further
consideration, the Bureau believes it is appropriate to allow lenders a
choice between residual income and debt-to-income methodologies, both
of which would analyze the total amount of net income and major
financial obligations during the month with the highest aggregate
payments on the loan. Lenders can use this one-month snapshot to
determine more generally whether the consumer has the ability to repay
the loan without re-borrowing and can do so without having to track the
specific timing of income receipts and major financial obligation
payments. By simplifying the calculation to focus on the month in which
the consumer is under the highest financial stress in connection with
the covered short-term or covered longer-term balloon-payment loan, the
final rule addresses concerns about compliance burden. The flexibility
to use a debt-to-income methodology also allows lenders to use analyses
that are more common in other credit markets, while maintaining
appropriate tailoring in light of the variable payment structures and
particular re-borrowing patterns evident in this market. See Sec.
1041.5(a)(2) and (b)(2)(i) and the associated section-by-section
analysis.
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\765\ In contrast, the methodology for covered longer-term loans
under proposed Sec. 1041.9(b)(2) would have generally allowed
lenders to calculate residual income on a monthly basis, although
lenders making covered longer-term balloon-payment loans would also
have had to evaluate consumers' ability to cover major financial
obligations and basic living expenses in the 30 days following the
single highest payment on the loan. The proposal explained that for
loans longer than 45 days, the Bureau generally believed that the
particular number and amount of net income payments and payments for
major financial obligations that will accrue between consummation
and a payment due date were less instructive for determining a
consumer's residual income than for covered short-term loans.
However, proposed comments 9(b)(2)(i)-1 and 9(b)(2)(ii)-1 emphasized
that lenders would have been required to evaluate residual income
for the month with the highest sum of payments in cases in which
loan payments were not even, and to consider the amount and timing
of major financial obligations in the period after the highest loan
payment on a covered longer-term balloon-payment loan.
\766\ The proposed commentary examples in comment 5(b)(2)(i)-1.A
and 5(b)(2)(ii)-1.i illustrate the granular focus that would have
been required on the part of the lender to ascertain the timing of
income receipts and expense payments as part of the broader ability-
to-repay determination for covered short-term loans under proposed
Sec. 1041.5(b)(2).
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Second, the Bureau has also made a number of modifications to the
proposed requirements regarding verification evidence for consumer's
net income and major financial obligations. The final rule requires
certain common-sense verification steps, such as requiring lenders
generally to verify income, use a recent national consumer report to
verify major financial obligations, and obtain a specialty consumer
report from a registered information system in light of the fact that
many covered loans are not reflected in national consumer reports. At
the same time, the final rule reduces burden relative to the proposal
and provides appropriate flexibility to consumers and lenders in cases
in which verification is not reasonably available.
For example, the final rule does not require income verification in
all instances, as the proposed rule would have required. In those
circumstances where a lender determines that a reliable income record
is not reasonably available--as, for example, when a consumer receives
some income in cash and spends that money in cash--the lender can
reasonably rely on the consumer's statements alone as evidence of
income. See section-by-section analysis of Sec. 1041.5(c)(2)(ii)(A)
and associated commentary for further discussion.
In addition, the final rule also no longer requires lenders to
obtain a national consumer report for every single new loan. Rather,
lenders may rely on a national consumer report that was obtained for a
previous loan if the lender did so within the last 90 days, unless
during the previous 90 days the consumer had taken out a sequence of
three loans and thereby triggered a cooling-off period since the
previous report was obtained. See section-by-section analysis of Sec.
1041.5(c)(2)(ii)(D) and associated commentary for further discussion.
And with respect to evidence of rental housing expenses, the final rule
does not require a lender to verify them with a lease or with estimates
based on data about general housing expenses in the locality of the
consumer, as the proposed rule would have required. Instead, lenders
are able to reasonably rely on consumers' written statements for
projecting rental housing expenses. See section-by-section analysis of
Sec. 1041.5(c)(2)(iii) and associated commentary for further
discussion.
Third, unlike in the proposed rule, the final rule permits lenders
and consumers to rely on income from third parties, such as spouses, to
which the consumer has a reasonable expectation of access as part of
the ability-to-repay analysis, as is generally true of the underwriting
provisions for credit cards (although there are some distinctions
described below, including that the lender must verify that the
consumer has regular access to the funds). The final rule also permits
the lender in certain circumstances to consider whether another person
is regularly contributing to the payment of major financial obligations
or basic living expenses. See section-by-section analysis of Sec.
1041.5(a)(5), (b)(1), and (c)(1) and associated commentary for further
discussion.
Fourth, the Bureau is not finalizing any of the presumptions of
unaffordability from proposed Sec. 1041.6 or Sec. 1041.10. The Bureau
had proposed presumptions of unaffordability during the period in which
a consumer had a covered loan outstanding, or for 30 days thereafter,
under the theory that one can presume a consumer who returns within 30
days after paying off a prior loan was unable to repay that loan while
still meeting other expenses (and hence likely would not be able to
afford to repay a new loan). In light of the complexity associated with
implementing that presumption, the Bureau is not finalizing these
provisions, and is instead leaving the determination of whether a
consumer has the ability to repay a second or third loan in a sequence
to the reasonable discretion of the lender consistent with the
requirements under Sec. 1041.5. The Bureau will, however, view
extensive re-borrowing, as observed through the lender's performance
metrics, as an indicator that the lender's ability-to-repay
determinations may not be reasonable. See section-by-section analysis
of Sec. 1041.5(b)(1) and (d) and associated commentary for further
discussion.
The Bureau has concluded that these significant changes will,
collectively, reduce the upfront process burdens on lenders to
underwrite these covered loans and provide more flexibility to
consumers with regard to accounting for certain types of income, while
maintaining the core elements of the proposal in reducing risks that
consumers will become stuck in long cycles of unaffordable debt. The
Bureau understands that any rule will impose some level of burden,
especially for entities that have not previously had to comply with
ability-to-repay standards. The Bureau is sensitive in particular to
the concerns raised about the impacts on small lenders, by the SBA
Office of Advocacy, the small entity representatives, and other
stakeholders. The Bureau has analyzed these impacts in detail in the
Regulatory Flexibility Analysis in part VIII, in addition to the
compliance burdens on the industry in general in the Section 1022(b)(2)
Analysis in part VII.
As discussed in more detail in those sections, the Bureau has found
that the compliance burdens of Sec. 1041.5 will not impose undue
costs, particularly as those burdens have been modified from the
proposal in the final rule. For instance, the Bureau continues to
expect that underwriting in accordance with the rule can largely be
automated and that the market will evolve toward greater automation to
manage operational costs and the time it takes consumers to obtain
loans. Rather, the Bureau believes that the main impacts to the
industry--including with regard to consolidation--are likely to be
driven
[[Page 54632]]
primarily by the question of how many consumers are reasonably
determined to have the ability to repay covered short-term and longer-
term balloon-payment loans and by the impact of the 30-day cooling-off
period after the third loan in a sequence. As set forth in the Section
1022(b)(2) Analysis, the Bureau acknowledges that those impacts will be
substantial and will likely drive significant consolidation and/or
product diversification, especially with respect to lenders who
currently offer only short-term vehicle title loans. But putting limits
on lending to consumers who lack the ability to repay is at the very
heart of the rulemaking, as lenders' failure to make reasonable
ability-to-repay determinations in the market today is the crux of the
unfair and abusive practice identified by the Bureau. As described
above, the Bureau has concluded that it is necessary to proscribe that
practice and adopt substantive regulatory measures reasonably designed
to prevent it. The substantial changes in the final rule are intended
to reduce the impact on lenders so that they are able to make
reasonable ability-to-repay determinations without unnecessary cost.
But the Bureau maintains its view expressed in the proposal that a
robust ability-to-repay requirement is necessary or appropriate to
prevent the unlawful practice identified by the Bureau, which leads to
harms to many consumers.
With regard to industry commenters who argued that the ability-to-
repay requirements would have negative impacts on consumers in the form
of increased time needed to obtain loans, increased prices, fewer
lenders in close geographic proximity, and reduced access to credit in
general, those issues are also addressed in greater detail in the
Section 1022(b)(2) Analysis. As discussed in that section as well as
with regard to specific elements of Sec. 1041.5 below, the Bureau
concludes that these impacts will generally be relatively modest. For
example, as discussed above, the Bureau expects that the market will
evolve toward automation in response to the rule, but for any lenders
that choose to maintain an entirely manual system that loan processing
time will be between 15 and 45 minutes.\767\ The Bureau also expects
that compliance costs will not generally be passed through to consumers
because many lenders are already charging the maximum amounts permitted
by law, and that geographic impacts will be relatively modest in most
areas. As described further below, the Bureau believes that a number of
the modifications to final Sec. 1041.5 will make it easier for
consumers to access credit relative to the proposal, and consumers will
also be able to access a limited number of covered short-term loans
originated under Sec. 1041.6 to deal with emergency situations or
other needs. Indeed, the Bureau estimates that only six percent of
current payday sequences would not be initiated due to the rule.
Moreover, the Bureau disagrees with the commenters that argued that the
proposal would preclude access to credit for any consumers who earn
under $40,000 per year. As described in the Section 1022(b)(2)
Analysis, the Bureau believes the analysis that underlies those
comments rests on flawed assumptions and possible misunderstandings
about the proposal.\768\
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\767\ As discussed in the Section 1022(b)(2) Analysis, the
Bureau believes that changes from the proposal will facilitate
automation under the final rule. While the Bureau has increased the
estimate for purely manual underwriting relative to the proposal
because a number of commenters had asserted that the original
estimate was too low, the Bureau believes that the estimates for the
final rule are lower than they would have been if all elements of
the proposal had been adopted. Further, the Bureau believes that
time for manual underwriting and the costs for lenders who choose to
move toward a more automated model are not so concerning as to
outweigh the benefits of preventing the identified unfair and
abusive practice and the consequent risks and harms to consumers.
\768\ The Bureau also finds it significant that the undated
presentation on which the commenters rely was not provided or
discussed in individual comment letters submitted to the Bureau by
three of the four specialty consumer reporting agencies that
generated the analysis.
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The Bureau notes that in making the changes to Sec. 1041.5 to
reduce the prescriptiveness of the upfront origination process
requirements, it is not adopting many policy suggestions suggested by
consumer groups that would have further increased verification
requirements and other compliance burdens as well as further limiting
re-borrowing. For example, consumer groups argued that lenders should
never be permitted to rely on consumers' written statements alone; that
the Bureau should impose a cooling-off period after two loans in a
sequence, rather than three; and that the final rule should impose an
annual limit on all covered short-term loans of six loans or 90 days of
total indebtedness. The treatment of the consumer groups' specific
policy suggestions is discussed below in the relevant portions of the
section-by-section for Sec. 1041.5. At a broad level, however, the
Bureau has concluded that the elements of the final rule as described
further below will be sufficient to require lenders to engage in robust
upfront underwriting and to provide targeted back-end protections to
prevent consumers from getting stuck in long cycles of debt. In
particular, the Bureau is finalizing a 30-day cooling-off period after
a sequence of three covered short-term loans and applying it to
sequences involving covered longer-term balloon-payment loans as well.
The Bureau believes that the final rule as modified from the proposal
will be sufficient to produce meaningful change in the incentives and
practices of lenders in the affected markets, and that as long as those
impacts are achieved it is appropriate to provide consumers and lenders
with appropriate flexibility to meet individual circumstances under the
rule.
Furthermore, the Bureau acknowledges that in some cases the final
rule provides more flexibility with respect to the ability-to-repay
requirements than the Bureau indicated in the proposal that it was
comfortable providing. For example, the Bureau is permitting lenders to
reasonably rely on consumers' written statements of net income if
verification evidence is not reasonably available, in contrast to the
proposal where it expressed concern about permitting loans to be made
based on consumers' written statements of income alone. The Bureau
remains concerned about the same policy issues expressed in the
proposal, but also sees merit in the arguments made by many commenters
about the challenges of documenting certain types of income or
obligations. The Bureau concludes that it has been able to calibrate
this exception in the final rule appropriately to apply to those
limited circumstances. As discussed further below, the Bureau has also
specifically emphasized that the ultimate reasonableness of lenders'
ability-to-repay determinations in such cases will be determined
primarily by the pattern of outcomes for consumers. The Bureau has
taken a similar approach with regard to other places where it has
relaxed certain elements of the final rule relative to the proposal.
The Bureau has judged that these changes strike an appropriate balance
to ensure that the final rule provides core consumer protections that
are necessary to address the identified harms in these markets, while
at the same time reducing the burdens, complexity, and prescriptiveness
of the proposed ability-to-repay requirements.
Comparison to other markets. The changes described above in the
final rule mean that relative to the proposal the rule is more
consistent with underwriting practices in other consumer credit
markets--whether specifically mandated by Federal law or
[[Page 54633]]
as a matter of standard industry practice--while maintaining
appropriately tailored requirements where the Bureau finds it
appropriate to do so in light of the characteristics of the consumers
who rely on covered short-term and longer-term balloon-payment loans,
the product structures used in these markets, and the particular
patterns of re-borrowing seen in these markets. The Bureau notes that
different markets warrant different regulatory interventions, as
demonstrated by the fact that Congress itself has established very
different regimes for underwriting mortgages and credit cards, and
believes that calibration is appropriate to address particular consumer
risks, industry practices, and product structures.\769\
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\769\ With regard to student and automobile purchase-money
loans, the Bureau notes that neither Federal consumer financial
statutes nor regulations establish underwriting requirements for
such loans. As the Bureau noted in proposing to exclude them from
the scope of the final rule, both are quite distinct product markets
that raise issues that are not present in the markets for covered
short-term and longer-term balloon-payment loans. The Bureau
therefore disagrees with commenters that suggested that the proposal
was somehow improper for failing to account for underwriting
practices in these separate markets. As for check and ACH overdraft,
the alternative to those fees is usually an NSF fee. For debit
overdraft, the Federal Reserve Board created an opt-in regime which
took effect in 2010 and which the Bureau is responsible for
administering and enforcing. The Bureau has been studying the
effects of that still-recent regime and opportunities to improve it.
The Bureau also has been studying consumer outcomes with a
particular focus on frequent overdrafters and is continuing to study
the extent to which overdrafts occur in sequences that may suggest
that repaying a prior overdraft led to a subsequent overdraft.
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At a basic conceptual level, the final rule requires lenders to
assess both consumer income and expenses using either a residual income
or debt-to-income analysis. This is broadly consistent with the Federal
underwriting requirements for both mortgages and credit cards, although
the three regimes vary as to certain details in light of the products'
structure and the history of particular problems in their respective
markets. For example, Congress specified a detailed regime for
consideration of consumers' ability to repay mortgage loans, including
verification of both income and current obligations, after substantial
evidence that ``no-doc'' loans helped to fuel a crisis in that
market.\770\ In the credit card market, Congress imposed an obligation
to consider consumers' ability to make required payments on a credit
card account, including heightened standards for consumers under the
age of 21, in light of particular concerns that college students were
being provided with amounts of debt that substantially exceeded their
ability to make even minimum payments on their accounts.\771\ However,
neither Congress nor the Federal Reserve Board, which was charged with
implementing those requirements, chose to require specific verification
requirements concerning income and expenses; the Board specifically
noted that there had not been a record of the kinds of problems seen in
the mortgage market and that certain market conditions created strong
incentives for lenders to exercise appropriate diligence even in the
absence of specific Federal requirements.\772\
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\770\ 15 U.S.C 1639c(a)(1), (3), (4) (requiring assessment of
consumer's ability to repay a mortgage loan based on ``verified and
documented information,'' including the consumer's credit history,
current income, current obligations, and various other factors).
\771\ 15 U.S.C. 1637(c)(8), 1665e (requiring consideration of
consumer's ability to make required payments on a credit card
account, but not verification).
\772\ The Board was also concerned about particular logistical
problems where consumers wanted to open a credit card account at the
point of sale with a retailer. 75 FR 7658, 7721 (Feb. 22, 2010); 74
FR 54124, 54161 (Oct. 21, 2009). The rules therefore require
creditors to consider information about income and current
obligations, but not specifically to verify information supplied by
a consumer. 12 CFR 1026.51(a)(1)(i). For a current description of
industry's routine reliance on consumer reports, see Bureau of
Consumer Fin. Protection, ``The Consumer Credit Card Market,'' at
140-141 (2015), available at http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf.
---------------------------------------------------------------------------
Similarly, the Bureau has tailored the details of the verification
requirements and underwriting methodology in Sec. 1041.5 based on the
particular product structures and history of specific problems in the
markets for covered short-term and longer-term loans. These include
such factors as the frequency of lump-sum and irregular payment
structures, the fact that many covered short-term and longer-term
balloon-payment loans do not appear on national consumer reports,
concerns that consumers who are in financial distress may tend to
overestimate income or underestimate expenses, and lenders' strong
incentives to encourage mistaken estimates to the extent that doing so
tends to result in more re-borrowing. The resulting final rule takes a
common-sense approach by generally requiring lenders to obtain what
verification evidence is reasonably available, while allowing reliance
on consumer statements where other evidence is not. In their details,
the income and expense verification requirements of the final rule are
somewhat less onerous than the Bureau's mortgage rules in 12 CFR
1026.43 and more onerous than the credit card rules for various groups
of consumers in 12 CFR 1026.51.\773\ The final rule also has been
modified in response to comments, discussed below, to allow
consideration of situations in which consumers have a reasonable
expectation of access to the income of other people and where another
person regularly pays for certain expenses of a consumer, which is
somewhat similar to the credit card rules but with more tailoring in
light of the overall structure of Sec. 1041.5 and general concerns
about incentives to inflate income in the affected markets.
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\773\ To the extent that commenters asserted that the proposal's
verification and other requirements were disproportionate simply
because covered short-term and longer-term balloon-payment loans
have smaller balances than other credit products and mortgages in
particular, the Bureau believes that there are certain fixed costs
involved in responsible lending that do not vary much with size and
that reducing below those minimums is unlawful. More generally as to
overall processing times and burden, the Bureau concludes as
summarized above and discussed in more detail in the Section
1022(b)(2) Analysis that a purely manual underwriting process for
covered short-term and longer-term balloon-payment loans would still
be quite modest, particularly compared to mortgage originations.
---------------------------------------------------------------------------
As noted above, the Bureau received many comments from industry
stakeholders suggesting that it apply the same rules as for credit card
ability-to-pay rules under Regulation Z. The Bureau believes the
response to these comments merits more extensive discussion.
First, the Bureau disagrees with commenters that stated or implied
that the proposed ability-to-repay requirement reflected a different
legal standard for underwriting than the credit card ability-to-pay
rule and questioned the basis for that difference, including the one
commenter's argument that the Bureau was imposing a different standard
because it did not ``trust'' consumers in this market to make decisions
for themselves. It is true that the credit card rules focus only on a
consumer's ability to make ``required minimum payments,'' which under
credit card contracts are typically minimum monthly payments--typically
finance charges, fees, and a small amount of principal--for however
long it takes to pay off the principal.\774\ The ability-to-repay test
set forth in the final rule requires the lender to determine whether
the consumer can make ``all payments on the loan.'' As a legal
standard, however, that is no different
[[Page 54634]]
than the test under the CARD Act. That is, in both cases the rule
requires that the lender assess the consumer's ability to repay the
payments required under the contract. What differs in the two contexts
is the structure of the loan and thus the size of the required payments
under the contract.
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\774\ As the Board noted in issuing rules to implement the CARD
Act standard, ``Because credit card accounts typically require
consumers to make a minimum monthly payment that is a percentage of
the total balance (plus, in some cases, accrued interest and fees),
the final rule requires card issuers to consider the consumer's
ability to make the required minimum payments.'' 75 FR 7658, 7660
(Feb. 22, 2010).
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Consumers under the typical covered short-term or longer-term
balloon-payment loan have a legal obligation to repay the full amount
of the loan when due in a single or large balloon payment, and the
loans are presented to consumers as having a definite term. Consumers
do not have the right to roll over or re-borrow; that is up to the
discretion of the lender. Thus, to the extent that commenters implied
that the Bureau should require that lenders inquire only about
consumers' ability to pay finance charges, such an approach would be
fundamentally inconsistent with the structure of these loans and would
ignore the fact that at some point the principal must be repaid in a
single or large balloon payment. Indeed, to apply the ability-to-repay
test only to the finance charges would perpetuate one of the core
concerns underlying this rule: that, as discussed in Market Concerns--
Underwriting, these loans are presented to consumers as short-term
loans to bridge until the next paycheck whereas in practice the loans
operate quite differently.\775\ As discussed below in the 1022(b)(2)
Analysis in more detail, there is substantial evidence that many
consumers end up re-borrowing more than they expect and that consumers
who end up in very long loan sequences in particular do not predict
their usage patterns accurately.\776\
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\775\ As discussed in Market Concerns--Underwriting and the
section-by-section analysis for Sec. 1041.4, the Bureau's extensive
research on the small-dollar lending market has focused to a large
degree on the problem of consumers rolling over their loans on the
due date or re-borrowing within 14 to 30 days of repayment of the
prior loan. The product structure typically associated with covered
short-term loans--a lump-sum payment due within 14 or 30 days of
consummation and tied to the consumer's payday--leads to the re-
borrowing problem.
\776\ In contrast, credit cards are commonly understood to be an
ongoing product. The Bureau further notes that the final rule does
not cover open-end credit which amortizes over a period of more than
45 days without a balloon payment. Thus the rule does not restrict
lenders from offering open-end credit plans with affordable minimum
payments which amortize a loan over time.
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The Bureau, furthermore, disagrees with commenters who asserted
that the Bureau should follow the model of the credit card rules and
not require verification of income. The Bureau believes that in view of
the particular concerns about reliance on stated income in the market
for covered short-term loans and covered longer-term balloon-payment
loans, it is appropriate to include a baseline verification requirement
in the final rule. Under the final rule, in Sec. 1041.5(c)(2)(ii)(A),
the lender must verify the consumer's net income amount if verification
evidence is reasonably available. If verification evidence as to some
or all of the net income is not reasonably available, the lender may
reasonably rely on the consumer's statement of the amount. As described
in the section-by-section analysis for Sec. 1041.5(c)(2)(ii)(A) below,
permitting lenders to reasonably rely on consumer statements of income
in absence of verification evidence is a change from the proposal that
addresses commenters' concerns that consumers paid in cash will not be
able to receive a loan if they otherwise would pass the ability-to-
repay requirements. The Bureau does not believe, however, that merely
requiring consideration of consumers' stated amounts for net income and
debt obligations as a baseline rule would provide sufficient consumer
protections in this market. The Bureau notes that the income
verification requirement in the final rule is generally aligned with
current practices in the market for covered short-term loans (other
than with regard to some vehicle title loans), where lenders typically
request the consumer provide evidence of one pay cycle of income.
Moreover, as discussed above, the Bureau understands that credit card
issuers typically obtain a national consumer report for card applicants
to ascertain ``current obligations'' under the credit card ability-to-
repay rules, which is similar to the obligation under the final rule
for lenders making covered short-term loans and covered longer-term
balloon-payment loans to obtain a national consumer report to verify
debt obligations.\777\
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\777\ Finally, a few commenters noted that the credit card rules
allow lenders to consider the consumer's debt-to-assets ratio as a
means of satisfying the ability-to-pay requirement. The Bureau notes
that this highlights the differences in the markets being regulated.
While that approach might make sense in the context of credit cards,
in the context of the markets at issue in this rule, many consumers
will have exhausted their cash assets before seeking a covered loan.
Moreover, as discussed in Market Concerns--Underwriting and the
section-by-section analysis for Sec. Sec. 1041.4 and 1041.6, the
Bureau has concluded that vehicle title loans pose substantial harm
to consumers in absence of robust underwriting that is tied to a
consumer's income and expenses, not the value of the vehicle. The
Bureau is concerned that permitting lenders to rely on a debt-to-
asset ratio for underwriting would potentially validate current
practices by vehicle title lenders and fail to result in a
meaningful change in current practices to remedy the identified
harms.
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Specificity. As discussed above in connection with the proposal and
with regard to the final rule, the Bureau has attempted to balance the
interests of specificity, which reduces uncertainty, with the interests
of flexibility, which allows for innovation, competition, and
diversification in business models. The Bureau received incompatible
comments requesting that it shift further in both directions on the
specificity-flexibility spectrum--sometimes from the same commenter
when addressing different issues. Ultimately, as compared to the
proposed rule, the Bureau found the commenters requesting more
flexibility rather than additional prescriptiveness with regard to
upfront underwriting procedures to raise the more compelling arguments,
and decided to add more flexibility to the final rule as discussed
generally above and with regard to individual elements below. At the
same time, as discussed below, the Bureau has also refined the
regulation text and commentary as appropriate in specific areas, for
instance to provide clearer guidance on particular elements of the
ability-to-repay analysis such as net income and estimation of basic
living expenses and to discuss various fact patterns in examples.
With regard to commenters who criticized the general reasonableness
standard, sought numerical thresholds or guidance on what constitutes
sufficient residual income (or a specific debt-to-income ratio), or
urged the Bureau to provide per se rules regarding what types of loan
performance patterns indicate that a lender's ability-to-repay analysis
was unreasonable, those issues are discussed in more detail below in
connection with Sec. 1041.5(b)(1). While this rule provides
substantial specificity as to upfront procedures, the Bureau does not
provide a formulaic residual-income threshold or debt-to-income ratio
to answer the question of whether a consumer has the ability to repay.
The same is true for the Bureau's mortgage and credit card ability-to-
repay rules.\778\
[[Page 54635]]
The Bureau does not believe it is possible to eliminate lender judgment
in making these determinations, and thus believes that the general
reasonableness standard is a critical element of the rule.
Reasonableness is a widely used legal concept in both State and Federal
law, and is what Congress required with respect to the underwriting of
mortgages. The Bureau believes the standard in the final rule--which
has been revised to include a substantial amount of new commentary
clarifying how the reasonableness of ability-to-repay determinations
will be evaluated--should provide a sufficiently discernible standard.
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\778\ The Bureau did adopt a 43 percent debt-to-income threshold
for one type of ``qualified mortgage,'' which is subject to either a
conclusive or rebuttable presumption of compliance with ability-to-
repay requirements under the mortgage rules depending on particular
loan terms. 12 CFR 1026.43(e)(2)(vi). However, the Bureau emphasized
in adopting this threshold that it was based on longstanding
benchmarks in the mortgage market (which do not exist in the markets
for covered short-term loans and covered longer-term balloon-payment
loans), that other types of qualified mortgages would allow lending
to consumers with ratios in excess of 43 percent, and that the
Bureau did not believe it was appropriate to set an across-the-board
threshold for determining consumers' ability to repay mortgage loans
for similar reasons to those discussed here. See generally 78 FR
6408, 6460-62, 6470, 6526-28, 6533-35 (Jan. 30, 2013).
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As for loan performance, as discussed in final comments 5(b)-2.iii
and 5(b)-2.iv, the Bureau will, among other things, use various outcome
metrics on an aggregate basis to assess whether various underwriting
models are indeed working as a practical matter to yield reasonable
determinations of consumers' ability to repay. However, such metrics
must also be evaluated in their specific context, particularly given
that the harms that arise from unaffordable loans may play out in
different ways depending on lender practices and other variables. For
example, lenders might have higher patterns of re-borrowing relative to
defaults depending on their particular sales and collection practices,
so establishing a single set of thresholds for all situations would be
difficult. As discussed below, the Bureau has provided more specific
guidance on the types of potentially relevant loan performance metrics
and more examples discussing particular fact patterns, but believes
that it is not practicable to establish numeric performance thresholds
that would definitively demarcate whether a lender's ability-to-pay
determinations meet the reasonableness standard. See the discussion
below regarding Sec. 1041.5(b)(1) for more details.
Using Residual-Income Analysis to Predict and Prevent Harms. As
described above, several industry commenters asserted that the proposed
requirement to determine consumers' ability to repay is arbitrary
because it will not actually predict and prevent the harms identified
in the Bureau's UDAAP analysis, particularly default and re-borrowing.
For example, an industry commenter cited a study that uses what the
researchers said was the residual income methodology specified in the
proposed rule to examine the relationship between such residual income
and default. Applying the residual income methodology to a large sample
of storefront payday loan borrowers, the study compares consumers
deemed to have positive residual income to consumers deemed to have
negative residual income with respect to whether they repaid or
defaulted on a particular test loan. In one such analysis using the
borrower's income most recently observed by the lender, loans in which
the borrower had positive residual income had a default rate of 11
percent, compared with a default rate of 14.7 percent for loans in
which the borrower had negative residual income. The study concluded
that little difference in default rates exists between these two
populations, and that the residual-income analysis is not highly
predictive of default. On the basis of these results, the industry
commenter inferred that the proposed rule's ability-to-repay
requirement will not prevent consumers from defaulting.
Setting aside the issue of whether the difference in default rates
among loans for which the borrowers did and did not have residual
income was meaningful,\779\ the Bureau does not agree with the
commenter's inference that an ability-to-repay requirement will not
reduce the harms identified in the Bureau's unfairness and abusiveness
analyses above. The study focuses only on defaults in isolation,
despite the fact that as the Bureau has explained numerous times (both
in the proposed rule and elsewhere in the final rule), when consumers
are faced with an unaffordable covered short-term loan, their most
frequent response is to roll over short-term loans (in States where
doing so is permitted) or nominally repay the loans, only to have to
re-borrow shortly thereafter. In its analysis, the Bureau found that
only 28 percent of loan sequences consisted of single loans, with the
remaining 72 percent of loan sequences consisted of at least one re-
borrowing. For that 28 percent, 22 percent were repaid without re-
borrowing, and only 6 percent defaulted.\780\ Where the lender has
account access, such repayment is accomplished by a debit of the
consumer's account. Where the lender has obtained a postdated check,
such repayment is made either by way of that check or in light of the
fact that the lender may deposit the check at any time. All of this
explains why the default rate of covered short-term loans for which the
consumer does not have the ability to repay is relatively low. Indeed,
the commenter effectively conceded this point when it claimed that by
imposing a cooling-off period after the third loan in a sequence, the
proposed rule will drive default rates higher.
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\779\ The Bureau notes that the residual income test performed
using the consumer's recently-documented income as observed by the
lender indicated that consumers with negative residual income
defaulted on their loans 34 percent more often than consumers with
some amount of positive residual income.
\780\ CFPB Supplemental Report, at 120.
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In addition, even if looking solely at default rates were a
relevant metric, the study itself identifies a number of possible
explanations for its finding of similar default rates for the two
populations, including that account access may incentivize borrowers to
prioritize paying the loan notwithstanding cash flow shortages
affecting other expenses, which is one of the factors noted in the
preceding paragraph.\781\
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\781\ The study does not, however, include in its list of
explanations the main factor identified above, namely, that default
rates for borrowers who lack the ability to repay are relatively low
because their re-borrowing rates are so high. More generally, given
that (i) re-borrowing rates are significantly higher than default
rates, and (ii) it appears that the data used for this study could
have been used to conduct a similar study of the re-borrowing rates
for the two population, it is not clear why the researcher chose to
conduct a study solely on default rates rather than a study on re-
borrowing rates (or rather than a study that included both).
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A specialty consumer reporting agency commenter made a similar
argument based on a study it conducted using its own borrowing data. At
a high level of generality, the study found very similar default rates
for loans made to consumers with positive residual income compared to
consumers with negative or zero residual income (with default rates of
16.1 percent and 16.2 percent, respectively). However, a more detailed
analysis that disaggregates these consumers into varying degrees of
residual income, ranging from those with negative residual income of
negative $2,500 or less to those with more than $2,500 in positive
residual income, showed higher default rates among consumers who have
the most negative residual income (20.0 percent) compared to those with
far less negative or positive residual income (15-16 percent).
Relatedly, the study reported that first-time borrowers with positive
residual incomes had slightly lower default rates than first-time
borrowers with residual incomes that were zero or negative. In
addition, the study found that consumers who triggered any of the
proposed 30-day cooling-off periods had markedly lower default rates
than consumers that did not trigger the criteria. Like the industry
commenter, this commenter concludes that residual income is not a good
predictor of
[[Page 54636]]
default.\782\ The commenter likewise forecasted that the proposed
rule's restrictions on re-borrowing will drive up default rates. In
addition, citing the study results, the commenter urged the Bureau to
modify the rule in three respects: (1) Replace the ability-to-repay
requirement with a propensity-to-repay requirement; (2) limit such an
ability-to-repay requirement to first-time borrowers and those with low
propensity to repay; and (3) eliminate all of the 30-day cooling-off
periods.
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\782\ This commenter also argued that it would therefore be
inappropriate for the Bureau to base assessments of lenders'
compliance with the ability-to-repay requirements on their default
rates.
---------------------------------------------------------------------------
Given the close similarity of this commenter's argument regarding
the relationship between residual income and default to the argument of
the industry commenter discussed above, the Bureau believes its
response above to that argument applies equally to this one. For
essentially the same reasons, the Bureau believes that the commenter's
proposed modifications of the rule are unwarranted and would, in fact,
result in perpetuating most of the harm experienced by consumers in the
current market.\783\
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\783\ The Bureau also addresses the recommendations to replace
ability to repay with propensity to repay, and to remove all
cooling-off periods, in the discussion of Sec. 1041.5(d) below.
---------------------------------------------------------------------------
In addition to making the comment discussed above about default,
the same industry commenter made a similar argument about re-borrowing:
The commenter argued that ability to repay is no more predictive of re-
borrowing than it is of default. In support of this claim, the
commenter cited two studies. The first is the same study it cited in
support of the ``default'' argument. In this instance, instead of
describing the study as finding that there is a weak correlation
between residual income and default, the commenter described it as
finding that there is a weak correlation between ability to repay and
repayment. The Bureau is not persuaded that this study provides such
support. To be sure, if a study considers only default and repayment,
its findings about default could be presented as findings about
repayment, which is the mirror image of default in such a study. By the
same token, however, given that such a study does not consider re-
borrowing rates at all, it is unclear how findings about such rates can
be derived from findings about default, or from mirror-image findings
about repayment.
The second study, which predated the proposed rule, contained a
number of slides that reference ability to repay, the most pertinent of
which appears to be one that includes the claim that consumers with
large amounts of residual income are as likely to roll over their loans
as consumers with limited residual income. Just below that is what
appears to be a screen shot of a portion of a database or spreadsheet
with various numbers and percentages. On its face, the statement does
not appear to provide support for the commenter's assertion. Nor does
the commenter make any attempt to explain this page of the
presentation.\784\
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\784\ Without citing any studies about either default or re-
borrowing, another industry commenter argued that the Bureau had
assumed without evidence that satisfaction of the proposed residual
income test would predict and prevent injury from re-borrowing and
default, and thus that it would be inappropriate for the Bureau to
assess a lender's compliance with that test based on performance
metrics. The Bureau disagrees, as it has based the ability-to-repay
requirement on a substantial body of evidence, including the
evidence of re-borrowing rates cited above.
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Disclosure alternative. The Bureau disagrees with commenters that
asserted that a disclosure remedy would be sufficient to prevent either
the unfair or abusive practice itself or the risks and harms to
consumers from such practice, that the Bureau is compelled as a matter
of law to adopt disclosure remedies to address any unfair or abusive
practices that involve a lack of understanding by consumers, and that
the Bureau erred in proceeding with the rulemaking instead of delaying
it to conduct further disclosure research. The Bureau notes that
consumer disclosures can be an important and effective tool in
different circumstances and indeed has adopted disclosures to
communicate various pieces of information to consumers in connection
with this final rule. But for the reasons discussed in the proposal and
below, the Bureau concludes that disclosures would not be sufficient to
prevent the unfair and abusive practices identified in this rule.
More generally, the Bureau concludes that it is not required to
mandate disclosures to address any unfair or abusive practices that
involve a lack of understanding by consumers, as opposed to adopting
other approaches, such as the ability-to-repay provisions here, to
prevent the unfair or abusive practices. Neither Congress \785\ nor
other agencies \786\ nor the courts \787\ have adopted such a position.
The Bureau is authorized by section 1031(b) of the Dodd-Frank Act to
prescribe rules to identify unfair, deceptive, or abusive acts or
practices and to include in such rules requirements for the purpose of
preventing such acts or practices. The unfair and abusive practice the
Bureau has identified in Sec. 1041.4 is making covered short-term or
longer-term balloon-payment loans without reasonably determining that
consumers will have the ability to repay the loans according to their
terms. No commenter claims that providing disclosures will prevent that
practice. At most, effective disclosures could mitigate some of the
harms from the failure to underwrite. In theory at least, disclosures
could be so effective that any harms would be reasonably avoidable by
the consumer and that consumers would no longer lack understanding of
the material costs and risks of the product. However, as discussed
below, the Bureau concludes that disclosures here would not have any
such effect.
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\785\ For instance, in the Dodd-Frank Act, Congress authorized
the Bureau both to take action to identify and prevent unfair or
abusive acts or practices and to impose disclosure requirements
regarding any consumer financial product or service. If Congress had
determined that disclosures were adequate and in fact required to
address any unfair or abusive act or practice that involves consumer
misunderstanding, then Congress could have directed the Bureau to
adopt disclosures in such circumstances. Congress did not do so.
\786\ For example, the Federal Reserve Board promulgated a rule
in 2010 prohibiting mortgage loan originator compensation from
varying based on loan terms due to concerns about the steering of
mortgage borrowers into less favorable terms than those for which
they otherwise qualified. 75 FR 58509 (Sept. 24, 2010). The Board
issued this rule under its TILA section 129(p)(2) authority to
regulate unfair and deceptive practices in the mortgage market and
had determined that a substantive approach was necessary. The Board
found that, based on its experience with consumer testing,
``disclosure alone is insufficient for most consumers to avoid the
harm caused by this practice.'' The Board also in its unfairness
analysis discussed how a Regulation X disclosure promulgated by the
Department of Housing and Urban Development similarly ``is not
likely by itself to prevent consumers from incurring substantial
injury from the practice.'' Id. at 58514-15.
\787\ See AFSA, 767 F.2d at 989 (upholding a rulemaking that
``reasonably concluded'' that the most effective way to eliminate an
unfair practice concerning adoption of certain contractual remedies
was to proscribe the contract clauses outright because
```[d]isclosure alternatives would deal only partially with limited
seller incentives to promote alternative remedies . . . and would
not address at all consumers' limited incentives to search for
information about remedies.' '').
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The Bureau agrees that informing consumers that covered short-term
loans or covered longer-term balloon-payment loans have high risks of
default, re-borrowing, or default avoidance harms or that lenders are
not underwriting such loans using the same sorts of practices that are
common to other credit markets may cause some consumers to be more
generally cautious in taking out such loans. Indeed, the Bureau's
analysis of the response by consumers to the new disclosure in Texas is
consistent with this outcome. The Bureau finds it likely
[[Page 54637]]
that the marginal difference in lending (around a 13 percent decrease
in loan volumes) in fact resulted from consumers whose decisions were
affected by the disclosures and decided not to borrow after better
understanding the risks.
However, generalized or abstract information does not inform the
consumer of the risks of the particular loan in light of the consumer's
particular financial situation. Lenders would still have strong
incentives, given their overall business models, to make loans to
consumers who cannot in fact afford to repay them according to their
terms, as long as such consumers do not default early in their loan
sequences. Because consumers using these loans--or at least those who
end up in extended loan sequences--are not good predictors of how long
it will take them to repay their loans, generalized disclosures are
particularly unlikely to position consumers effectively to appreciate
the risks they themselves would face from their loans and to make their
decisions accordingly. In light of these circumstances, the Bureau
finds that generalized disclosures to consumers will not prevent the
unfair and abusive practice identified above or equip consumers to
avoid the harms it causes as effectively as prohibiting lenders from
engaging in the unfair and abusive practice in the first instance.
The only disclosure that the Bureau could envision that could come
close to positioning consumers to mitigate the unfair and abusive
practice effectively would be an individualized forecast of whether the
consumer could afford to repay the loan according to its term, and if
not, a forecast of how long such repayment would be reasonably expected
to take. While consumers are most familiar with their particular
financial situations, lenders have the most information about their
business models and the performance of their credit products over
hundreds or thousands of individual cases. The Bureau notes, however,
that no commenter has suggested such an approach, which would be
unprecedented as a matter of mandatory disclosures under federal
consumer financial law. Moreover, if anything, an individualized
disclosure might require more compliance burden than the final rule to
the extent that it would require a lender to forecast how many
rollovers or re-borrowing might be required in the event that a
consumer is not likely to repay the entire balance during the initial
loan term.\788\
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\788\ As noted earlier, one commenter suggested that a
disclosure requirement could be dynamic and require consumers to
fill out a form that would demonstrate how much residual income they
have each month based on projected income and expenses. The Bureau
notes that this suggestion bears some conceptual similarity to
traditional installment lenders who, as noted in the proposal, work
with their customers to prepare a budget itemizing income and
expenses. However, in that case the lenders use the information to
conduct an ability-to-repay analysis, which would not happen under
the commenter's suggested regime. As such, the Bureau believes this
type of approach would not sufficiently address the identified
harms.
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Further, with disclosures in this specific context, the only option
for a consumer warned about the risks of an unaffordable loan is simply
not to take out the loan at all, since once a consumer takes out a loan
that in fact turns out to be unaffordable the consumer's only options
are to choose between the harms associated with default, re-borrowing,
or forgoing other major financial obligations or basic living expenses.
Thus, the Bureau believes that it is telling that while the Texas
disclosures appear to have caused some consumers to seek different
options altogether, in the first instance, once they had already taken
out a loan, there was only a 2 percent decrease in the probability of
re-borrowing.\789\
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\789\ For these reasons, the Bureau disagrees with the commenter
that asserted that the Bureau's economists made statements at a
conference undermining the Bureau's statements in the NPRM regarding
the effectiveness of disclosures. The Bureau views those statements
as compatible with its statements on this issue in the proposal and
in this final rule. Specifically, the presentation asserted
``borrowers more likely to end up in long-term debt cycles may be
more responsive to disclosures'' (emphasis added). The Bureau also
notes that, even if these borrowers are relatively more responsive
to disclosures, that fact would not equate to such disclosures being
an effective means to reduce these sequences, let alone a viable
substitute for the ability-to-repay approach set forth by the rule.
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The Bureau also addresses three other arguments commenters raised
about disclosures. First, as to the specific trade group commenter's
argument that the Bureau was wrong to reject a formal invitation to
engage in a study to test enhanced disclosures, the Bureau notes that
this commenter had engaged in outreach with the Bureau for several
years during the course of the rulemaking, yet did not present the
disclosure trial proposal until less than two weeks before the proposal
was released and requested that the Bureau delay issuing a proposal or
hold the comment period open during the pendency of the proposed
study.\790\ Thus, in addition to the substantive reasons discussed
above for why the Bureau concludes that generalized disclosures are
insufficient to prevent the practice or harms identified, the Bureau
rejected the request to delay the proposal in light of this strategic
procedural posturing. The Bureau did indicate that it would be open to
considering the results of any new research as part of the comment
process, but no such evidence has been forthcoming.
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\790\ The Bureau notes that the commenter presented the
disclosure trial proposal to the Bureau at a meeting shortly after
numerous press reports had already indicated that the proposal
release was imminent. See, e.g., ``CFPB to Propose Payday-Loan Rule
on June 2,'' Wall St. J. (May 18, 2016), available at https://www.wsj.com/articles/cfpb-to-propose-payday-loan-rule-on-june-2-1463615308; ``CFPB Set to Release Payday Lending Proposal on June
2,'' Am. Banker, May 18, 2016, available at https://www.americanbanker.com/news/cfpb-set-to-release-payday-lending-proposal-on-june-2. The Bureau also notes receipt of a comment from
an executive at a large lender who stated that he had sent
correspondence to the Bureau in June 2015 following the Small
Business Review Panel Outline release and the Small Business Review
Panel meeting, which offered to make the commenter's company
available to conduct a controlled field trial to measure consumer
outcomes relating to the proposals under consideration. The
commenter noted that he had raised the idea again when he met with
Bureau officials, along with trade groups and other lenders, in July
of 2015. The commenter argued further that, at the meeting, Bureau
officials were dismissive of the idea because it was ``not a test
and learn environment'' and that the Bureau had not spoken to
consumers and did not think it necessary to do so. The Bureau does
not agree with the commenter's assertions. To the extent any
statements were made referring to a ``test and learn'' environment,
Bureau officials were referring to the difficulty of incorporating a
sandbox approach to testing policy ideas into an ongoing formal
Federal rulemaking process, which was well underway at the time (see
discussion elsewhere regarding other commenters' ideas about sandbox
approaches). Moreover, the Bureau has heard from consumers during
the rulemaking process and views such feedback as meaningful,
including its review of more than one million comments from
individual commenters. See part III.
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Second, the Bureau finds that commenters overstate the degree to
which the Bureau is relying on behavioral economics in rejecting a
disclosure alternative. As discussed above, there are both theoretical
and data-driven explanations for why the Bureau does not share the view
that disclosures will sufficiently remedy the observed harms. Lastly,
the Bureau does not view as a viable option one commenter's suggestion
of requiring a new TILA disclosure that would potentially capture the
``all-in'' cost of credit. The Bureau finds that this disclosure would
not be effective at preventing the unfair and abusive practice or
rectifying the identified harms for the same reasons as described
above.
Payment-to-income alternative. While the Bureau is now allowing
lenders to choose between underwriting approaches based either on a
debt-to-income ratio or on residual income, the Bureau is not adopting
an alternative approach centered on a payment-to-
[[Page 54638]]
income ratio. The Bureau recognizes that many commenters have expressed
strong support for this approach, including depository institutions
interested in making lower-cost small-dollar loans. However, the Bureau
notes that the particular proposal under consideration at the SBREFA
stage and which these commenters have elaborated upon in their
comments--namely a safe harbor for loans with a payment that takes up 5
percent or less of a consumer's income--is far more relevant to the
market for longer-term installment loans than for the loans covered by
Sec. Sec. 1041.4 and 1041.5, as those loans generally have lump-sum or
other large irregular payments that far exceed a 5 percent payment-to-
income ratio for the vast majority of consumers.
Consider, for example, a consumer making $2,000 per month. A 5
percent payment-to-income ratio safe harbor would mean the consumer is
only eligible for a $100 loan, assuming all payments on the loan would
be due in one month; for loans due in two weeks--as is common for
payday loans--the maximum loan amount would be only $50. Accordingly,
the Bureau does not believe that lenders or consumers would be likely
to use a 5 percent payment-to-income option in the short-term space,
particularly where it is permissible to make loans under Sec. 1041.6
in amounts of up to $500.\791\ To the extent the Bureau engages in
further study and potential future rulemaking on longer-term
installment products, the Bureau will continue to consider whether a
payment-to-income approach either in the specific form suggested by the
commenters or in other forms would be a reasonable alternative to an
ability-to-repay requirement.
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\791\ The Bureau also has some skepticism that a consumer's
ability to repay a covered short-term loan or covered longer-term
balloon-payment loan can be evaluated without some consideration of
major financial obligations and basic living expenses, particularly
in light of their lump sum or irregular payment features. For
example, the Bureau notes that some States have limited short-term
loans to 25 percent of income, but such limitations do not appear to
have produced any substantial improvement in re-borrowing rates.
See, e.g., Nev. Rev. Stat. sec. 604A.425.1(a); see also State Law
Regulatory Approaches below.
---------------------------------------------------------------------------
State law regulatory approaches. As discussed above, many
commenters argued that the Bureau failed to rigorously study existing
State laws regulating small-dollar loans and consider more seriously
whether one or more existing regulatory approaches in the States would
be sufficient to address the concerns the Bureau identified in the
market rather than the ability-to-repay requirements. The Bureau also
notes that in some cases, State Attorneys General or other State or
local officials in the States cited by the aforementioned commenters as
having model State regulatory approaches wrote in support of the
proposed ability-to-repay requirements and of the proposal in general,
reflecting a diversity of opinion about the sufficiency of the laws in
those States to address the identified harms at the Federal level.
The Bureau has over the past several years studied the regulatory
approaches of many States carefully and, as discussed in part III, has
engaged in outreach with a wide variety of stakeholders including
elected officials and regulators in States that permit covered lending.
The development of the proposal framework and the final rule has been
informed by this understanding of these State laws. The Bureau provides
more detail on State laws in part II, but some examples follow.
A number of States set rollover thresholds that are higher than
those in this final rule. Delaware permits four rollovers on payday
loans, Missouri permits six on payday loans, and New Hampshire permits
10 rollovers on short-term title loans.\792\ Idaho, on the other hand,
sets their rollover cap at three, similar to this rule.\793\ Other
States, like California and Kentucky, impose fewer restrictions but cap
payday loans at, for example, $500 (Kentucky) or $300 (California).
---------------------------------------------------------------------------
\792\ 5 Del. Laws. Sec. 2235A(a)(2); Mo. Rev. Stat. sec.
408.500(6); N.H. Rev. Stat. sec. 399-A:19.
\793\ Idaho Code Ann. Sec. 28-46-413(9).
---------------------------------------------------------------------------
Other commenters argued that States have imposed less onerous, but
nonetheless effective, ability-to-repay frameworks that the Bureau
should consider adopting instead of the proposed ability-to-repay
requirements. For example, some commenters noted Utah as an example.
Utah lenders must determine that a consumer has the ability to repay a
loan based on one or more of the following sources: A consumer report
from a consumer reporting agency, verification or proof of income, the
borrower's self-affirmation of ability to repay, or prior payment
history with the lender from its own records.\794\ In addition, lenders
may not roll over loans beyond 10 weeks, and once a year consumers may
request extended repayment plans. It appears one significant difference
between Utah law and this rule is in how that State treats re-
borrowing. In Utah a lender need only determine whether the consumer
can repay the loan in the ordinary course, ``which may include
rollovers or extended payment plans,'' and need not make a separate
repayment determination on rollovers.\795\ To comply with Sec.
1041.5(b), lenders will need to determine whether consumers have an
ability to repay each loan according to its terms, without re-
borrowing. And Utah law allows 10 weeks of re-borrowing, as opposed to
the Bureau's cap of three loans in a sequence (under Sec. 1041.5(d)),
which would result in a shorter period for consumers taking out 14-day
loans (approximately six weeks of re-borrowing), but a longer period
for consumers taking out 30-day loans (approximately 12 weeks of re-
borrowing).
---------------------------------------------------------------------------
\794\ Utah Code Ann sec. 7-23-401.
\795\ Id.
---------------------------------------------------------------------------
Of course, the Bureau's approach is not more restrictive than that
used by all the States. For example, only a minority of States, 19 by
the Bureau's count, permit vehicle title lending with lump-sum
(typically short-term) structures, and 15 States and the District of
Columbia either ban payday loans or set fee or interest caps that
payday lenders find too low to sustain the business model (see part
II). Even in States that do allow payday lending, certain parts of
their payday lending laws may be more restrictive. For example, the
cooling-off period imposed by Virginia in certain circumstances lasts
45 or 90 days,\796\ while the Bureau's rule sets cooling-off periods,
such as the one in Sec. 1041.5(d), at 30 days.
---------------------------------------------------------------------------
\796\ Va. Code Ann. sec. 6.2-1816. Specifically, the law
requires a 45-day cooling-off period after a consumer has taken out
five loans in 180 days and a 90-day cooling-off period after a
consumer completes an extended payment plan. The Bureau received a
comment letter from the State Attorney General in Virginia that
urged the Bureau to finalize a 60-day cooling-off period or, at
minimum, a 45-day cooling-off period, and discussed the above
referenced 45-day cooling-off period under Virginia law as context
for the request. See the discussion of Sec. 1041.5(d) below for a
more detailed description of the Bureau's decision to adopt a 30-day
cooling-off period in the final rule.
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Commenters also raised Colorado's laws as a model. However,
following such an approach would involve banning covered short-term
lending altogether since that State only allows loans of at least six
months in term. To the extent the Bureau engages in further study and
potential future rulemaking concerning longer-term installment
products, the Bureau will continue to consider whether the Colorado
model may provide additional insight.\797\
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\797\ The Bureau also notes that Colorado does require lenders
to obtain detailed information and credit histories from consumers
for creditworthiness analysis in cases in which the loan exceeds a
certain size threshold.
---------------------------------------------------------------------------
Though the Bureau closely studied the various States' approaches as
it
[[Page 54639]]
developed this rule, the Bureau concludes that none of these State law
frameworks, alone, would suffice to prevent the harms the Bureau has
identified. As the Bureau noted in the proposal, above in Market
Concerns--Underwriting and the section-by-section analysis for Sec.
1041.4, and below in the Section 1022(b)(2) Analysis, the regulatory
frameworks in most States do not appear to have had a significant
impact on reducing re-borrowing and other harms that confront consumers
of short-term loans.
For example, the Bureau's evidence shows that 24- and 48-hour
cooling-off periods have a minimal impact on overall re-borrowing
rates.\798\ As noted in the proposal, the Bureau studied re-borrowing
rates from 2010-2011 in most of the States noted by commenters and
found that, generally, over 80 percent of loans were re-borrowed
regardless of the type of State restriction studied. This evidence
suggests that the laws in those States at that time had not
meaningfully prevented re-borrowing. Commenters have not rebutted these
findings directly. Some instead challenge the premise that re-borrowing
is an indicator of consumer harms. The Bureau addresses that issue
above in Market Concerns--Underwriting and the section-by-section
analysis for Sec. 1041.4.
---------------------------------------------------------------------------
\798\ CFPB Supplemental Findings, at 100-109.
---------------------------------------------------------------------------
Thus, the Bureau continues to believe that there is a need to adopt
minimum Federal standards that apply consistently across all of these
States. In setting the parameters of this final rule, the Bureau sought
to prevent the harms identified in Sec. 1041.4 from continuing. For
that reason, the Bureau declines to exempt entities operating in any
given State on the basis of the given State's laws. The Bureau
recognizes that States may wish to prevent more harms than are
prevented by this rule, and they are free to do so because, as noted
earlier, this rule should be considered a floor and not a ceiling. See
part IV (discussing preemption under the Dodd-Frank Act and noting that
State usury caps are an example of State consumer protections that may
extend beyond the floor of Federal law).
Other alternatives. The Bureau does not believe that any of the
other posited alternative approaches to regulating covered short-term
or longer-term balloon-payment loans would be less onerous than, but as
effective as, an ability-to-repay requirement. As noted in part II and
Market Concerns--Underwriting sections and discussed at some length in
the proposal, about 18 States require payday lenders to offer repayment
plans to borrowers who encounter difficulty in repaying payday loans.
The usage rate of these repayment plans varies widely, but in all cases
it is relatively low.\799\ The Bureau believes the low take-up rate on
these repayment plans may be due to lenders discouraging use of the
plans or failing to promote their availability.\800\ At the very least,
a rule that required only that lenders offer extended repayment plans
would create significant evasion risk absent more complex provisions to
try to prevent lenders from discouraging the use of repayment plans in
order to make it more likely that such consumers will instead re-
borrow. The Bureau is aware, from confidential information gathered in
the course of statutory functions, that one or more payday lenders
train their employees not to mention repayment plans until after the
employees have offered renewals, and then only to mention repayment
plans if borrowers specifically ask about them.
---------------------------------------------------------------------------
\799\ Washington permits borrowers to request a no-cost
installment repayment schedule prior to default. In 2014, 14 percent
of payday loans were converted to installment loans. Wash. Dep't of
Fin. Insts., ``2014 Payday Lending Report,'' at 7 (2014), available
at http://www.dfi.wa.gov/sites/default/files/reports/2014-payday-lending-report.pdf. Illinois allows payday loan borrowers to request
a repayment plan with 26 days after default. Between 2006 and 2013,
the total number of repayment plans requested was less than 1
percent of the total number of loans made in the same period. Ill.
Dep't. of Fin. & Prof. Reg., ``Illinois Trends Report All Consumer
Loan Products Through December 2015,'' at 19 (Apr. 14, 2016),
available at http://www.idfpr.com/DFI/CCD/pdfs/IL_Trends_Report%202015-%20FINAL.pdf?ActID=1204&ChapterID=20. In
Colorado, in 2009, 21 percent of eligible loans were converted to
repayment plans before statutory changes repealed the repayment
plan. State of Colorado, Dep't of Law, Office of the Att'y Gen.,
``2009 Deferred Deposit Lenders Annual Report,'' at 2 (2009),
available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/2009_ddl_composite.pdf. In Utah, 6 percent of
borrowers entered into an extended payment plan. G. Edward Leary,
Comm'r of Fin. Insts. for the State of Utah to Hon. Gary R. Herbert,
Governor, and the Legislature, (Report of the Commissioner of
Financial Institutions for the Period July 1, 2013 to June 30,
2014), at 135, (Oct. 2, 2014), available at http://dfi.utah.gov/wp-content/uploads/sites/29/2015/06/Annual1.pdf. Florida law also
requires lenders to extend the loan term on the outstanding loan by
60 days at no additional cost for borrowers who indicate that they
are unable to repay the loan when due and agree to attend credit
counseling. Although 84 percent of loans were made to borrowers with
7 or more loans in 2014, fewer than 0.5 percent of all loans were
granted a cost-free term extension. See Brandon Coleman & Delvin
Davis, ``Perfect Storm: Payday Lenders Harm Florida Consumer Despite
State Law,'' at 4 (Ctr. for Responsible Lending, 2016), available at
http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
\800\ Colorado's 2009 annual report of payday loan activity
noted lenders' self-reporting of practices to restrict borrowers
from obtaining the number of loans needed to be eligible for a
repayment plan or imposing cooling-off periods on borrowers who
elect to take a repayment plan. State of Colorado, Dep't of Law,
Office of the Att'y Gen., ``2009 Deferred Deposit Lenders Annual
Report,'' at 2 (2009), available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/2009_ddl_composite.pdf. This evidence was from Colorado under the
state's 2007 statute, which required lenders to offer borrowers a
no-cost repayment plan after the third balloon loan. The law was
changed in 2010 to prohibit balloon loans, as discussed in part II.
---------------------------------------------------------------------------
Another alternative posited by commenters was increased or
sustained enforcement attention focusing on the worst market actors, or
focused on specific sub-markets like unregulated or offshore online
lenders. As noted in part III, the Bureau has already engaged in
extensive enforcement and supervisory activity in this market focused
on a wide variety of practices. But, as noted in Market Concerns--
Underwriting, the identified unfair and abusive practice in Sec.
1041.4 is a market-wide practice. Continued enforcement and supervisory
activity focused on the worst actors would simply not prevent the
market-wide harms identified by the Bureau. In addition, the Bureau is
sometimes criticized for ``regulation through enforcement.'' Thus,
while the Bureau could bring enforcement actions against individual
lenders for engaging in the practices identified here as unfair and
abusive, the Bureau believes that it provides more consistent
protection for consumers and compliance guidance for industry to
address market-wide harms through a detailed rulemaking that both
defines the unfair and abusive practice, carefully outlines affirmative
standards to prevent that practice, and provides a reasonable period
for lenders to come into compliance with those standards.
With regard to implementing a nationwide licensing and registration
system, the Bureau has authority under the Dodd-Frank Act to prescribe
rules regarding registration requirements applicable to covered
persons, including those covered by this rule. The Bureau also has
authority under 12 U.S.C. 5514(b)(7)(C) to prescribe rules to ensure
that lenders under the Bureau's nonbank supervision authority are
legitimate entities and are able to perform their obligations to
consumers, including by requiring background checks and bonding.
Indeed, the Bureau has noted in its recent semi-annual regulatory
agendas that it is evaluating stakeholder suggestions about creating
such a system for these markets.\801\ But while such an action may
assist with enforcement and supervision efforts (discussed above) and
provide a better means of identifying lenders operating
[[Page 54640]]
without State lending licenses, the Bureau does not believe that it
would be effective in lieu of ability-to-repay requirements at
remedying the identifying harms. A well-bonded lender with officers
with a clean record, which is registered, would still be able to cause
all of the identified harms noted in Market Concerns--Underwriting and
the section-by-section analysis for Sec. 1041.4 unless the Bureau took
more substantive action (like adopting this rule).
---------------------------------------------------------------------------
\801\ See, e.g., 82 FR 40386, 40387 (Aug. 24, 2017).
---------------------------------------------------------------------------
In response to the comment urging the Bureau to forgo rulemaking
and instead focus on consumer education initiatives, the Bureau does
not find that this would be a viable option for significantly reducing
the observed harms. While financial education is an important pillar of
the Bureau's work, and it will continue those efforts, it does not
believe that its financial education efforts would impact saving rates
broadly enough to have a substantial impact on the need to borrow to
cover cash shortfalls across all consumers. Nor does the Bureau believe
that generalized financial education, even if it succeeded in reaching
all would-be-borrowers, could enable consumers to accurately predict
their own likelihood of re-borrowing or defaulting. The Bureau
recognizes that there will continue to be demand for credit from
consumers who lack the ability to repay covered short-term or longer-
term balloon-payment loans. See the discussion in the section-by-
section analysis for Sec. 1041.4 regarding substitution to alternative
products.
Fair lending. The Bureau expects that certain of the burden-
reducing changes to the final rule will also address commenters'
concerns relating to fair lending. For example, under the final rule,
when a reliable record to verify income is not reasonably available, a
lender may now rely on a consumer's statement of net income, provided
such reliance is reasonable (see discussion of Sec.
1041.5(c)(2)(ii)(A) and comment 5(c)(2)(ii)(A)-3 and -4, below). This
change should reduce concern that members of protected classes would be
denied access to credit solely because of the difficulty in verifying
their income. Additionally, unlike the proposed rule, the final rule
permits lenders to include in the consumer's net income any income of
another person to which the consumer has a reasonable expectation of
access if the consumer documents that he or she has regular, verifiable
access to such income (see 1041.5(a)(5) and comment 5(a)(5)-3). In the
final rule, the lender is also permitted to rely on the consumer's
statement for rental housing expenses, provided such reliance is
reasonable; this is a change from the proposal, which would have
required a projection of rental housing expense using a reliable record
or an estimate based on survey or other data with respect to the
consumer's neighborhood (see Sec. 1041.5(c)(2)(iii) and associated
commentary). More generally, the Bureau notes that inquiries relating
to dependents for purposes of estimating basic living expenses can be
made consistent with Regulation B.\802\ For the foregoing reasons, the
Bureau believes that the final rule is consistent with the requirements
of ECOA and Regulation B.
---------------------------------------------------------------------------
\802\ 12 CFR 1002.5(d)(3) (``A creditor may inquire about the
number and ages of an applicant's dependents or about dependent-
related financial obligations or expenditures, provided such
information is requested without regard to sex, marital status, or
other prohibited basis.'').
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5(a) Definitions
Proposed Sec. 1041.5(a) would have provided definitions of several
terms used in proposed Sec. Sec. 1041.5 and 1041.6. Virtually
identical definitions and commentary appeared in proposed Sec.
1041.9(a) for covered longer-term loans (including covered longer-term
balloon-payment loans), with minor adjustments to account for the
difference in the term of the products. In the final rule, the Bureau
has revised several of the six proposed definitions for substance or
clarity, made them applicable to both covered short-term loans and
covered longer-term balloon-payment loans, and has added two more
definitions in part to effectuate the new underwriting methodology
based on debt-to-income ratio. A discussion of the proposed
definitions, the comments received on those definitions, and the final
definitions follows.
5(a)(1) Basic Living Expenses
Proposed Rule
Proposed Sec. 1041.5(a)(1) would have defined basic living
expenses as a component of the ability-to-repay determination as
established in the proposed rule. The Bureau proposed to define basic
living expenses as expenditures, other than payments for major
financial obligations, which a consumer makes for goods and services
necessary to maintain the consumer's health, welfare, and ability to
produce income, and the health and welfare of members of the consumer's
household who are financially dependent on the consumer. Accordingly,
the proposed definition of basic living expenses was a principle-based
definition and did not provide a comprehensive list of all the expenses
for which a lender must account. Proposed comment 5(a)(1)-1 provided
illustrative examples of expenses that would be covered by the
definition. It provided food and utilities as examples of goods and
services that are necessary for maintaining health and welfare, and
transportation to and from a place of employment and daycare for
dependent children as examples of goods and services that are necessary
for maintaining the ability to produce income.
Proposed comment 5(b)-2.i.C would have clarified that as part of
the reasonable ability-to-repay determination, the lender's estimates
of basic living expenses must be reasonable. Proposed comment 5(b)-4
would have provided examples of approaches to estimating basic living
expenses that were reasonable or unreasonable. For discussion of how
the final rule addresses the reasonableness of lender estimates of
basic living expenses, see the section-by-section analysis of Sec.
1041.5(b), where the commentary provisions relating to basic living
expenses have been revised, as well as the immediately following
discussion.
The Bureau's proposed definition gave lenders some flexibility in
how lenders determine dollar amounts that meet the proposed definition,
provided they do not rely on amounts that are so low that they are
unreasonable for consumers to pay for the types and levels of expenses
provided in the definition. The Bureau specifically noted in the
proposal that a lender would not be required to verify or conduct a
detailed analysis of every individual consumer expenditure. In contrast
to major financial obligations, the Bureau explained that recent
expenditures might not reflect the amounts a consumer needs for basic
living expenses during the term of a prospective loan. The Bureau
expressed concern that such a requirement could substantially increase
costs for lenders and consumers while adding little protection for
consumers.
The Bureau sought comment in the proposal on whether an alternative
formulation focusing on expenses that are of the types that are likely
to recur through the term of the loan and in amounts below which a
consumer cannot realistically reduce them would be preferable; the
Bureau had used similar concepts to define which expenses should be
treated as major financial obligations as discussed further below in
connection with Sec. 1041.5(a)(3). The Bureau also sought comment on
whether there are standards in other contexts that can be relied upon
by the Bureau. The Bureau
[[Page 54641]]
explained in the proposal that, for example, it was aware that the
Internal Revenue Service (IRS) and bankruptcy courts have their own
respective standards for calculating amounts an individual needs for
expenses while making payments toward a tax delinquency or bankruptcy-
related repayment plans.
Comments Received
The Bureau received many comments on the proposed definition of
basic living expenses from a variety of stakeholders. In general,
industry commenters criticized the proposed definition as overly vague
and argued it would create uncertainty for lenders trying to comply
with the proposed rule. A number of industry commenters asked for the
Bureau to provide additional clarity on the definition. Some, including
a trade association for payday lenders, suggested the Bureau include
safe harbor amounts for basic living expenses due to the costs of
having to establish a framework to estimate such expenses, particularly
for smaller lenders. Some commenters argued that the standards were so
vague that different lenders in good faith could apply different
definitions. One State Attorney General expressed concern that the
vagueness in the proposed definition would lead to inconsistent
interpretation of the rule.
Industry commenters also raised a number of more discrete issues
with the proposed definition. Some argued that the Bureau should let
lenders assume that consumers could cut back on discretionary spending
on items like restaurant meals, gym memberships, and the like, and that
the proposed rule was not clear whether those types of expenses were
included in the definition and whether lenders could assume that
consumers would undertake some reductions in spending on those items
for purposes of the basic living expenses estimates. Another commenter
noted that the Bureau had not taken account of the fact that prices may
change seasonally (as with back-to-school sales). Several commenters
criticized the definition for including expenses for the health and
welfare of the consumer's dependents when, they argued, consumers may
have spouses or other persons paying a portion of the household
expenses, including those of dependents. (These issues are noted above
in the discussion of general comments regarding ECOA and Regulation B.)
They argued that the definition should be modified to account for such
sharing of expenses.
Most consumer advocates commenting on the rule expressed support
for the concept of lenders having to estimate basic living expenses,
but argued that the definition was under-inclusive. For example, they
questioned why the Bureau only included four examples of specific
expenses. They also expressed support for including within the
definition any expense that is likely to recur. They also criticized
what they viewed as too permissive provisions in commentary regarding
reasonable estimates of basic living expenses. Some of these commenters
suggested specific expenses that should be explicitly added to the
definition, such as alimony, health insurance premiums other than those
deducted from a consumer's paycheck, cell phone payments, car insurance
payments, and a number of other categories. Another suggestion was to
change the definition to include typical expenses based on geography,
income, and household size.
In contrast, one organization generally supportive of the rule
criticized the approach on this element of the financial analysis and
argued that lenders should be expected to itemize basic living expenses
because of the risk that estimates would be too low. The Bureau notes
that it is responding to this comment in the discussion below of
comment 5(b)-2.i.C.1. A public policy and research organization argued
that childcare expenses, including diaper costs for new parents, could
consume a large percentage of a consumer's budget and therefore should
be treated not as a basic living expense but as a major financial
obligation to be verified.
Several commenters urged the Bureau to use the IRS Collection
Financial Standards to define the ambit of basic living expenses. They
argued that the proposed definition was too ambiguous and could lead to
confusion and potentially lender evasion; they argued that the IRS
Collection Financial Standards would provide needed clarity for all
parties involved. A lender commenter, a SER, took a different view,
arguing that the IRS Collection Financial Standards should not be used
for either estimating basic living expenses or rental housing and
citing the average housing cost in Orange County, California, as an
example of the Standards being ``unrealistic.''
Final Rule
The Bureau has decided to finalize the proposal's framing of the
definition of basic living expenses as expenses that are ``necessary''
to maintain the consumer's health, welfare, and ability to produce
income and the health and welfare of the members of the consumer's
household who are financially dependent on the consumer. As such, the
regulatory text is being finalized with only minor wording changes from
the proposal for clarity. However, the Bureau in response to comments
is making a number of modifications to the commentary clarifying the
definition, as described in more detail below.
The Bureau concludes that the conceptual framework of the proposal
remains the appropriate formulation for defining basic living expenses.
The ``necessary to maintain'' language in the proposed definition is
adapted largely from the IRS Collection Financial Standards, which set
forth necessary expenses for repayment of tax delinquencies by
taxpayers.\803\ The Bureau considered finalizing the alternative
formulation on which it had sought comment (i.e., personal and
household goods and services that are likely to recur and that are
types of expenditures that the consumer cannot reasonably be expected
to reduce or forgo during the term of the loan). However, while the
focus on recurring obligations has been helpful in defining major
financial obligations as discussed below, the Bureau is concerned about
the complexity that would result from trying to differentiate recurring
from non-recurring expenses and reducible from non-reducible expenses
when it comes to more discretionary expenditures. To give an example,
newspaper and magazine subscriptions and health club memberships are
not typically thought of as necessary expenses, but they generally are
recurring. And whether such expenses are reducible during the term of
the loan generally and the relevant monthly period that is the focus of
the residual-income or debt-to-income analysis in particular may depend
on such factors as the term of the relevant contracts (for
[[Page 54642]]
both the loan and the product or service), the method by which payments
are made (e.g., automatic debit versus monthly bill pay), and the
applicable termination policies and penalties (e.g., advance notice of
termination). The Bureau also is not aware of data sources that
categorize the types and amounts of recurring expenses as distinguished
from non-recurring expenses, in contrast to the ``necessary'' expense
formulation which as noted above is derived from the IRS Collection
Financial Standards.
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\803\ Internal Revenue Servs., ``Collection Financial
Standards,'' https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards (last revised Mar. 27, 2017)
(providing that ``Collection Financial Standards are used to help
determine a taxpayer's ability to pay a delinquent tax liability.
Allowable living expenses include those expenses that meet the
necessary expense test. The necessary expense test is defined as
expenses that are necessary to provide for a taxpayer's (and his or
her family's) health and welfare and/or production of income.'').
The IRS Collection Financial Standards contain Local Standards for
transportation expenses and housing expenses and utilities, and
National Standards for other categories, such as food, clothing,
out-of-pocket medical expenses, and miscellaneous items. The
National and Local Standards are tied to different data sources,
including the Bureau of Labor Statistics Consumer Expenditure
Survey, U.S. Census Data, and the American Community Survey. The
Standards are updated periodically. Both the categories and the
amounts provided as estimates are found on the IRS Web site.
---------------------------------------------------------------------------
With regard to the commentary to Sec. 1041.5(a)(1), the Bureau
revised comment 5(a)(1)-1 and created a new comment 5(a)(1)-2. The
revised comment 5(a)(1)-1 clarifies that estimating basic living
expenses is part of the broader ability-to-repay determination under
Sec. 1041.5(b). The comment also clarifies that a lender may make a
reasonable estimate of basic living expenses without making an
individualized determination and includes a cross-reference to comment
5(b)-2.i.C. With regard to the amounts of basic living expenses,
comment 5(b)-2.i.C has been revised in a number of ways to provide more
guidance on how to reasonably estimate basic living expenses. Those
changes are described below in the discussion of Sec. 1041.5(b) and
are to be read in tandem with the changes to commentary for the
definition of basic living expenses in Sec. 1041.5(a)(1).
Comment 5(a)(1)-2 expands the examples of basic living expenses
described in the proposal with some additional clarification to six
items, which are: (1) Food, (2) utilities not paid as part of rental
housing expenses, (3) transportation, (4) childcare, (5) phone and
Internet service, and (6) out-of-pocket medical expenses (which would
include insurance premiums to the extent not deducted from consumer's
paychecks as well as co-pays, prescriptions, and similar expenses). The
comment also includes new language clarifying that basic living
expenses do not include expenditures for discretionary personal and
household goods or services and gives examples of newspaper
subscriptions and vacation activities. Additionally, comment 5(a)(1)-2
notes that if the consumer is responsible for payment of household
goods and services on behalf of the consumer's dependents, those
expenditures are included in basic living expenses. The comment further
clarifies that the lender may reasonably consider whether another
person is regularly contributing toward the consumer's payment of basic
living expenses when conducting a reasonable ability-to-repay
determination (with a cross-reference to comment 5(b)-2.i.C.2). The
Bureau agrees with the commenters who suggested that, when a lender
estimates basic living expenses on an individualized basis, the Bureau
should permit lenders to take this fact into account given that the
proposed definition of basic living expenses included members of the
consumer's household who are financially dependent on the consumer.
The inclusion of additional examples of basic living expenses in
comment 5(a)(1)-2 and the new language describing examples of items
that are not included in the definition are in response to comments
asking for more specificity on what expenses are included in and what
are excluded from the definition of basic living expenses. Commenters
had specifically asked about the status of the items now addressed. The
categories of out-of-pocket medical expenses and phone and Internet
service have been added in view of comments urging the Bureau either to
clarify the status of the items or to include them because of the view
by the commenters that they are necessary expenses. The category of
utility payments also has been clarified to note that it includes
utilities not paid as part of rental housing expense, in response to
interagency comments from a Federal prudential regulator. The example
of transportation as a basic living expense also has been broadened
from the proposal, which included transportation to work as an example.
The Bureau finds that transportation expenses for both personal and
household use and for work is more consistent with the notion of
``necessary'' expenses for health, welfare, and the ability to work.
The Bureau concludes that the six categories of expenses provided
as examples are sufficient for estimating basic living expenses. To
this end, the Bureau has included language in comment 5(b)-2.i.C.1
clarifying that a lender is not required to itemize the basic living
expenses of each consumer but may instead arrive at estimates for the
amount needed to cover the costs of food, utilities not paid as part of
rental housing expenses, transportation, out-of-pocket medical
expenses, phone and Internet services, and childcare. The comment also
clarifies it would be reasonable for the lender to use data about these
expenses from the Consumer Expenditure Survey of the Bureau of Labor
Statistics or the IRS Collection Financial Standards, or a combination
of the two data sources, to develop non-individualized estimates of
basic living expenses for consumers seeking covered short-term or
longer-term balloon-payment loans. The comment also clarifies that in
using the data from those sources to estimate the amount spent on a
particular category, the lender may make reasonable adjustments to
arrive at an estimate of basic living expenses, for instance where a
data source's information on a particular type of basic living expenses
overlaps with a type of major financial obligation as defined in Sec.
1041.5(a)(3). More explanation of the comment is provided in the
section-by-section analysis for Sec. 1041.5(b)(1), below.
With regard to the comments requesting that the Bureau should
provide safe harbor categories and amounts for basic living expenses,
the Bureau believes that the IRS Collection Financial Standards are a
useful source for developing estimates of basic living expenses. As
explained earlier, the ``necessary'' expense concept at the heart of
the definition in Sec. 1041.5(a) is derived from the Standards.
Lenders can use the Standards to estimate both the amounts and
categories of expenses, and the Bureau would view such an approach as
reasonable. As described above, comment 5(b)-2.i.C.1 now contains
language recognizing that fact. At the same time, the Bureau recognizes
that lenders may well want to make reasonable adjustments from that
framework. The Bureau believes that in some cases the Standards may
capture expenses that would not be relevant for a lender making a basic
living expenses estimate for the relevant monthly period, which is the
calendar month with the highest payments on the loan.\804\ And there
also is overlap between some of the categories provided in the
Standards and the items deemed in this rule as major financial
obligations (such as automobile lease payments). A direct application
of the Standards thus in some cases may create operational difficulty
or result in an over-inclusive estimate for purposes of what is
required under Sec. 1041.5.\805\
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\804\ For example, a consumer might not have transportation
expenses such as licenses, registration, and maintenance, but the
consumer presumably will have gas costs if she owns a car.
\805\ Regarding the comment by a SER who argued that using the
IRS Collection Financial Standards would be unrealistic for
estimating basic living expenses and rental housing expenses, as
discussed below the Bureau is clarifying in comment 5(b)-2.i.C.1
that it would be reasonable to use the Standards to estimate the
amounts or categories of basic living expenses, but the Bureau is
not requiring use of the Standards, and the Bureau expects that
lenders would have to make adjustments if they do use them.
Moreover, the final rule no longer requires the lender to estimate
housing expenses based on locality-based data. See Sec.
1041.5(c)(2)(iii).
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The Bureau also considered whether to use the Consumer Expenditure
[[Page 54643]]
Survey of the Bureau of Labor Statistics (CEX) as a safe harbor. Like
the Standards, the CEX is a useful source for information about
consumers' household expenditures which could inform estimates of basic
living expenses. As with the IRS Collection Financial Standards,
comment 5(b)-2.i.C.1 now clarifies that use of the CEX would be a
reasonable method for estimating the categories and amounts of basic
living expenses. However, because the CEX collects data at the
household level, not the individual consumer level, and because of how
it groups the categories of expenses, it too may be over-inclusive as
to the amounts of the expenses, depending on whether the consumer has
dependents or not match precisely the list of categories in comment
5(a)(1)-2.
Put another way, the Bureau views both data sources as reliable and
useful for the purposes of estimating various categories of basic
living expenses, and believes it would be reasonable for lenders to
draw on one or both of them or on their own experience (or on a
combination of the lenders' experience and these extrinsic data
sources). But since the IRS Collection Financial Standards and the CEX
each may be potentially over-inclusive or not match precisely the list
of categories in comment 5(a)(1)-2, the Bureau expects that most
lenders who use those sources will choose to make some reasonable
adjustments or turn to supplemental sources.
The Bureau finds that, cumulatively, the changes to comments
5(a)(1)-2 and 5(b)-2.i.C.1 described above will address commenters'
concerns. To recap, the commentary now contains: (1) Additional
examples of expense categories that are included in the definition; (2)
clarification that it would suffice for lenders to estimate the six
categories of expenses described in comment 5(a)(1)-2; (3)
clarification around what is excluded from the definition; (4) new
commentary language clarifying that use of particular government data
sources (IRS Collection Financial Standards and/or CEX) would be
reasonable methods of estimating expenses; and (5) commentary
explaining that lenders have flexibility to make adjustments based on
the lender's experiences and for other reasonable considerations. The
Bureau recognizes that estimating basic living expenses will involve
some complexity and burden, particularly initially while lenders are
developing a system to comply with the rule's requirements. (This is
discussed in the Section 1022(b)(2) Analysis.) The Bureau does expect
that, at least in some cases, service providers would be positioned to
provide software to permit lenders to develop this capability. Indeed,
some commenters appear to have developed their own methodologies in the
course of researching the affected markets and commenting on the
proposal. The Bureau does not want to unduly restrict the flexibility
of lenders and service providers to develop innovative methods of
estimating basic living expenses, which a more prescriptive approach
might do.
More generally, the Bureau emphasizes that at bottom the question
will be whether the lender is acting reasonably in developing the
estimates. The rule gives lenders substantial flexibility to develop
estimates by consulting reliable data sources or developing reasonable
estimates based on their own experience with similarly-situated
consumers using at least the six categories of expenses provided as
examples. Assuming a lender follows these procedural steps, the Bureau
concludes that the strongest evidence of whether the estimations were
in fact reasonable will be the performance of the loans in question; if
a lender is consistently making unreasonable estimates of basic living
expenses, the Bureau expects to see substantial re-borrowing and
default activity.
In response to one commenter, the Bureau has declined to modify the
commentary to address specifically whether a lender should take account
of the fact that prices may change seasonally. The Bureau finds this to
be adequately covered by the general reasonableness standard, such that
a lender could choose to do so if there were reason to believe, for
example, that the monthly averages that a lender is using in estimating
basic living expenses are not representative of expenses during a
particular term. At least in certain regions, a lender could make a
reasonable determination based on historical and local trends that the
estimated expense allocation for utilities declines in the spring and
fall, when electricity and gas bills are lower.
The Bureau does not agree with the commenters who argued childcare
expenses (including the costs of supplies for infant children) should
not be basic living expenses and instead should be defined as major
financial obligations and subject to verification. The Bureau believes
that childcare expenses, particularly to the extent of including such
items as diapers, could be difficult to verify and would not lend
themselves to categorization as major financial obligations for which
the primary source of verification is consumer reports from a
nationwide consumer reporting agency. Therefore, the Bureau concludes
that these expenses are better categorized as basic living expenses.
The Bureau has determined that the changes to the basic living
expenses definition described above, along with revisions to comment
5(b)-2.i.C described below, appropriately balance the weight of the
comments. The Bureau acknowledges that it has left some flexibility in
the definition, but believes this flexibility will permit lenders to
develop methodologies that work best for them consistent with the
requirement that the estimates are reasonable.
5(a)(2) Debt-to-Income Ratio
The Bureau has added a new definition at Sec. 1041.5(a)(2) for
debt-to-income ratio in light of its decision, in response to the
criticisms of the proposed residual income approach, to permit lenders
to choose to use that underwriting methodology. Due to the addition of
this new definition, the remaining subparagraphs of Sec. 1041.5(a) are
renumbered accordingly.
The final rule defines debt-to-income ratio as the ratio, expressed
as a percentage, of the sum of the amounts that the lender projects
will be payable by the consumer for major financial obligations during
the relevant monthly period and the payments under the covered short-
term loan or covered longer-term balloon-payment loan during the
relevant monthly period, to the net income that the lender projects the
consumer will receive during the relevant monthly period, all of which
projected amounts are determined in accordance with Sec. 1041.5(c).
The Bureau has also added a definition for relevant monthly period in
Sec. 1041.5(a)(7), which consists of the calendar month in which the
highest sum of payments under the loan is due. The section-by-section
analysis for Sec. 1041.5(a)(7) below describes why the Bureau chose
this particular time period as the relevant monthly period.
The Bureau has added a new comment 5(a)(2)-1 to clarify aspects of
the debt-to-income definition. Most notably, the comment clarifies that
for covered longer-term balloon-payment loans, where the relevant
monthly period may fall well into the future relative to the
consummation of the loan, the lender must calculate the debt-to-income
ratio using the projections made under Sec. 1041.5(c) and in so doing
must make reasonable assumptions about the consumer's net income and
major financial obligations during the relevant monthly period compared
to the period covered by the verification
[[Page 54644]]
evidence. The comment clarifies that, for example, the lender cannot
assume, absent a reasonable basis, that there will be a substantial
increase in net income or decrease in major financial obligations
between consummation and the relevant monthly period.
The addition of this new definition ties to the broader revision of
Sec. 1041.5(b)(2) in the final rule. The changes to Sec. 1041.5(b)(2)
are described in more detail in the associated section-by-section
analysis below, but they bear some mention here given the interplay. As
noted in the general Sec. 1041.5 discussion above, under proposed
Sec. 1041.5(b)(2), the reasonable ability-to-repay determination would
have required the lender to project both the amount and timing of the
consumer's net income and major financial obligations, and to analyze
the consumer's finances during two distinct time periods: First for the
shorter of the term of the loan or 45 days after consummation of the
loan, and then also for 30 days after having made the highest payment
under the loan. For covered longer-term loans (including covered
longer-term balloon-payment loans), the two periods would have been the
month with the highest payments on the loan and also for 30 days after
having make the single highest payment on that loan.
Upon further consideration of comments concerning the burdens
involved in the proposed residual-income analysis and other factors,
the Bureau has decided to streamline the calculations needed to support
lenders' determination of consumers' ability to repay. Accordingly, the
final rule simply requires lenders to make a projection about net
income and major financial obligations and calculate the debt-to-income
ratio or residual income, as applicable, during only a single monthly
period, i.e., the relevant monthly period, which is the calendar month
with the highest sum of payments on the loan. The debt-to-income ratio
during this period is used as a snapshot of the consumer's financial
picture to draw conclusions about the consumer's ability to pay, since
it is the month in which the loan will cause the highest amount of
financial strain. Specifically, under Sec. 1041.5(b)(2), the lender
uses this information to reach a reasonable conclusion about whether
the consumer has the ability to repay the loan while meeting basic
living expenses and major financial obligations during: (1) The shorter
of the term of the loan or 45 days after consummation of the loan, for
covered short-term loans, and the relevant monthly period, for covered
longer-term loans, and (2) for 30 days after having made the highest
payment under the loan. This simplified approach--which also has been
incorporated into the definition of residual income in Sec.
1041.5(a)(8) for purposes of making the standards for both alternatives
consistent--dovetails with the inclusion of the debt-to-income ratio
methodology as an alternative to residual income. As discussed above, a
debt-to-income methodology does not track a consumer's individual
income inflows and major financial obligation outflows on a continuous
basis over a period of time.
Section 1041.5(b) requires that lenders using debt-to-income ratios
leave a sufficiently large percentage of income to cover basic living
expenses. Commentary to Sec. 1041.5(b) elaborates on this
reasonableness standard in more detail. Comment 5(b)-2.ii.B clarifies
that it would be unreasonable for the lender to assume that the
consumer needs an implausibly low percentage of income to meet basic
living expenses. The comment also clarifies in an example that a 90
percent debt-to-income ratio would leave an implausibly low percentage
of income to meet basic living expenses. The Bureau does not intend to
require lenders to set individualized thresholds for each consumer;
instead, a lender could set its own internal thresholds in its policies
and procedures, which would then be applied to individual loan
applications. Whether a lender would be able to rely on one debt-to-
income threshold for all borrowers, or enact multiple thresholds based
on income tiers or other characteristics, would depend on whether
application of a single threshold or multiple thresholds resulted in
reasonable ability-to-repay determinations in the run of cases,
informed in part by the factors listed in comment 5(b)-2.iii.
Lenders using a debt-to-income ratio will, in essence, be taking an
individualized accounting of the consumer's projected net income and
major financial obligations within the relevant monthly period, which
is the month in which a consumer will have to pay the most under the
covered short-term or longer-term balloon-payment loan. The snapshot
provided by the debt-to-income ratio, coupled with the lender's
estimate of the consumer's basic living expenses during the relevant
monthly period, will enable the lender to draw a reasonable conclusion
about whether the consumer will be able to make payments for major
financial obligations, make all payments under a covered longer-term
balloon-payment loan, and meet basic living expenses during the loan
term or 45 days following consummation (for covered short-term loans)
or the relevant monthly period (for covered longer-term balloon-payment
loans) and for 30 days after making the highest payment under the loan.
This accounting of the consumer's financial picture using a debt-
to-income ratio is less granular than the proposed residual-income
methodology, which would have required lenders to track the timing and
amounts of net income and major financial obligations, and to analyze
the consumer's finances for two separate periods in proposed Sec.
1041.5(b)(2). The Bureau had expressed concern in the proposal that a
debt-to-income approach might be problematic in the context of the
market for covered loans, due to the lack of long-established debt-to-
income norms in this market, and noted that debt-to-income ratios which
might seem quite reasonable for an ``average'' consumer might be quite
unmanageable for a consumer at the lower end of the income spectrum and
higher end of the debt burden range. Upon further consideration of the
comments focused on the complexity and burdens of the proposal, the
Bureau concludes that it is appropriate to move to a simplified
analysis that concentrates on the total inflows and outflows for the
month in which the loan places the most financial strain on the
consumer. In light of this change, the Bureau expects that lenders may
be able to use either a debt-to-income ratio or a residual-income
analysis, as long as they think carefully about the need for consumers
to cover basic living expenses. For instance, lenders using a debt-to-
income analysis may decide to set a more conservative ratio than
lenders might use in other markets to account for the financial
profiles of consumers in the markets for covered short-term loans or
covered longer-term balloon-payment loans. Another option as referenced
above may be to use different ratios for different subgroups of
customers to account for differences in income, debt obligations, and
other relevant factors.\806\
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\806\ The Bureau recognizes that the particular debt-to-income
ratio approach in the final rule, while drawing inspiration from and
sharing some similarities with the standard in credit card
underwriting rules, has differences which the Bureau finds are
justifiable as described in the general discussion of Sec. 1041.5.
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As described below, in the discussion of Sec. 1041.5(b), the
Bureau has not set particular debt-to-income ratios for lenders to use.
As with other aspects of the ability-to-repay requirements, lenders
would be expected to be reasonable. Section 1041.5(b)
[[Page 54645]]
commentary, as described below, has been revised extensively to include
additional clarification and examples of the reasonableness of ability-
to-repay determinations, in response to many comments urging the Bureau
to provide additional clarity. See discussion of Sec. 1041.5(b) for
further elaboration.
5(a)(3) Major Financial Obligations
Proposed Rule
The Bureau proposed a definition for major financial obligations as
a component of the ability-to-repay determination specified in proposed
Sec. 1041.5(b). Specifically, proposed Sec. 1041.5(a)(2) would have
defined the term to mean a consumer's housing expense, minimum payments
and any delinquent amounts due under debt obligations (including
outstanding covered loans), and court- or government agency-ordered
child support obligations. In comment 5(a)(2)-1, the Bureau proposed to
further clarify that housing expense includes the total periodic amount
that the consumer applying for the loan is responsible for paying, such
as the amount the consumer owes to a landlord for rent or to a creditor
for a mortgage. It would have provided that minimum payments under debt
obligations include periodic payments for automobile loan payments,
student loan payments, other covered loan payments, and minimum
required credit card payments.
The Bureau explained in the proposal that the obligations that it
included in the proposed definition were obligations that are typically
recurring; that can be significant in the amount of a consumer's income
that they consume; and that a consumer has little or no ability to
change, reduce, or eliminate in the short run, relative to their levels
up until application for a covered short-term or longer-term balloon
payment loan. The Bureau stated its belief that the extent to which a
particular consumer's net income is already committed to making such
payments was highly relevant to determining whether that consumer has
the ability to make payments under a prospective covered short-term
loan. As a result, the Bureau believed that a lender should be required
to inquire about such payments, that they should be subject to
verification for accuracy and completeness to the extent feasible, and
that a lender should not be permitted to rely on income already
committed to such payments in determining the consumer's ability to
repay. The Bureau further elaborated in the proposal that obligations
included in the proposed definition are roughly analogous to those
included in total monthly debt obligations for calculating monthly
debt-to-income ratio and monthly residual income under the Bureau's
ability-to-repay requirements for certain residential mortgage loans,
citing 12 CFR 1026.43(c)(7)(i)(A).
In the proposal, the Bureau noted that it had adjusted its approach
to major financial obligations based on feedback from SERs and other
industry stakeholders in the Small Business Review Panel Outline. In
the SBREFA process, the Bureau stated that it was considering including
within the category of major financial obligations ``other legally
required payments,'' such as alimony, and had considered an alternative
approach that would have included utility payments and regular medical
expenses. However, the Bureau noted in the proposal that it believed
that it would be unduly burdensome to require lenders to make
individualized projections of a consumer's utility or medical expenses.
With respect to alimony, the Bureau noted its belief that relatively
few consumers seeking covered loans have readily verifiable alimony
obligations and that, accordingly, inquiring about alimony obligations
would impose unnecessary burden. The Bureau also noted that it did not
include a category of ``other legally required payments'' because it
believed that category, which was included in the Small Business Review
Panel Outline, would leave too much ambiguity about what other payments
are covered. The Bureau sought comment on whether to include alimony as
a major financial obligation, as well as regarding other expenses such
as telecommunication services.
Comments Received
The Bureau received a number of comments on its definition of major
financial obligations. Some commenters argued that the proposal did not
do enough to clarify the scope of obligations that are included in
major financial obligations. For example, commenters questioned whether
a medical debt would be included. Consumer advocates and some other
commenters urged the Bureau to include additional expenses in the
definition, like taxes, childcare, medical expenses, telecommunications
services, health insurance premiums, and homeowners insurance. Some
commenters, including a Federal financial regulator during interagency
consultation, asked for clarification on the treatment of alimony or
questioned why it was excluded from the definition while child support
obligations were included. Other commenters interpreted the proposed
definition to mean that the definition of major financial obligations
did not include the payments on non-covered loans and urged the Bureau
to include them.
Some industry commenters objected to the proposal to include
delinquent amounts due on debt obligations in the definition of major
financial obligations. They suggested that errors on credit reports
often include defaulted debt, like medical debt, which could
effectively halt the application process. Some commenters cited a
Bureau report on the prevalence of consumers with outstanding medical
debt in arguing that the proposal would impede credit access if medical
debt was included as a major financial obligation. Others noted that,
more generally, given how many consumers have accounts in collections
on their credit reports, and the fact that the entire defaulted amount
would need to be considered as a major financial obligation, this
requirement would result in many consumers failing to demonstrate
ability to repay and effectively being excluded from the market. Other
commenters took a different view, arguing that delinquent amounts on
non-covered loans should be part of the definition of major financial
obligations.
Some commenters asked the Bureau to pinpoint the exact amount of
time after which evidence on major financial obligations would become
stale, and how long the calculations for major financial obligations
remain valid. Similarly, commenters noted that it will be impossible to
detect major financial obligations taken out the same day, or otherwise
not reflected on national consumer reports because there is a delay
between when a consumer takes out an obligation and when companies
furnish to nationwide consumer reporting agencies.
Some commenters argued that where basic living expenses or major
financial obligations were deducted from a paycheck, they would be
deducted twice from residual income because they would count as major
financial obligations or basic living expenses but would not be counted
in the definition of net income. The commenters cited examples of such
``double deductions'' where consumers sign up directly for bill-pay
from a paycheck or if the deduction is required under State law in
connection with payment of child support obligations.
The Bureau received a comment suggesting that some of the
categories of major financial obligations may not be able to be
verified through national consumer reports, including escrowed
[[Page 54646]]
amounts for property insurance and taxes. More broadly, industry
commenters raised concerns about the accuracy of consumer reports, and
being held accountable for inaccuracies in them.
One commenter, a State trade association, criticized the proposal
for not clarifying how lenders should treat debts of non-applicant
spouses, as well as their income, in a community property State where
debt obligations are considered equally owned and are split equally
upon dissolution of the marriage. The commenter argued that the
proposed ability-to-repay requirements were significantly flawed
because did not take into account the interplay with State community
property laws. The commenter requested that the Bureau withdraw the
proposal until it had adequately studied the issue.
Finally, one consumer suggested that the Bureau's identification of
major financial obligations effectively prioritizes payment of other
debts over covered loans. This commenter argued that the Bureau had not
provided evidence that these debts were more important than covered
loans.
Final Rule
The Bureau is finalizing the definition of major financial
obligation at Sec. 1041.5(a)(3) with certain substantive changes. The
most significant change is that the Bureau has revised the reference to
debt obligations to focus on ``required payments under debt obligations
(including, without limitation, outstanding covered loans).'' In
comment 5(a)(3)-1, the Bureau has provided further clarifications with
regard to treatment of debt obligations to address commenters' concerns
about treatment of medical debt and other issues.
First, comment 5(a)(3)-1 clarifies that the term ``debt
obligation'' for purpose of Sec. 1041.5(a)(3) does not include amounts
due or past due for medical bills, utilities, and other items that are
generally defined as basic living expenses under Sec. 1041.5(a)(1).
Second, the Bureau has provided a more robust definition of ``required
payments under debt obligations'' drawing largely on language that was
contained in proposed comments 5(a)(3)-1 and 5(c)(3)(ii)(B)-1. Third,
the Bureau has added language to final comment 5(a)(3)-1 to include
delinquent amounts on debt obligations within the concept of ``required
payments'' only to the extent that such delinquent amounts are due as
of the relevant monthly period, and not in cases in which an obligation
on a covered short-term loan or a covered longer-term balloon-payment
loan is no longer outstanding or where the obligation is listed as
charged off on a national consumer report. The Bureau has also included
an example of a creditor adding delinquent amounts on periodic payments
to the consumer's next regularly scheduled periodic payment for an
automobile loan payment.
The Bureau believes that these changes cumulatively will address a
significant portion of commenters' concerns, particularly that
resolving disputes about medical debts could effectively halt the
application process. The Bureau has always intended that major
financial obligations and basic living expenses be distinct categories,
as evidenced by language in proposed and final Sec. 1041.5(a)(1)
defining the latter term, and the Bureau believes this further
clarification will be helpful to reinforce the distinction. The Bureau
recognizes that because of insurance and other factors, collections on
medical bills can pose particular challenges for consumers. The Bureau
believes that it may be appropriate for both consumers and lenders to
exclude such irregular items from consideration. Because the general
intent of the definition of major financial obligations generally is to
capture recurring payments, the Bureau believes that a different rule
is logical with regard to delinquent amounts on traditional consumer
credit products by focusing on those amounts due in the relevant
monthly period.
The Bureau made a few other changes to Sec. 1041.5(a)(3) and
comment 5(a)(3)-1. The Bureau specified in the text of the regulation
that required payments under debt obligations could include, but are
not limited to, outstanding covered loans, to address the impression
expressed by commenters that non-covered loans are not considered debt
obligations. The Bureau also added language to the commentary to
reflect the new underwriting approach regarding timing--namely that the
projections and calculations lenders will need to conduct will be in
relation to the relevant monthly period, as defined in Sec.
1041.5(a)(7). And the Bureau has clarified in comment 5(a)(3)-1 that
the payments which must be included for a mortgage include principal,
interest, and escrow if required.
Second, the Bureau has revised Sec. 1041.5(a)(3) to include child
support obligations and alimony obligations in general, rather than
focusing solely on court- or government agency-ordered child support as
in the proposal. As described above, at the SBREFA stage the Bureau had
contemplated including both types of obligations generally within the
definition of major financial obligations, but at the proposal stage
decided to focus only on the obligations that were likely to be
reflected in a national consumer report due to concerns that requiring
lenders to verify other types of alimony or child support would be
burdensome. Upon further consideration, the Bureau has concluded that
the most reasonable approach is to include both types of expenses
generally within the definition, and to permit lenders to rely on the
information contained in consumers' written statements about such
obligations to the extent that they are not listed on national consumer
reports. The Bureau has added associated regulatory text and commentary
to Sec. 1041.5(c) to effectuate this requirement.
Finally, the Bureau has added a new comment 5(a)(3)-2 to specify
that for purposes of the rule, motor vehicle leases shall be treated as
a debt obligation. As explained in the Bureau's separate rulemaking to
define larger participants in the market for automobile financing,
automobile leases often function similarly to automobile loans.\807\ In
the Bureau's experience, they are reported on national consumer
reports--and, indeed, are often listed on such reports as installment
loans--and the Bureau believes that it will promote more effective
determinations of consumers' ability to repay a new covered short-term
or covered longer-term balloon-payment loan to treat them as the
equivalent of an automobile purchase loan.
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\807\ See generally 80 FR 37496, 37499 (June 30, 2015)
(explaining that certain automobile leases are defined by statute as
consumer financial products and services under the Dodd-Frank Act,
and using the Bureau's discretionary authority to define certain
additional leasing arrangements as consumer financial products and
services).
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Regarding the comments asking for a broader definition of major
financial obligations, the general theory behind the distinction
between major financial obligations and basic living expenses under the
final rule is that a major financial obligation is something a lender
will need to calculate individually and generally to verify, while a
lender will not need to do so for basic living expenses. The Bureau's
decision about what to include in the definition of major financial
obligations has been influenced in part by considerations of
administrability as well as size--all payments on debt obligations are
included because they are generally both easily ascertained from a
consumer report and tend to be large in amount. The other expenses
[[Page 54647]]
that commenters recommended the Bureau include, such as childcare
expenses, would not be ascertainable from a consumer report. Also,
because housing is typically the largest recurring expense and is
reflected on a credit report if the consumer has a mortgage, the Bureau
thought it prudent for lenders to account specifically for that expense
when performing their underwriting rather than including it in basic
living expenses more generally.
The Bureau does not agree that the definition for major financial
obligations should be vaguer and more flexible. It includes rental
housing payments and payments on debt obligations. The Bureau has
generally provided flexibility in this rule, but where lenders are
required to itemize specific obligations, the Bureau concludes that it
is more reasonable to prescribe the specific obligations for which the
Bureau will expect heightened attention.
As to commenters that expressed concerns about duplicative
deductions, the Bureau has added comments 5(c)(2)(ii)(B)-2 and
5(c)(2)(ii)(C)-2 to address this issue, both of which clarify the
provisions on verification evidence for debt obligations and child
support and alimony obligations. The comments provide that if
verification evidence shows that a debt obligation or child support or
alimony obligation is deducted prior to the receipt of take-home pay,
the lender does not include the obligation in the projection of major
financial obligations under Sec. 1041.5(c). The Bureau also added an
example to comment 5(c)(1)-1 relating to similar facts.
With regard to the comment that it would be difficult to verify
some debt obligations on national consumer reports, the Bureau
understands from its market monitoring that the nationwide consumer
reporting agencies do in fact include most debt obligations in their
national consumer reports, including payments necessary to cover
escrowed items for mortgages. But, to the extent a consumer report does
not include a debt obligation, lenders may reasonably rely on the
information in the consumer's written statement. As described in final
Sec. 1041.5(c)(1), a lender must consider major financial obligations
that are listed in a consumer's written statement even if they cannot
be verified by the required sources.
If the national consumer report does not show a consumer's
obligation because it is too recent or is not reported to a nationwide
consumer reporting agency, and the consumer's statement does not
include the payment on the obligation in listing major financial
obligations, a lender would be reasonable in not accounting for that
obligation in the lender's projection of major financial obligations
and its residual income or debt-to-income calculation. Comment
5(c)(2)(ii)(B)-3 provides detailed guidance to lenders about how to
reconcile inconsistent information as between a consumer's written
statements and the verification evidence required under Sec.
1041.5(c)(2)(ii)(B).
With regard to the commenter writing about State community property
laws, the Bureau does not believe there is a fundamental tension
between the proposed ability-to-repay requirements and State community
property laws and declines the request to withdraw the proposal based
on this issue. As an initial response to this comment, the Bureau notes
that it has revised the final rule based on other commenters' input
requesting that the final rule account for a consumer's reasonable
expectation of access to spousal or third-party income, as well as the
payment by another person of a consumer's major financial obligations
or basic living expenses. Specifically, the Bureau has revised Sec.
1041.5(a)(5), the definition of net income, and other provisions of
Sec. 1041.5 to provide that lenders may count as net income of the
consumer any third party's income to which the consumer has a
reasonable expectation of access, which must be verified. The Bureau
has also added a comment that clarifies that lenders may factor into
the projections of major financial obligations the regular
contributions of third parties to those obligations (comment 5(c)(1)-
2). Similarly, the Bureau has clarified that if a lender is
individually itemizing a consumer's basic living expenses, the lender
may consider whether other persons are regularly contributing to the
consumer's payment of basic living expenses (comment 5(b)-2.i.C.2).
These changes are described in more detail in other parts of the
section-by-section analysis for Sec. 1041.5.
Thus, a consumer's access to spousal income or the spouse's
contributions toward payment of a consumer's major financial
obligations or basic living expenses may be accounted for by the lender
under the final rule, regardless of whether the consumer lives in a
community property State. The Bureau believes these changes would
achieve for some consumers the same result as, for example, a rule that
would permit a consumer to rely on the income of his spouse in a
community property State.\808\
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\808\ The Bureau acknowledges that the credit card ability-to-
pay rules under Regulation Z discuss in commentary how reasonable
expectation of access to the income of another person includes a
legal entitlement to that income under a Federal or State
regulation, including State community property laws. The Bureau is
declining to adopt that standard in this final rule. See the
section-by-section analysis of Sec. 1041.5(a)(5) (net income
definition) and the general discussion above in Sec. 1041.5 about
why the Bureau is imposing different ability-to-repay standards for
this market in contrast to the credit card market.
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The Bureau does not find it sensible to create separate ability-to-
repay requirements for community property States and common law
property States.\809\ This would add complexity to the rule, pose
challenges for examination and uniform enforcement of the rule, and add
compliance burdens on providers operating in multiple States with
different family law regimes. Furthermore, such an adjustment would not
fit with the final rule's orientation towards practical assessments of
how much consumers pay in the short term for basic living expenses and
major financial obligations, and practical access to income. For
example, the final rule does not direct lenders to ascertain a
consumer's legal entitlement to income where the consumer does not have
practical access to the funds. Nor did the commenter present any
evidence that lenders in the market today have been taking into account
State community property laws in making lending decisions.
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\809\ The commenter did not provide specific policy suggestions
to address the issue, other than withdrawing the proposal which the
Bureau is declining to do. The Bureau infers from the comment that
this is one such policy option short of withdrawal.
---------------------------------------------------------------------------
The Bureau disagrees with the commenter that argued that its
identification of major financial obligations as obligations that must
be itemized by category in underwriting suggests that the Bureau is
prioritizing payment of other debt obligations over covered loans for
which the lender is making an ability-to-repay determination. In fact,
covered loans can also be major financial obligations (such as where a
consumer has a concurrent loan outstanding). Rather, the Bureau is
simply differentiating between major financial obligations that the
consumer is already committed to and the obligation that would be
incurred in connection with a new covered short-term or longer-term
balloon-payment loan.
Finally, the Bureau declines the suggestion by commenters to
include as major financial obligations property taxes and insurance
that is not required
[[Page 54648]]
to be paid in escrow to a mortgagee. The Bureau believes that the pool
of consumers taking out covered short-term and longer-term balloon-
payment loans who both own a home and who do not escrow their property
taxes and insurance will be quite low.\810\ In the presumably small
number of cases where consumers have a mortgage and do not pay taxes or
insurance through a regular escrow arrangement, the Bureau also
believes that the payments may be infrequent, particularly with regard
to property taxes which, unless escrowed, are typically not paid
monthly. Therefore, the Bureau believes it is unlikely in the vast
majority of cases that these items would actually bear on the
consumer's financial balance sheet for purposes of the ability-to-repay
requirement for a covered short-term loan,\811\ and thus these items
should not be treated as a major financial obligation. The Bureau also
is not treating them as a basic living expense for similar reasons, as
well as the difficulty lenders would have in developing a non-
individualized estimate of property taxes.
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\810\ As discussed in Market Concerns--Underwriting, for the
population of payday borrowers, renting is twice as common as in the
general U.S. population. See Skiba and Tobacman, ``Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default,'' at 5 (Apr. 1, 2008). Moreover, a recent
analysis by CoreLogic shows that currently almost 80 percent of all
mortgage borrowers are paying their taxes (and insurance) through
escrow accounts. See Dominique Lalisse, Escrow vs. Non-escrow
Mortgages: The Trend is Clear (June 21, 2017), available athttp://www.corelogic.com/blog/authors/dominique-lalisse/2017/06/escrow-vs-non-escrow-mortgages-the-trend-is-clear.aspx#. WdRrL3IUns0. Finally,
mortgage borrowers with higher loan-to-value ratios are more prone
to have required escrow arrangements, which could mean that payday
borrowers are more likely to have escrow arrangements than the
mortgage borrowing population at large.
\811\ Similarly, for a covered longer-term balloon-payment loan,
it is relatively unlikely that such irregular expenses would come
due in the relevant monthly period.
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5(a)(4) National Consumer Report
In proposed Sec. 1041.5(a)(3), the Bureau defined national
consumer report to mean a consumer report, as defined in section 603(d)
of the Fair Credit Reporting Act (FCRA), 15 U.S.C. 1681a(d), obtained
from a consumer reporting agency that compiles and maintains files on
consumers on a nationwide basis, as defined in section 603(p) of the
FCRA, 15 U.S.C. 1681a(p). In proposed Sec. 1041.5(c)(3)(ii), the
Bureau provided that a lender would have to obtain a national consumer
report as verification evidence for a consumer's required payments
under debt obligations and under court- or government agency-ordered
child support obligations. Reports that meet the proposed definition
are often referred to informally as a credit report or credit history
from one of the three major nationwide consumer reporting agencies or
bureaus. A national consumer report may also be furnished to a lender
from a consumer reporting agency that is not a nationwide agency, such
as a consumer reporting agency that is a reseller.
The Bureau did not receive comments on the specific definition of
national consumer report, though it did receive comments on the
requirement to obtain national consumer reports. The Bureau addresses
those comments in the discussion regarding major financial obligations
and Sec. 1041.5(c). Therefore, the Bureau finalizes the definition as
proposed, except renumbered as Sec. 1041.5(a)(4).
5(a)(5) Net income
Proposed Rule
In proposed Sec. 1041.5(a)(4), the Bureau set forth a definition
for net income as a component of the calculation for the ability-to-
repay determination specified in proposed Sec. 1041.5(b).
Specifically, the Bureau proposed to define the term as the total
amount that a consumer receives after the payer deducts amounts for
taxes, other obligations, and voluntary contributions, but before
deductions of any amounts for payments under a prospective covered
short-term loan or for any major financial obligation.
The Bureau explained in the proposal that the proposed definition
was similar to what is commonly referred to as ``take-home pay,'' but
is phrased broadly to apply to income received from employment,
government benefits, or other sources. It would exclude virtually all
amounts deducted by the payer of the income, whether deductions are
required or voluntary, such as voluntary insurance premiums or union
dues. The Bureau stated its belief that the total dollar amount that a
consumer actually receives after all such deductions is the amount that
is most instructive in determining a consumer's ability to repay.
Certain deductions (e.g., taxes) are beyond the consumer's control. The
Bureau further stated in the proposal that other deductions may not be
revocable, at least for a significant period, as a result of
contractual obligations into which the consumer has entered. Even with
respect to purely voluntary deductions, most consumers are unlikely to
be able to reduce or eliminate such deductions immediately--that is,
between consummation of a loan and the time when payments under the
loan would fall due. The Bureau also stated in the proposal that it
believed that the net amount a consumer actually receives after all
such deductions is likely to be the amount most readily known to
consumers applying for a covered short-term loan (rather than, for
example, periodic gross income) and is also the amount that is most
readily verifiable by lenders through a variety of methods. The Bureau
stated in the proposal that the proposed definition would clarify,
however, that net income is calculated before deductions of any amounts
for payments under a prospective covered short-term loan or for any
major financial obligations. The Bureau stated that it was proposing
the clarification to prevent double-counting of any such amounts when
making the ability-to-repay determination.
Comments Received
The Bureau received a number of comments on its proposed definition
of net income, raising a variety of issues. Several industry commenters
argued that the Bureau should explicitly state that the definition
includes a number of other sources of income that are paid at irregular
times or in irregular amounts, including seasonal income, tips,
bonuses, overtime pay, or commissions. Commenters also asked the Bureau
to state explicitly that receipt of a number of other types of income
should be included, such as child support, annuities, alimony,
retirement, disability, prizes, jury awards, remittances, investment
income, tax refunds, and legal settlements. A consumer advocate
commenter took the opposite view, arguing that one-time lump-sum
payments, tax refunds, legal settlements, or other income that is ``not
consistently reliable'' should not be counted. This commenter argued
that these income sources often are speculative and that consumers
relying on them often take out payday or vehicle title loans in
reliance on the expected funds only to see the payment delayed or to
receive less funds than expected or not at all, leading to inability to
repay and collateral consequences.
Other commenters argued that the Bureau should allow lenders to
include in net income any third-party income, like spousal income,
because many individuals' finances are managed on a household basis.
Some suggested that the Bureau's failure to do so was inconsistent with
CARD Act regulations, which permit card issuers to consider as the
applicant's income the income of another person if the applicant has a
reasonable expectation of access to the
[[Page 54649]]
other person's income.\812\ The commenters argued that this created a
disadvantage to stay-at-home spouses and would result in loss of credit
access. They criticized the proposal for not addressing this issue in
the same manner as the Bureau's rulemaking in 2013 amending the CARD
Act regulations. (Commenters raised related Regulation B issues
addressed in the general Sec. 1041.5 discussion above.) One commenter
made arguments similar to those it made regarding major financial
obligations, discussed with regard to Sec. 1041.5(a)(3) above, arguing
that the Bureau should have taken into account spousal income in
community property States.
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\812\ The CARD Act regulations in commentary to 12 CFR
1026.51(a)(1)(i) clarify when card issuers may consider for purposes
of the ability-to-pay test the income of another person to which the
consumer has reasonable expectation of access. Two comments directly
or indirectly reference community property laws. Comment
51(a)(1)(i)-4.iii clarifies that, consideration of the income or
assets of authorized users, household members, or other persons who
are not liable for debts incurred on the account does not satisfy
the requirement to consider the consumer's current or reasonably
expected income or assets, ``unless a Federal or State statute or
regulation grants a consumer who is liable for debts incurred on the
account an ownership interest in such income and assets (e.g., joint
ownership granted under State community property laws),'' such
income is being deposited regularly into an account on which the
consumer is an accountholder (e.g., an individual deposit account or
a joint account), or the consumer has a reasonable expectation of
access to such income or assets even though the consumer does not
have a current or expected ownership interest in the income or
assets. Comment 51(a)(1)(i)-6.iv includes an example of where there
is not reasonable expectation of access because, among other facts,
``no Federal or State statute or regulation grants the applicant an
ownership interest in that income.''
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Some commenters argued that the Bureau should use gross income
instead of net income. One trade association argued that one of its
members currently uses gross income, and that just this minor change
would require training, systems updates, and changes to forms. Another
noted that for Federal student loans, income-based repayment plans are
assessed using adjusted gross income, and asserted that the Bureau's
proposal to use net income was merely a method of ensuring that fewer
consumers would meet the standard.
Some commenters argued that the Bureau should not require lenders
to subtract voluntary deductions from the net income calculation,
arguing that because these deductions are voluntary they thus could be
diverted to cover basic living expenses, major financial obligations,
or loan payments. Other commenters asked for further clarification of
what ``other obligations'' and ``voluntary contributions'' would
include. Still others argued that it would be very difficult in many
instances to verify whether an employer was deducting for taxes or
other items. Those commenters questioned whether lenders would be
required to ascertain the consumer's tax liability or be held
responsible if the take-home pay figure used for the projection of net
income was found to be based on erroneous information about tax
deductions. A small rural lender commented that the proposed definition
would create an inconsistent standard, positing that a loan applicant
who withholds the maximum permitted amount would be less likely to pass
the ability-to-repay requirement than another applicant who withholds
the minimum amount, even if they work at the same job and earn the same
salary. Another commenter asked for clarification on the situation
where the verification evidence does not identify the payee or purpose
of a deduction; the commenter noted this would likely occur with
deposit account transaction history.
Several industry commenters believed that the Bureau should allow
lenders to include in net income the proceeds from the covered loan
itself.\813\ These commenters argued that while it may make sense not
to include proceeds in net income when a consumer is using those
proceeds to pay for emergency expenses, it is conceptually inconsistent
to exclude proceeds when they are being used to pay for basic living
expenses or major financial obligations. For example, if a consumer
uses proceeds to pay rent--which is a major financial obligation--
commenters believed it would be unfair to have to treat rent as an
obligation that the consumer would still have to pay in order to
determine whether she would have the ability to repay the loan, unless
the proceeds can be included in the net income calculation. They viewed
this approach as improper ``double-counting'' of the major financial
obligation or basic living expense paid with proceeds.
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\813\ Including proceeds in income, or deducting them from basic
living expenses or major financial obligations, are mathematically
and conceptually equivalent. Here, the Bureau addresses this line of
argument as a request to include proceeds in income. But the
Bureau's response applies to both versions of the concept.
---------------------------------------------------------------------------
Final Rule
The Bureau is finalizing the definition of net income in Sec.
1041.5(a)(5) with two changes from the proposal. The Bureau, moreover,
has added three new comments to address various issues raised by the
commenters.
The first change is a technical change that aligns with the change
in scope of the final rule. The proposal defined net income as the
total amount the consumer receives after the payor deducts amounts for
taxes, other obligations, and voluntary contributions, qualified with a
parenthetical phrase reading ``but before deductions of any amounts for
payments under a prospective covered short-term loan or for any major
financial obligation.'' The definition of net income in proposed Sec.
1041.9(a)(5) contained similar language referring to covered longer-
term loans. In light of its decision not to finalize the ability-to-
repay requirements as to all covered longer-term loans and to
consolidate into Sec. 1041.5 provisions from Sec. 1041.9 relating to
covered longer-term balloon-payment loans, the Bureau has changed the
language to refer to ``but before deductions of any amounts for
payments under a prospective covered short-term loan or covered longer-
term balloon-payment loan or for any major financial obligation.''
Second, the Bureau agreed with commenters that it should allow
lenders to include income from third parties where the consumer has a
reasonable expectation of access to that income, and Sec. 1041.5(a)(5)
of the final rule allows lenders to do so. In new comment 5(a)(5)-3,
the Bureau clarifies that a consumer has a reasonable expectation of
access to a third party's income if the consumer has direct, practical
access to those funds on a regular basis through a bank account in
which the consumer is an accountholder. The Bureau also provided
examples in comment 5(a)(5)-3 of what reasonable expectation of access
would entail, including evidence of a joint bank account or of regular
deposits from said third party into an account in the consumer's name.
A number of commenters had cited the Bureau's CARD Act regulations
as precedent for the request to include the income of another person in
net income. The Bureau notes that the CARD Act regulations in 12 CFR
1026.51(a)(1)(i) contain commentary including a number of examples of
whether an applicant had a reasonable expectation of access to the
income of another person.\814\ This commentary was added in the
Bureau's amendments to the credit card ability-to-pay rules in 2013.
The Bureau notes that it drew inspiration from this commentary in
drafting the examples in comment 5(a)(5)-3, but the Bureau has not
incorporated all of the examples. In particular, one example posited
that the
[[Page 54650]]
consumer has reasonable expectation of access where another person is
regularly paying the consumer's expenses, and another comment cited
above includes an example of where there is not reasonable expectation
of access because, among other facts, no Federal or State statute or
regulation grants the applicant an ownership interest in that income.
The former example, in the Bureau's view, does not align well with the
final rule insofar that the credit card example blends the distinction
between income and expenses; as with the proposal, the final rule
creates separate definitions for net income, major financial
obligations, and basic living expenses. Accordingly, the Bureau has
dealt with contributions toward basic living expenses and major
financial obligations in comment 5(b)-2.i.C.2 and comment 5(c)(1)-2,
respectively, of the final rule rather than in connection with the
definition of net income. Also, the Bureau is not adapting the language
referencing Federal or State statutes or regulations granting an
ownership interest in income for similar reasons to those described
above with regard to State community property laws in connection with
major financial obligations. For further discussion on the differences
more generally between the final rule and the CARD Act ability-to-pay
regulations, see general Sec. 1041.5 discussion above.
---------------------------------------------------------------------------
\814\ See 12 CFR 1026.51(a)(1)(i), comment 51(a)(1)(i)-6.
---------------------------------------------------------------------------
Regarding the commenter that discussed State community property
laws, similar to the treatment of this issue as applied to major
financial obligations, the Bureau concludes that whether a consumer
lives in a community property State does not change the consumer's
practical access to income, and thus the regulation does not need to
distinguish between how lenders should treat net income from one State
to another. However, as noted above, in response to other comments the
Bureau has decided to allow lenders to rely on third-party income,
including income from a spouse, if the consumer has a reasonable
expectation of access to that income (see discussion of Sec.
1041.5(a)(5) and comment 5(a)(5)-3). This is consistent with the
Bureau's general approach to whether a consumer has practical access to
a spouse's (or other third party's) income. Given that this rule is
closely focused on whether consumers will be able to meet their major
financial obligations, make the payments on the loan, and pay basic
living expenses in the near term, the Bureau determined that practical
access to income was more important than legal entitlement to income.
The Bureau also notes that attributing all community property to a
consumer would not necessarily increase the odds that the consumer
would be able to meet the ability-to-repay requirement relative to the
final rule, because in community property States, liabilities are also
imputed to the spouse. The Bureau also noted in the earlier discussion
that creating separate underwriting regimes depending on the family law
of the State would create added complexity and also challenges for
examination, enforcement, and compliance.
The Bureau also agrees with commenters that the final rule should
provide more clarity about and examples of what sources of income could
be included in net income. The Bureau has added a detailed new comment,
5(a)(5)-1, addressing these issues. Specifically, the comment clarifies
that net income includes income that is regularly received by the
consumer as take-home pay, whether the consumer is treated as an
employee or independent contractor, and also includes income regularly
received by the consumer from other sources, such as court-ordered
child support or alimony received by the consumer and any payments
received by the consumer from retirement, social security, disability,
or other government benefits, or annuity plans.
Comment 5(a)(5)-1 further clarifies that lenders may include in net
income irregular or seasonal income, such as tips, bonuses, and
overtime pay, and that net income does not include one-time payments
anticipated to be received in the future from non-standard sources,
such as legal settlements, tax refunds, jury prizes, or remittances,
unless there is verification evidence of the amount and expected timing
of such income. The Bureau has included the verification requirement
with regard to future one-time payments because they generally are
uncertain as to timing or amount. Before basing an ability-to-repay
determination on a projection of this sort, the Bureau believes it is
important to be confident that income will be received during the
relevant monthly period in the expected amount. Of course, lenders must
always collect verification evidence about net income where it is
reasonably available (see Sec. 1041.5(c)(2)(ii)(A) and comment
5(c)(2)(ii)(A)-3). Therefore, the effect of comment 5(a)(5)-1 is that
when verification evidence is not reasonably available to project one-
time income payment, then unlike with other sources of income, the
lender cannot rely on the consumer's statement of the amount alone. The
Bureau does not agree with the commenter requesting the rule prohibit
inclusion of these types of one-time income sources altogether, because
if verification evidence as described is available, the Bureau believes
it is appropriate to include such types of income in the definition of
net income.
The Bureau does not agree with commenters that it is more
appropriate to calculate debt-to-income or residual income based on
gross income than net income. The ability-to-repay determination is
intended to capture the amount of money the consumer will actually have
available to pay for major financial obligations, basic living
expenses, and loan payments in the month with the highest sum of
payments on the loan. Income that is automatically diverted to taxes or
other deductions would not be available to cover any of those expenses.
While it is true, as one commenter noted, that student loan income-
driven repayment plans are based on gross income, that is because an
income-driven repayment plan is a flat percentage of income and does
not account for basic living expenses or major financial obligations
(see the discussion above about why a payment-to-income approach has
not been adopted in this rule).
At the same time, with regard to commenters that raised concerns
about compliance burdens where they are relying on verification sources
that do not clearly reflect whether deductions have been made from
take-home pay, the Bureau believes it is not practicable to require
lenders to engage in detailed inquiries and individual adjustments.
Thus, the Bureau has clarified in comment 5(a)(5)-1 that the lender may
draw reasonable conclusions from information provided by the consumer
and is not required to inquire further about deductions for the
consumer's taxes, other obligations, or voluntary contributions. This
may mean that a lender could rely on gross income on a pay stub, if net
income and/or deductions are not otherwise on the pay stub. Similarly,
if a lender is verifying income via a bank statement, the lender may
assume that the amount deposited is net of deductions.
The Bureau also is adding commentary language to address the
comments asking for clarification on the meaning of voluntary
contributions and whether the lender must, or can, assume that
voluntary contributions will be discontinued during the term. The
Bureau has added comment 5(a)(5)-2 to provide further clarification
about what would be included as a voluntary contribution deducted from
income, giving an example of a consumer's contribution to a defined
contribution plan commonly referred to as 401K plans. In light of
comments received,
[[Page 54651]]
comment 5(a)(5)-2 also clarifies that a lender may inquire about and
reasonably consider whether the voluntary contributions will be
discontinued prior to the relevant monthly period, in which case
deductions for those voluntary contributions would not need to be
accounted for in the income calculation. New comment 5(a)(5)-2 also
clarifies that an example of an ``other obligation'' is a consumer's
portion of payments for premiums for employer-sponsored health
insurance plans.
Treatment of loan proceeds. After careful consideration, the Bureau
has decided not to include the loan proceeds in net income, or
otherwise allow the lender to give a credit for or otherwise account
for the proceeds in the estimation of basic living expenses or
projection of major financial obligations. The Bureau acknowledges that
some consumers use loan proceeds to cover basic living expenses or
major financial obligations, but believes on balance that treating for
loan proceeds as income is not appropriate for multiple reasons.
First, many consumers take out covered short-term or covered
longer-term balloon-payment loans specifically to pay unusual, non-
recurring or emergency expenses, or because covering such expenses in
the recent past has left them without sufficient funds to cover basic
living expenses or major financial obligations. The Bureau received
many comments, including many from individual consumers, describing how
consumers often use payday loans and other covered loans to cover
emergency expenses. Payday lenders in their advertising also tend to
cite this usage category as the primary purpose for using the product,
and industry commenters noted it as a use case as well. Academic
literature and surveys discussing usage patterns on payday loans have
consistently found that a sizable number of consumers report using
payday loans and other covered loans for non-recurring and emergency
expenses. See part II and Market Concerns--Underwriting (citing a 2012
study by Center for Financial Services Innovation).
Because money is fungible, the Bureau is concerned that
disentangling the interplay between regular and irregular expenses
would create significant compliance and examination challenges. Lenders
would be expected to adhere to different rules depending on the stated
intended use of the loan proceeds. This would put the lenders in the
position of having to inquire in detail about consumers' intended use
for the loans, which consumers may feel is unduly intrusive. Such a
provision would also be difficult to enforce given the fungible nature
of the funds in question and raise questions about lender compliance
burden and liability under the rule if they rely on a consumer's
statement of intended use that does not prove accurate. It also would
create incentives for evasion.
In addition, simply assuming that all consumers will use the loan
proceeds to pay basic living expenses or major financial obligations
would be as simple as the approach taken by the Bureau, but is a
problematic approach on policy grounds. Because many consumers use loan
proceeds for reasons other than payment of major financial obligations
or basic living expenses, such a rule would lead to lenders making
loans to many consumers who plan to use the funds to cover a non-
recurring or emergency expense, and thus the ability-to-repay
determinations would be inaccurate in the opposite direction. As a
result, the harms identified in Market Concerns--Underwriting and the
section-by-section analysis for Sec. 1041.4 would continue to exist
and would likely be prevalent.
Moreover, there is a question of timing. As referenced above and
described in more detail below in connection with Sec. 1041.5(a)(7)
and (b)(2), the Bureau has decided to focus the calculation of debt-to-
income or residual income on the relevant monthly period, which is the
calendar month with the highest sum of loan payments. This snapshot is
intended to focus on the month in which the loan places the greatest
strain on the consumer's finances, which is then used in turn by the
lender to forecast the consumer's ability to cover loan payments, major
financial obligations, and basic living expenses both during the loan
term and for 30 days after the single highest payment. To the extent
that consumers use loan proceeds to cover major financial obligations
or basic living expenses, that is likely to occur soon after
consummation. Thus, except for loans with short terms made near the
beginning of a calendar month, the Bureau believes that the proceeds
will have been disbursed to cover expenses before the relevant monthly
period and/or the 30 days after the single highest payment on the
covered loan.
Indeed, in light of the concern about high risk of re-borrowing in
the markets for covered short-term and longer-term balloon-payments,
this is precisely why the Bureau has focused the analysis on the period
of time in which the consumer is making the largest payment(s) on the
loan and the major financial obligations and basic living expenses that
are due soon thereafter.
5(a)(6) Payment Under the Covered Short-Term or Longer-Term Balloon-
Payment Loan
Proposed Rule
The Bureau proposed to define payment under the covered short-term
loan, which was a component of the calculation for the ability-to-repay
determination as specified in proposed Sec. 1041.5(b). Specifically,
the proposed definition of payment under the covered short-term loan in
proposed Sec. 1041.5(a)(5)(i) and (ii) would have included all costs
payable by the consumer at a particular time after consummation,
regardless of how the costs are described in an agreement or whether
they are payable to the lender or a third party. Proposed Sec.
1041.5(a)(5)(iii) would have set special rules for projecting payments
on lines of credit if they are provided for under a covered short-term
loan for purposes of the ability-to-repay test, since actual payments
for lines of credit may vary depending on usage.
Proposed Sec. 1041.5(a)(5)(i) would have applied to all covered
short-term loans. It defined payment under the covered short-term loan
broadly to mean the combined dollar amount payable by the consumer in
connection with the covered short-term loan at a particular time
following consummation. The proposed definition further would have
provided that, for short-term loans with multiple payments, in
calculating each payment under the covered loan, the lender must assume
that the consumer has made the preceding required payments and has not
taken any affirmative act to extend or restructure the repayment
schedule or to suspend, cancel, or delay payment for any product,
service, or membership provided in connection with the covered loan.
Proposed Sec. 1041.5(a)(5)(ii) similarly would have applied to all
covered short-term loans and clarified that payment under the covered
loan included all principal, interest, charges, and fees.
The Bureau stated in the proposal that it believed that a broad
definition was necessary to capture the full dollar amount payable by
the consumer in connection with the covered short-term loan, including
amounts for voluntary insurance or memberships and regardless of
whether amounts are due to the lender or another person. The Bureau
noted that it is the total dollar amount due at each particular time
that is relevant to determining whether or not a consumer has the
ability to repay
[[Page 54652]]
the loan based on the consumer's projected net income and payments for
major financial obligations. The amount of the payment is what is
important, not whether the components of the payment include principal,
interest, fees, insurance premiums, or other charges. In the proposal,
the Bureau recognized, however, that under the terms of some covered
short-term loans, a consumer may have options regarding how much the
consumer must pay at any given time and that the consumer may in some
cases be able to select a different payment option. The Bureau
explained that the proposed definition would include any amount payable
by a consumer in the absence of any affirmative act by the consumer to
extend or restructure the repayment schedule, or to suspend, cancel, or
delay payment for any product, service, or membership provided in
connection with the covered short-term loan. Proposed comment
5(a)(5)(i) and 5(a)(5)(ii)-1 would have included three examples
applying the proposed definition to scenarios in which the payment
under the covered short-term loan includes several components, such as
voluntary fees owed to a person other than the lender, as well as
scenarios in which the consumer has the option of making different
payment amounts.
Proposed Sec. 1041.5(a)(5)(iii) included additional provisions for
calculating the projected payment amount under a covered line of credit
for purposes of assessing a consumer's ability to repay the loan. As
explained in proposed comment 5(a)(5)(iii)-1, the Bureau believed such
rules were necessary because the amount and timing of the consumer's
actual payments on a line of credit after consummation may depend on
the consumer's utilization of the credit (i.e., the amount the consumer
has drawn down) or on amounts that the consumer has repaid prior to the
payments in question. As a result, if the definition of payment under
the covered short-term loan did not specify assumptions about consumer
utilization and repayment under a line of credit, there would be
uncertainty as to the amounts and timing of payments to which the
ability-to-repay requirement applies. Proposed Sec. 1041.5(a)(5)(iii)
therefore prescribed assumptions that a lender must make in calculating
the payment under the covered short-term loan. It would have required
the lender to assume that the consumer will utilize the full amount of
credit under the covered loan as soon as the credit is available to the
consumer, and that the consumer will make only minimum required
payments under the covered loan. The lender would then apply the
ability-to-repay determination to that assumed repayment schedule.
Proposed Sec. 1041.9(a)(5)(iii) would have included parallel
provisions, with a supplemental provision to account for the fact that
it applied to longer-term loan structures. In addition to the same two
assumptions that a lender must make in calculating the payment under
proposed Sec. 1041.5(a)(5)(iii), proposed Sec. 1041.9(a)(5)(iii) also
would have required the lender to assume that, if the terms of the
covered longer-term loan would not provide for a termination of access
to the credit line by a date certain and for full repayment of all
amounts due by a date certain, the consumer must repay any remaining
balance in one payment on the date that is 180 days following the
consummation date.
Comments Received
The Bureau received a number of comments that were generally
supportive of the Bureau's definition of payment under the covered
short-term loan.
A trade group representing open-end credit providers criticized
this rule generally for reflecting what was, in the commenter's view,
the Bureau's lack of understanding about open-end credit provisions.
They specifically criticized the proposal for, in the commenter's view,
not addressing how lines of credit with principal paydown requirements
or with a specified duration would be treated. The Bureau also received
a comment objecting to proposed Sec. 1041.9(a)(5)(iii)(C), the
parallel definition for the proposed underwriting section for covered
longer-term loans, which would have provided that the whole balance of
open-end longer-term credit should be considered to be due 180 days
following the consummation date if there is not a date certain for
termination of the line and repayment of any remaining balance. The
commenter argued instead that the Bureau should use the maximum
required payment under the terms of the agreement.
Final Rule
The Bureau has finalized the definition as proposed in Sec.
1041.5(a)(6), with minor wording clarifications and the addition of
references to payments for covered longer-term balloon-payment loans.
The Bureau also has made minor adjustments to the examples in comment
5(a)(6)(i)-1 and 5(a)(6)(ii)-1 to reflect that the same definition
applies to covered longer-term balloon-payment loans.
With regard to the rules for calculating payments on open-end
loans, the Bureau has not imported the text from proposed Sec.
1041.9(a)(5)(iii)(C) into this definition, which would have made a
lender assume, for purposes of the ability-to-repay determination, that
all advances under a longer-term open-end credit line would be due
within 180 days of consummation if there is not a date certain for
termination of the line and repayment of any remaining balance. Because
the Bureau has decided to apply the ability-to-repay requirements only
to covered longer-term balloon-payment loans that have the payment
features as described in Sec. 1041.3(b)(2), the Bureau does not
believe that this provision is necessary to help lenders calculate
potential loan payments. Put another way, if a loan without a date
certain for termination of the line and repayment of any remaining
balance qualifies as a covered longer-term balloon-payment loan under
the rule, the Bureau believes the terms of the loan contract that
create that balloon payment feature will be sufficient for lenders to
calculate payments using the assumptions in Sec. 1041.5(a)(6)(iii)(A)
and (B).
In comment 5(a)(6)(iii)-1, in addition to corresponding technical
updates, the Bureau added a description of how a lender should
calculate the payment amount for open-end credit when underwriting for
a new advance, including when there is an outstanding balance. The
comment states that lenders should use the same test with the same
assumptions when they make a new ability-to-repay determination under
Sec. 1041.5(b)(1)(ii) prior to an advance under the line of credit
that is more than 90 days after the date of a prior ability-to-repay
determination for the line of credit, in order to determine whether the
consumer still has the ability to repay the current credit line.
The Bureau also disagrees with the commenter that argued the
proposal reflects a lack of understanding of open-end credit
provisions. The commenter's primary focus in asserting a lack of
understanding appears to have been on
[[Page 54653]]
certain assumptions about credit line usage and repayment that the
proposal would have required lenders to use in periodically re-
underwriting open-end loans. Those assumptions were admittedly
complicated by the fact that the proposal would have applied to a broad
range of product structures. However, the Bureau has since simplified
and clarified those assumptions particularly in light of the narrowed
scope of the final rule's ability-to-repay requirements, which now
apply only to covered short-term loans and covered longer-term balloon-
payment loans. The Bureau believes the remaining assumptions--that
consumers draw the maximum amount allowed on the loan and make minimum
payments for as long as permitted under the loan contract--are logical
for assessing consumers' ability to repay and relatively simple to
apply in conjunction with covered loans' contractual terms governing
principal pay-down and other matters.
5(a)(7) Relevant Monthly Period
As described above, the Bureau has added a definition for relevant
monthly period, which is the calendar month in which the highest sum of
payments under the loan is due. This definition will be used as the
period for which a lender will need to calculate residual income or a
debt-to-income ratio. As noted in the discussion regarding debt-to-
income ratio above, the concept of the relevant monthly period flows
from the larger streamlining and reconceptualization of the
requirements under Sec. 1041.5(b)(2). The Bureau believes that instead
of requiring lenders to make separate calculations to analyze
consumers' ability to cover major financial obligations, basic living
expenses, and payments on the covered loan both during the term of the
loan and for 30 days after the highest payment on the loan, it would be
more administrable to allow lenders to make a single monthly
calculation that can then be used to evaluate more generally whether
the consumer has the ability to cover all relevant expenses during the
time periods described in Sec. 1041.5(b)(2).
Because the month with the highest sum of payments on the covered
short-term or covered longer-term balloon-payment loan will be the
month in which the loan places the greatest strain on the consumer's
finances, the Bureau believes that it is the logical period to use as a
snapshot. Indeed, the Bureau had proposed to focus the underwriting
analysis for covered longer-term balloon-payment loans on this specific
period for this same reason.\815\ The Bureau considered starting the
monthly clock on the date of the first of the loan payment(s), but
ultimately concluded that a calendar month was easier to administer.
Since billing cycles typically correspond to calendar months, the
Bureau believes that it will be relatively straightforward for lenders
to project income and major financial obligations based on consumer
statements, income documentation, and national consumer reports. The
Bureau also believes that calculating the residual income and debt-to-
income ratio for a relevant monthly period defined by reference to a
calendar month will generally give lenders a sense of total monthly
inflows and outflows that can be projected to the time periods for
which the lender must make a reasonable conclusion that, based on
residual income or the debt-to-income ratio, the consumer can make
payments for major financial obligations, make all payments under the
loan, and meet basic living expenses. See discussion of Sec.
1041.5(b)(2)(i) and (ii) and commentary for further information. The
relevant monthly period is also the time period referenced under Sec.
1041.5(b)(2)(i)(B) and (b)(2)(ii)(B).
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\815\ Specifically, for covered longer-term loans, proposed
Sec. 1041.9(b)(2) set out a two-part test. All lenders for all
covered loans would have had to evaluate consumers' residual income
for the term of the loan under Sec. 1041.9(b)(2)(i), which comment
9(b)(2)(i)-1.i explained could be satisfied by analyzing residual
income for the month with the highest sum of payments (if
applicable) under the loan. The second part of the test under
proposed Sec. 1041.9(b)(2)(ii) applied only to covered longer-term
balloon-payment loans and would have required lenders to evaluate
consumers' ability to cover major financial obligations and basic
living expenses for 30 days after the highest single payment.
---------------------------------------------------------------------------
The Bureau considered alternative time periods for the relevant
monthly period, such as the 30-day period starting at consummation, the
30-day period ending on the contractual due date, or the calendar month
in which consummation occurred. The Bureau chose the specific calendar
month in which the highest sum of payments under the loan will be due
for the reasons discussed above, because it believes that the residual
income and debt-to-income ratio will only be demonstrative of ability
to repay if they reflect the calendar month in which the loan will
strain the consumer's monthly balance sheet the most. The Bureau notes
that for covered longer-term balloon-payment loans, there may be
challenges to projecting major financial obligations and net income, as
the relevant monthly period may fall far into the future. Commentary in
the definitions of debt-to-income ratio and residual income addresses
this issue; see comments 5(a)(2)-1 and 5(a)(8)-1 which provide that for
covered longer-term balloon-payment loans, lenders must make reasonable
assumptions about that period compared to the period covered by the
verification evidence, and gives examples.
5(a)(8) Residual Income
The Bureau proposed Sec. 1041.5(a)(6) to define residual income as
a component for the calculation of the ability-to-repay determination
specified in proposed Sec. 1041.5(b). It proposed to define the term
as the sum of net income that the lender projects the consumer
obligated under the loan will receive during a period, minus the sum of
amounts that the lender projects will be payable by the consumer for
major financial obligations during that same period. Proposed Sec.
1041.5(b) would have generally required a lender to determine that a
consumer will have sufficient residual income to make payments under a
covered short-term loan and to meet basic living expenses.
The Bureau discussed above the comments that generally criticized
its approach to requiring a residual-income analysis, which led the
Bureau in the final rule to add the debt-to-income ratio as another
option for lenders to use. Other comments about the Bureau's general
ability-to-repay framework were also listed above, and will be
discussed further in addressing Sec. 1041.5(b).
The Bureau made a few changes to the definition of residual income
as finalized in Sec. 1041.5(a)(8). First, there were a number of
technical edits, and the Bureau included ``relevant monthly period''
where appropriate to incorporate the revised approach to the timing of
the underwriting calculations that must be made and thus parallel the
definition of debt-to-income ratio. As discussed above, the Bureau has
modified its approach to residual income calculations to allow lenders
to calculate them on a net basis for the relevant monthly period,
rather than focusing in detail on the timing of inflows and outflows
within the time periods specified in Sec. 1041.5(b)(2)(ii).
The Bureau has also added into the residual income calculation the
payments under the covered short-term or longer-term balloon-payment
loan. This was a shift in structure from the proposal, but not
substance. In the proposed rule, residual income was net income minus
major financial obligations, and the result was used to make sure a
consumer could afford the loan payments and basic living expenses. Now
residual income is net
[[Page 54654]]
income minus major financial obligations and loan payments, and the
results will be used to determine whether consumers can afford basic
living expenses only. The Bureau thought it would be easier to
reposition these variables so that the numbers for which the lender
will need to make an individualized assessment--net income, major
financial obligations, and loan payments--will all be used to come up
with a single number. That will allow a lender to isolate the only
estimated figure--basic living expenses. The Bureau notes that this
``back-end'' approach is consistent with the formulation in the
Bureau's mortgage ability-to-repay requirements and the definition of
debt-to-income ratio in Sec. 1041.5(a)(2).
In addition, the Bureau added comment 5(a)(8)-1, which restates the
definition of residual income and provides further clarification on how
to project net income and major financial obligations for covered
longer-term balloon-payment loans where the relevant monthly period may
be well into the future. The Bureau states that the lender cannot
assume, absent a reasonable basis, that there will be a substantial
increase in income or decrease in major financial obligations between
consummation and the relevant monthly period. As for all loans made
under Sec. 1041.5, lenders will generally be using figures verified by
evidence of past payment amounts and income to project into the future.
The Bureau recognizes that this projection will likely become somewhat
less accurate as the time between verification evidence and the
relevant monthly period lengthens, but notes that any further
augmentations to amounts derived from verification evidence should be
made only if a lender has a reasonable basis for doing so.
5(b) Reasonable Determination Required
Overview
The Bureau proposed to prohibit lenders from making covered short-
term loans without first making a reasonable determination that the
consumer will have the ability to repay the loan according to its
terms, unless the loans were made in accordance with the conditional
exemption in proposed Sec. 1041.7. Specifically, proposed Sec.
1041.5(b)(1) would have required lenders to make a reasonable
determination of ability to repay before making a new covered short-
term loan, increasing the credit available under an existing loan, or
before advancing additional credit under a covered line of credit if
more than 180 days have expired since the last such determination.
Proposed Sec. 1041.5(b)(2) would have specified minimum elements
of a baseline methodology that would be required for determining a
consumer's ability to repay, using a residual-income analysis and an
assessment of the consumer's prior borrowing history. It would have
required the assessment to be based on projections of the consumer's
net income, basic living expenses, and major financial obligations that
are made in accordance with proposed Sec. 1041.5(c). It would have
required that, using such projections, the lender must reasonably
conclude that the consumer's residual income will be sufficient for the
consumer to make all payments under the loan and still meet basic
living expenses during the shorter of 45 days or the term of the
covered short-term loan. It would have further required that a lender
must reasonably conclude that the consumer, after making the highest
payment under the loan (typically, the last payment), will continue to
be able to meet major financial obligations as they fall due, make any
remaining payments on the loan, and meet basic living expenses for a
period of 30 additional days.\816\ Finally, proposed Sec. 1041.5(b)(2)
would have required that, in situations in which the consumer's recent
borrowing history suggests that she may have difficulty repaying a new
loan as specified in proposed Sec. 1041.6, a lender must satisfy the
requirements in proposed Sec. 1041.6 before extending credit (i.e.,
the proposed presumptions of unaffordability and prohibitions on
lending contained therein).
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\816\ Under proposed Sec. 1041.9(b)(2) and comments 9(b)(2)(i)-
1 and 9(b)(2)(ii)-1, the focus for analyzing covered longer-term
balloon-payment loans would have been on two similar periods: (1)
The month with the highest sum of loan payments; and (2) the 30 days
after the single highest payment on the loan.
---------------------------------------------------------------------------
As noted above in the general Sec. 1041.5 discussion above, the
Bureau received a significant number of comments asserting that the
proposed ability-to-repay requirements were overly burdensome. Many
commenters argued that they would lead to undue lost access to credit
and excessive costs. The Bureau also received comments asserting that
various aspects of the proposed ability-to-repay requirements were too
restrictive and, on the other hand, too vague. Some commenters
specifically argued that the reasonableness test animating the entirety
of proposed Sec. 1041.5 was overly vague and would lead to uncertainty
about the Bureau's expectations for compliance and potential challenges
for examination and enforcement. These commenters included a wide
spectrum of parties, including industry stakeholders, State banking
supervisors, and some State Attorneys General. Consumer advocates, on
the other hand, generally supported the proposed requirements while
suggesting various means of strengthening them in their view. These
comments are discussed in more detail in the discussion of individual
subparagraphs within Sec. 1041.5(b).
As stated above, the Bureau has made a number of changes to Sec.
1041.5(b) and its associated commentary in the final rule. As a general
matter, these changes have been made in response to comments and have
two primary purposes: To provide a streamlined set of requirements for
evaluating the consumer's ability to repay, which the Bureau believes
will reduce burden, and to clarify the ``reasonableness'' standard for
ability-to-repay determinations, which the Bureau believes will reduce
uncertainty about the standards for compliance. The specific changes to
the rule and commentary to achieve these purposes are found in two
areas: First, the Bureau has made substantial revisions to Sec.
1041.5(b)(2), which sets forth the specific parameters of the general
ability-to-repay determination in Sec. 1041.5(b)(1), i.e., that the
lender use the projections of net income and major financial
obligations for the relevant monthly period and calculations of debt-
to-income ratio or residual income for that same period to draw
reasonable conclusions about the consumer's ability to make the loan
payments, pay for major financial obligations, and meet basic living
expenses during specified time periods as described in final Sec.
1041.5(b)(2)(i) and (ii).
Second, the Bureau has substantially revised and expanded the
commentary to Sec. 1041.5(b) to provide additional clarity on the
expected components of a ``reasonable'' ability-to-repay determination
and how reasonableness will be evaluated through the lender's loan
performance. Specifically, comment 5(b)-2.i has been revised to provide
additional discussion of reasonable ability-to-repay determinations, in
particular, additional clarification on reasonable estimates of basic
living expenses. Comment 5(b)-2.ii now provides additional discussion
of what constitutes an unreasonable ability-to-repay determination,
including a new example involving a specific debt-to-income ratio. The
final rule also significantly expands comment 5(b)-2.iii, which in the
proposal described how evidence of the lender's objective and
comparative loan
[[Page 54655]]
performance (i.e., rates of delinquency, re-borrowing, and default) may
be evaluated to assess the reasonableness of ability-to-repay
determinations. The comment now contains a broader list of indicators
than the proposal (including default rates, re-borrowing rates,
patterns of lending across loan sequences, evidence of delinquencies
and collateral effects, and patterns of lenders ``bridging'' covered
loans with non-covered loans) and provides more detail on how the
Bureau will use the loan performance metrics to evaluate lenders'
ability-to-repay determinations. The final rule also contains a new
comment 5(b)-2.iv, which complements the expanded comment 5(b)-2.iii
and provides four detailed examples of whether the lender is making
reasonable or unreasonable ability-to-repay determinations.
The Bureau also made several changes throughout Sec. 1041.5(b) and
its commentary to implement the decision to incorporate the part of
proposed Sec. 1041.9(b) that would have imposed similar ability-to-
repay requirements for covered longer-term balloon-payment loans into
Sec. 1041.5.
Thus, as finalized, at a high level, Sec. 1041.5(b)(1) provides
that lenders must make reasonable determinations that the consumer will
have the ability to repay the loan according to its terms. Section
1041.5(b)(1)(i) applies to covered short-term loans and covered longer-
term balloon-payment loans generally, while Sec. 1041.5(b)(1)(ii)
imposes requirements to determine consumers' ability to repay
periodically for open-end lines of credit. Finalized Sec. 1041.5(b)(2)
sets forth that a lender's determination is reasonable only if it uses
a debt-to-income ratio methodology as set forth in Sec.
1041.5(b)(2)(i), or a residual income methodology as set forth in Sec.
1041.5(b)(2)(ii). Under Sec. 1041.5(b)(2), both the residual income
and debt-to-income methodologies are used to project the consumer's
finances during the relevant monthly period so that the lender in turn
can draw conclusions about the consumer's ability to repay covered
short-term loans or covered longer-term balloon-payment loans without
re-borrowing. This broader determination focuses for covered short-term
loans on whether the consumer can make payments for major financial
obligations, payments under the loan, and basic living expenses during
the shorter of the loan term or 45 days following consummation, and for
30 days after the highest payment under the loan, and for covered
longer-term balloon-payment loans, on whether the consumer can make the
same payments during the relevant monthly period and for 30 days after
the highest payment under the loan. However, as described in the
general Sec. 1041.5 discussion and the discussion of the debt-to-
income ratio definition in Sec. 1041.5(a)(2), above, the debt-to-
income ratio and residual income would not need to be calculated for
all of those periods. Rather, the lender only needs to project net
income and major financial obligations and calculate debt-to-income
ratio or residual income, as applicable, for one calendar month--the
relevant monthly period.
The final rule reduces burden in at least two ways relative to the
proposal, in addition to permitting use of a debt-to-income ratio as
well as a residual-income analysis. Under proposed Sec. 1041.5(b)(2),
the reasonable ability-to-repay determination would have required the
lender to project both the amount and timing of the consumer's net
income and major financial obligations, as well as to make separate
calculations about the consumer's finances during two distinct time
periods: First for the shorter of the term of the loan or 45 days after
consummation of the loan, and then also for 30 days after having made
the highest payment under the loan. Under the final rule, however,
lenders are instead required to make a projection about net income and
major financial obligations and calculate the debt-to-income ratio or
residual income, as applicable, during only the relevant monthly
period, which is the calendar month with the highest payments on the
loan. The debt-to-income ratio or residual income during this period is
used as a snapshot of the consumer's financial picture to draw
conclusions about the consumer's ability to pay. The lender then uses
this information to make a reasonable conclusion that the consumer has
the ability to repay the loan while meeting basic living expenses and
major financial obligations during the two specified time periods
(which are not necessarily the same as the relevant monthly period, but
may often overlap).
The nature of the calculation has changed as well. While the
proposal would have required lenders to pay particularly close
attention to the timing of income and major financial obligations in
the 30 days after the loan's highest payment, the final rule requires
that the calculations for the relevant monthly period focus on the
total amount of net income and major financial obligations. The Bureau
also notes that this simplified approach dovetails with the inclusion
of the debt-to-income ratio methodology as an alternative to residual
income. As discussed above, a debt-to-income methodology does not
permit the tracking of a consumer's individual income inflows and major
financial obligation outflows on a continuous basis over a period of
time. The same approach has also been incorporated into the definition
of residual income in Sec. 1041.5(a)(8) for purposes of making the
standards for both alternatives consistent. As explained in more detail
below, the Bureau believes that this approach will streamline the
process for making the ability-to-repay determination required under
1041.5(b) because the lender will only be required to project net
income and major financial obligations and make the calculation of
debt-to-income ratio or residual income for one calendar month. The
Bureau believes the revised approach will prove simpler for consumers
as well.\817\
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\817\ For example, both consumers and lenders will not need to
be as precise in tracking the timing of inflows and outflows within
the periods in Sec. 1041.5(b)(2)(i) and (ii).
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5(b)(1)
Proposed Rule
In proposed Sec. 1041.5(b)(1), the Bureau proposed generally that,
except as provided in proposed Sec. 1041.7, a lender must not make a
covered short-term loan or increase the credit available under a
covered short-term loan unless the lender first makes a reasonable
determination of the consumer's ability to repay the covered short-term
loan. The proposed provision would also have imposed a requirement to
determine a consumer's ability to repay before advancing additional
funds under a covered short-term loan that is a line of credit, if such
advance would occur more than 180 days after the date of a prior
required determination. Proposed Sec. 1041.9(b)(1) would have included
parallel provisions to proposed Sec. 1041.5(b)(1) as applied to
covered longer-term loans, except for certain conditional exemptions
that are discussed above in connection with final Sec. 1041.3(d)(7)
and (8).
Proposed Sec. 1041.5(b)(1) would have required the ability-to-
repay determination before a lender actually takes one of the
triggering actions. The Bureau recognized in the proposal that lenders
decline covered loan applications for a variety of reasons, including
to prevent fraud, avoid possible losses, and to comply with State law
or other regulatory requirements. Accordingly, the requirements of
proposed Sec. 1041.5(b)(1) would not have required a lender to make
the ability-to-repay determination
[[Page 54656]]
for every covered short-term loan application it receives, but rather
only before taking one of the enumerated actions with respect to a
covered short-term loan. Similarly, the Bureau explained in the
proposal that nothing in proposed Sec. 1041.5(b)(1) would have
prohibited a lender from applying screening or underwriting approaches
in addition to those required under proposed Sec. 1041.5(b) prior to
making a covered short-term loan.
Proposed Sec. 1041.5(b)(1)(ii) would have provided that, for a
covered short-term loan that is a line of credit, a lender must not
permit a consumer to obtain an advance under the line of credit more
than 180 days after the date of a prior required determination, unless
the lender first makes a new reasonable determination that the consumer
has the ability to repay the covered short-term loan. As the Bureau
wrote in the proposal, under a line of credit, a consumer typically can
obtain advances up to the maximum available credit at the consumer's
discretion, often long after the covered loan was consummated. Each
time the consumer obtains an advance under a line of credit, the
consumer becomes obligated to make a new payment or series of payments
based on the terms of the covered loan. But when significant time has
elapsed since the date of a lender's prior required determination, the
facts on which the lender relied in determining the consumer's ability
to repay may have changed significantly. As the Bureau explained in the
proposal, during the Bureau's outreach to industry, the Small Dollar
Roundtable urged the Bureau to require a lender to periodically make a
new reasonable determination of ability to repay in connection with a
covered loan that is a line of credit. The Bureau stated in the
proposal that it believed that the proposed requirement to make a new
determination of ability to repay for a line of credit 180 days
following a prior required determination appropriately balanced the
burden on lenders and the protective benefit for consumers.
Reasonable determination. Under Sec. 1041.5(b)(1) of the proposed
rule, a lender would have to make a reasonable determination that a
consumer will be able to repay a covered short-term loan according to
its terms. A consumer would have the ability to repay a covered short-
term loan according to its terms, under the proposed rule, only if the
consumer is able to make all payments under the covered loan as they
fall due while also making payments under the consumer's major
financial obligations as they fall due and continuing to meet basic
living expenses during the shorter of the term of the loan or 45 days
following consummation. The proposed rule would have also required that
the lender determine if, for a period of 30 days after making the
highest payment on the loan, the consumer will be able to pay major
financial obligation as they fall due, make any remaining payments
under the loan, and meet basic living expenses.\818\
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\818\ Under proposed Sec. 1041.9(b)(2) and comments 9(b)(2)(i)-
1 and 9(b)(2)(ii)-1, the focus for analyzing covered longer-term
balloon-payment loans would have been on two similar periods: (1)
The month with the highest sum of loan payments; and (2) the 30 days
after the single highest payment on the loan.
---------------------------------------------------------------------------
Proposed comment 5(b)-1 would have provided an overview of the
baseline methodology that would be required as part of a reasonable
determination of a consumer's ability to repay in proposed Sec. Sec.
1041.5(b)(2) and (c) and Sec. 1041.6.
As noted in the general discussion of proposed Sec. 1041.5(b),
above, proposed comment 5(b)-2 would have identified standards for
evaluating whether a lender's ability-to-repay determinations under
proposed Sec. 1041.5 are reasonable. It would have clarified the
minimum requirements of a reasonable ability-to-repay determination;
identified assumptions that, if relied on by the lender, would render a
determination not reasonable; and established that the overall
performance of a lender's covered short-term loans is evidence of
whether the lender's determinations for those loans are reasonable.
The Bureau explained in the proposal that the proposed standards
would not have imposed bright-line rules prohibiting covered short-term
loans based on fixed mathematical ratios or similar criteria. Moreover,
the Bureau stated that it did not anticipate that a lender would need
to perform a manual analysis of each prospective loan to determine
whether it meets all of the proposed standards. Instead, the Bureau
explained that each lender would be required under proposed Sec.
1041.18 to develop and implement policies and procedures for approving
and making covered loans in compliance with the proposed standards and
based on the types of covered loans that the lender makes. The Bureau
noted in the proposal that a lender would then apply its own policies
and procedures to its underwriting decisions, which the Bureau
anticipated could be largely automated for the majority of consumers
and covered loans.
Minimum requirements. Proposed comment 5(b)-2.i set out some of the
specific respects in which a lender's determination must be reasonable
under the proposed rule with respect to covered short-term loans. For
example, it noted that the determination must include the applicable
determinations provided in proposed Sec. 1041.5(b)(2), be based on
reasonable projections of a consumer's net income and major financial
obligations in accordance with proposed Sec. 1041.5(c) and be based on
reasonable estimates of a consumer's basic living expenses (which were
further clarified under proposed comment 5(b)-4). It would also have to
be consistent with the lender's written policies and procedures
required under proposed Sec. 1041.18(b) and must be grounded in
reasonable inferences and conclusions in light of information the
lender is required to obtain or consider.
Proposed comment 5(b)-2.i would have clarified that for a lender's
ability-to-repay determination to be reasonable, the lender must
appropriately account for information known by the lender, whether or
not the lender is required to obtain the information under proposed
Sec. 1041.5, that indicates that the consumer may not have the ability
to repay a covered short-term loan according to its terms. For example,
the Bureau explained, proposed Sec. 1041.5 would not have required a
lender to inquire about a consumer's individual transportation or
medical expenses, but if the lender learned that a particular consumer
had a transportation or recurring medical expense that was dramatically
in excess of the amount the lender used to estimate basic living
expenses for consumers generally, proposed comment 5(b)-2.i would have
clarified that the lender could not ignore that fact. The Bureau wrote
in the proposal that, instead, it would have to consider the
transportation or medical expense and then reach a reasonable
determination that the expense did not negate the lender's otherwise
reasonable ability-to-repay determination.
For covered longer-term loans, proposed comment 9(b)-2.i would have
paralleled comment 5(b)-2.i in all respects except for the addition of
proposed comment 9(b)-2.i.F, would have provided that for covered
longer-term loans, the reasonable determination must include
appropriately accounting for the possibility of volatility in the
consumer's income and basic living expenses during the term of the
loan, with a cross-reference to proposed comment 9(b)(2)(i)-2.
Determinations that are not reasonable. Proposed comment 5(b)-2.ii
would have provided an example of an ability-to-repay determination
that is not reasonable for covered short-term loans. The example, in
proposed
[[Page 54657]]
comment 5(b)-2.ii.A, was a determination that relies on an assumption
that the consumer will obtain additional consumer credit to be able to
make payments under the covered short-term loan, to make payments under
major financial obligations, or to meet basic living expenses. The
Bureau stated in the proposal that it believed that a consumer whose
net income would be sufficient to make payments under a prospective
covered short-term loan, to make payments under major financial
obligations, and to meet basic living expenses during the applicable
period only if the consumer supplements that net income by borrowing
additional consumer credit is a consumer who, by definition, lacks the
ability to repay the prospective covered short-term loan.
Similarly, proposed comment 9(b)-2.ii would have included two
examples of unreasonable ability-to-repay determinations with respect
to covered longer-term loans. The first example, proposed comment 9(b)-
2.ii.A, was a parallel example to proposed comment 5(b)-2.ii.A. The
second example, in proposed comment 5(b)-2.ii.B, would have clarified
that an unreasonable ability-to-repay determination is one that relies
on an assumption that a consumer will accumulate savings while making
one or more payments under a covered longer-term loan and that, because
of such assumed future savings, will be able to make a subsequent loan
payment under a covered longer-term loan. The Bureau explained in the
proposal that, like the prior comment, the Bureau is including this
comment in an abundance of caution lest some lenders seek to justify a
decision to make, for example, a multi-payment, interest-only loan with
a balloon payment on the ground that during the interest-only period
the consumer will be able to accumulate savings to cover the balloon
payment when due. The Bureau explained further in the proposal that a
consumer who finds it necessary to seek a covered longer-term loan
typically does so because she has not been able to accumulate
sufficient savings while meeting her existing obligations and expenses.
The Bureau noted in the discussion in the proposal's Market Concerns--
Longer-Term Loans section regarding the high incidence of re-borrowing
and refinancing coinciding with balloon payments under longer-term
loans strongly and stated that it suggests that consumers are not, in
fact, able to accumulate sufficient savings while making lower payments
to then be able to make a balloon payment. The Bureau wrote in the
proposal that a projection that a consumer will accumulate savings in
the future is purely speculative, and basing an ability-to-repay
determination on such speculation presents an unacceptable risk of an
erroneous determination. The Bureau explained that believed that basing
a determination of a consumer's ability to repay on such speculative
projections would not be reasonable.
Performance of covered loans as evidence. The Bureau stated in the
proposal that in determining whether a lender has complied with the
requirements of proposed Sec. 1041.5, there is a threshold question of
whether the lender has carried out the required procedural steps, for
example by obtaining consumer statements and verification evidence,
projecting net income and payments under major financial obligations,
and making determinations about the sufficiency of a consumer's
residual income. The Bureau explained that in some cases, a lender
might have carried out these steps but still have violated Sec. 1041.5
by making determinations that are facially unreasonable, such as if a
lender's determinations assume that the amounts a consumer needs to
meet basic living expenses are clearly insufficient for that purpose.
The Bureau explained further in the proposal that, in other cases, the
reasonableness or unreasonableness of a lender's determinations might
be less clear. Accordingly, proposed comment 5(b)-2.iii provided that
evidence of whether a lender's determinations of ability to repay for
covered short-term loans are reasonable may include the extent to which
the lender's determinations subject to proposed Sec. 1041.5 result in
rates of default, delinquency, and re-borrowing for covered short-term
loans that are low, equal to, or high, as compared to the rates of
other lenders making similar covered loans to similarly situated
consumers.
The Bureau stated in the proposal that proposed comment 5(b)-2.iii
would not mean that a lender's compliance with the requirements of
proposed Sec. 1041.5 for a particular loan could be determined based
solely on the performance of that loan. Nor, the Bureau stated in the
proposal, would this proposed comment mean that comparison of the
performance of a lender's covered short-term loans with those of other
lenders could be the sole basis for determining whether that lender's
underwriting complies with the requirements of proposed Sec. 1041.5.
The Bureau wrote in the proposal that, for example, one lender may have
default rates that are much lower than the default rates of other
lenders because it uses aggressive collection tactics, not because its
determinations of ability to repay are reasonable. The Bureau wrote
that similarly, the fact that one lender's default rates are similar to
the default rates of other lenders does not necessarily indicate that
their determinations of ability to repay are reasonable; the similar
rates could instead reflect that their respective determinations of
ability to repay are similarly unreasonable. The Bureau wrote in the
proposal that it believed, however, that such comparisons would provide
important evidence that, considered along with other evidence, would
facilitate evaluation of whether a lender's ability-to-repay
determinations are reasonable.
The Bureau elaborated in the proposal that for example, a lender
may use estimates for a consumer's basic living expenses that initially
appear unrealistically low, but if the lender's determinations
otherwise comply with the requirements of proposed Sec. 1041.5 and
otherwise result in covered short-term loan performance that is
materially better than that of peer lenders, the covered short-term
loan performance may help show that the lender's determinations are in
fact reasonable. Similarly, the Bureau wrote, an online lender might
experience default rates significantly in excess of those of peer
lenders, but other evidence may show that the lender followed policies
and procedures similar to those used by other lenders and that the high
default rate resulted from a high number of fraudulent applications.
The Bureau stated in the proposal that, on the other hand, if consumers
experience systematically worse rates of default, delinquency, and re-
borrowing on covered short-term loans made by one lender, compared to
the rates of other lenders making similar loans, that fact may be
important evidence of whether that lender's estimates of basic living
expenses are, in fact, unrealistically low and therefore whether the
lender's ability-to-repay determinations are reasonable.
With respect to covered longer-term loans, the discussion in the
proposal's section-by-section analysis for proposed Sec. 1041.9(b) and
comment 9(b)-2.iii paralleled the discussion above.
Payments under the covered short-term loan. Proposed comment 5(b)-3
noted that a lender is responsible for calculating the timing and
amount of all payments under the covered short-term loan. The Bureau
explained in the proposal that the timing and amount of all loan
payments under the covered short-term loan were essential
[[Page 54658]]
components of the required reasonable determination of a consumer's
ability to repay under proposed Sec. 1041.5(b)(2)(i), (ii), and (iii).
Calculation of the timing and amount of all payments under a covered
loan was also necessary to determine which component determinations
under proposed Sec. 1041.5(b)(2)(i), (ii), and (iii) apply to a
particular prospective covered loan. Proposed comment 9(b)-3 mirrored
the discussion in comment 5(b)-3 with regard to payments under the
covered longer-term loan.
Basic living expenses. A lender's ability-to-repay determination
under proposed Sec. 1041.5(b) would have been required to account for
a consumer's need to meet basic living expenses during the applicable
period, while also making payments for major financial obligations and
payments under a covered short-term loan. The Bureau explained in the
proposal that if a lender's ability-to-repay determination did not
account for a consumer's need to meet basic living expenses, and
instead merely determined that a consumer's net income is sufficient to
make payments for major financial obligations and for the covered
short-term loan, the Bureau believed the determination would greatly
overestimate a consumer's ability to repay a covered short-term loan
and would be unreasonable. The Bureau further explained that doing so
would be the equivalent of determining, under the Bureau's ability-to-
repay rule for residential mortgage loans, that a consumer has the
ability to repay a mortgage from income even if that mortgage would
result in a debt-to-income ratio of 100 percent. The Bureau stated in
the proposal that it believed there would be nearly universal consensus
that such a determination would be unreasonable.
However, the Bureau recognized in the proposal that in contrast
with payments under most major financial obligations, which the Bureau
stated it believes a lender can usually ascertain and verify for each
consumer without unreasonable burden, it would be extremely challenging
to determine a complete and accurate itemization of each consumer's
basic living expenses. Moreover, the Bureau stated, a consumer may be
somewhat more able, at least in the short-run, to reduce some
expenditures that do not meet the proposed definition of major
financial obligations. For example, the Bureau noted that a consumer
may be able for a period of time to reduce commuting expenses by ride
sharing.
Accordingly, the Bureau did not propose to prescribe a particular
method that a lender would be required to use for estimating an amount
of funds that a consumer needs to meet basic living expenses for an
applicable period. Instead, proposed comment 5(b)-4 stated the
principle that whether a lender's method complies with the proposed
Sec. 1041.5 requirement for a lender to make a reasonable ability-to-
repay determination depends on whether it is reasonably designed to
determine whether a consumer would likely be able to make the loan
payments and meet basic living expenses without defaulting on major
financial obligations or having to rely on new consumer credit during
the applicable period.
Proposed comment 5(b)-4 provided a non-exhaustive list of methods
that may be reasonable ways to estimate basic living expenses. The
first method was to set minimum percentages of income or dollar amounts
based on a statistically valid survey of expenses of similarly situated
consumers, taking into consideration the consumer's income, location,
and household size. The Bureau explained in the proposal that this
example was based on a method that several lenders had told the Bureau
they use in determining whether a consumer will have the ability to
repay a loan and is consistent with the recommendations of the Small
Dollar Roundtable. The Bureau noted that the Bureau of Labor Statistics
conducts a periodic survey of consumer expenditures that may be useful
for this purpose.
The second method was to obtain additional reliable information
about a consumer's expenses other than the information required to be
obtained under proposed Sec. 1041.5(c) to develop a reasonably
accurate estimate of a consumer's basic living expenses. The Bureau
explained in the proposal that this example was not meant to suggest
that a lender would be required to obtain this information, but was
intended to clarify that doing so may be one effective method of
estimating a consumer's basic living expenses. The Bureau wrote that
the method described in the second example may be more convenient for
smaller lenders or lenders with no experience working with
statistically valid surveys of consumer expenses, as described in the
first example. The third example was any method that reliably predicts
basic living expenses. The Bureau wrote that it was proposing to
include this broadly phrased example to clarify that lenders may use
innovative and data-driven methods that reliably estimate consumers'
basic living expenses, even if the methods are not as intuitive as the
methods in the first two examples. The Bureau wrote that it expected to
evaluate the reliability of such methods by taking into account the
performance of the lender's covered short-term loans in absolute terms
and relative to other lenders, as discussed in proposed comment 5(b)-
3.iii.
Proposed comment 5(b)-4 also provided a non-exhaustive list of
unreasonable methods of determining basic living expenses. The first
example was a method that assumes that a consumer needs no or
implausibly low amounts of funds to meet basic living expenses during
the applicable period and that, accordingly, substantially all of a
consumer's net income that is not required for payments for major
financial obligations is available for loan payments. The second
example was a method of setting minimum percentages of income or dollar
amounts that, when used in ability-to-repay determinations for covered
short-term loans, have yielded high rates of default and re-borrowing,
in absolute terms or relative to rates of default and re-borrowing of
other lenders making covered short-term loans to similarly situated
consumers.
Proposed comment 9(b)-4 would have paralleled the language of
proposed comment 5(b)-4, and the relevant discussion in the proposal's
section-by-section analysis regarding this comment mirrored the
discussion above.
Comments Received
The Bureau received a significant amount of comments on the
standard set forth in Sec. 1041.5(b)(1). The Bureau first addresses
comments focused on the general ability-to-repay requirement itself,
and then separately discusses comments received regarding the standards
for assessing reasonableness of the ability-to-repay requirements,
including proposed commentary in 5(b)-2.
General ability-to-repay requirement. A wide spectrum of commenters
wrote in support of the ability-to-repay requirement as a general
matter, including a group of United States Senators, a number of State
Attorneys General, many local and State elected officials, civil rights
organizations, faith groups and individual clergy members, other
advocacy organizations, numerous individual consumers writing as part
of organized comment campaigns, and other commenters. Relatedly,
consumer groups agreed with the Bureau's basic premise in the proposal
that true ability to repay on a covered loan is not determined merely
by whether a consumer repays the loan, but rather by whether the
consumer has the ability to repay the loan, major financial
[[Page 54659]]
obligations, and basic living expenses without the need to re-borrow.
In fact, some consumer groups urged Bureau to revise the general
ability-to-repay requirement in Sec. 1041.5(b)(1) to read ``ability to
repay the loan according to its terms while meeting other obligations
and expenses and without re-borrowing'' to more expressly reflect that
the standard was not just focused on lenders' ability to collect
payments from consumers no matter what the downstream consequences.
These commenters cited statutory and regulatory language as precedent,
such as language from HOEPA and the Federal Reserve Board's higher-
priced mortgage loan rule.
Commenters who criticized the general reasonableness standard in
proposed Sec. Sec. 1041.5(b)(1) and 1041.9(b)(1) were split as to
whether it was too vague, particularly as to the use of loan
performance as a factor of the analysis, or too prescriptive,
particularly in mandating specific upfront procedures. In one camp,
several commenters objected generally to the use of a reasonableness
standard, arguing that it is overly vague and would create uncertainty
for compliance and examination. A group of State banking regulators
commented that the proposed ability-to-repay requirement would be
difficult to enforce because of the uncertain standards for making a
reasonable determination. Other commenters criticized the proposal for
not specifying the expected level of residual income that would be
necessary for a determination to be reasonable. Some commenters
referred to the lack of clarity on both front-end and performance
standards as creating a ``gotcha'' regime.
On the other hand, some commenters argued that the final rule
should be less prescriptive and designed to provide flexibility for
innovation. A lender and a policy and research organization both argued
that the Bureau's rule should embrace a ``sandbox'' or pilot approach
to the ability-to-repay requirements that would test policy
interventions in the market before enshrining them into specific rules.
One of these commenters suggested that a sandbox could, for example, be
used to ``test out and `right-size''' a payment-to-income or payment-
to-deposits approach to underwriting. The other suggested that the
Bureau establish a process for approving data sources used in
underwriting.
Relatedly, several commenters argued that the rule should embrace a
principles-based approach to the ability-to-repay requirements which
leaves more flexibility to lenders on the process and more closely
scrutinizes the outcomes. One commenter cited its experience lending in
the United Kingdom and discussed how the U.K. Financial Conduct
Authority (FCA) in recent years has imposed regulations on small-dollar
loans that are non-prescriptive. This lender described how it had
successful implemented the FCA regulations and encouraged the Bureau to
consider such an approach in this rulemaking.
A number of commenters argued that the Bureau should create an
exception or safe harbor to the rule for various scenarios, including
for unusual, non-recurring, or emergency expenses. A group of State
Attorneys General writing in opposition to the proposal questioned the
Bureau's reasoning for declining to create such an exemption. They
argued that creating an exception for unusual circumstances--such as
where a consumer has a documented medical emergency or a necessary
furnace repair during the winter--would be no more difficult to
implement than the proposal's other requirements such as income and
expense verification. They argued that such an exemption would be
invoked rarely, and also would provide States with more flexibility to
impose their own requirements. They argued that failing to provide for
an exception is ``particularly incongruous'' given that the proposal
would require lenders to consider unusual expenses in determining a
consumer's ability to repay, citing the section-by-section analysis
describing proposed comment 5(b)-2.i.E.
Several commenters argued that the Bureau had failed to take into
account a factor that lenders are currently using in their basic
underwriting models--willingness to repay. These commenters argue that
willingness to repay is often indicative of whether a consumer will
default, and several commenters provided data regarding default rates.
Several commenters discussed proposed comment 5(b)-2.i.E, which
would have clarified that a reasonable determination includes the
lender appropriately accounting for information known to the lender
indicating the consumer may not have the ability to repay, even if the
lender is not required to obtain the information. Consumer advocates
urged that this language be included in the regulatory text. They also
asked that the language be broadened to provide that ``information
known to the lender'' include the following: (1) Information on the
national consumer report or registered information system reflecting
delinquencies or defaults on covered loans, other forms of credit or
debt obligations, basic living expenses within the past year; and (2) a
pattern of re-borrowing known to the lender. A group of State Attorneys
General commenting on the proposal interpreted this proposed comment to
mean the rule would require lenders to consider unusual expenses in
determining a consumer's ability to repay.
With regard to treatment of open-end lines of credit specifically
under proposed Sec. 1041.5(b)(1)(ii), consumer groups commenting on
the rule also urged the Bureau to treat each advance on a covered loan
that is an open-end line of credit as a new loan for purposes of the
ability-to-repay requirement. They expressed concern about the risks of
open-end credit lines that are covered loans and believed the rule
should have stricter requirements to prevent evasion and debt traps.
One commenter, a State trade group representing open-end credit
providers, took the opposite view. This commenter argued that the
Bureau should exempt open-end lines of credit from the proposal and, in
the alternative, that the Bureau should either address open-end lines
of credit in a separate rulemaking along with credit cards or apply the
requirements of the CARD Act in connection with open-end lines of
credit that are covered in this rule. This commenter also argued that
the condition under Sec. 1041.5(b)(1)(ii) imposing a requirement to
conduct an additional ability-to-repay determination after 180 days
would contravene the definition of open-end credit under Regulation Z,
12 CFR 1026.2(a)(20), which has a replenishment element. This commenter
also argued that the proposal did not address the parameters for when
the open-end credit provider can increase the amount of the line or
when the consumer no longer has the ability to repay amounts
outstanding after 180 days due to a deterioration of the consumer's
income or increase in expenses.
Performance of a lender's loans as evidence of ability to repay. As
discussed briefly above, the Bureau received a substantial number of
comments focusing specifically on proposed comment 5(b)-2.iii, which
would have clarified that certain portfolio-wide backward-looking
metrics of loan performance such as a lender's re-borrowing and default
rates, may be indicative of whether a lender's determinations of
ability to repay are reasonable.
Some commenters objected to the use of loan performance data, for
instance by arguing that the use of performance metrics would unfairly
penalize lenders for choices made by consumers. A
[[Page 54660]]
number of commenters also argued that use of defaults or other metrics
as measures of reasonableness could lead to unintended consequences,
like creating a heightened incentive to aggressively collect delinquent
loans. Several commenters also took particular issue with the Bureau's
use of defaults as a performance metric.
Other commenters did not disagree that loan performance was
potentially relevant to the question of whether a lender had made a
reasonable determination of a consumer's ability to repay the loan, but
urged the Bureau to provide more concrete guidance. Several commenters
encouraged the Bureau to set objective performance metric standards
rather than relying on clarifying principles in commentary. For
instance, a group of consumer advocates wrote that the Bureau should
set a 5 percent default rate for vehicle title loans and payroll
deduction loans and a 10 percent default rate for payday loans as
thresholds that, if exceeded by the lender on a portfolio basis, would
trigger heightened scrutiny of the lender's practices to determine
whether the ability-to-repay determinations are unreasonable.\819\ They
also suggested that lenders whose loan performance exceeds those
benchmarks would potentially be subject to enforcement actions or other
required steps to mitigate such as refunding late fees, waiving back
interest, or reducing loan principal. Another commenter similarly
argued for the Bureau to treat lenders with a portfolio default rate on
covered loans above 10 percent with heightened scrutiny. Other
commenters argued that the Bureau should add more examples about the
patterns of re-borrowing that would be indicative of unreasonable
ability-to-repay determinations.
---------------------------------------------------------------------------
\819\ In justifying the suggested default rate thresholds,
consumer advocates made several arguments: That the 10 percent
default rate threshold for payday loans was double the default rate
chosen by the Bureau in the proposed conditional exemption for
covered longer-term loans under proposed Sec. 1041.12; that
mainstream credit products have single-digit default rates; that the
leveraged payment mechanism substantially lowers the default rate
lenders otherwise would experience; and, that vehicle title loans
present unique harms justifying an even lower threshold.
---------------------------------------------------------------------------
Some commenters actively advocated to use particular metrics. One
commenter, a research and policy organization, generally supported the
approach to use default data as a metric for evaluating ability to
repay, stating that the clearest proof of effective underwriting
processes should be found in consumer repayment outcome data rather
than by assessing inputs into the product design alone. This commenter
also argued that first-payment defaults would be a key indicator for
the success of an underwriting model because absent fraud they clearly
points to a mis-calibration in underwriting. Others argued that the
Bureau should look to see whether consumers met expenses during the 30
or 60 days following the highest or last payment. Consumer groups also
provided a list of additional performance metrics that they urged the
Bureau to monitor as indicative of deficient ability-to-repay analyses,
such as failed payments, late payments, requests for forbearance,
aggressive collection practices, indications of consumers' overdrafting
or having trouble paying other expenses, and the extent of consumer
injury (which they argued was influenced by a number of factors
including late fees, debt collection practices, the interest rate and
for how long interest was charged, and whether the lender sells or sues
on the debt).
In contrast, other commenters who generally supported the proposal
and the reasonableness approach criticized the proposed comment 5(b)-
2.iii for very different reasons and in particularly strong terms.
These commenters objected to the language in the proposed comment
suggesting that a review of the comparative performance metrics among
lenders would be relevant to the evaluation of ability to repay. They
suggested that this approach would perpetuate high default or
delinquency rates by incentivizing lenders to achieve only marginally
better results than their competitors rather than meaningfully improved
performance. A group of consumer advocates wrote that this provision
was ``among the most dangerous parts of the proposal'' and ``strongly
impl[ies] that the metric for evaluating loan performance is simply not
to be the worst of the worst.'' The commenters noted the Bureau's
statements in the section-by-section analysis for the proposal that
comparative performance metrics could not be the sole basis for a
reasonableness determination and that factors such as aggressive
collection efforts could be the reason for one lender's default rates
to appear lower than another, rather than ability to repay, but they
argued that such statements were cautionary and would ``be exploited.''
Other commenters, including a large number of individual commenters
writing as part of organized commenter campaigns, expressed concern
that this provision would be a ``business as usual loophole.'' However,
one commenter expressed support for the language regarding comparative
performance metrics, arguing that such an analysis of comparative loan
performance would help control for macroeconomic shifts that could
affect large groups of consumers similarly.
Final Rule
The Bureau finalized the text of Sec. 1041.5(b)(1) with
adjustments to apply it to covered longer-term balloon-payment loans
and a change to the time period for re-underwriting open-end lines of
credit from every 180 days to every 90 days. The justification for this
latter change is discussed below in the context of the Bureau's
response to comments asking for additional protections regarding open-
end credit products covered by the proposal. The Bureau concluded that
it was not necessary to further revise the regulation text in Sec.
1041.5(b)(1) to refer expressly to consumers repaying the covered loan
while meeting other obligations and expenses and without re-borrowing,
as these elements are expressly addressed in various other parts of the
regulation text and commentary.
The Bureau also made minor adjustments to the regulation text and
commentary for clarity and conformity, such as to reflect policy
decisions discussed elsewhere to permit lenders to analyze either a
consumer's debt-to-income ratio or residual income for the relevant
monthly period and to cross reference other relevant commentary.\820\
In addition, the Bureau is making several substantive changes to the
commentary to address various concerns raised in comments on the
proposal.
---------------------------------------------------------------------------
\820\ For example, the Bureau revised final comment 5(b)-3 to
reflect that the calculation of payments under the covered short-
term loan or covered longer-term balloon loan focuses on the
payments due during the relevant monthly period.
---------------------------------------------------------------------------
Specific elements of the ability-to-repay analysis. The Bureau made
a number of substantive changes to the commentary for final Sec.
1041.5(b)(1)(i) to address specific concerns about specific elements of
the ability-to-repay test.
First, with regard to basic living expenses, the Bureau has
significantly revised comment 5(b)-2.i.C to elaborate on the estimation
methods posited in the proposal. The Bureau did so in part in response
to comments and also because of the Bureau's decision to consolidate
this comment with proposed comment 5(b)-4. The Bureau is not finalizing
proposed comment 5(b)-4 because it believes it had some redundancy with
other commentary language on basic living expenses, would have added
complexity, and would have created some tension with comment 5(b)-2.i
and -2.ii. The Bureau
[[Page 54661]]
has chosen to harmonize the language regarding reasonable estimates of
basic living expenses into one comment under Sec. 1041.5(b).
Specifically, comment 5(b)-2.i.C now has two subparagraphs. Comment
5(b)-2.i.C.1 emphasizes that the final rule does not specify a
particular method that must be used to estimate basic living expenses,
and that the lender is not required to itemize them for individual
consumers. The comment goes on to clarify that a lender may instead
arrive at estimates for the amount needed to cover the six categories
of costs identified in Sec. 1041.5(a)(1) based upon such sources as
the lender's own experience in making covered short-term loans or
covered longer-term balloon-payment loans to similarly-situated
consumers, reasonably reliable information available from government
surveys or other publications about the basic living expenses of
similarly-situated consumers, or some combination thereof. The Bureau
disagrees with commenters who argued that the Bureau should require
itemization, as that would create potentially substantial burdens for
lenders and consumers and make automation harder.
With regard to reliance on government sources, the comment also
specifically clarifies that it would be reasonable for the lender to
use data about the amounts spent on the six categories of basic living
expenses identified in comment 5(a)(1)-2 from the IRS Collection
Financial Standards or the CEX to develop non-individualized estimates
of basic living expenses. However, the comment also notes that in using
the data from those sources to estimate the amount spent on a
particular category, the lender may make reasonable adjustments to
arrive at an estimate of basic living expenses, for instance where a
data source's information on a particular type of basic living expenses
overlaps with a type of major financial obligation as defined in Sec.
1041.5(a)(3) or where a source groups expenses into different
categories than comment 5(a)(1)-2.
As discussed above in connection with the final commentary to Sec.
1041.5(a)(1), the Bureau intends to make clear that lenders have
flexibility to make reasonable non-individualized estimates of basic
living expenses and that, in doing so, they can rely on their own
experience in estimating basic living expenses for similarly-situated
consumers or upon governmental survey or data sources, some of which
are now listed as examples. At the same time, for the reasons discussed
above, while the Bureau believes that it would be reasonable for
lenders to rely on either the IRS Collection Financial Standards or the
Consumer Expenditure Survey, there is reason to believe that both may
be over-inclusive or reflect some differences as to expense
categorization. The Bureau believes it is therefore appropriate to
emphasize that further reasonable adjustments are permitted to
estimates that are primarily based on such sources. These changes are
in part responsive to comments asserting that the standards in proposed
comment 5(b)-4, which were consolidated with this comment, were too
vague.
The Bureau also has not finalized language in comment 5(b)-4 that
would have referenced an example of reasonable basic living expense
estimates being based on a survey taking into consideration a
consumer's income, household size, and location. The Bureau received a
number of questions and comments about these categories, including
those suggesting that consideration of location and household size
would implicate fair lending law issues. As noted earlier, the Bureau
does not believe estimates based on these categories would raise fair
lending law issues, and the Bureau believes it will be difficult for
lenders to arrive at reasonable estimates that apply without regard to
household size or, for lenders operating in multiple States, without
regard to differences in living costs. However, the Bureau believes
including commentary language of this sort might suggest that the final
rule requires more precision in estimating than the Bureau intends.
The Bureau has also added a comment 5(b)-2.i.C.2 regarding basic
living expenses. This comment provides that if the lender is conducting
an individualized estimate by itemizing the consumer's basic living
expenses (which earlier commentary clarifies the lender is not required
to do), the lender may reasonably consider other factors specific to
the consumer that are not required to be projected under Sec.
1041.5(c). The comment clarifies that this could include whether other
persons are regularly contributing toward the payment of basic living
expenses. The comment clarifies that the lender can consider such
consumer-specific factors only when it is reasonable to do so, and
further notes that it is not reasonable for the lender to consider
whether other persons are contributing toward the consumer's payment of
basic living expenses if the lender is also separately including in its
projection of net income any income of another person to which the
consumer has a reasonable expectation of access.
As discussed above, the Bureau has made these changes to this
comment based on comments to the proposal arguing that lenders should
be permitted to account for the fact that other persons besides
consumers themselves sometimes contribute to pay basic living expenses.
The Bureau notes that it is permitting consideration of consumer-
specific factors only if the lender is making an individualized
determination. The Bureau believes it would be unworkable operationally
and also potentially create a loophole if consumer-specific factors
were permitted to be considered when the lender makes non-
individualized estimates of basic living expenses. For example, the
Bureau would be concerned if lenders developed a model for estimating
basic living expenses that applied to all of their consumers or
relevant subsets of them, and the model assumed that a percentage of
basic living expenses is always paid by persons other than the
consumer. The comment also reflects the Bureau's policy concern that if
lenders were able to count both the income of another person to which
the consumer has a reasonable expectation of access and assume that the
consumer's basic living expenses were being paid by that same person,
it could result in a double-counting problem and an artificial
inflation of net income (or deflation of basic living expenses); that
is, the same income of another person to which the consumer claims
access could be the income being used to pay for the consumer's
expenses. The Bureau believes it is a reasonable response to the
comments asking for flexibility on this point to permit lenders to do
one or the other--consider payment of basic living expenses by another
person toward the estimate, or count as net income the other person's
income to which the consumer has a reasonable expectation of access.
The Bureau also has decided not to finalize comment 5(b)-2.i.E,
which would have stated that for a reasonable determination of ability
to repay, the lender must appropriately account for information known
by the lender whether or not the lender is required to obtain the
information. The Bureau believes that this language created potential
tension with other commentary indicating that lenders need not
individually analyze basic living expenses because it would potentially
have required substantial individual follow up that would negate the
decision to allow lenders to rely on survey data and other generalized
sources. The Bureau believes there is
[[Page 54662]]
even more potential for this risk under the final rule, given that it
now also allows lenders to rely on their historical experiences. The
Bureau is therefore not finalizing the comment, but notes that it has
had added other commentary as discussed separately below clarifying
that lenders must, for example, take into account major financial
obligations that consumers list on their written statements even if
those items are not reported on other sources. The Bureau believes that
this more tailored guidance in particular circumstances will be more
helpful to lenders in reconciling information from multiple sources. As
such, the Bureau is declining the consumer groups' suggestion to embed
concepts into the rule that were discussed in the proposal's section-
by-section analysis for this proposed comment.
General reasonableness standard. More generally, with regard to
comments that expressed broader concerns about prescriptiveness,
vagueness, and flexibility under Sec. 1041.5(b)(1)'s reasonableness
standard, the Bureau has made a number of adjustments to the
commentary. First, the Bureau has expanded comment 5(b)-2.ii to provide
more examples of front-end underwriting that would not meet the
reasonableness standard. In addition, as discussed separately below,
the Bureau added substantial additional text to comments 5(b)-2.iii
regarding consideration of loan performance and added a new comment
5(b)-2.iv with illustrative examples of how the factors in 5(b)-2.iii
would be used to evaluate the reasonableness of ability-to-repay
determinations on the back end. The latter two comments are discussed
separately below.
With regard to comment 5(b)-2.ii, the Bureau has added a new
subparagraph B to clarify that a lender's determination would not be
reasonable if it assumed a consumer needs implausibly low amounts or
percentages of funds to meet basic living expenses. In the proposal,
this language appeared in proposed comment 5(b)-4.ii.A, but the Bureau
moved it for purposes of the final rule and revised it to address an
example where a lender makes an unreasonable ability-to-repay
determination by making a loan to consumer with a 90 percent debt-to-
income ratio. The Bureau is adding this example in part to address the
comments that the proposal did not provide any indication of what
thresholds would be considered sufficient for purposes of a reasonable
ability-to-repay determination. The Bureau believes that a debt-to-
income ratio in the range of 90 percent would not leave sufficient net
income to cover consumers' basic living expenses for purposes of this
requirement.
However, more generally, the Bureau is finalizing the general
framework of considering whether an entity's ability-to-repay
determinations are reasonable. Reasonableness is a widely used legal
concept in both State and Federal law, and is what Congress required
with respect to the underwriting of mortgages, and so the Bureau
believes the standard in the final rule--which, again, has been revised
to include a substantial amount of new commentary clarifying how the
reasonableness of ability-to-repay determinations will be evaluated--
should provide a sufficiently discernible standard.
The Bureau also declines to set more specific parameters about the
level of residual income or debt-to-income ratio that would be
considered reasonable or unreasonable for purposes of Sec. 1041.5(b).
Outside of extreme cases such as a 90 percent debt-to-income ratio, the
Bureau believes that with regard to individual determinations of
ability to repay, the acceptable level of residual income or debt-to-
income ratio for a reasonable determination will depend on the
circumstances. This question may also depend on whether lenders are
using across-the-board DTI or residual income-thresholds or whether
they are sorting their consumers into different categories and applying
different thresholds for acceptable levels of DTI or residual income
for consumers within those categories. There may be some debt-to-income
thresholds that are sufficiently low that it would be reasonable to use
a uniform debt-to-income threshold for all of the lender's customers,
whereas as thresholds get higher it may be reasonable to apply the
threshold to only subsets of the lender's customers (such as customers
in higher income tiers). The overarching principle, of course, is that
the lender must make reasonable determinations of consumers' ability to
repay. Moreover, as discussed below, the Bureau believes that at least
for lenders who follow the procedural requirements set forth in Sec.
1041.5(c), the primary evidence with respect to the reasonableness of a
lenders' determinations will be the pattern of outcomes for consumers
found to have the ability to repay. That is why the Bureau is adding
detailed commentary to 5(b)-2.iii and a new comment 5(b)-2.iv
clarifying the performance factors that would be reviewed for purposes
of assessing reasonableness and giving examples.
The Bureau declines the suggestion by some commenters to take a
``sandbox'' approach to components of the ability-to-repay requirement.
The Bureau as a general matter supports innovation and policy
experimentation through Project Catalyst and other initiatives. It
simply does not believe this rulemaking is the best candidate for such
an approach. Given the nature of the Federal rulemaking process and the
particular history of this rulemaking--which has involved to date many
years of study, outreach and deliberation, and where the compliance
date of Sec. Sec. 1041.2 through 1041.10, 1041.12, and 1041.13 will
not be for another 21 months after publication in the Federal
Register--the Bureau is concerned that failing to finalize necessary
components of the rule, such as the ability-to-repay requirement, and
instead testing ideas in the market would not prove a fruitful value
proposition in view of the further delays in finalizing the rule. Any
policy ideas emanating from the sandbox would have to be reintegrated
into a rulemaking process in any event, further forgoing valuable
consumer protections in the Bureau's view.
With regard to the commenters suggesting a principles-based
approach where outcomes are more important that procedures, the Bureau
notes that the final rule strikes a balance between a rules-based and
an outcomes-based approach, with more emphasis than the proposal on the
latter. First, the Bureau is taking a less prescriptive approach on
certain key components of the ability-to-repay requirements, such as by
permitting reasonable reliance on stated amounts for income in absence
of reasonably available verification evidence. Second, as discussed
below, the Bureau is expanding the discussion of how loan performance
metrics will be used to evaluate ability-to-repay determinations. These
changes reflect a greater emphasis on lender performance as a means of
evaluating compliance with the ability-to-repay requirements.
As to commenters asserting that the Bureau should allow for
exceptions to the ability-to-pay framework for consumers who are
seeking loans to pay for non-recurring, unusual, and emergency
expenses, the Bureau declines this suggestion for several reasons.
First, lenders will already have an alternative to Sec. 1041.5 by
lending under Sec. 1041.6 of the final rule, which is not subject to
the ability-to-repay requirements. That approach is available for
consumers up to six times per year and can be used in any of the
circumstances--including emergency situations--that the commenters
noted, unless the consumer is in a cooling-off period. Second, the
Bureau continues to believe that the policy challenges described in the
proposal with crafting
[[Page 54663]]
such an exception are profound, such as the difficulty of defining, by
rule, unusual and emergency expenses, and disagrees that this would
pose the same or less challenges as with the implementation of other
aspects of the rule.\821\
---------------------------------------------------------------------------
\821\ While the proposal discussed the challenges to this
exception in the context of alternatives considered to the
presumption of unaffordability in proposed Sec. 1041.6, the
commenter referred to this language in the broader context of the
ability-to-repay requirements.
---------------------------------------------------------------------------
Third, the Bureau believes that this type of exception would be
extremely difficult to administer, for some the same reasons discussed
in the section-by-section analysis for Sec. 1041.5(a)(5) in connection
with suggestions made by other commenters to count the proceeds of the
loan toward net income or as a credit against major financial
obligations or basic living expenses. As discussed in the section-by-
section analysis for Sec. 1041.5(a)(5), the Bureau believes it is
difficult if not impossible to construct a workable rule that would
carve out from the requirement one type of usage case for a consumer--
here, emergency expenses--but include other usage cases, such as
payment of basic living expenses, given the fungibility of money, the
potential intrusiveness of asking about why the consumer is taking out
the loan, and the challenges of policing such a rule. Lastly, the
Bureau does not agree that this exception would be used sparingly. This
assertion contravenes empirical evidence, assertions by other
commenters including many individual consumers, and lender advertising
about the purpose of the loans.\822\ Moreover, the difficulty of
enforcing this type of provision would create an incentive for evasion,
where consumers simply state a reason that would fall under the
exception and lenders accept that reason without further inquiry.
---------------------------------------------------------------------------
\822\ As noted in the section-by-section analysis for Sec.
1041.5(a)(5) in discussion of the loan proceeds issue, the Bureau
received many comments, including a large number from individual
consumers, describing how consumers often use payday loans and other
covered loans to cover their new needs or emergency expenses; payday
lenders in their advertising tend to cite this usage category as the
primary purpose for using the product; and academic literature and
surveys discussing usage patterns on payday loans have consistently
found that a sizable number of consumers report using payday loans
and other covered loans for non-recurring and emergency expenses.
---------------------------------------------------------------------------
Performance of a lender's loans as ability to repay. As noted
above, the Bureau received many comments asking for additional
guidelines and clarity on what constitutes a reasonable ability-to-
repay determination, including in some cases numerical thresholds above
which would trigger heightened scrutiny or even consumer remedies. The
Bureau appreciates the concerns raised by the commenters and has
substantially expanded the language in comment 5(b)-2.iii and added new
comment 5(b)-2.iv to further clarify how it will use loan performance
metrics and analysis in assessing whether a lender's determinations of
consumers' ability to repay are reasonable. The specifics of the
revised language are described in more detail below.
The Bureau is declining, however, to provide a prescriptive
standard or exhaustive list of factors that would show reasonableness,
or a set of numerical thresholds tied to the factors such as a specific
default rate that would constitute a per se violation or grounds for
closer scrutiny. While the Bureau understands that reasonableness tests
and multi-factor back-end performance metrics, without specific
numerical thresholds, may not give lenders perfectly clear direction on
how exactly to underwrite, the Bureau believes that on balance the more
prudent option at this time is to preserve the principles-based
approach of the proposal but add detail and illustrations. The Bureau
believes it may be challenging to set thresholds that would apply
across the board, given that lenders who make unaffordable loans may
experience different rates of default, re-borrowing, and other harms
depending on collections practices and other factors. Furthermore, the
Bureau also does not believe there is enough evidence at this time to
codify specific numerical thresholds for default rates, re-borrowing
rates, and the like, given that the practices identified in this rule
are market-wide and that there is not currently a Federal ability-to-
repay rule for this market. And the Bureau is concerned that setting
particular benchmarks at this time would incentivize lenders to take
steps to manage their rates aggressively through enhanced debt
collection or even to manipulate the metrics to fall just beneath the
threshold, neither of which would be a beneficial result.
Further, to the extent that consumer group commenters urged the
Bureau to establish numeric thresholds for enhanced scrutiny of
particular lenders rather than outright thresholds for per se
violations, such as 5 percent default rates for vehicle title loans and
employer-based loans and 10 percent threshold for payday loans, such a
policy decision would not be made as part of a rulemaking, but rather,
in the Bureau's prioritization decisions regarding supervision or
enforcement activity as the market evolves over time in response to the
rule and other business developments. As noted above, comment 5(b)-
2.iii does state that default rates can provide evidence that a
lender's ability-to-pay determinations were not reasonable.\823\
---------------------------------------------------------------------------
\823\ The Bureau also notes that with regard to the specific
thresholds suggested by the consumer groups, the Bureau does not
find the justification compelling that the Bureau should designate a
10 percent portfolio default rate for payday loans because it is
double the 5 percent rate included as part of a larger set of
conditions for a proposed exemption for longer-term, and generally
lower-cost, loans--an exemption which the Bureau is not finalizing.
Nor does the Bureau believe commenters provided a compelling reason
for why there should be a separate, and more stringent, 5 percent
threshold for vehicle title and employer-based loans.
---------------------------------------------------------------------------
The Bureau also declines some commenters' request to change the
ability-to-repay standard to one focused on willingness or propensity
to pay. The Bureau recognizes that many lenders today already employ
predictive underwriting tools to screen out those with a propensity to
default, a point noted in some comments. However, the Bureau's core
concern in this rulemaking is the determination of whether consumers
have the ability to repay, i.e., the financial capacity to make the
loan payments, pay for major financial obligations, and meet basic
living expenses. The Bureau expects that lenders will continue to
utilize in their underwriting models various methods for detecting
fraud or willingness to repay, and nothing in the final rule precludes
that from happening as long as they comply with the requirements of
this rule.
The assertion made by some commenters that default and re-borrowing
are caused simply by consumer choice and not at all by lender
practices--including the identified unfair and abusive practice that is
the Bureau's focus in this rule--runs counter to the analysis provided
above in Market Concerns--Underwriting and seems to contradict their
own comments that their customers are often living paycheck to
paycheck.
Regarding the comments about the use of comparative performance
metrics and how that would create a ``business as usual loophole,'' as
an initial matter the Bureau agrees with the concern voiced by consumer
advocates, individual consumers, and others about a rule that would
judge the reasonableness of ability-to-repay determinations based
solely (or primarily) on a comparison of loan performance across
lenders. The Bureau did not intend to promulgate a standard that would
evaluate loan performance simply on not being ``the worst of the
[[Page 54664]]
worst.'' The Bureau expressly noted in the proposal that comparative
metrics are not the sole basis of judging compliance, that lenders
cannot rely on comparative performance to excuse poor loan performance
as measured more objectively, and that comparatively lower default
rates could be caused by factors extrinsic to ability-to-repay
determinations (such as aggressive debt collection).
To further underscore and memorialize this intent, the Bureau has
revised comment 5(b)-2.iii to state specifically that evidence about
comparative performance is not dispositive as to the evaluation of a
lender's ability-to-repay determinations. Additionally, this comment
has been revised more generally to provide a more expansive discussion
of the types of performance metrics used to evaluate the reasonableness
of ability-to-repay determinations, along with several examples in
comment 5(b)-2.iv showing lending patterns that indicate either
reasonable or unreasonable ability-to-repay determinations. The
combination of these changes provides more clarity that the
reasonableness of ability-to-repay determinations are to be measured
over a variety of dimensions (e.g., default rates, re-borrowing rates,
patterns of lending across loan sequences, and delinquency-related
harms such as late fees); non-comparative measures of loan performance
will be primary; and comparative performance metrics will be
complementary. These changes are discussed in detail below.
However, the Bureau has decided not to eliminate reference to
comparative performance metrics altogether, as requested by the
consumer advocates and other commenters. Although as noted above the
fact that a lender's outcomes are not among the worst of its peers is
not sufficient to establish that the lender is making reasonable
ability-to-repay determinations, outlier outcomes surely are probative
of the unreasonableness of a particular lender's ability-to-repay
determinations. That is the import of comment 5(b)-2.iii and 5(b)-2.iv.
The Bureau agrees with the consumer advocates that evaluating the
ability-to-repay determinations should involve looking at indicators
beyond default rates. Again, revised comment 5(b)-2.iii provides
additional clarification on the types of performance metrics that will
be evaluated. The list of factors has been expanded from the proposal.
The commentary states that a variety of factors may be relevant,
including rates of default, patterns of re-borrowing within loan
sequences, patterns of re-borrowing across loan sequences, rates of
delinquency-related harms (e.g., late fees and failed presentments),
and patterns of lenders making non-covered loans that bridge gaps
between sequences of covered loans. The Bureau has also clarified that
loan performance may be evaluated across the lender's entire portfolio
of covered short-term or longer-term balloon-payment loans, as well as
with respect to particular products, geographic regions, time periods
during which the loans were made, or other relevant categorizations.
Finally, the Bureau provides several new illustrative examples of
lending patterns that would indicate reasonable or unreasonable
ability-to-repay determinations in comment 5(b)-2.iv. More discussion
and explanation of these revised commentary provisions are found below.
Comment 5(b)-2.iii has been revised and expanded in a number of
important ways. First, it now states that evidence that a lender's
determinations of ability to repay are not reasonable may include,
without limitation, the factors described under paragraphs (A) through
(E) of the comment. This change refers to how the comment now lists the
factors in separate paragraphs rather than the main body of the comment
for organizational purposes and due to the additional level of detail
provided. Second, comment 5(b)-2.iii now clarifies that these factors
may be evaluated across a lender's entire portfolio of covered short-
term loans or covered longer-term balloon-payment loans or with respect
to particular products, geographic regions, particular time periods
during which the loans were made, or other relevant categorizations,
and clarifies that other relevant categorizations would include,
without limitation, loans made in reliance on consumer statements of
income in the absence of verification evidence. The Bureau believes
that this approach is important to identify potential troublesome
patterns insofar as lenders could not simply blend the categories of
covered loans evidencing poor performance with other types of covered
loans made by the lender with better performance. Third, the comment
now clarifies that the factors may be considered either individually or
in combination with one another; that the factors are not absolute in
their application and instead exist on a continuum and may apply to
varying degrees; and that each of the factors is viewed in the context
of the facts and circumstances relevant to whether the lender's
ability-to-repay determinations are reasonable. Finally, the comment
clarifies that relevant evidence may also include a comparison of the
factors listed in the comment on the part of the lender to that of
other lenders making covered short-term loans or covered longer-term
balloon-payment loans to similarly situated consumers, but that such
evidence about comparative performance is not dispositive as to the
evaluation of a lender's ability-to-repay determinations. This revised
language above is a response to the criticisms of the proposed comment
5(b)-2.iii language regarding comparative performance metrics as
evaluative tools, as discussed above.
Comment 5(b)-2.iii is then organized into five sub-paragraphs
elucidating the factors that will be evaluated. Comment 5(b)-2.iii.A
addresses default rates, clarifying that this evidence includes
defaults during and at the expiration of covered loan sequences as
calculated on a per sequence or per consumer basis. The Bureau believes
that a per-loan basis for calculating default rates would not be as
accurate for purposes of evaluating whether reasonable ability-to-repay
determinations are being made, because then a lender's re-borrowing
rate would substantially distort the metric. For example, on a per loan
basis, a consumer who re-borrows twice and then defaults would have
one-third the impact on the default rate that a consumer who defaults
after the first loan would, even though both loan sequences end the
same way. The Bureau also notes that the consumer advocates in their
joint comment letter urged that any default rate metric that is used
should be a per-customer or per-sequence default rate, for similar
reasons.
Comment 5(b)-2.iii.B addresses re-borrowing rates, which the
comment clarifies as including the frequency with which the lender
makes consumers multiple covered short-term loans or covered longer-
term balloon-payment loans within a loan sequence as defined in Sec.
1041.2(a)(14), i.e., consecutive or concurrent loans taken out within
30 days of a prior loan being outstanding. As discussed in many places
in the final rule, including Market Concerns--Underwriting and the
section-by-section analysis for Sec. 1041.4, the Bureau has identified
repeat re-borrowing as a problem in this market meriting intervention
and is requiring lenders to determine whether consumers have the
ability to repay a covered short-term or longer-term balloon-payment
loan without the repayment triggering a need to re-borrow over the
ensuing 30 days. Thus, within-sequence re-borrowing rates will be
critical in evaluating compliance with the ability-to-repay
[[Page 54665]]
determination, as that is one of the core consumer harms that the
requirements of the final rule are aiming to prevent.
Comment 5(b)-2.iii.C lists patterns of lending across loan
sequences as a third factor and clarifies that this evidence includes
the frequency with which the lender makes multiple sequences of covered
short-term loans or covered longer-term balloon-payment loans to
consumers. The comment clarifies that this evidence also includes the
frequency with which the lender makes new covered short-term loans or
covered longer-term balloon-payment loans immediately or soon after the
expiration of a cooling-off period under Sec. 1041.5(d)(2) or the 30-
day period that separates one loan sequence from another, referencing
the loan sequence definition in Sec. 1041.2(a)(14). As noted in the
section-by-section analysis for Sec. 1041.4, while the Bureau has
established a 30-day period as the measure for determining whether a
consumer is likely to be re-borrowing the prior loan, there are
circumstances in which new loans beyond the 30-day period would also be
the result of the unaffordability of a prior loan rather than the
result of a new borrowing need. For example, if a consumer does not
have funds to pay major financial obligations or basic living expenses
as they come due because the consumer used income that would pay those
obligations to pay off a covered short-term loan, and the consumer
falls behind on an obligation during the month after repaying a short-
term loan and then returns to obtain a new loan 31 days after the prior
loan was repaid, that would effectively mean that the prior loan was
not affordable. A pattern of consumers frequently returning to take out
a new loan immediately after the end of a cooling-off period would thus
be relevant in assessing whether the lender's ability-to-repay
determinations were reasonable.
Comment 5(b)-2.iii.D lists a fourth factor, rates of delinquencies
and collateral impacts. The comment clarifies that this evidence
includes the proportion of consumers who incur late fees, failed
presentments, delinquencies, and repossessions. The Bureau believes
that evaluating the rates of late fees, failed presentments,
delinquencies, and repossessions is highly relevant to the evaluation
of ability-to-repay determinations because those metrics would indicate
that consumers are struggling to repay their loans, even if they do not
necessarily wind up in default. The Bureau discusses the consumer harms
associated with failed presentments in Sec. 1041.7.
Comment 5(b)-2.E lists a fifth factor, patterns of non-covered
lending. The comment clarifies that this evidence includes the
frequency with which the lender makes non-covered loans shortly before
or shortly after consumers repay a covered short-term loan or covered
longer-term balloon-payment loan, and the non-covered loan bridges all
or a substantial part of either the time period between two loans that
otherwise would be part of a loan sequence or of a cooling-off period.
The comment lists an example where the lender, its affiliate, or a
service provider frequently makes 30-day pawn loans to consumers
shortly before or soon after repayment of covered short-term loans made
by the lender, and where the lender then makes additional covered
short-term loans to the same consumers soon after repayment of the pawn
loans. The Bureau included this factor as a way to address concerns,
discussed by the Bureau in the proposal, about the possibility of
lenders using non-covered loans as a way of ``bridging'' gaps between
the making of covered loans in order to evade the cooling-off period
and other aspects of the proposal. The proposal attempted to address
this issue more directly through rule provisions justified under the
Bureau's Dodd-Frank Act anti-evasion authority,\824\ but as described
in the discussion below of Sec. Sec. 1041.5(d) and 1041.6(d), the
Bureau is not finalizing these provisions due to concerns about their
efficacy and complexity and to the Bureau's decision to significantly
streamline the re-borrowing restrictions that had been in proposed
Sec. 1041.6 based on public comments. Upon further consideration,
however, the Bureau has realized that if lenders are making these
``bridge'' loans on a frequent basis, it may be an indication that the
consumers are struggling to repay the preceding covered short-term or
covered longer-term balloon-payment loan and therefore the underlying
ability-to-repay determination on the earlier loan may have been
unreasonable.
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\824\ The proposal would have defined ``non-covered bridge
loan'' in proposed Sec. 1041.2(a)(13) and provided in proposed
Sec. 1041.6(h) that if the lender or an affiliate made a non-
covered bridge loan while a covered short-term loan under proposed
Sec. 1041.5 or Sec. 1041.7 or a covered longer-term balloon-
payment loan under proposed Sec. 1041.9 was outstanding or for 30
days thereafter, the days during which a non-covered bridge loan is
outstanding would not have counted toward any of the time periods in
proposed Sec. 1041.6, including the proposed 30-day cooling-off
period following a three-loan sequence. More explanation of this
provision and the reasons for why the Bureau is not finalizing it
are found in the discussion of Sec. 1041.5(d), below.
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The Bureau believes that revised comment 5(b)-2.iii provides a
relatively comprehensive list of factors that broadly capture the types
of ascertainable outcomes that would be useful in evaluating the
reasonableness of lenders' ability-to-repay determinations. As such,
the Bureau declines to include all of the factors urged to be added by
the consumer advocates, including the loan's interest rate and the
``extent and aggressiveness of the lender's debt collection
practices.'' At least some of the examples suggested by the consumer
groups would be very difficult if not impossible to measure
quantitatively; others may be more aptly described as potential
examples of evasion rather than indicators of unreasonable ability-to-
repay determinations; and still others in the Bureau's view are overly
restrictive, such as the suggestion regarding interest rates.
Other commenters' suggestions about which metrics would be most
indicative of a failure to make a reasonable ability-to-repay
determination, such as first-payment defaults absent those due to
fraud, are helpful and may help inform Bureau analyses once the rule
takes effect. However, the Bureau is not at this time rank-ordering the
metrics because it believes that, depending on the facts and
circumstances, any one of the factors, or multiple factors working in
tandem, may be indicative of whether an ability-to-repay methodology is
unreasonable.
As a complement to revised comment 5(b)-2.iii, the Bureau has also
added a new comment 5(b)-2.iv. This comment contains four detailed
examples of fact scenarios illustrating how the factors in comment
5(b)-2.iii might constitute evidence about whether lenders' ability-to-
repay determinations are reasonable under Sec. 1041.5(b). The Bureau
is including these examples as a further response to criticisms that
proposed comment 5(b)-2.iii, and Sec. 1041.5(b) more broadly, did not
provide sufficient guidance on how reasonableness on ability-to-repay
determinations would be evaluated. These examples are non-exhaustive.
The examples focus on fact scenarios where lenders' portfolios include
multiple factors from comment 5(b)-2.iii and where the factors are
present to varying degrees, thus illustrating how the factors will be
evaluated in combination.
The first example, in comment 5(b)-2.iv.A, describes a scenario in
which a significant percentage of consumers who obtain covered short-
term loans from a lender under Sec. 1041.5 re-borrow within 30 days of
repaying their initial loan, re-borrow within 30 days of repaying their
second loan, and re-borrow shortly after the end of the
[[Page 54666]]
cooling-off period that follows the initial loan sequence of three
loans, and how, based on the combination of these factors, this
evidence suggests that the lender's ability-to-repay determinations are
not reasonable. This example illustrates a pattern where the lender's
consumers experience frequent re-borrowing--specifically, where a
significant percentage of the lender's consumers take out a full
sequence of three covered short-term loans and then return to borrow
shortly after the end of the cooling-off period, beginning another
sequence. This would implicate the factors in both comment 5(b)-2.iii.B
and 5(b)-2.iii.C.
The second example, in comment 5(b)-2.iv.B, describes a scenario in
which a lender frequently makes at or near the maximum number of
covered short-term loans permitted under the conditional exemption in
Sec. 1041.6 to consumers early within a 12-month period (i.e., the
loans do not require ability-to-repay determinations) and then makes a
large number of additional covered short-term loans to those same
consumers under Sec. 1041.5 (i.e., the loans require ability-to-repay
determinations) later within the 12-month period. The example assumes
that the loans made under Sec. 1041.5 are part of multiple loan
sequences of two or three loans each and the sequences begin soon after
the expiration of applicable cooling-off periods or 30-day periods that
separate one loan sequence from another. The example clarifies that
this evidence suggests that the lender's ability-to-repay
determinations for the covered short-term loans made under Sec. 1041.5
are not reasonable. The example notes further that the fact that some
of the loans in the observed pattern were made under Sec. 1041.6 and
thus are conditionally exempted from the ability-to-repay requirements
does not mitigate the potential unreasonableness of the ability-to-
repay determinations for the covered short-term loans that were later
made under Sec. 1041.5.
This example is intended to illustrate the potential interaction of
the provisions under Sec. Sec. 1041.5 and 1041.6 and how the
reasonableness of the lender's ability-to-repay determinations for
loans made under Sec. 1041.5 would be evaluated if the lender makes a
combination of loans under the different provisions to consumers during
a given time period. Here, the lender is making loans to many consumers
more or less continuously throughout the year (i.e., long loan
sequences, borrowing shortly after cooling-off periods expire), with
the Sec. 1041.6 loans made toward the beginning of the year and Sec.
1041.5 loans made later in the year. This pattern suggests that the
lender is not making reasonable ability-to-repay determinations for the
loans made under Sec. 1041.5. This is the case even though some of the
loans in the pattern did not require such an ability-to-repay
determination. Put another way, the mere fact that the first set of
loans in the pattern did not require an ability-to-repay determination
does not insulate the lender from scrutiny if the subsequent loans show
a pattern of long loan sequences and frequent borrowing shortly after
cooling-off periods expire.
The third example, in comment 5(b)-2.iv.C, is a variation of the
preceding example. The facts are that a lender frequently makes at or
near the maximum number of loans permitted under Sec. 1041.6 to
consumers early within a 12-month period and then only occasionally
makes additional covered short-term loans to those same consumers under
Sec. 1041.5 later within the 12-month period, and that very few of
those additional loans are part of loans sequences longer than one
loan. The example clarifies that absent other evidence that the
ability-to-repay determination is unreasonable (i.e., presence of the
factors in comment 5(b)-2.iii.A through E), this evidence suggests that
the lender's ability-to-repay determinations for the loans made under
Sec. 1041.5 are reasonable. In contrast to the preceding example where
the lender made a large number of Sec. 1041.6 loans and a large number
of Sec. 1041.5 loans within a given time period and the latter loans
were made in long sequences and close in time (broken up only by the
cooling-off periods), under this example the vast majority of loans are
made under Sec. 1041.6, and there is little to no evidence of re-
borrowing on the Sec. 1041.5 loans. Therefore, this pattern reflects
the permissible maximization of lending under Sec. 1041.6 and the
incidental making of additional Sec. 1041.5 loans within the given
time period, a pattern that is not suggestive of unreasonableness.
Comment 5(b)-2.iv.D contains the final example. The pattern
described is that within a lender's portfolio of covered short-term
loans, a small percentage of loans result in default; consumers
generally have short loan sequences (fewer than three loans); the
consumers who take out multiple loan sequences typically do not begin a
new loan sequence until several months after the end of a prior loan
sequence; and there is no evidence of the lender or an affiliate making
non-covered loans to consumers to bridge cooling-off periods or the
time periods between loan sequences. The example clarifies that this
evidence suggests that the lender's ability-to-repay determinations are
reasonable. Although this example does indicate the presence of two
factors from comment 5(b)-2.iii (i.e., defaults and re-borrowing), it
illustrates that the degree to which these factors are present is
germane to the overall evaluation. The re-borrowing is typically less
than a full loan sequence, defaults are infrequent, and while there are
some consumers who borrow multiple sequences, they are spread further
apart, suggesting that new borrowing needs are driving the re-borrowing
rather than the spillover effects of the prior loans. Therefore, this
pattern does not indicate potentially unreasonable ability-to-repay
determinations.
Re-underwriting of open-end credit. Finally, with regard to the
special rule requiring re-underwriting of open-end credit on a periodic
basis under Sec. 1041.5(b)(1)(ii), the Bureau is concerned that the
consumer group commenters' suggestion to require lenders to underwrite
each individual advance separately would be unduly burdensome
particularly as to small advances. However, the Bureau has further
considered the timeline it proposed, and decided to adjust the final
rule to require in Sec. 1041.5(b)(1)(ii) that the lender must make a
new ability-to-repay determination prior to an advance on an open-end
line of credit if more than 90 days has elapsed since the initial
determination, rather than every 180 days as proposed. The Bureau
believes it is reasonable to require a new ability-to-repay
determination once a quarter for an open-end line of credit, which for
example would mean that a consumer would be re-underwritten after
taking a monthly advance three times in a row. This revised time period
also aligns with the revised requirement in Sec. 1041.5(c)(2)(ii)(D),
which as discussed below generally exempts lenders from the requirement
to obtain a new national consumer report to verify debt obligations,
child support obligations, and alimony obligations if the lender or its
affiliates has previously obtained such a report in the prior 90 days
(unless the consumer had triggered a cooling-off period since the
report was last obtained).
The Bureau disagrees with the commenter that argued that the Bureau
should exempt open-end lines of credit from the proposal or, in the
alternative, should address open-end lines of credit in a separate
rulemaking along with credit cards or apply the requirements of the
CARD Act in connection with open-end lines of credit that are covered
in this rule. The Bureau notes that while
[[Page 54667]]
open-end products are not as common in the affected markets as closed-
end products, the Bureau did conduct substantial research as part of
this rulemaking concerning deposit advance products, which can be
structured as open-end credit. The Bureau believes that consumers can
be harmed just as much by unaffordable open-end credit as unaffordable
closed-end credit, and that both products are therefore appropriately
subject to the final rule. With regard to why the Bureau is not
imposing the same rules for open-end products as the CARD Act
regulations--an alternative approach suggested by the commenter--see
the general discussion above for Sec. 1041.5 about the comparison
between the two rules. The Bureau also disagrees with the more
technical arguments made by the same commenter about the proposed
requirement to assess consumers' ability to repay an open-end line of
credit where the consumer requests a new advance more than 180 days
after the lender's last assessment of the consumer's ability to
repay.\825\
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\825\ Specifically, the commenter argued that this provision
would be inconsistent with the definition of open-end credit under
Regulation Z. One element of that definition focuses on whether the
amount of credit that may be extended to the consumer is generally
made available to the extent that any outstanding balance is repaid.
12 CFR 1026.2(a)(20)(iii). The commentary to Regulation Z
distinguishes open-end credit on this ground from situations in
which the consumer has to apply for each advance individually under
a closed-end credit feature. However, the Regulation Z commentary
also emphasizes that this distinction does not prevent creditors
offering open-end products from periodically adjusting their credit
limits or refusing to make an individual extension of credit ``due
to changes in the creditor's financial condition or the consumer's
creditworthiness.'' Comment 1026.2(a)(20)-5. The Bureau believes
that the final rule here is consistent with this Regulation Z
commentary, in that the final rule periodically requires a lender to
evaluate whether the consumer has the ability to repay the entire
amount available under an open-end line of credit. With regard to
how the lender would decide after such an assessment whether to
increase the line or to take other action where the consumer's
credit has deteriorated such that she can no longer make the
outstanding payments, the Bureau would expect lenders to make
decisions in accordance with the updated ability-to-repay analysis
as to whether a change in the credit line is appropriate in either
direction.
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5(b)(2)
Proposed Rule
Proposed Sec. 1041.5(b)(2) set forth the Bureau's specific
proposed methodology for making a reasonable determination of a
consumer's ability to repay a covered short-term loan. Specifically, it
would have provided that a lender's determination of a consumer's
ability to repay is reasonable only if, based on projections in
accordance with proposed Sec. 1041.5(c), the lender reasonably makes
the applicable determinations provided in proposed Sec.
1041.5(b)(2)(i), (ii), and (iii). Proposed Sec. 1041.5(b)(2)(i) would
have required an assessment of the sufficiency of the consumer's
residual income during the term of the loan, and proposed Sec.
1041.5(b)(2)(ii) would have required an assessment of an additional 30-
day period after having made the highest payment on the loan in light
of the harms from loans with short-term structures. In proposed Sec.
1041.5(b)(2)(iii), the Bureau would have required compliance with
further requirements in proposed Sec. 1041.6 in situations where
consumers' borrowing history suggests that they may have difficulty
repaying additional credit. Proposed Sec. 1041.9(b)(2) would have
imposed similar requirements on covered longer-term balloon-payment
loans.
More specifically, proposed Sec. 1041.5(b)(2)(i) would have
provided that for any covered short-term loan subject to the ability-
to-repay requirement of proposed Sec. 1041.5, a lender must reasonably
conclude that the consumer's residual income would be sufficient for
the consumer to make all payments under the covered short-term loan and
to meet basic living expenses during the shorter of the term of the
loan or for 45 days following consummation. The Bureau believed that if
the payments for a covered short-term loan would consume so much of a
consumer's residual income that the consumer would be unable to meet
basic living expenses, then the consumer would likely suffer injury
from default or re-borrowing, or suffer collateral harms from having to
make unaffordable payments. The parallel provision in Sec.
1041.9(b)(2)(i) applicable to covered longer-term loans would have
provided for a reasonable conclusion about the sufficiency of the
residual income during the loan term. Proposed comment 9(b)(2)(i)-1.i
would have clarified that for covered longer-term loans, a reasonable
conclusion about the sufficiency of the residual income for the month
in which the highest sum of payments were due on the loan would have
satisfied this requirement.
In proposing Sec. 1041.5(b)(2)(i), the Bureau recognized that,
even when lenders determine at the time of consummation that consumers
will have the ability to repay a covered short-term loan, some
consumers may still face difficulty making payments on these loans
because of changes that occur after consummation. The Bureau noted in
the proposal that, for example, some consumers would experience
unforeseen decreases in income or increases in expenses that would
leave them unable to repay their loans. Thus, the fact that a consumer
ended up in default is not, in and of itself, evidence that the lender
failed to reasonably assess the consumer's ability to repay the loan ex
ante. The Bureau explained that proposed Sec. 1041.5(b)(2)(i) would
instead have looked to the facts that were reasonably knowable prior to
consummation and prohibited a lender from making a covered short-term
loan if the lender lacked a reasonable basis at consummation to
conclude that the consumer would be able to repay the covered loan
while also meeting basic living expenses and major financial
obligations.
The Bureau further explained in the proposal that while some
consumers may have so little (or no) residual income as to be unable to
afford any loan at all, for other consumers the ability to repay will
depend on the amount and timing of the required repayments. Thus, the
Bureau noted, even if a lender concludes there is no reasonable basis
for believing that a consumer can pay a particular prospective loan,
proposed Sec. 1041.5(b)(2)(i) would have not prevented a lender from
making a different covered loan with more affordable payments to such a
consumer, provided that the loan is consistent with State law and that
the more affordable payments would not consume so much of the
consumer's residual income that she would be unable to meet basic
living expenses.
Proposed comment 5(b)(2)(i)-1 would have provided more detailed
guidance on the calculations needed for the applicable period under
Sec. 1041.5(b)(2)(i), explaining that a lender complies with the
requirement in Sec. 1041.5(b)(2)(i) if it reasonably determines that
the consumer's projected residual income during the shorter of the term
of the loan or the period ending 45 days after consummation of the loan
will be greater than the sum of all payments under the covered short-
term loan plus an amount the lender reasonably estimates will be needed
for basic living expenses during the term of the covered short-term
loan. The Bureau explained in the proposal that this method of
compliance would have allowed the lender to make one determination
based on the sum of all payments that would be due during the term of
the covered short-term loan, rather than having to make a separate
determination for each respective payment and payment period in
isolation in cases where the short-
[[Page 54668]]
term loan provide for multiple payments.
Under the proposed rule, the lender would have had to make the
determination for the actual term of the loan, accounting for residual
income (i.e., net income minus payments for major financial
obligations) that would actually accrue during the shorter of the term
of the loan or the period ending 45 days after consummation of the
loan. The Bureau wrote that it believed that for a covered loan with
short duration, a lender should make the determination based on net
income the consumer will actually receive during the term of the loan
and payments for major financial obligations that will actually be
payable during the term of the loan, rather than, for example, based on
a monthly period that may or may not coincide with the loan term. The
Bureau explained that when a covered loan period is under 45 days,
determining whether the consumer's residual income will be sufficient
to make all payments and meet basic living expenses depends a great
deal on, for example, how many paychecks the consumer will actually
receive during the term of the loan and whether the consumer will also
have to make no rent payment, one rent payment, or two rent payments
during that period.
Proposed comment 9(b)(2)(i)-1 contained similar content but also
emphasized that determination of whether residual income will be
sufficient for the consumer to make all payments and to meet basic
living expenses during the term of a covered longer-term loan
(including covered longer-term balloon-payment loans) requires a lender
to reasonably account for the possibility of volatility in the
consumer's residual income and basic living expenses over the term of
the loan. The Bureau further stated in that proposed comment that a
lender reasonably accounts for the possibility of volatility in income
and basic living expenses by reasonably determining an amount (i.e., a
cushion) by which the consumer's residual income must exceed the sum of
the loan payments under the loans and the amount needed for basic
living expenses.
Proposed comment 5(b)(2)(i)-2 clarified what constitutes
``sufficient'' residual income for a covered short-term loan,
explaining that residual income is sufficient as long as it is greater
than the sum of payments that would be due under the covered loan plus
an amount the lender reasonably estimates will be needed for basic
living expenses. Proposed comment 9(b)(2)(i)-2 was identical.
The proposal also would have required lenders who make covered
short-term loans and covered longer-term balloon-payment loans to
assess consumers' finances for a second, distinct time period under
Sec. Sec. 1041.5(b)(2)(ii) and 1014.9(b)(2)(ii), respectively.
Specifically, those sections would have required that before making
such loans, a lender must reasonably conclude that the consumer will be
able to make payments required for major financial obligations as they
fall due, make any remaining payments under the loan, and meet basic
living expenses for 30 days after having made the highest payment under
the loan on its due date.
Proposed comment 5(b)(2)(ii)-1 noted that a lender must include in
its determination under proposed Sec. 1041.5(b)(2)(ii) the amount and
timing of net income that it projects the consumer will receive during
the 30-day period following the highest payment, in accordance with
proposed Sec. 1041.5(c). Proposed comment 5(b)(2)(ii)-1 also included
an example of a covered short-term loan for which a lender could not
make a reasonable determination that the consumer would have the
ability to repay under proposed Sec. 1041.5(b)(2)(ii). The Bureau
noted in the proposal that it proposed to include the requirement in
Sec. 1041.5(b)(2)(ii) for covered short-term loans because research
showed that these loan structures are particularly likely to result in
re-borrowing shortly after the consumer repays an earlier loan. As
discussed in the proposal, when a covered loan's terms provide for it
to be substantially repaid within 45 days following consummation, the
fact that the consumer must repay so much within such a short period
makes it especially likely that the consumer will be left with
insufficient funds to make subsequent payments under major financial
obligations and meet basic living expenses. The Bureau noted that the
consumer may then end up falling behind in paying major financial
obligations, being unable to meet basic living expenses, or borrowing
additional consumer credit. Such consumers may be particularly likely
to borrow new consumer credit in the form of a new covered loan.
The Bureau further elaborated in the proposal that this shortfall
in a consumer's funds is most likely to occur following the highest
payment under the covered short-term loan (which is typically but not
necessarily the final payment) and before the consumer's subsequent
receipt of significant income. The Bureau noted, however, that
depending on the regularity of a consumer's income payments and payment
amounts, the point within a consumer's monthly expense cycle when the
problematic covered short-term loan payment falls due, and the
distribution of a consumer's expenses through the month, the resulting
shortfall may not manifest itself until a consumer has attempted to
meet all expenses in the monthly expense cycle, or even longer. The
Bureau noted that indeed, many payday loan consumers who repay a first
loan and do not re-borrow during the ensuing pay cycle (i.e., within 14
days) nonetheless find it necessary to re-borrow before the end of the
expense cycle (i.e., within 30 days).
The Bureau noted in the proposal that in the Small Business Review
Panel Outline, the Bureau described a proposal under consideration to
require lenders to determine that a consumer has the ability to repay a
covered short-term loan without needing to re-borrow for 60 days,
consistent with the proposal in the same document to treat as part of
the same loan sequence a loan taken out within 60 days of having a
prior covered short-term loan outstanding. The Bureau noted in the
proposal that several consumer advocates had argued that consumers may
be able to juggle expenses and financial obligations for a time, so
that an unaffordable loan may not result in re-borrowing until after a
30-day period. The Bureau proposed a 30-day period for both purposes.
The Bureau wrote that it believed that the incidence of re-
borrowing caused by such loan structures would be somewhat ameliorated
simply by determining that a consumer would have residual income during
the term of the loan that exceeds the sum of covered loan payments plus
an amount necessary to meet basic living expenses during that period.
But if the loan payments consume all of the consumer's residual income
during the period beyond the amount needed to meet basic living
expenses during the period, the Bureau wrote in the proposal, then the
consumer will have insufficient funds to make payments under major
financial obligations and meet basic living expenses after the end of
that period, unless the consumer receives sufficient net income shortly
after the end of that period and before the next set of expenses fall
due. The Bureau noted that often, though, the opposite is true: A
lender schedules the due dates of loan payments under covered short-
term loans so that the loan payment due date coincides with the
consumer's receipt of income. The Bureau noted that this practice
maximizes the probability that the lender will timely receive the
payment under the covered
[[Page 54669]]
short-term loan, but it also means the term of the loan (as well as the
relevant period for the lender's determination that the consumer's
residual income will be sufficient under proposed Sec.
1041.5(b)(2)(i)) ends on the date of the consumer's receipt of income,
with the result that the time between the end of the loan term and the
consumer's subsequent receipt of income is maximized.
Thus, in the proposal, the Bureau wrote that even if a lender made
a reasonable determination under proposed Sec. 1041.5(b)(2)(i) that
the consumer would have sufficient residual income during the loan term
to make loan payments under the covered short-term loan and meet basic
living expenses during the period, there would remain a significant
risk that, as a result of an unaffordable highest payment (which may be
the only payment, or the last of equal payments), the consumer would be
forced to re-borrow or suffer collateral harms from unaffordable
payments. The Bureau wrote that the example included in proposed
comment 5(b)(2)(ii)-1 was intended to illustrate just such a result.
In proposed Sec. 1041.5(b)(2)(iii), the Bureau would have required
the lender to determine that the requirements of proposed Sec. 1041.6
are satisfied when making a covered short-term loan for which a
presumption of unaffordability under proposed Sec. 1041.6 applies.
Comments Received
The Bureau received a number of comments on proposed Sec.
1041.5(b)(2), and specifically the time period and sufficiency of the
residual income model. Many of the comments pertaining to this section
were already discussed above in the discussion of comments received
pertaining to Sec. 1041.5 more generally and Sec. 1041.5(a) and
(b)(1).
On the time period, several consumer advocate commenters suggested
that residual income should be assessed under Sec. 1041.5(b)(2)(ii)
for 60 days following the highest payment. Other commenters argued that
the time period in question should run from the last payment instead of
the highest payment, arguing that this would ensure that the consumer
does not need to re-borrow throughout the entirety of the loan term and
thereafter. As articulated by the commenters, if a consumer's highest
payment came more than 30 days before the end of the loan term, then
under the Bureau's proposed requirement, the lender would only need to
make a reasonable conclusion about whether the consumer could repay
until the end of the loan term (and there would not be a 30-day period
after to assess for re-borrowing).
Industry commenters asserted that forecasting for income and
expenses as they come due, including the timing of those payment and
expenses, during the various overlapping proposed time periods would be
infeasible. Others made the opposite argument, asserting that lenders
should at least be encouraged to assess actual basic living expenses
during the two time periods specified in proposed Sec. 1041.5(b)(2).
As discussed above, a number of commenters asserted that the
residual income model was unduly restrictive or otherwise inadequate
for assessing whether a consumer has the ability to repay. Some argued
that if the Bureau is using a residual income approach, it should model
its test after the Department of Veterans Affair's residual income
test, which includes objective numerical standards. Many other
commenters, as noted in the general Sec. 1041.5 discussion above,
asserted that a debt-to-income ratio was a more well-accepted and time-
tested underwriting model. Other commenters argued, as noted above, for
a loan-to-income or payment-to-income approach instead. Others argued,
also as noted above, that a residual income test would be too
burdensome. Still other commenters pointed to data showing that
residual income is not indicative of whether a consumer will default.
These comments are discussed in more detail in the introduction to
Sec. 1041.5 and the summary of Sec. 1041.5(b)(1) above.
The Bureau also received a number of comments relating to how
proposed Sec. 1041.9(b) would have required lenders to include a
cushion to account for income volatility over the course of a covered
longer-term loan, arguing that to do so would be purely speculative.
Final Rule
As described in the general Sec. 1041.5 discussion and in the
discussion of the debt-to-income ratio definition in Sec. 1041.5(a)(2)
above, the Bureau has made a substantial number of changes to Sec.
1041.5(b)(2) of the final rule.
To summarize, as described in the general Sec. 1041.5 discussion
above, under proposed Sec. 1041.5(b)(2) the reasonable ability-to-
repay determination would have required the lender to project both the
amount and timing of the consumer's net income and major financial
obligations and draw reasonable conclusions about the consumer's
ability to repay during two distinct time periods: First for the
shorter of the term of the loan or 45 days after consummation of the
loan,\826\ and then also for 30 days after having made the highest
payment under the loan. This requirement is being streamlined in the
final rule. Lenders are instead required to make a projection about net
income and major financial obligations and calculate the debt-to-income
ratio or residual income, as applicable, during only a single monthly
period, i.e., the relevant monthly period. The Bureau has defined that
term in Sec. 1041.5(a)(7) as the calendar month with the highest
payments on the loan, which is generally consistent with the analysis
that the Bureau proposed to use for covered longer-term balloon payment
loans under proposed Sec. 1041.9(b)(2)(i) and focuses on the time in
which the loan places the greatest strain on the consumer's finances.
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\826\ The proposal would have designated this time period to
cover the term of the loan for covered longer-term loans.
---------------------------------------------------------------------------
Lenders can use the debt-to-income ratio or residual income during
this relevant monthly period as a snapshot of the consumer's financial
picture to draw conclusions about the consumer's ability to repay the
covered short-term loan or covered longer-term balloon-payment loan
without re-borrowing. Specifically, under Sec. 1041.5(b)(2), the
lender uses this information to make a reasonable conclusion that the
consumer has the ability to repay the loan while meeting basic living
expenses and major financial obligations during: (1) The shorter of the
term of the loan or 45 days after consummation of the loan, for covered
short-term loans, and the relevant monthly period, for covered longer-
term balloon-payment loans, and (2) for 30 days after having made the
single highest payment under the loan. This simplified approach also
dovetails with the inclusion of the debt-to-income ratio methodology as
an alternative to residual income. As discussed above, a debt-to-income
methodology does not permit the tracking of a consumer's individual
income inflows and major financial obligation outflows on a continuous
basis over a period of time.
In response to commenters arguing that forecasting the timing of
income flow and payment obligations over the applicable period will be
difficult, the Bureau has adjusted the rule. While Sec. 1041.5(b)(2)
still requires the lender to generally make a reasonable conclusion
about whether the consumer can pay major financial obligations, loan
payment amounts, and basic living expenses for the loan term and 30
days after the largest payment, the Bureau has adjusted the rule such
that the
[[Page 54670]]
lender does not need to specifically project both the amount of the
payments and the timing of the payments during those periods. Rather,
the lender is required to account only for the amounts of such
payments--and not the timing of them--during a single calendar month,
the relevant monthly period. The relevant monthly period is defined in
Sec. 1041.5(a)(7) as the calendar month in which the payments on the
loan are highest.
The Bureau has also revised commentary to Sec. 1041.5(b)(2) to
discuss how lenders are to use the projections of net income and major
financial obligations during the relevant monthly period as a baseline
of information to then make reasonable inferences and draw a reasonable
conclusion about the time periods described in Sec. 1041.5(b)(2).
As noted above, Sec. 1041.5(b)(2) has been revised and expanded
largely as a way of accommodating the inclusion in the final rule of an
option for lenders to use a debt-to-income methodology in lieu of a
residual income methodology. Although some of the revisions are
substantive and are described below, most of the changes reflect the
creation of a parallel set of provisions to apply to the debt-to-income
methodology. Thus Sec. 1041.5(b)(2) of the final rule is now split so
that paragraph (b)(2)(i) addresses the debt-to-income ratio
methodology, and paragraph (b)(2)(ii) addresses the residual income
methodology. Lenders will only have to comply with one or the other
subparagraph depending on which methodology they choose.
The Bureau described the debt-to-income ratio methodology above in
the discussion of Sec. 1041.5(a), but, to recap, a lender may
determine whether a consumer will have a high enough percentage of net
income remaining to pay for basic living expenses after paying major
financial obligations and the loan payments during the relevant monthly
period. As discussed earlier, the Bureau has not set the threshold for
how high a percentage would meet the test and will allow lenders to use
their reasoned judgment. The Bureau believes that a lender may find
that different thresholds are effective for consumers with different
income levels and family sizes. However, a lender could conceivably use
a single threshold, and lenders that choose to vary the thresholds will
almost surely develop different approaches of doing so. The test will
be whether the thresholds deployed by any given lender lead to
reasonable determinations of whether consumers have the ability to
repay their loans according to the loan terms. Of course, if lenders
set thresholds based on reasoned judgment, but then find they do not
work in practice, the Bureau will expect them to adjust accordingly.
The Bureau has not imported the requirement under proposed comment
9(b)(2)(i)-2 (also cross-referenced in proposed comment 9(b)-2.i.F)
that lenders must allow a cushion for income volatility. The proposal
did not include a requirement to account for income volatility for
covered short-term loans, and the Bureau sees no reason to add one in
the final rule. The Bureau is skeptical that such a requirement is
needed for covered short-term loans due to their shorter duration.
Moreover, the Bureau is not finalizing this comment as to covered
longer-term balloon-payment loans, which are included in the scope of
Sec. 1041.5(b)(2). The Bureau proposed the cushion requirement with
respect to covered longer-term loans because installment loans would
have predominated that category. For those loans, the proposed ability-
to-repay requirement would have focused on the affordability of the
regular periodic payment. The Bureau believed that if a consumer had
only just enough money to cover that payment in a ``normal'' month, the
loan would prove unaffordable over its term due to income or expense
volatility. The final rule, however, covers only longer-term loans with
a balloon payment and requires underwriting such loans to assess
whether the consumer will be able to make the payments in the month
with the highest sum of payments. Therefore, the Bureau does not
believe it is necessary to add a cushion to that calculation.
In addition to substantially revising the text of Sec.
1041.5(b)(2) in light of these major changes, the Bureau has also
revised the comments. Comment 5(b)(2)-1 reiterates the general
methodology, and notes that if there are two payments that are equal to
each other in amount and higher than all other payments, the highest
payment under the loan is considered the later in time of the two.
Comments 5(b)(2)(i)-1 and -2 explain how the relevant monthly period
for calculating the debt-to-income ratio is not identical to the
periods for which a lender is assessing ability to repay in Sec.
1041.5(b)(2)(i), and explains that in fact they may overlap. Comment
5(b)(2)(i)-2 explains that the lender uses the projections about the
consumer's net income and major financial obligations during the
relevant monthly period and the calculation of the consumer's debt-to-
income ratio as a baseline of information on which to make reasonable
inferences and draw a reasonable conclusion about whether the consumer
will be able to pay major financial obligations, make the payments on
the loan, and meet basic living expenses during the periods specified
in Sec. 1041.5(b)(2)(i). The comment further states that the lender
cannot assume, for example, in making those reasonable inferences, that
the consumer will defer payment on major financial obligations or basic
living expenses until after the 30-day period that follows the date of
the highest payment on the loan, or assume that the obligations and
expenses will be less than in the relevant monthly period. The Bureau
provides examples of this dynamic in comment 5(b)(2)(i)-3. Comments
5(b)(2)(ii)-1 through -3 provide parallel guidance as to covered
longer-term balloon-payment loans.
Lastly, the Bureau did not finalize the content in proposed Sec.
1041.5(b)(2)(iii), which would have required lenders to satisfy further
requirements under proposed Sec. 1041.6 before making a covered short-
term loan in circumstances where the consumer's recent borrowing or
current difficulties paying off an existing loan suggested that they
did not have the ability to repay a new loan. As discussed below, the
Bureau has instead finalized certain elements of proposed Sec. 1041.6
as final Sec. 1041.5(d).
5(c) Projecting Consumer Net Income and Payments for Major Financial
Obligations
Overview
Proposed Sec. 1041.5(c) specified the requirements for obtaining
information directly from consumers as well as various forms of
verification evidence for use in projecting consumers' net income and
major financial obligations for purposes of the ability-to-repay
requirements under proposed Sec. 1041.5(b). Following the Bureau's
review and consideration of the comments to the proposal, the Bureau is
finalizing Sec. 1041.5(c) with substantial changes to provide more
flexibility with regard to verification requirements and to provide
more detailed guidance for how lenders should treat discrepancies
between consumers' written statements and verification evidence. The
Bureau has carefully balanced the final rule to require substantial
improvements in current industry verification practices, while
providing appropriate flexibility for lenders and consumers in
situations in which verification evidence is not reasonably available.
Specifically, the Bureau had proposed Sec. 1041.5(c) in the
following manner: Paragraph (c)(1) set forth the general evidentiary
standards for reasonably
[[Page 54671]]
projecting net income and major financial obligations and the standards
for addressing inconsistencies between the consumers' stated amounts
for such items and verification evidence; paragraph (c)(2) addressed
one narrow way in which lenders could deviate from information in
verification evidence; and paragraph (c)(3) governed how and when
lenders must obtain verification evidence for net income and major
financial obligations. The Bureau is not finalizing much of the content
in paragraph (c)(2), as described below, and, for increased clarity,
the Bureau is now placing the content from paragraph (c)(2), to the
extent that content is being finalized or amended, into paragraph
(c)(1). Accordingly, final Sec. 1041.5(c)(1) describes the general
evidentiary standards, the standards for addressing inconsistencies
between the consumers' stated amounts for net income and major
financial obligations and the verification evidence, and the process
for when lenders can deviate from the information in verification
evidence; and Sec. 1041.5(c)(2) governs how and when lenders must
obtain verification evidence for net income and major financial
obligations.
5(c)(1) General
Proposed Rule
With regard to covered short-term loans, in proposed Sec.
1041.5(c)(1), the Bureau provided that for a lender's projection of the
amount and timing of net income or payments for major financial
obligations to be reasonable, the lender must obtain both a written
statement from the consumer as provided for in proposed Sec.
1041.5(c)(3)(i) and verification evidence as provided for in proposed
Sec. 1041.5(c)(3)(ii). Proposed Sec. 1041.5(c)(1) further provided
that for a lender's projection of the amount and timing of net income
or payments for major financial obligations to be reasonable, it may be
based on a consumer's statement of the amount and timing only to the
extent the stated amounts and timing are consistent with the
verification evidence.
As the Bureau explained in the proposal, the Bureau believed
verification of consumers' net income and payments for major financial
obligations was an important component of the reasonable ability-to-
repay determination. Consumers seeking a loan may be in financial
distress and inclined to overestimate net income or to underestimate
payments for major financial obligations to improve their chances of
being approved. Lenders have an incentive to encourage such
misestimates to the extent that as a result consumers find it necessary
to re-borrow. The Bureau further stated in the proposal that this
result is especially likely if a consumer perceives that, for any given
loan amount, lenders offer only a one-size-fits-all loan repayment
structure and will not offer an alternative loan with payments that are
structured to be within the consumer's ability to repay. As the Bureau
noted, an ability-to-repay determination that is based on unrealistic
factual assumptions will yield unrealistic and unreliable results,
leading to the very consumer harms that the Bureau's proposal was
intended to prevent.
Accordingly, proposed Sec. 1041.5(c)(1) would have permitted a
lender to base its projection of the amount and timing of a consumer's
net income or payments for major financial obligations on a consumer's
written statement of amounts and timing under proposed Sec.
1041.5(c)(3)(i) only to the extent the stated amounts and timing are
consistent with verification evidence of the type specified in proposed
Sec. 1041.5(c)(3)(ii). Proposed Sec. 1041.5(c)(1) also provided that
in determining whether and the extent to which stated amounts and
timing are consistent with verification evidence, a lender may
reasonably consider other reliable evidence the lender obtains from or
about the consumer, including any explanations the lender obtains from
the consumer.
In the proposal, the Bureau stated its belief that the proposed
approach would appropriately ensure that the projections of a
consumer's net income and payments for major financial obligations will
generally be supported by objective, third-party documentation or other
records. The Bureau further stated, however, that the proposed approach
also recognized that reasonably available verification evidence may
sometimes contain ambiguous, out-of-date, or missing information. For
example, the net income of consumers who seek covered loans may vary
over time, such as for a consumer who is paid an hourly wage and whose
work hours vary from week to week. In fact, a consumer is more likely
to experience financial distress, which may be a consumer's reason for
seeking a covered loan, immediately following a temporary decrease in
net income from more typical levels. Accordingly, the Bureau stated
that the proposed approach would not have required a lender to base its
projections exclusively on the consumer's most recent net income
receipt shown in the verification evidence. Instead, it allowed the
lender reasonable flexibility in the inferences the lender draws about,
for example, a consumer's net income during the term of the covered
loan, based on the consumer's net income payments shown in the
verification evidence, including net income for periods earlier than
the most recent net income receipt. At the same time, the proposed
approach would not have allowed a lender to mechanically assume that a
consumer's immediate past income as shown in the verification evidence
will continue into the future if, for example, the lender has reason to
believe that the consumer has been laid off or is no longer employed.
The Bureau stated in the proposal, that in this regard, the
proposed approach recognized that a consumer's own statements,
explanations, and other evidence can be important components of a
reliable projection of future net income and payments for major
financial obligations. Proposed comment 5(c)(1)-1 included several
examples applying the proposed provisions to various scenarios,
illustrating reliance on consumer statements to the extent they are
consistent with verification evidence and how a lender may reasonably
consider consumer explanations to resolve ambiguities in the
verification evidence. It included examples of when a major financial
obligation in a consumer report is greater than the amount stated by
the consumer and of when a major financial obligation stated by the
consumer does not appear in the consumer report at all.
The Bureau stated in the proposal that it anticipated that lenders
would develop policies and procedures, in accordance with proposed
Sec. 1041.18, for how they project consumer net income and payments
for major financial obligations in compliance with proposed Sec.
1041.5(c)(1) and that a lender's policies and procedures would reflect
its business model and practices, including the particular methods it
uses to obtain consumer statements and verification evidence. The
Bureau stated its belief that many lenders and vendors would develop
methods of automating projections, so that for a typical consumer
relatively little labor would be required.
In proposed Sec. 1041.5(c)(2), the Bureau proposed an exception to
the requirement in proposed Sec. 1041.5(c)(1) that projections must be
consistent with the verification evidence that a lender would be
required to obtain under proposed Sec. 1041.5(c)(3)(ii). As discussed
below, the required verification evidence would have normally consisted
of third-party documentation
[[Page 54672]]
or other reliable records of recent historical transactions or of
payment amounts. Proposed Sec. 1041.5(c)(2) would have permitted a
lender to project a net income amount that is higher than an amount
that would otherwise be supported under proposed Sec. 1041.5(c)(1), or
a payment amount for a major financial obligation that is lower than an
amount that would otherwise be supported under proposed Sec.
1041.5(c)(1), only to the extent and for such portion of the term of
the loan that the lender obtains a written statement from the payer of
the income or the payee of the consumer's major financial obligation of
the amount and timing of the new or changed net income or payment.
As the Bureau explained in the proposal, the exception was intended
to accommodate situations where a consumer's net income or payment for
a major financial obligation will differ from the amount supportable by
the verification evidence. For example, a consumer who has been
unemployed for an extended period of time, but who just accepted a new
job, may not be able to provide the type of verification evidence of
net income that generally would have been required under proposed Sec.
1041.5(c)(3)(ii)(A). Proposed Sec. 1041.5(c)(2) would have permitted a
lender to project a net income amount based on, for example, an offer
letter from the new employer stating the consumer's wage, work hours
per week, and frequency of pay. The lender would have been required to
retain the statement in accordance with proposed Sec. 1041.18.
Proposed Sec. 1041.9(c) included parallel requirements applicable
to covered longer-term loans.
Comments Received
The Bureau received many comments on the proposed verification
requirements from a variety of stakeholders. Many of these commenters
argued that the verification requirements were overly burdensome, too
prescriptive, and not appropriate to this credit market in contrast to
the mortgage and credit card markets. Other industry commenters asked
the Bureau to provide more specificity around verification requirements
to reduce uncertainty. These commenters included both industry
stakeholders and other parties, such as several State Attorneys General
and the SBA Office of Advocacy. Many individual consumers, often
commenting as part of letter-writing campaigns, also criticized aspects
of the verification requirements, particularly the requirement for
lenders to obtain a national consumer report for each loan to verify
debt obligations. Consumer advocates, on the other hand, generally
argued that the verification requirements were calibrated appropriately
or, in some places, were too permissive. Some of these arguments are
described in the general Sec. 1041.5 discussion at the outset of the
section-by-section analysis for this section. These arguments are also
described with more particularity in discussion below of paragraphs of
this overall section, such as the requirements under Sec.
1041.5(c)(2)(ii)(A) and (B) (verification evidence for net income and
major financial obligations, respectively).
Commenters generally argued that there are many consumers who have
an ability to repay, but who cannot verify income, and that they would
be harmed by the verification requirements. Specifically, many
commenters cited consumers who work in the cash economy or who had
seasonal or sporadic work as consumers who would be unable to access
credit under the proposal because of the income verification
requirements. One industry trade group representing community banks
argued that some consumers use cash to pay for basic living expenses,
so deposit account records would not provide accurate verification
evidence. These comments are addressed in the discussion of Sec.
1041.5(c)(2).
One commenter argued that the Bureau should not impose any
verification evidence requirements until the Bureau could prove that
consumers were harmed by lenders failing to collect evidence to verify
consumer claims.
A number of industry commenters asserted that the Bureau had failed
to explain why it was applying more vigorous verification requirements
to payday loans than to mortgages and credit cards. Some of these
arguments are described in the general Sec. 1041.5 discussion above.
Some commenters argued that requiring similar verification requirements
undermined the business model of payday and title loan companies, which
they argued are built around speed, convenience, and lack of intrusive
underwriting, and that consumers desire these features of the business
model. Many individual consumers, often writing as part of organized
letter-writing campaigns made similar comments. They described
favorably their experience with payday loans based on the lack of a
credit check requirement, the ease of the application process, and the
respect they feel they receive from the origination process at payday
lenders (in contrast to their experience at banks, which they argued
was more intrusive and impersonal).
Other commenters argued that the Bureau could and should provide
safe harbors or exceptions for certain lenders who meet various
criteria. For example, one commenter, an online lender, argued that the
Bureau should not impose any income verification requirements on short-
term lenders with below market average charge-offs and that the Bureau
should set a safe harbor loss rate of under 15 percent for first-time
customers.
A trade group representing vehicle title lenders commented that
income verification is incompatible with the business model for the
vehicle title loan product and its customer base. The commenter argued
that vehicle title lenders would have difficulty obtaining the
information from consumers; that the time it would add to the process
is disproportionate for this type of loan; and that it would undermine
the value and competitiveness of the product.
A number of commenters argued that the more rigorous underwriting
requirements would involve personal questions that many consumers would
believe violate their privacy and so would resist answering, or viewed
such questions as too intrusive for a small-dollar loan as opposed to a
much larger extension of credit. Similarly, many individual commenters
expressed concerns about providing their personal information to
lenders, and were concerned about their privacy and also the risk of
data breach. Some industry commenters provided similar comments,
stating that the need to create real-time, centralized databases for
obtaining information on consumers during underwriting would increase
consumers' exposure to data breach risk.
A number of commenters, including several lenders and consumer
reporting agencies, argued that the Bureau should adopt a validation
instead of a verification model, in which lenders could compare
statements about income, basic living expenses, or major financial
obligations to various third-party data sources or data models, and
perform manual processing and verification only when the validation
process identifies an anomaly. Some of these commenters noted that the
U.K. Financial Conduct Authority guidelines on small-dollar lending
permit such an approach. Another provided data comparing deviations
from historical 12-month average stated income to default rates,
finding that the further a consumer's stated income deviated from that
consumer's historic average, the higher the default rate (with
significantly higher default rates as
[[Page 54673]]
consumers' stated income is multiples higher than the historic
average).
More broadly, commenters argued that the proposed verification
requirements did not take into consideration shared payment of major
financial obligations by consumers and other persons, such as expenses
shared with spouses and cohabitants. Consumer advocates argued,
alternatively, that claims of shared major financial obligations should
be allowed only with verification evidence. The issues raised in these
comments in some cases overlap with the issues discussed in the
section-by-section analysis for Sec. 1041.5(a)(1) (definition of basic
living expenses) and Sec. 1041.5(a)(3) (definition of major financial
obligations).
The Bureau received a number of comments relating to how proposed
Sec. 1041.5(c)(1) and (2) would have addressed inconsistencies between
the consumers' stated amounts and the verification evidence, when
deviation from the stated amounts would have been permitted, and what
additional steps would have been required in those circumstances.
Consumer advocates argued that lenders should not be allowed to rely on
consumer statements that are inconsistent with verification evidence
unless relying on the consumer statements would result in a projection
of a lower income amount or a higher major financial obligations
amount. Others expressed concern that the ability to deviate from
amounts in the verification evidence based on explanations from the
consumer would be an easy way to skirt the verification requirements in
the proposal. On the other hand, industry commenters suggested that
lenders should be able to deviate from amounts in verification evidence
based on borrower statements. Specific to proposed Sec. 1041.5(c)(2),
a number of industry commenters argued that a requirement to procure
statements from payors or payees would pose significant privacy
concerns for consumers.
Online lenders and their trade groups expressed concerns about the
practicality and burdens on both the consumer and the lender with
respect to the verification requirements. They argued that document
verification disadvantages online lenders because documents submitted
by fax, mobile image capture, or email scan are frequently illegible or
easily misinterpreted; mobile image capture does not work for pay
stubs; and even if the customers could submit the documents via mobile
app, lenders would need to manually process them on the back end. They
also expressed concerns about the fraud and security risks related to
consumers taking photos of sensitive documents to submit to online
lenders via a smartphone.
Lastly, some commenters noted concerns about potential double-
deductions, where a national consumer report identifies a debt
obligation or child support obligation that may have already been
deducted from the consumer's gross income prior to the consumer's
receipt of take-home pay. The concern was that the portion of the gross
income deducted for this obligation would not be included in net income
but would still be counted as a major financial obligation.
Final Rule
After carefully considering the comments received, the Bureau has
finalized the core elements of Sec. 1041.5(c)(1) to require lenders to
obtain consumers' written statements and various forms of verification
evidence in order to reasonably project net income and major financial
obligations for the relevant monthly period as required by Sec.
1041.5(b). However, the Bureau has adopted a number of changes to the
proposed approach to provide lenders with greater flexibility to rely
on consumers' written statements in appropriate circumstances and to
clarify how lenders should address situations in which there are
inconsistencies between consumers' written statements and consumer
reports or other verification evidence. The Bureau has also
incorporated some elements of proposed Sec. 1041.5(c)(2) into the
commentary on Sec. 1041.5(c)(1), but is not adopting a categorical
requirement that lenders may only project increases in net income or
decreases in major financial obligations if they obtain a written
statement from the payer of the income or the payee of the obligation.
Specifically, final Sec. 1041.5(c) specifies that a lender must
obtain the consumer's written statement in accordance with Sec.
1041.5(c)(2)(i), obtain verification evidence as required by Sec.
1041.5(c)(2)(ii), assess information about rental housing expense as
required by Sec. 1041.5(c)(2)(iii), and make a reasonable projection
of the amount of a consumer's net income and payments for major
financial obligations during the relevant monthly period. As described
in more detail in connection with final Sec. 1041.5(c)(2) below, each
of those provisions has been modified in turn to allow lenders more
flexibility in reasonably relying on information in consumers' written
statements where particular income or major financial obligations
cannot be verified through reasonably available sources. For example,
Sec. 1041.5(c)(2)(ii)(A) allows lenders to reasonably rely on
consumers' written statements with regard to income that cannot be
verified through pay records, bank account records, or other reasonably
available sources. Section 1041.5(c)(2)(iii) also allows lenders to
reasonably rely on consumers' written statements with regard to rental
housing expense, but not with regard to mortgages that can be verified
from a national consumer report.
The Bureau also revised Sec. 1041.5(c)(1) to address different
types of potential inconsistencies between consumers' written
statements and verification evidence in more detail. Thus, final Sec.
1041.5(c)(1) specifically requires lenders to consider major financial
obligations that are listed in a consumer's written statement, even if
they cannot be verified by the sources provided for as verification
evidence under Sec. 1041.5(c)(2)(ii)(B). This requirement is
consistent with various Bureau statements in the proposal and with
proposed comment 5(c)(1)-1.G, which included an example in which a
consumer's child support payment did not appear on a national consumer
report, but the Bureau has concluded that the requirement implicit in
the example should be reflected in a more direct statement in the
regulation text. With regard to other types of inconsistencies between
the consumer's written statement and verification evidence, the final
rule provides that a lender may base the amounts of net income or major
financial obligations on the consumer's written statement only as
specifically permitted under Sec. 1041.5(c)(2) or to the extent the
stated amounts are consistent with the verification evidence.
Consistent with the proposal, Sec. 1041.5(c)(1) states that in
determining consistency with verification evidence, the lender may
reasonably consider other reliable evidence the lender obtains from or
about the consumer, including any explanations the lender obtains from
the consumer.
While the basic elements of proposed Sec. 1041.5(c)(1) remain
intact in the final rule, the Bureau has made a number of significant
changes to Sec. 1041.5(c)(1). First, as discussed above in connection
with Sec. 1041.5(a) and (b), the Bureau is not requiring lenders to
project the specific timing of major financial obligations or income.
Thus, the Bureau has eliminated all references to the need to verify
timing throughout this provision.
Second, the Bureau is not finalizing proposed Sec. 1041.5(c)(2).
That section
[[Page 54674]]
would have required a lender to obtain a written statement from a payor
of income or a payee of major financial obligations in order to project
income in a higher amount, or to project major financial obligations in
a lower amount, than would otherwise have been supported by the
verification evidence. The Bureau upon further consideration believes
this requirement would be too onerous and inflexible, and may also
raise privacy concerns if a consumer had to explicitly ask for a
written statement from an employer. Because the Bureau is not
finalizing proposed Sec. 1041.5(c)(2), it is renumbering proposed
Sec. 1041.5(c)(3), which is being finalized (as described in further
detail below), as Sec. 1041.5(c)(2).
The Bureau believes that the final rule strikes an appropriate
balance that will require substantial and reasonable improvements in
current industry verification procedures while also addressing concerns
that the proposal would be too burdensome to implement and would deny
consumers access to credit in situations in which their finances are
difficult to verify. The Bureau agrees with consumer advocates that
verifying net income and major financial obligations is important to
ensure the soundness of ability-to-repay determinations. But the Bureau
also found the concerns raised by industry commenters regarding the
burden of the verification requirements to be compelling in some
instances, as noted below.
In response to commenters asserting that the Bureau must first
determine that lack of verification evidence is causing harms to
consumers before imposing verification requirements, the Bureau notes
that it has found harms associated with failing to make reasonable
determinations that a consumer has the ability to repay the loan, and
had identified the practice as unfair and abusive (as discussed in the
section-by-section analysis for Sec. 1041.4 of the final rule). To
make a reasonable determination that a consumer has the ability to
repay, lenders must satisfy certain reasonable verification
requirements, which have been loosened somewhat in light of the
concerns raised by commenters. In other words, the verification
requirements are reasonably related to preventing the identified unfair
and abusive practice in Sec. 1041.4. As discussed above, this is the
legal standard for exercise of the Bureau's prevention authority under
section 1031(b) of the Dodd-Frank Act.
Moreover, as consumer groups noted and as the proposal stated,
there are particular concerns in this market that that consumers who
are in financial distress may tend to overestimate income or
underestimate expenses, and lenders have strong incentives to encourage
misestimates to the extent that doing so tends to result in more re-
borrowing. Thus, the Bureau believes that the practice of making loans
without verification evidence is a contributing cause of the harms
previously discussed. This premise was further validated by data
submitted by a commenter, on 1.2 million covered loan applicants in
2014 to support arguments on a different issue. The analysis tracked
the degree to which consumers' stated income deviated from a 12-month
historical average for that consumer and compared it to default rates.
The data showed that default rates increased as a consumer's stated
income deviated from that same consumer's 12-month average. Some of
this could be due of course to unexpected changes in income after the
point of prediction, but it may also suggest that the stated income
predictions were inaccurate in the first instance. Indeed, the
commenter's data suggests that 35 percent of the 1.2 million applicants
studied provided stated income that was 1.5 or more times higher than
their own 12-month averages and that those borrowers saw significantly
higher default rates than other applicants.
The Bureau disagrees with arguments that the proposal would have
imposed more rigorous verification requirements than it has in the
mortgage market under Regulation Z, but in any event as discussed in
detail in the introduction to Sec. 1041.5 above, the Bureau believes
that the final rule's income and expense verification requirements are
somewhat less onerous than the Bureau's mortgage rules in 12 CFR
1026.43 and more onerous than the credit card rules for various groups
of consumers in 12 CFR 1026.51.\827\ The Bureau recognizes that the
Regulation Z rules for credit cards do not impose similar verification
requirements for income, although pulling consumer reports is a
widespread industry practice. As noted above, each credit market is
different and warrants different regulations. For further explication
on this issue, see the discussion at the beginning of the section-by-
section analysis for Sec. 1041.5.
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\827\ In determining whether a consumer will have a reasonable
ability to repay the loan according to its terms, a mortgage lender
must verify all information that the creditor relies upon, including
income, assets, and debt obligations. 12 CFR 1026.43. The mortgage
ability-to-repay rules under Regulation Z do not contain an
exception that permits lenders to rely on a consumer's statement of
income if verification evidence is not reasonably available, for
example. Nor do those rules permit a lender to dispense with
obtaining a consumer report if the lender has done so with respect
to the consumer in the prior 90 days.
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The Bureau does not agree with comments requesting the Bureau grant
safe harbors regarding the verification requirements for lenders
meeting certain criteria such as below-market average charge-off rates.
The Bureau does not believe the comments provided adequate data or
justification for the particular safe harbors suggested. These changes
also would add certain amounts of operational complexity. Additionally,
the Bureau is not convinced that, as finalized, the verification
requirements are so onerous as to warrant a safe harbor; see discussion
elsewhere in this section of the various ways in which the requirements
are being relaxed from the proposal. Allowing lenders to collect any
less information, for example, through a safe harbor, would
significantly undermine the lender's ability-to-repay determinations
under Sec. 1041.5(b), which rely on a reasonable projection of net
income and major financial obligations which is grounded in relevant
evidence concerning the consumer's current or recent income and
obligations.
The Bureau is not revising the final rule to allow lenders to rely
on validation or modeling of income or expenses in lieu of
verification, as suggested by a number of commenters. As described in
the section-by-section analysis for Sec. 1041.5(c)(2), the final rule
relaxes the verification requirement in a variety of ways, such as not
requiring verification of rental housing expenses and permitting
reliance on stated amounts of income where verification evidence is not
reasonably available. Thus, one of the reasons for expressly permitting
the validation or modeling of income and expenses in the final rule as
a broad alternative to verification--that it would permit lenders to
make loans to consumers with undocumented cash income--has been
addressed in a different manner. Furthermore, the rule permits income
verification to be done electronically via transaction account data or
payroll data, which may be particularly useful to online lenders.
Additionally, the Bureau does not have reason to believe that
income validation or modeling is a viable option in many contexts
covered by Sec. 1041.5, at least as an across-the-board substitute for
income verification. The loans covered by Sec. 1041.5 are, for the
most part, short-term loans and the rule requires the lender to project
net income for the relevant monthly period. Whatever the reliability of
income validation or income estimation modeling may be in assessing a
consumer's average monthly income or
[[Page 54675]]
annual income, the Bureau does not believe that these techniques
provide an adequate substitute for obtaining verification evidence,
when reasonably available, of the consumer's current income or income
in the recent past. However, the Bureau has no objection to lenders
using validation or modeling methods as a backstop in situations in
which consumers' income cannot be verified through traditional means or
continuing to experiment with them in addition to traditional
verification methods in order to develop a more complete picture of the
strengths and weaknesses of those methods. The Bureau will continue to
monitor developments in this area.
As noted in Background and Market Concerns--Underwriting, the
Bureau understands that obtaining verification evidence for income is a
common practice in most of the covered markets (except with regard to
some vehicle title lending), and thus, the Bureau's requirement to
verify income is unlikely to upend current norms in those markets. The
Bureau notes that the Small Dollar Roundtable, including several
lenders, supported an income verification requirement.
The Bureau agrees with commenters representing vehicle title
lenders who argued that requiring income verification would present
more of an adjustment for vehicle title lenders than payday lenders.
However, the Bureau is not convinced that this is a compelling reason
to not require income verification for vehicle title lenders.
Commenters' arguments are essentially that because a vehicle title
lender has security for the loan, the lender's business model is to
forgo underwriting, and not obtain evidence of income, and that the
Bureau's rule should permit that business model to continue as is. But
the Bureau has identified particular consumer harms associated with
this business model (see Market Concerns--Underwriting), and that is
precisely why the Bureau believes it is important that vehicle title
lenders be required to underwrite the loans based on consumers' ability
to repay and not rely on the asset value as a substitute for
underwriting. Were the Bureau to exclude vehicle title lenders from the
verification provisions of the rule, it would be antithetical to one of
the goals of this rule, which is to require reasonable determinations
that consumers have the ability to repay loans according to their
terms.
More broadly, the Bureau added comment 5(c)(1)-2 as one of several
steps taken to address commenters who urged the Bureau to allow lenders
to recognize situations in which other persons regularly contribute to
a consumer's income or regularly pay a consumer's expenses.
Specifically, this comment clarifies that, when it is reasonable to do
so, a lender may take into account consumer-specific factors, such as
whether other persons are regularly contributing toward paying the
consumer's major financial obligations. Comment 5(c)(1)-2 also notes,
however, that it is not reasonable for the lender to consider whether
other persons are regularly contributing toward the consumer's payment
of major financial obligations if the lender is separately including in
its projection of net income any income of another person to which the
consumer has a reasonable expectation of access. As discussed also in
connection with Sec. 1041.5(a)(1) and (5) concerning others'
contributions to basic living expenses and net income, respectively,
this clarification is intended to avoid double-counting.
Regarding comments by online lenders and their representatives that
the proposed verification requirements would disadvantage and prove
impractical to online lenders and would raise fraud or security risks,
the Bureau believes that these comments are largely overstated or
mooted in view of the scope and substance of the final rule's ability-
to-repay requirements. First, the Bureau understands that online
lenders generally fund the loans they make by depositing those loans
into consumers' checking accounts and collect payment by debiting those
accounts. Thus, consumers obtaining online loans have transaction
accounts that can be used to verify income electronically. As discussed
below in the section-by-section analysis, comment 5(c)(2)(ii)(A)-3 has
been added to clarify that the consumer's recent transaction account
deposit history is a reliable record (or records) that is reasonably
available if the consumer has such an account and to note that that
with regard to such bank account deposit history, the lender could
obtain it directly from the consumer or, at its discretion, with the
consumer's permission via an account aggregator service that obtains
and categorizes consumer deposit account and other account transaction
data.\828\ Furthermore, in the rare case in which a consumer without a
transaction account seeks an online loan, the consumer may be able to
provide verification evidence through online payroll records or by
electronically transmitting a picture of a pay stub from her smart
phone. Thus, the concern of commenters that the income verification
requirement will require a scanner or fax machine, or will implicate
widespread issues around data transmission or fraudulent documentation,
seems misplaced. The Bureau also notes that the commenters' concerns
are moot to the extent that they were focused primarily on longer-term
loans without balloon payments, given that such loans are not covered
by the ability-to-repay requirements in the final rule.
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\828\ As noted in the proposal, based on its market outreach the
Bureau understands that at least some online lenders utilize account
aggregator services.
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In light of the significant revisions it has made to the proposed
rule, the Bureau has re-written many of the examples in the commentary
for Sec. 1041.5(c)(1). In response to the comments received, the
Bureau has also added commentary in both Sec. 1041.5(c)(1) and (2) to
clarify exactly when lenders can deviate from verification evidence. As
discussed further below with regard to specific types of information,
the Bureau recognizes that there is some risk of evasion, as consumer
groups noted, but has decided to allow lenders to rely on consumers'
written statements in limited circumstances to augment the picture
painted by verification evidence, as long as those statements are
consistent and reasonable. The Bureau does so in recognition of the
evident fact that many borrowers of covered loans have cash income that
they spend in cash rather than deposit in a transaction account, and
thus would be adversely affected by an overly rigid income verification
requirement. For example, in comment 5(c)(1)-1.iii, the Bureau notes
that it would be reasonable to rely on consumers' written statements to
supplement verified income (by, for example, identifying and explaining
a separate source of cash income in a reasonable amount), so long as
there is no reasonably available evidence to verify that other source
(like deposit account statements). Additionally, and consistent with
the proposal, comment 5(c)(1)-1.iv states that a lender acts reasonably
in relying on a consumer's explanation to project income where there is
inconsistent verification evidence such as, for example, where a
consumer explains that she was sick and missed two days of work, and
thus made less income than usual in the most recent period covered by
the verification evidence and that the prior period covered by the
evidence is more representative of the consumer's income.
Similarly, other examples in the commentary address inconsistencies
between a consumer's written statement and verification evidence with
regard to major financial obligations. Specifically,
[[Page 54676]]
comment 5(c)(1)-1.vi emphasizes that lenders must consider major
financial obligations that are listed on the consumer's written
statement but not on a national consumer report or other verification
sources, while comment 5(c)(1)-1.vii addresses a situation in which a
national consumer report lists a debt obligation that does not appear
on the consumer's written statement. Lastly, the Bureau added comment
5(c)(1)-1.viii, to provide an example clarifying that a lender can
deduct from major financial obligations the child support payments that
a lender reasonably determines, based on a combination of verification
evidence and an explanation from the consumer, have already been
deducted from net income, a concept that is further described in Sec.
1041.5(c)(2).
5(c)(2) Evidence of Net Income and Payments for Major Financial
Obligations
Overview
Proposed Sec. 1041.5(c)(3) provided more detailed requirements for
collection of a written statement from the consumer concerning the
amount and timing of net income and required payments for various major
financial obligations, as well as various types of verification
evidence for particular categories of major financial obligations. As
explained above in connection with proposed Sec. 1041.5(c)(1) and (2),
proposed Sec. 1041.5(c)(3) generally would have required lenders to
base their projections on amounts shown in the verification evidence,
with only limited reliance on the written statements. In light of the
challenges in documenting housing expenses where a consumer does not
have a formal mortgage or lease, however, proposed Sec.
1041.5(c)(2)(ii)(D) would have permitted lenders to use a reliable
estimate of rental housing expenses for consumers with households in
the same locality as the consumer, based either on a source such as the
American Community Survey of the United States Census Bureau or a
lender's own applicants, provided that the lender periodically reviewed
the reasonableness of its estimates by comparing them to statistical
survey data or other reliable sources. The Bureau had proposed that
more permissive approach to rental housing expense following feedback
during the SBREFA process and other outreach about a stricter
verification approach to rental housing expense.
The Bureau is finalizing proposed Sec. 1041.5(c)(3) as Sec.
1041.5(c)(2) of the final rule, with a number of modifications to the
proposal that are intended to relieve unnecessary burdens of
verification and to provide greater flexibility and clarity to lenders
and consumers in situations in which a source of net income or a major
financial obligation cannot be verified through the sources that
lenders are required to obtain under the final rule. The Bureau has
also modified the final rule to reflect policy decisions addressed in
more detail above, including the decision to relax proposed
requirements for lenders to project the timing of individuals' net
income and major financial obligations as part of the broader ability-
to-repay determination, the decision to include alimony as a major
financial obligation, and the decision to allow lenders to account for
situations in which the consumer has a reasonable expectation of access
to others' income or in which other parties regularly pay for a
consumer's major financial obligation.
5(c)(2)(i) Consumer Statements
Proposed Rule
Proposed Sec. 1041.5(c)(3)(i)--which is being finalized, with
adjustments, in Sec. 1041.5(c)(2)(i) of the final rule--would have
required a lender to obtain a consumer's written statement of the
amount and timing of net income, as well as of the amount and timing of
payments required for categories of the consumer's major financial
obligations (e.g., credit card payments, automobile loan payments,
housing expense payments, child support payments, and the like). The
lender would then use the statements as an input in projecting the
consumer's net income and payments for major financial obligations
during the term of the loan. The lender would also have been required
to retain the statements in accordance with proposed Sec. 1041.18.
These statements were intended to supplement verification evidence
because verification evidence may sometimes contain ambiguous, out-of-
date, or missing information.
Proposed comment 5(c)(3)(i)-1 would have clarified that a
consumer's written statement includes a statement that the consumer
writes on a paper application or enters into an electronic record, or
an oral consumer statement that the lender records and retains or
memorializes in writing and retains. It further would have clarified
that a lender complies with a requirement to obtain the consumer's
statement by obtaining information sufficient for the lender to project
the dates on which a payment will be received or will be paid through
the period as required under proposed Sec. 1041.5(b)(2). This proposed
comment included the example that a lender's receipt of a consumer's
statement that the consumer is required to pay rent every month on the
first day of the month is sufficient for the lender to project when the
consumer's rent payments are due. Proposed Sec. 1041.5(c)(3)(i) did
not specify any particular form or even particular questions or
particular words that a lender must use to obtain the required consumer
statements.
Comments Received and Final Rule
The Bureau received few comments about the written statements in
their own right, and is finalizing the proposed regulation and
commentary as Sec. 1041.5(c)(2)(i) in the final rule. The Bureau has
revised the regulation text slightly for clarity and to reflect the
decision to allow consideration of the amount of any income of another
person to which the consumer has a reasonable expectation of access, as
discussed above in connection with Sec. 1041.5(a)(5) (definition of
net income). The regulation text and commentary have also been edited
to omit references to the timing of particular income and major
financial obligation payments, in light of the final rule's changes
with regard to use of debt-to-income ratios and revisions to the
residual-income analysis as discussed above in connection with Sec.
1041.5(a)(2) (debt-to-income ratio definition) and Sec. 1041.5(b)(2)
(ability-to-repay determination methodologies). Comments concerning
lenders' ability to rely on written statements in the absence of
verification evidence are discussed in more detail below.
5(c)(2)(ii) Verification Evidence
In proposed Sec. 1041.5(c)(3)(ii), the Bureau would have required
a lender to obtain verification evidence for the amounts and timing of
the consumer's net income and payments for major financial obligations
for a fixed period prior to consummation. It separately specified the
type of verification evidence required for net income and each
component of major financial obligations. The Bureau explained in the
proposal that the requirements were designed to provide reasonable
assurance that lenders' projections of consumers' finances were based
on accurate and objective information, while also allowing lenders to
adopt innovative, automated, and less burdensome methods of compliance.
5(c)(2)(ii)(A)
Proposed Rule
In proposed Sec. 1041.5(c)(3)(ii)(A), the Bureau specified that
for a consumer's
[[Page 54677]]
net income, the applicable verification evidence would be a reliable
record (or records) of an income payment (or payments) covering
sufficient history to support the lender's projection under proposed
Sec. 1041.5(c)(1). It did not specify a minimum look-back period or
number of net income payments for which the lender must obtain
verification evidence. The Bureau explained in the proposal that it did
not believe it was necessary or appropriate to require verification
evidence covering a look-back period of a prescribed length. Rather,
the Bureau indicated that the sufficiency of the history for which a
lender would obtain verification evidence may depend on the source or
type of income, the length of the prospective covered longer-term loan,
and the consistency of the income shown in the verification evidence
that the lender initially obtains, if applicable.
Proposed comment 5(c)(3)(ii)(A)-1 would have clarified that a
reliable transaction record includes a facially genuine original,
photocopy, or image of a document produced by or on behalf of the payer
of income, or an electronic or paper compilation of data included in
such a document, stating the amount and date of the income paid to the
consumer. It further would have clarified that a reliable transaction
record also would include a facially genuine original, photocopy, or
image of an electronic or paper record of depository account
transactions, prepaid account transactions (including transactions on a
general purpose reloadable prepaid card account, a payroll card
account, or a government benefits card account), or money services
business check-cashing transactions showing the amount and date of a
consumer's receipt of income.
The Bureau explained in the proposal that the proposed requirement
was designed to be sufficiently flexible to provide lenders with
multiple options for obtaining verification evidence for a consumer's
net income. For example, the Bureau noted that a paper pay stub would
generally satisfy the requirement, as would a photograph of the pay
stub uploaded from a mobile phone to an online lender. In addition, the
Bureau noted that the requirement would also be satisfied by use of a
commercial service that collects payroll data from employers and
provides it to creditors for purposes of verifying a consumer's
employment and income. Proposed comment 5(c)(3)(ii)(A)-1 would also
have allowed verification evidence in the form of electronic or paper
bank account statements or records showing deposits into the account,
as well as electronic or paper records of deposits onto a prepaid card
or of check-cashing transactions. Data derived from such sources, such
as from account data aggregator services that obtain and categorize
consumer deposit account and other account transaction data, would also
generally satisfy the requirement. During outreach, service providers
informed the Bureau that they currently provide such services to
lenders.
The Bureau explained in the proposal that this approach was
designed to address concerns that had been raised during the SBREFA
process and other industry outreach prior to the proposal. In
particular, some SERs and industry representatives had expressed
concern that the Bureau would require outmoded or burdensome methods of
obtaining verification evidence, such as always requiring a consumer to
submit a paper pay stub or transmit it by facsimile (fax) to a lender.
Others questioned requiring income verification at all, stating that
many consumers are paid in cash and therefore have no employer-
generated records of income. The Bureau explained in the proposal that
proposed Sec. 1041.5(c)(3)(ii)(A) was intended to respond to many of
these concerns by providing a wide range of methods to obtain
verification evidence for a consumer's net income, including electronic
methods that can be securely automated through third-party vendors with
a consumer's consent. The Bureau explained that in developing the
proposal, Bureau staff met with more than 30 lenders, nearly all of
which stated they already use some method--though not necessarily the
precise methods the Bureau was proposing--to verify consumers' income
as a condition of making a covered loan. The Bureau stated that its
proposed approach thus would accommodate most of the methods they
described and that the Bureau was aware of from other research and
outreach. It was also intended to provide some accommodation for making
covered loans to many consumers who are paid in cash. For example,
under the Bureau's proposed approach, a lender would have been able to
obtain verification evidence of net income for a consumer who is paid
in cash by using deposit account records (or data derived from deposit
account transactions), if the consumer deposits income payments into a
deposit account. The Bureau explained in the proposal that lenders
often require consumers to have deposit accounts as a condition of
obtaining a covered loan, so the Bureau believed that lenders would be
able to obtain verification evidence for many consumers who are paid in
cash in this manner.
The Bureau recognized in the proposal that there would be some
consumers who receive a portion of their income in cash and do not
deposit it into a deposit account or prepaid card account. For such
consumers, a lender may not be able to obtain verification evidence for
that portion of a consumer's net income, and therefore generally could
not base its projections and ability-to-repay determinations on those
amounts. The Bureau stated in the proposal that where there is no
verification evidence for a consumer's net income, the Bureau believed
the risk would be too great that projections of net income would be
overstated and that payments under a covered short-term loan
consequently would exceed the consumer's ability to repay, resulting in
all the harms from unaffordable covered loans identified in the
proposal.
For similar reasons, the Bureau did not propose to permit the use
of predictive models designed to estimate a consumer's income or to
validate the reasonableness of a consumer's statement of her income.
The Bureau noted that it had received recommendations from the Small
Dollar Roundtable, comprising a number of lenders making the kinds of
loans the Bureau was considering whether to cover in this rulemaking
and a number of consumer advocates, urging the Bureau to require income
verification.
Comments Received
Many commenters, particularly industry stakeholders, were generally
concerned that the income verification requirements would create
inaccurate portrayals of consumers' income because many types of income
would not be verifiable. These commenters specifically focused on
consumers who are paid in cash, noting that these consumers would
likely not have a way, except account statements, to verify income. One
trade group commenter said even then, some consumers use cash income
directly to pay basic living expenses (without depositing it in an
account). Commenters similarly argued that the Bureau's verification
regime had not accounted for consumers who have seasonal or irregular
income, such as tips, bonuses, and overtime pay. Commenters also asked
for clarity on how income earned in amounts and from sources other than
regular payroll would be handled under the rule, and expressed concern
with strict verification requirements that would
[[Page 54678]]
make it difficult for consumers with these types of income to prove
future income with past documentation. Commenters argued that these
consumers who work in the ``cash economy'' make up a substantial
portion of the customer base for covered lenders, and cited numerous
examples of occupations such as restaurant workers, hair stylists, or
day laborers who are routinely paid in cash. Others argued that the
Bureau should allow stated income based on consumer statements, noting
that credit card issuers do not need to verify income.
Consumer groups generally supported the income verification
requirements and urged the Bureau not to permit lenders to rely on
stated income in any circumstances. They argued that variations from
verification evidence based on the consumer statements should be
permitted only if they result in a lower projection of income (i.e., a
more conservative estimate).
Also, as stated earlier, many commenters argued that the Bureau had
not established a way to account for income from third parties to which
a lender has a reasonable expectation of access (or even a legal
right), like spousal income. These comments are described in the
section-by-section analysis for Sec. 1041.5(a)(5).
Some commenters argued that consumers of online loans would need a
fax machine or scanner to submit evidence of income, something that
many of their customers do not own. These comments are described in
more detail above in the section-by-section analysis for Sec.
1041.5(c)(1).
Commenters asked for further detail about what constitutes a
``sufficient history'' of net income for purposes of the verification
requirement, a phrase appearing in the proposed regulation text without
corresponding commentary. These commenters asked how long a lender
should look back (e.g., for how many pay stubs) to establish a
sufficient history. One trade group asked for a safe harbor of two pay
cycles of verification evidence for covered longer-term loans, citing
NCUA requirements. Other lenders asked whether they could look far back
into the past, for example, at the bonus payment from last year, to
help establish whether the borrower is likely to receive one this year.
Consumer advocates argued that for longer-term loans with a duration of
longer than six months, ``sufficient history'' should correspond to the
length of the loan.
Final Rule
The Bureau has carefully considered the comments received and has
concluded that it is appropriate to make two significant modifications
to proposed Sec. 1041.5(c)(3)(ii)(A). First, while the Bureau
continues to believe that it is critical for lenders to obtain reliable
records of net income if they are reasonably available, the Bureau has
decided to permit lenders discretion to reasonably rely on consumers'
written statements of net income where such records cannot be obtained.
Second, with regard to situations in which the consumer has a
reasonable expectation of access to the income of another person, the
Bureau has decided to permit lenders discretion to reasonably rely on
such income but only if they have obtained verification evidence of
regular access to that income, such as documentation of a joint
account.
Specifically, in the final rule, Sec. 1041.5(c)(2)(ii)(A)(1) has
been revised to provide that the lender must obtain a reliable record
(or records) of an income payment (or payments) directly to the
consumer covering sufficient history to support the lender's projection
under Sec. 1041.5(c)(1) if a reliable record (or records) is
reasonably available. Section 1041.5(c)(2)(ii)(A)(1) has also been
revised in the final rule to provide that if a lender determines that a
reliable record (or records) of some or all of the consumer's net
income is not reasonably available, then the lender may reasonably rely
on the consumer's written statement described in Sec.
1041.5(c)(2)(i)(A) for that portion of the consumer's net income.
The Bureau has added two comments in the final rule to accompany
these changes in the regulation text. First, comment 5(c)(2)(ii)(A)-3
clarifies the meaning of ``reasonably available'' records. The comment
clarifies that a reliable record of the consumer's net income is
reasonably available if, for example, the consumer's source of income
is from her employment and she possesses or can access a copy of her
recent pay stub. The comment clarifies that the consumer's recent
transaction account deposit history is a reliable record (or records)
that is reasonably available if the consumer has such an account. The
comment further clarifies that with regard to such bank account deposit
history, the lender could obtain it directly from the consumer or, at
its discretion, with the consumer's permission via an account
aggregator service that obtains and categorizes consumer deposit
account and other account transaction data. The comment also clarifies
that in situations in which income is neither documented through pay
stubs or transaction account records, the reasonably available standard
requires the lender to act in good faith and exercise due diligence as
appropriate for the circumstances to determine whether another reliable
record (or records) is reasonably available.
Second, comment 5(c)(2)(ii)(A)-4 clarifies when a lender can
reasonably rely on a consumer's statement if a reliable record is not
reasonably available. The comment clarifies that Sec.
1041.5(c)(2)(ii)(A) does not permit a lender to rely on a consumer's
written statement that the consumer has a reasonable expectation of
access to the income of another person. The comment further clarifies
that a lender reasonably relies on the consumer's written statement if
such action is consistent with a lender's written policies and
procedures required under Sec. 1041.12 and there is no indication that
the consumer's stated amount of net income on a particular loan is
implausibly high or that the lender is engaged in a pattern of
systematically overestimating consumers' income. The comment clarifies
that evidence of the lender's systematic overestimation of consumers'
income could include evidence that the subset of the lender's portfolio
consisting of the loans where the lender relies on the consumers'
written statements to project income in absence of verification
evidence perform worse, on a non-trivial level, than other covered
loans made by the lender with respect to the factors noted in comment
5(b)-2.iii indicating poor loan performance (e.g., high rates of
default, frequent re-borrowings). The comment also clarifies that if
the lender periodically reviews the performance of covered short-term
loans or covered longer-term balloon-payment loans where the lender has
relied on consumers' written statements of income and uses the results
of those reviews to make necessary adjustments to its policies and
procedures and future lending decisions, such actions indicate that the
lender is reasonably relying on consumers' written statements. The
comment provides an example of how such necessary adjustments could
include, for example, the lender changing its underwriting criteria for
covered short-term loans to provide that the lender may not rely on the
consumer's statement of net income in absence of reasonably available
verification evidence unless the consumer's debt-to-income ratio is
lower, on a non-trivial level, than that of similarly situated
applicants who provide verification evidence of net income. Finally,
the comment clarifies that a lender is not required to consider income
that cannot be verified other
[[Page 54679]]
than through the consumer's written statement.
The Bureau emphasizes four points relating to the changes in the
final rule permitting lenders to reasonably rely on consumer statements
of net income where reliable records for verification are not
reasonably available. First, the test for whether a reliable record is
reasonably available is not whether the consumer brings it with him to
the store, but rather is akin to whether such records could have been
brought because they do, in fact, exist. Pay stubs and transaction
account history records documenting income are considered reliable
records as clarified by comment 5(c)(2)(ii)(A)-3. If the consumer
possesses or can access these types of records, the consumer has to
provide them as needed to verify the consumer's written statement and
the lender cannot merely rely on the consumer's written statement.
Second, the Bureau expects that such reliance on consumers' written
statements will occur in relatively narrow circumstances. These would
include situations where a consumer has a primary job where she
receives a traditional pay stub but has a side business or job where
the consumer is paid in cash and cannot document the income, and the
small number of cases where a consumer is paid entirely in cash for her
primary job and has no transaction account or deposits only a portion
of cash wages in the account. In the vast majority of cases, the Bureau
expects that the consumer will have a pay stub or transaction account
history that can serve as a reliable record to verify the relevant net
income.
Third, as stated in comment 5(c)(2)(ii)(A)-4, lenders are not
required to consider income that cannot be verified other than through
the consumer's written statement (i.e., where a reliable record is not
reasonably available). However, if they do so they are still subject to
a reasonableness standard. The comment specifically notes that a lender
reasonably relies on the consumer's written statement only if such
action is consistent with a lender's written policies and procedures
required under Sec. 1041.12 and there is no indication that the
consumer's stated amount of net income on a particular loan is
implausibly high or that the lender is engaged in a pattern of
systematically overestimating consumers' income. The comment also
discusses what types of performance patterns might constitute evidence
of a lender's systematic overestimation of income and ways in which
lenders could monitor and make adjustments to their policies and future
lending decisions in the face of such evidence. The Bureau thus expects
to monitor lenders for systematic overestimation of income where
lenders are relying on consumers' stated income amounts. The Bureau
will look at whether lenders themselves are monitoring such loans and
making appropriate adjustments to their underwriting policies and
procedures and lending decisions.
Fourth, the Bureau recognizes that, generally, the current practice
among storefront payday lenders (but not vehicle title lenders) is to
verify at least one pay stub of income for an initial loan. The Bureau
thus believes that lenders have strong incentives to continue that
practice rather than shift toward a widespread model of relying on
stated income. With vehicle title lenders there are greater incentives
for lenders to forgo verification and rely on the asset value of the
vehicle. But under the final rule, even for vehicle title lenders, the
lender can only reasonably rely on the consumer's statement of income
when a reliable record is not reasonably available.
The Bureau believes this approach responds appropriately to the
comments from industry and other stakeholders about how the proposed
verification requirements would not have accounted for, and potentially
would have disadvantaged, individuals who are paid in cash and could
afford to repay the loan but may not have the necessary documentation.
At the same time, the Bureau believes that the final rule's
requirements that lenders' reliance on consumers' written statements of
income must be reasonable and that lenders can only rely on such
written statements when the records are not ``reasonably available''--
along with the detailed guidance in commentary about the meaning of
those terms and the expectations around lender monitoring--will provide
guardrails against lender overreliance on consumers' written statements
of income and the potential for abuse of this provision. For these
reasons, as well as those noted in the several paragraphs above, the
Bureau disagrees with the suggestion by the consumer group commenters
that lenders should not be permitted to rely on consumers' written
statements of income in any circumstances or that they should only be
permitted to use a more conservative estimate.
The other significant change is in response to statements by
commenters that some consumers rely on income from third parties such
as spouses or partners. The Bureau has added Sec.
1041.5(c)(2)(ii)(A)(2) which permits consumers to rely on third party
income, but only when the lender obtains verification evidence to
support the fact that the consumer has a reasonable expectation of
access to that income. The Bureau recognizes that many consumers either
pool their income in households or rely on third-party income, such as
contributions from siblings or from parents to adult children. Given
this fact, the Bureau in finalizing the rule is allowing lenders to
rely on third-party income when calculating net income. However, the
Bureau is adopting a different approach with regard to verification of
such income relative to income received directly by the consumer. As
described above, for a consumer's income, a lender must obtain
verification evidence unless it is not reasonably available. For third-
party income, a lender must obtain verification evidence that the
consumer has a reasonable expectation of access to that income for such
income to be included in the ability-to-repay analysis. Comment
5(c)(2)(ii)(A)-1 clarifies that such evidence could consist of bank
account statements indicating that the consumer has an account into
which the other person's income is regularly deposited. With regard to
income that is not the consumer's own income, the Bureau judges it is
important for lenders to obtain objective evidence of regular access.
The Bureau acknowledges that in this regard the rule imposes a more
demanding verification requirement than applies under the CARD Act with
respect to ``accessible income'' but notes again that, as explained
earlier, differences between the credit card market and the market for
short-term and balloon-payment loans warrant the differences in
treatment; see the general discussion of Sec. 1041.5 and the
discussion of Sec. 1041.5(a)(5) and comment 5(a)(5)-3 for further
detail.
In response to commenter requests for clarification about what
constitutes ``sufficient history'' for purposes of projecting income,
the Bureau has added a new comment 5(c)(2)(ii)(A)-2 to provide general
guidance. The comment states that: For covered short-term loans, one
pay cycle would typically constitute sufficient history; and for
longer-term balloon payment loans, two pay cycles generally would
constitute sufficient history. However, the comment also clarifies that
additional verification evidence may be needed to resolve inconsistency
between verification evidence and consumers' written statements, and
depending on the length of the loan.
For covered longer-term balloon-payment loans, a national trade
association for online lenders suggested a safe harbor for sufficient
history of two
[[Page 54680]]
pay stubs, citing National Credit Union Administration requirements for
certain loans. In contrast, consumer groups argued that for covered
longer-term loans greater than six months in duration, the final rule
should require a look-back period of the length of the loan. The Bureau
declines to adopt the consumer groups' suggestion, because such a long
look-back period would impose significant burdens on lenders and
consumers to provide many months of pay stubs or bank statements, at
least for loans of significant length. At the same time, the Bureau
does not believe a safe harbor of two pay cycles would be appropriate,
given that in some circumstances more income history might be necessary
to project future income. The Bureau has structured comment
5(c)(2)(ii)(A)-2 to take into account these competing considerations.
In response to a comment to the proposal seeking clarification on
how far back lenders may look to make reasonable projections of future
net income, specifically citing the issue of annual bonuses, Sec.
1041.5(c)(2)(ii)(A), as clarified by new comment 5(c)(2)(ii)(A)-2, does
not preclude the lender from requesting additional verification
evidence dating back to earlier periods where needed to make the
lender's projection of income reasonable.
5(c)(2)(ii)(B), (C), and (D)
Proposed Rule
The Bureau proposed separate provisions to detail the verification
requirements for different types of major financial obligations in
proposed Sec. 1041.5(c)(3)(ii)(B) (debt obligations), Sec.
1041.5(c)(3)(ii)(C) (child support), and Sec. 1041.5(c)(3)(ii)(D)
(rental housing expense), respectively. Specifically, in proposed Sec.
1041.5(c)(3)(ii)(B) the Bureau specified that for a consumer's required
payments under debt obligations, the applicable verification evidence
would be a national consumer report, the records of the lender and its
affiliates, and a consumer report obtained from an information system
currently registered pursuant to Sec. 1041.17(c)(2) or (d)(2), if
available. The Bureau believed that most typical consumer debt
obligations other than covered loans would appear in a national
consumer report. Many covered loans are not included in reports
generated by the nationwide consumer reporting agencies, so the lender
would also be required to obtain, as verification evidence, a consumer
report from consumer reporting agency that specifically registers with
the Bureau under part 1041. As discussed above, proposed Sec.
1041.5(c)(1) would have permitted a lender to base its projections on
consumer statements of amounts and timing of payments for major
financial obligations (including debt obligations) only to the extent
the statements are consistent with the verification evidence. Proposed
comment 5(c)(1)-1 included examples applying that proposed requirement
in scenarios where a major financial obligation shown in the
verification evidence is greater than the amount stated by the consumer
and where a major financial obligation stated by the consumer does not
appear in the verification evidence at all.
Proposed comment 5(c)(3)(ii)(B)-1 would have clarified that the
amount and timing of a payment required under a debt obligation are the
amount the consumer must pay and the time by which the consumer must
pay it to avoid delinquency under the debt obligation in the absence of
any affirmative act by the consumer to extend, delay, or restructure
the repayment schedule. To the extent the national consumer report and
the consumer report from a registered information system omit
information for a payment under a debt obligation stated by the
consumer, the Bureau explained in the proposal that the lender would
simply base its projections on the amount and timing stated by the
consumer.
The Bureau also emphasized in the proposal that proposed Sec.
1041.5(c)(3)(ii)(B) would not have required a lender to obtain a
consumer report unless the lender is otherwise prepared to make a loan
to a particular consumer. Because obtaining a consumer report adds some
cost, the Bureau assumed in the proposal that lenders would order such
reports only after determining that a consumer otherwise satisfied the
ability-to-repay test so as to avoid incurring costs for applicants who
would be declined without regard to the contents of the report.
Similarly, in proposed Sec. 1041.5(c)(3)(ii)(C), the Bureau
specified that for a consumer's required payments under court- or
government agency-ordered child support obligations, the applicable
verification evidence would be the same national consumer report that
serves as verification evidence for a consumer's required payments
under debt obligations under proposed Sec. 1041.5(c)(3)(ii)(B). To the
extent the national consumer report omitted information for a required
payment, the Bureau explained in the proposal that the lender could
simply base its projections on the amount and timing stated by the
consumer, if any.
Comments Received
Many industry commenters and many individual consumer commenters
objected broadly to the proposed requirements to collect verification
evidence on major financial obligations on the grounds of burden,
efficacy, and negative consequences for consumers. For example, many
individual consumer commenters and several lenders and industry trade
groups argued that requiring a credit check for every loan will harm
consumers' credit by lowering their credit scores. Others stated that
many consumers do not have a credit history, and so the credit check
will not work. Still others claimed that the credit check and
requirement to obtain a report from a registered information system
would be costly for lenders. The SBA Office of Advocacy encouraged the
Bureau to eliminate the credit check requirement because they argued it
is an unnecessary hurdle based on feedback from small business
roundtable participants. They also noted the costs to small businesses,
citing the Bureau's estimate in the proposal that a consumer report
will cost approximately $2.00 for small lenders versus $0.55 for larger
lenders. They also reported that SERs stated that the actual cost of a
consumer report may be as high as $12.00. Commenters more specifically
asked the Bureau to require that registered information systems only
charge lenders a fee if a report is actually obtained (as opposed to an
inquiry that generates no hits). Other commenters asked for a safe
harbor when they rely on information from a consumer report, noting
that the information in a consumer report may be inaccurate.
A specialty consumer reporting agency commenting on the proposed
provision requiring lenders to obtain a national consumer report to
verify debt obligations and child support obligations wrote that it
agreed with the Bureau's assumption that lenders will stage the
ordering of credit reports. The commenter wrote that it expected
lenders will have a ``two-step process'' for obtaining national
consumer reports--they would first order the separate required report
from the registered information system to determine the borrowing
history on covered loans and would conduct a preliminary underwriting
assessment, and that only if the applicant passed that first phase
would the lender then order the national consumer report as part of the
final ability-to-repay determination.
Commenters noted that credit report information is for the past,
and not the
[[Page 54681]]
future for which the lender would need to project major financial
obligations. The commenters asked for clarification on whether in these
instances a lender can trust a consumer's statements regarding future
payments, or how the lender will be able to project for any changes to
the obligation in the future.
Final Rule
After careful consideration of the comments, the Bureau is
finalizing proposed Sec. 1041.5(c)(3)(ii)(B) and (C) as final Sec.
1041.5(c)(2)(ii)(B) and (C), respectively, to address verification
evidence for debt obligations and for alimony and child support.
With regard to debt obligations, the final rule is consistent with
the proposal in that it generally requires that lenders search their
own records and those of affiliates and obtain consumer reports from
both a nationwide consumer reporting agency and from an information
system that has been registered for 180 days or more pursuant to Sec.
1041.11(c)(2) or is registered pursuant to Sec. 1041.11(d)(2), if
available. However, in recognition of commenters' concerns about the
burdens on lenders with regard to the requirement to obtain a national
consumer report (particularly on small lenders as described by the SBA
Office of Advocacy) and the possibility of small negative impacts on
some consumers' credit scores as discussed further below, the Bureau
has adopted new Sec. 1041.5(c)(2)(ii)(D) to permit lenders and their
affiliates to rely on a national consumer report that was obtained
within the prior 90 days, provided that the consumer did not complete a
three-loan sequence and trigger the mandatory 30-day cooling-off period
under Sec. 1041.5(d)(2) since the prior report was obtained.
Even with this change, the Bureau acknowledges that there will be
some costs associated with obtaining consumer reports from nationwide
consumer reporting agencies, and costs associated with obtaining a
report from a registered information system. The Bureau has estimated,
in its Section 1022(b)(2) Analysis below, that the cost of obtaining a
report from a registered information system will likely be around $0.50
``per-hit,'' and has estimated that the cost of pulling a consumer
report from a nationwide consumer reporting agency will run somewhere
between $0.50 and $2.00 each, depending on the report. The Bureau
agrees that these are not small costs. However, they are essential to
making sure that the lender can adequately determine that a borrower
has an ability to repay, and are essential to the proper administration
of the cooling-off period found in Sec. 1041.5(d). In particular,
given the importance of tracking consumers' borrowing patterns with
regard to covered short-term loans and covered longer-term balloon-
payment loans under Sec. 1041.5 in order to comply with Sec. 1041.6
and with the cooling-off period provisions of Sec. 1041.5(d), the
Bureau believes it is important to require that lenders obtain new
reports from registered information systems for each such loan where
available.
Further, as noted in the section-by-section analysis for Sec.
1041.4, the Bureau believes that any impact on consumer's credit scores
will be minimal as a result of the requirements under Sec.
1041.5(c)(2)(ii), for several reasons. First, as discussed above, the
final rule in general only requires a credit check no more than once
every 90 days, rather than for every loan. Second, as discussed in the
proposal, the Bureau expects that lenders making loans under Sec.
1041.5 will only order national consumer reports after determining that
the consumer otherwise satisfies the rule's eligibility requirements
and the ability-to-repay test using a consumer report from a registered
information system so as to avoid incurring these costs for applicants
who would be declined without regard to the contents of the national
consumer report. In this regard, the Bureau notes the comment described
earlier from a specialty consumer reporting agency which predicted that
lenders would develop a ``two-step process'' for obtaining credit
reports--they would first order the report from the registered
information system and would determine the borrowing history on covered
loans, along with a preliminary underwriting assessment, and that only
if the applicant passed that first phase would the lender then order
the national consumer report as part of the final ability-to-repay
determination. Thus, the Bureau expects that many consumers who apply
for loans but are denied based on information reflected in a report
from a registered information system will have no negative impacts on
their credit scores.\829\ Third, as discussed in the 1022(b)(2)
Analysis, the Bureau is projecting that the majority of covered short-
term loans that would be made under the final rule would be made under
Sec. 1041.6, not Sec. 1041.5, so this particular requirement may
affect only a small number of consumers.
---------------------------------------------------------------------------
\829\ The Bureau notes that in the Section 1022(b)(2) Analysis,
there is discussion of how lenders may potentially minimize the cost
impacts of these requirements by obtaining both the consumer report
from the registered information system and a national consumer
report as part of a consolidated report. Even with the consolidated
reports envisioned there, however, lenders and the providers for the
registered information systems could stagger the delivery of such
reports such as to minimize the negative scoring impacts on
consumers.
---------------------------------------------------------------------------
Moreover, as a more general matter, the impact that any credit
check with a nationwide consumer reporting agency will have on a
borrower's overall credit profile is limited and uncertain, given that
every consumer report differs and different creditors use different
credit scoring models. One of the most experienced scoring companies,
FICO, says the following about the impact of credit inquiries on a
consumer's score: ``The impact from applying for credit will vary from
person to person based on their unique credit histories. In general,
credit inquiries have a small impact on one's FICO Scores. For most
people, one additional credit inquiry will take less than five points
off their FICO Scores. For perspective, the full range of FICO Scores
is 300-850.'' Through the Bureau's market monitoring and outreach it
also understands that such a decrease in credit score may only be
reflected on consumer reports for up to 12 months or could be fixed
during that time period. For these reasons, the Bureau believes that
the negative impacts claimed by commenters resulting from lenders
having to obtain national consumer reports will be minimal.
The Bureau recognizes, as commenters note, that consumer reports
always include historical information. Thus, in projecting forward to
the relevant monthly period, there will be times when lenders will have
to make reasonable adjustments based on the consumer's written
statement and other sources as discussed in Sec. 1041.5(c)(1) and (2)
and related commentary.
In addition, the Bureau reconsidered, as commenters noted, whether
it was inconsistent to count child support but not alimony as a major
financial obligation, especially where alimony is court- or government
agency-ordered, and thus, likely reported on a consumer report.
(Commenters also had questioned why receipt of alimony or child support
was not included as net income, as discussed in the section-by-section
analysis for Sec. 1041.5(a)(5)). In light of the fact that, like other
major financial obligations, alimony could potentially appear on a
consumer report, or alternatively, a lender could rely on a written
statement from the consumer about alimony, and the fact that alimony
meets the general definition of a major financial obligation, the
Bureau has decided to adjust Sec. 1041.5(c)(2)(ii)(C) and the
corresponding commentary to state that
[[Page 54682]]
both alimony and child support obligations should be verified where
possible from a national consumer report and that lenders may otherwise
reasonably rely on information provided in a consumer's written
statement for purposes of verification.
In addition, in response to commenters asking for a safe harbor for
instances where information in a consumer report is inaccurate, the
Bureau has added comment 5(c)(2)(ii)(B)-3 to clarify more specifically
how lenders should resolve conflicting information about major
financial obligations as between a consumer's written statement and
various forms of verification evidence. The comment also clarifies that
a lender is not responsible for information about a major financial
obligation that is not owed to the lender, its affiliates, or its
service providers if such obligation is not listed in a consumer's
written statement, a national consumer report, or a consumer report
from an information system that has been registered for 180 days or
more pursuant to Sec. 1041.11(c)(2) or is registered pursuant to Sec.
1041.11(d)(2). A similar provision addressing inaccurate or incomplete
information in consumer reports from an information system that has
been registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or
is registered pursuant to Sec. 1041.11(d)(2) has been included in the
commentary for Sec. 1041.6.
With regard to the privacy concerns raised by commenters, the
lender need only obtain information about the borrower's individual
income, information that is on consumer reports (including a report
from a registered information system), and information contained in the
borrower's written statement. In the modern era, it is quite typical
for creditors to have access to consumer reports, and many other
parties, including employers, often do as well. The Bureau expects
lenders to act in accordance with permissible use restrictions as
prescribed in the Fair Credit Reporting Act and other privacy laws and
regulations to the extent applicable. Lenders will also ask consumers
questions about, and receive verification evidence on, income. In the
payday market, this will likely make only a marginal difference with
respect to privacy because the payday market typically already collects
this information. It will have a more significant impact for vehicle
title lending borrowers, who would now have to obtain income
verification. The Bureau recognizes that some consumers will be
troubled by the increased scrutiny into borrowers' private information,
as noted by many individual commenters, but believes that these
concerns have been somewhat reduced by changes to the final rule and in
any event are worth the benefits of requiring income verification.
The Bureau has made a number of technical and structural, as well
as substantive, changes to Sec. 1041.5(c)(2)(ii) and the related
commentary to implement the policy changes discussed above, and the
policy changes found throughout other paragraphs in Sec. 1041.5.
Lastly, in response to commenters' concerns that lenders may
``double-count'' certain major financial obligations if they are
deducted from income, the Bureau notes that it has added comment
5(c)(2)(ii)(B)-2 and comment 5(c)(2)(ii)(C)-2, which specify that if
verification evidence shows that a debt obligation, child support
obligation, or alimony obligation is deducted from the consumer's
income, the lender does not include those amounts in the projection of
major financial obligations. This change and the comments underlying
the change are discussed in more detail in the section-by-section
analysis for Sec. 1041.5(a)(3) (definition of major financial
obligations), above.
5(c)(2)(iii)
Proposed Rule
The Bureau proposed a more flexible approach with regard to rental
housing expenses in proposed Sec. 1041.5(c)(3)(ii)(D) than with regard
to other major financial obligations. Specifically, proposed Sec.
1041.5(c)(3)(ii)(D) specified that for a consumer's housing expense
(other than a payment for a debt obligation that appears on a national
consumer report obtained by the lender under proposed Sec.
1041.5(c)(3)(ii)(B)), the applicable verification evidence would be
either a reliable transaction record (or records) of recent housing
expense payments or a lease, or an amount determined under a reliable
method of estimating a consumer's housing expense based on the housing
expenses of consumers in the same locality.
Proposed comment 5(c)(3)(ii)(D)-1 described each of the options for
verification evidence in more detail. Most importantly, proposed
comment 5(c)(3)(ii)(D)-1.iii provided examples of situations in which a
lender used an amount determined under a reliable method of estimating
a consumer's share of housing expense based on the individual or
household housing expenses of similarly situated consumers with
households in the same locality, such as relying on the American
Community Survey of the U.S. Census Bureau to estimate individual or
household housing expense in the locality (e.g., in the same census
tract) where the consumer resides. In the alternative, the comment also
provided that a lender may estimate individual or household housing
expense based on housing expense and other data (e.g., residence
location) reported by applicants to the lender, provided that it
periodically reviews the reasonableness of the estimates that it relies
on using this method by comparing the estimates to statistical survey
data or by another method reasonably designed to avoid systematic
underestimation of consumers' shares of housing expense. It further
explained that a lender may estimate a consumer's share of household
expense by reasonably apportioning the estimated household housing
expense among the people sharing the housing expense as stated by the
consumer, or by another reasonable method.
The Bureau explained in the proposal that this approach was
designed to address concerns that had been raised in the SBREFA process
and other industry outreach prior to the proposal. In particular, the
Small Business Review Panel Outline had referred to lender verification
of a consumer's rent or mortgage payment using, for example, receipts,
cancelled checks, a copy of a lease, and bank account records. As
discussed in the proposal, some SERs and other lender representatives
stated that many consumers would not have these types of documents
readily available. Few consumers receive receipts or cancelled checks
for rent or mortgage payments, they stated, and bank account statements
may simply state the check number used to make a payment, providing no
way of confirming the purpose or nature of the payment. Consumers with
a lease would not typically have a copy of the lease with them when
applying for a covered loan, they stated, and it would be unduly
burdensome, if not impracticable for them to locate and transmit or
deliver a copy of the lease to a lender.
Comments Received
Several commenters argued that the Bureau's standards around
verifying housing expenses were unfair and would lead to a significant
number of ``false negatives'' (i.e., unintended denials of credit) for
consumers who can, and do regularly, pay for rental housing expense but
do not possess the requisite verification evidence. Commenters claimed
that many consumers have non-traditional living
[[Page 54683]]
arrangements where there is no documented lease, or live rent-free with
a relative, and thus would not have any verification evidence of rent.
Some commenters argued that asking consumers for verification of rental
housing expense would be considered intrusive, particularly for those
consumers living in informal rooming arrangements. The Bureau also
received a number of comments arguing that the proposal had not
accounted for consumers who share rental housing expense and where the
formal documentation does not reflect the arrangement. For example, if
two roommates pay rent on the same lease, the verification evidence
would indicate that only one of them may have to pay the full rent.
Other commenters claimed that rental agreements were difficult to
procure, and thus, it would be impractical to require one. Commenters
also argued that bank statements would not be sufficient to verify
housing expenses because they might not show the names of the
recipients of the rental payments.
A number of commenters raised issues with the provision in proposed
Sec. 1041.5(c)(3)(ii)(D) that lenders could estimate rental housing
expenses by using a reliable method (either locality-based data or data
on their own customers) as an alternative to collecting a reliable
record of rental housing expense such a lease. As explained earlier,
the Bureau had included the alternative in response to feedback during
the SBREFA process and outreach that the Small Business Review Panel
Outline took too strict of an approach to verification of rental
housing expense. Commenters were critical of this proposed provision on
a number of grounds. Some argued it would be burdensome for lenders,
particularly small lenders, to develop statistical estimates. Other
commenters argued that using census tract data, as given in a proposed
commentary example, could substantially overstate housing expenses by
failing to account for the greater amount of shared living arrangements
among payday borrowers or the demographics of this borrowing
population. One trade group argued that, at minimum, the Bureau should
allow ``validation'' of housing expenses based on a consumer's stated
history and circumstances. Some commenters also raised concerns that
taking into account locality-based information on housing expenses in
underwriting decisions could violate ECOA and Regulation B (see
discussion of these issues in the more general Sec. 1041.5 discussion
above).
Consumer groups, on the other hand, commented that the proposal's
treatment of rental housing expenses was too permissive. They argued
that rental housing expense should be verified wherever possible, and
that if verification evidence is not available, the lender should have
to use the larger of the locality-based average or the consumer's
statement. They also argued that if there is a shared arrangement,
lenders should obtain verification evidence (such as a lease or
checking account activity) or reliable third-party evidence (like a co-
tenant statement). They expressed concern about proposed commentary
language permitting lenders to apportion household expense based solely
on the consumer's statement. And they argued that the Bureau should
consider providing ``portfolio-level guardrails'' that indicate whether
housing estimates not based on verification evidence and lender
assertions of shared housing expense are more likely to be
unreasonable, and subjecting lenders whose portfolios have those
indicators to higher scrutiny.
Final Rule
The Bureau is finalizing proposed Sec. 1041.5(c)(3)(ii)(D) as
final Sec. 1041.5(c)(2)(iii) with a number of significant changes as
discussed below. In response to the many comments criticizing the
Bureau for proposing to require, for rental housing, either a reliable
record or an estimate based on the housing expenses of consumers with
households in the same locality (including concerns about fair lending
interests discussed above), the Bureau has adjusted Sec.
1041.5(c)(2)(iii) to provide that lenders may reasonably rely on the
consumer's written statement to project rental housing obligations. New
comment 5(c)(2)(iii)-1 states that a lender reasonably relies on the
consumer's written statement if such actions are consistent with a
lender's policies and procedures, there is no evidence that the stated
amount on a particular loan is implausibly low, and there is no pattern
of the lender underestimating consumers' rental housing expense. The
Bureau views these clarifications as analogous to those in comment
5(c)(2)(ii)(A)-4 regarding reasonable reliance on stated amounts for
net income, and refers to the explanatory explanation above.
The Bureau recognizes that there are likely a significant number of
consumers, as noted by commenters, that have non-traditional living
situations, live with roommates without being on the lease, rent on a
month-to-month basis without a lease or a current lease, sublet, or
live with a third party (like parents). The Bureau also recognizes that
requiring consumers with a lease to present those documents to obtain a
loan could prove burdensome, especially for consumers applying online.
For these reasons, the proposal did not require applicants to provide a
lease even where one existed. Instead, the proposal allowed lenders
instead to rely on verification evidence consisting of data that could
be used to validate the reasonableness of a consumer's statement of
rental housing expenses. However, the Bureau is persuaded by the weight
of the comments suggesting that the proposal's approach to estimation
of expenses raised a number of challenges.
Specifically, the Bureau is persuaded by commenters who argued that
data on the median or average rental expenses for households in the
same locality may not accurately reflect the median or average
demographic or housing expenses of customers of covered short-term and
longer-term balloon-payment loans and would thus potentially overstate
the amount of rental housing expense for prospective borrowers.
Furthermore, the Bureau is persuaded that even if it were possible to
determine the average or median rental expense for these consumers,
such data would not be useful in validating the reasonableness of any
individual consumer's statement of her rental housing expenses, which
could be vastly different from the average or median consumer. Finally,
the Bureau agrees with commenters who noted that small lenders would be
at a disadvantage in obtaining statistical validation evidence. The
Bureau continues to recognize the risks entailed in permitting lenders
to rely on stated rental expenses--including the risk that consumers
will misstate or be induced to misstate their expenses--which are
concerns echoed by the consumer groups in their comment. But the Bureau
nonetheless is persuaded that the available alternatives are not
practical and therefore is permitting lenders to rely on consumers'
written statements of rental housing expense where it is reasonable to
do so.
5(d) Additional Limitations on Lending--Covered Short-Term Loans and
Covered Longer-Term Balloon-Payment Loans
Proposed Sec. 1041.6 would have augmented the basic ability-to-
repay determination in proposed Sec. 1041.5 in circumstances in which
the consumer's recent borrowing history or recent difficulty repaying
an outstanding loan provides important evidence with respect to the
consumer's financial
[[Page 54684]]
capacity to afford a new covered short-term loan. In particular,
proposed Sec. 1041.6 would have imposed a presumption of
unaffordability when a consumer returned for a covered short-term loan
within 30 days of a prior covered short-term or covered longer-term
balloon-payment loan being outstanding. Presumptions would also have
been imposed in particular circumstances indicating that a consumer was
having difficulty repaying an outstanding covered or non-covered loan
outstanding that was made or was being serviced by the same lender or
its affiliate. Under the proposed approach, lenders would have been
able to overcome a presumption of unaffordability only in circumstances
where there was a sufficient improvement in financial capacity. This
would have applied, for instance, where there was evidence that the
prior difficulty with repayment was due to an income shock that was not
reasonably expected to recur or where there was a reasonable projected
increase of income or decrease in major financial obligations during
the term of the new loan. However, after the third covered short-term
loan in a sequence, proposed Sec. 1041.6 would have imposed a
mandatory 30-day cooling-off period. The proposed section also
contained certain additional provisions that were designed to address
concerns about potential evasion and confusion if consumers alternated
in quick succession between covered short-term loans under proposed
Sec. 1041.5 and other types of credit products.
Similarly, proposed Sec. 1041.10 would have applied parallel
presumptions of unaffordability to new covered longer-term loans based
on consumers' recent borrowing history on certain types of covered
loans or difficulty repaying a current covered or non-covered loan,
that was made or was being serviced by the same lender or its
affiliate, although it would not have imposed a mandatory cooling-off
period after a three loan sequence. Proposed Sec. 1041.10 also would
have imposed certain restrictions to address concerns about potential
evasion and confusion if consumers alternated in quick succession
between a covered short-term loan under proposed Sec. 1041.7 and other
types of credit products.
After consideration of the comments received as discussed further
below, the Bureau has decided to finalize only selected elements of
proposed Sec. Sec. 1041.6 and 1041.10, consolidated as Sec. 1041.5(d)
of the final rule. Specifically, the Bureau is finalizing a 30-day
mandatory cooling-off period after a consumer has completed a three-
loan sequence of covered short-term loans, covered longer-term balloon-
payment loans, or a combination thereof. It is also finalizing
restrictions on certain re-borrowing within 30 days of a covered
shorter-term loan made under final rule Sec. 1041.6 (which was Sec.
1041.7 in the proposal) being outstanding.\830\ As explained below in
detail, the Bureau is not finalizing several provisions, including any
of the proposed presumptions of unaffordability. Thus, the Bureau is
finalizing adjusted portions of proposed Sec. 1041.6(a)(2), (f), and
(g) and proposed Sec. 1041.10(a)(2) and (e) on a combined basis in
Sec. 1041.5(d) for both covered short-term and longer-term balloon-
payment loans as discussed further below.
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\830\ See also the section-by-section analysis of final Sec.
1041.6(d) below, which discusses a related provision limiting loans
by lenders or their affiliates within 30 days of a prior outstanding
loan under Sec. 1041.6 by the same lender or its affiliates.
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Proposed Rule
In proposed Sec. 1041.6, the Bureau proposed to require the lender
to factor evidence about the consumer's recent borrowing history and
difficulty in repaying an outstanding loan into the ability-to-repay
determination and, in certain instances, to prohibit a lender from
making a new covered short-term loan to the consumer under proposed
Sec. 1041.5 for 30 days. The Bureau proposed the additional
requirements in Sec. 1041.6 for the same basic reason that it proposed
Sec. 1041.5: To prevent the unfair and abusive practice identified in
proposed Sec. 1041.4 and the consumer injury that results from it. The
Bureau explained in the proposal that it believed that these additional
requirements would be needed in circumstances where proposed Sec.
1041.5 alone might not suffice to prevent a lender from making a
covered short-term loan that the consumer would lack the ability to
repay.
Proposed Sec. 1041.6 would have generally imposed a presumption of
unaffordability on continued lending where evidence suggested that the
prior loan was not affordable for the consumer, indicating that the
consumer could have particular difficulty repaying a new covered short-
term loan. Specifically, such a presumption would have applied in three
circumstances: (1) Under proposed Sec. 1041.6(b), when a consumer
sought a covered short-term loan during the term of a covered short-
term loan made under proposed Sec. 1041.5 and for 30 days thereafter;
(2) under proposed Sec. 1041.6(c), when a consumer sought a covered
short-term loan during the term of a covered longer-term balloon-
payment loan made under proposed Sec. 1041.9 and for 30 days
thereafter; and (3) under proposed Sec. 1041.6(d), when a consumer
sought to take out a covered short-term loan when there were indicia
that the consumer was already struggling to repay an outstanding loan
of any type--covered or non-covered--with the same lender or its
affiliate.
The Bureau explained in the proposal that a central component of
the preventive requirements in proposed Sec. 1041.6 was the concept of
a re-borrowing period--a period following the payment date of a prior
loan during which a consumer's borrowing of a covered short-term loan
is deemed evidence that the consumer is seeking additional credit
because the prior loan was unaffordable. When consumers have the
ability to repay a covered short-term loan, the loan should not cause
consumers to have the need to re-borrow shortly after repaying the
loan. As discussed in the proposal, including in the proposal's
discussion of Market Concerns--Short-term Loans, however, the Bureau
believed that the fact that covered short-term loans require repayment
so quickly after consummation makes such loans more difficult for
consumers to repay consistent with their basic living expenses and
major financial obligations without needing to re-borrow. Moreover, as
the Bureau explained, most covered short-term loans--including payday
and vehicle title loans--also require payment in a single lump sum,
thus exacerbating the challenge of repaying the loan without needing to
re-borrow.
For these loans, the Bureau stated in the proposal that it believed
that the fact that a consumer returns to take out another covered
short-term loan shortly after having a previous covered short-term loan
outstanding frequently indicates that the consumer did not have the
ability to repay the prior loan and meet the consumer's basic living
expenses and major financial obligations. This also may provide strong
evidence that the consumer will not be able to afford a new covered
short-term loan. The Bureau further explained that a second covered
short-term loan shortly following a prior covered short-term loan may
result from a financial shortfall caused by repayment of the prior
loan. The Bureau noted that evidence shows that re-borrowing for short-
term loans often occurs on the same day that a loan is due, either in
the form of a rollover of the existing loan (where permitted by State
law) or in the form of a new loan taken out on the same day that the
prior loan was repaid. Some States require a
[[Page 54685]]
cooling-off period between loans, typically 24 hours, and the Bureau
found that in those States, if consumers take out successive loans,
they generally do so at the earliest time that is legally
permitted.\831\ The Bureau interpreted these data to indicate that
these consumers could not afford to repay the full amount of the loan
when due and still meet their basic living expenses and major financial
obligations.
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\831\ CFPB Report on Supplemental Findings, at Chapter 4.
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In the proposal, the Bureau stated that it is less facially evident
whether a particular loan is a re-borrowing that was prompted by the
unaffordability of a prior loan when that new loan is taken out after
some time has elapsed since a consumer has repaid the prior loan (and
after the expiration of any State-mandated cooling-off period). The
fact that consumers may cite a particular income or expense shock is
not dispositive, since a prior unaffordable loan may be the reason that
the consumer cannot absorb the new change. The Bureau stated in the
proposal that on balance, the Bureau believed that for new loans taken
out within a short period after a prior loan ceases to be outstanding,
the most likely explanation is the unaffordability of the prior loan--
i.e., the fact that the size of the payment obligation on the prior
loan left these consumers with insufficient income to make it through
their monthly expense cycle.
The Bureau explained in the proposal that to provide a structured
process that accounts for the likelihood that the unaffordability of an
existing or prior loan is driving re-borrowing and that ensures a more
rigorous analysis of consumers' individual circumstances, the Bureau
believed that an appropriate approach would be to impose presumptions
when new loans fall within a specified re-borrowing period, rather than
engaging in an open-ended inquiry. The Bureau thus proposed to
delineate a specific re-borrowing period, during which a new loan will
be presumed to be a re-borrowing.\832\ In determining the appropriate
length of the re-borrowing period, the Bureau described how it had
considered several different possible periods. The Bureau proposed a
30-day period, but also considered periods of 14, 45, 60, or 90 days in
length. The Bureau also considered an option that would tie the length
of the re-borrowing period to the term of the preceding loan.
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\832\ The Bureau explained in the proposal that re-borrowing
takes several forms in the market for covered short-term loans. As
used throughout the proposal, re-borrowing and the re-borrowing
period include any rollovers or renewals of a loan, as well as new
extensions of credit. The Bureau explained that a loan may be a
``rollover'' if, at the end of a loan term, a consumer only pays a
fee or finance charge in order to ``roll over'' a loan rather than
repaying the loan. The Bureau noted that similarly, the laws of some
States permit a lender to ``renew'' a consumer's outstanding loan
with the payment of a finance charge, and that more generally, a
consumer may repay a loan and then return to take out a new loan
within a fairly short period. The Bureau stated in the proposal that
it considers rollovers, renewals, and re-borrowing within a short
period after repaying the prior loan to be functionally the same
sort of transaction--and generally used the term re-borrowing in the
proposal to cover all three scenarios, along with concurrent
borrowing by a consumer whether from the same lender or its
affiliate or from different, unaffiliated lenders.
---------------------------------------------------------------------------
In evaluating the alternative options for defining the re-borrowing
period (and, in turn, the definition of a loan sequence), the Bureau
described in the proposal how it was seeking to strike a balance
between two alternatives. The first would be a re-borrowing period that
is too short, thereby not capturing substantial numbers of subsequent
loans that are in fact the result of the spillover effect of the
unaffordability of the prior loan and inadequately preventing consumer
injury. The second would be a re-borrowing period that is too long,
thereby covering substantial numbers of subsequent loans that are in
fact the result of a new need for credit, independent of such effects.
The Bureau further described how this concept of a re-borrowing period
is also intertwined with the definition of loan sequence. Under
proposed Sec. 1041.2(a)(12), the Bureau would have defined loan
sequence as a series of consecutive or concurrent covered short-term
loans in which each of the loans is made while the consumer currently
has an outstanding covered short-term loan or within 30 days after the
consumer ceased to have such a loan outstanding.
The Bureau explained in the proposal that the Bureau's 2014 Data
Point analyzed repeated borrowing on payday loans using a 14-day re-
borrowing period reflecting a bi-weekly pay cycle, the most common pay
cycle for consumers in this market.\833\ For the purposes of the 2014
Data Point, a loan was considered part of a sequence if it was made
within 14 days of the prior loan. The Bureau stated in the proposal
that it had adopted this approach in its early research in order to
obtain a relatively conservative measure of re-borrowing activity
relative to the most frequent date for the next receipt of income.
However, the 14-day definition had certain disadvantages, including the
fact that many consumers are paid on a monthly cycle, and a 14-day
definition thus does not adequately reflect how different pay cycles
can cause somewhat different re-borrowing patterns.
---------------------------------------------------------------------------
\833\ See generally CFPB Data Point: Payday Lending.
---------------------------------------------------------------------------
The Bureau stated in the proposal that upon further consideration
of what benchmarks would sufficiently protect consumers from re-
borrowing harm, the Bureau turned to the typical consumer expense
cycle, rather than the typical income cycle, as the most appropriate
metric.\834\ The Bureau noted that consumer expense cycles are
typically a month in length with housing expenses, utility payments,
and other debt obligations generally paid on a monthly basis. Thus,
where repaying a loan causes a shortfall, the consumer may seek to
return during the same expense cycle to get funds to cover downstream
expenses.
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\834\ The Bureau noted in the proposal that researchers in an
industry-funded study also concluded that ``an entire billing cycle
of most bills--rent, other loans, utilities, etc.--and at least one
paycheck'' is the ``appropriate measurement'' for purposes of
determining whether a payday loan leads to a ``cycle of debt.'' Marc
Anthony Fusaro & Patricia J. Cirillo, ``Do Payday Loans Trap
Consumers in a Cycle of Debt?,'' (2011), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776.
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The proposals under consideration in the Small Business Review
Panel Outline relied on a 60-day re-borrowing period, based on the
premise that consumers for whom repayment of a loan was unaffordable
may nonetheless be able to juggle their expenses for some time so that
the spillover effects of the loan may not manifest themselves until the
second expense cycle following repayment. As explained in the proposal,
upon additional analysis and extensive feedback from a broad range of
stakeholders, the Bureau tentatively concluded that the 30-day
definition incorporated into the proposal may strike a more appropriate
balance between the competing considerations, chiefly because so many
expenses are paid on a monthly basis.
The Bureau stated its belief that loans obtained during the same
expense cycle are relatively likely to indicate that repayment of a
prior loan may have caused a financial shortfall. Similarly, in
analyzing supervisory data, the Bureau found that a considerable
segment of consumers who repay a loan without an immediate rollover or
re-borrowing nonetheless return within the ensuing 30 days to re-
borrow.\835\ The Bureau stated in the proposal that accordingly, if the
consumer returned to take out another covered short-term loan--or, as
described in proposed Sec. 1041.10, certain types of covered longer-
term loans--within the same 30-
[[Page 54686]]
day period, the Bureau believed that this pattern of re-borrowing
indicated that the prior loan was unaffordable and that the following
loan may likewise be unaffordable. On the other hand, the Bureau stated
its belief that for loans obtained more than 30 days after a prior
loan, there is a higher likelihood that the loan is prompted by a new
need on the part of the borrower, and is not directly related to
potential financial strain from repaying the prior loan. The Bureau
further explained that while a prior loan's unaffordability may cause
some consumers to need to take out a new loan as many as 45 days or
even 60 days later, the Bureau believed that the effects of the
previous loan are more likely to dissipate once the consumer has
completed a full expense cycle following the termination of a prior
loan that has been fully repaid.
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\835\ CFPB Report on Supplemental Findings, at Chapter 5.
---------------------------------------------------------------------------
For these reasons, the Bureau believed at the time it developed the
proposed rule that a 45-day or 60-day definition would be too broad.
The Bureau also stated in the proposal that a re-borrowing period that
would vary with the length of the preceding loan term would be
operationally complex for lenders to implement and, for consumers who
are paid either weekly or bi-weekly, may also be too narrow.
Accordingly, using this 30-day re-borrowing window, the Bureau
proposed a presumption of unaffordability for covered short-term loans
made while a prior loan is outstanding or within a 30-day period after
the end of the term of the prior loan. As proposed, however, the
presumption could have been overcome in various circumstances
suggesting that there is sufficient reason to believe the consumer
would, in fact, be able to afford the new loan even though she is
seeking to re-borrow during the term of or shortly after a prior loan.
The Bureau recognized, for example, that there may be situations in
which the prior loan would have been affordable but for some unforeseen
disruption in income that occurred during the prior expense cycle and
which is not reasonably expected to recur during the term of the new
loan. The Bureau also recognized that there may be circumstances,
albeit less common, in which even though the prior loan proved to be
unaffordable, a new loan would be affordable because of a reasonably
projected increase in net income or decrease in major financial
obligations.
To effectuate these policy decisions, proposed Sec. 1041.6(a)
would have set forth the general requirement for lenders to obtain and
review information about a consumer's borrowing history from the
records of the lender and its affiliates, and from a consumer report
obtained from an information system currently registered pursuant to
proposed Sec. 1041.17(c)(2) or (d)(2), if available, and to use this
information to determine a potential loan's compliance with the
requirements of proposed Sec. 1041.6.
Proposed Sec. 1041.6(b) through (d) would have defined the set of
circumstances in which the Bureau believed that a consumer's recent
borrowing history makes it unlikely that the consumer can afford a new
covered short-term loan, including concurrent loans.\836\ In such
circumstances, a consumer would be presumed not to have the ability to
repay a covered short-term loan under proposed Sec. 1041.5.
Specifically, the presumption of unaffordability would have applied:
(1) Under proposed Sec. 1041.6(b), when a consumer sought a covered
short-term loan during the term of a covered short-term loan made under
proposed Sec. 1041.5 and for 30 days thereafter; (2) under proposed
Sec. 1041.6(c), when a consumer sought a covered short-term loan
during the term of a covered longer-term balloon-payment loan made
under proposed Sec. 1041.9 and for 30 days thereafter; and (3) under
proposed Sec. 1041.6(d), when a consumer sought to take out a covered
short-term loan when there are indicia that the consumer is already
struggling to repay an outstanding loan of any type--covered or non-
covered--with the same lender or its affiliate. Proposed Sec.
1041.6(e) would have defined the additional determinations that a
lender would be required to make in cases where the presumption applies
in order for the lender's ability-to-repay determination under proposed
Sec. 1041.5 to be reasonable despite the unaffordability of the prior
loan.
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\836\ In the proposal, the Bureau noted that the proposed
ability-to-repay requirements would have not prohibited a consumer
from taking out a covered short-term loan when the consumer has one
or more covered short-term loans outstanding, but instead accounted
for the presence of concurrent loans in two ways: (1) A lender would
have been required to obtain verification evidence about required
payments on debt obligations, which were defined under proposed
Sec. 1041.5(a)(2) to include outstanding covered loans; and (2) any
concurrent loans would have been counted as part of the loan
sequence for purposes of applying the presumptions and prohibitions
under proposed Sec. 1041.6. The Bureau explained in the proposal
that this approach differs from the conditional exemption for
covered short-term loans under proposed Sec. 1041.7, which
generally would have prohibited the making of such a loan if the
consumer has an outstanding covered loan. The Bureau noted that for
further discussion, see the section-by-section analysis of proposed
Sec. 1041.7(c)(1), including an explanation of the different
approaches and notation of third-party data about the prevalence of
concurrent borrowing in this market.
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The presumption of unaffordability in proposed Sec. 1041.6(c)
would have provided that a consumer is presumed not to have the ability
to repay a covered short-term loan under proposed Sec. 1041.5 during
the time period in which the consumer has a covered longer-term
balloon-payment loan made under proposed Sec. 1041.9 outstanding and
for 30 days thereafter. The Bureau stated in the proposal that it
believed that when a consumer seeks to take out a new covered short-
term loan that would be part of a loan sequence, there is substantial
reason for concern that the need to re-borrow is being triggered by the
unaffordability of the prior loan. Similarly, covered longer-term
balloon-payment loans, by definition, require a large portion of the
loan to be paid at one time. The Bureau described its research
suggesting that the fact that a consumer seeks to take out another
covered longer-term balloon-payment loan shortly after having a
previous covered longer-term balloon-payment loan outstanding will
frequently indicate that the consumer did not have the ability to repay
the prior loan and meet the consumer's other major financial
obligations and basic living expenses. The Bureau stated that it had
found that the approach of the balloon payment coming due is associated
with significant re-borrowing. However, the need to re-borrow caused by
an unaffordable covered longer-term balloon is not necessarily limited
to taking out a new loan of the same type. The Bureau explained that if
the borrower takes out a new covered short-term loan in such
circumstances, it also is a re-borrowing. Accordingly, in order to
prevent the unfair and abusive practice identified in proposed Sec.
1041.4, the Bureau proposed a presumption of unaffordability for a
covered short-term loan that would be concurrent with or shortly
following a covered longer-term balloon-payment loan.
In proposed Sec. 1041.6(d), the Bureau would have established a
presumption of unaffordability when a lender or its affiliate sought to
make a covered short-term loan to an existing consumer in which there
are indicia that the consumer cannot afford an outstanding loan with
that same lender or its affiliate. The triggering conditions would have
been a delinquency of more than seven days within the preceding 30
days, expressions by the consumer within the preceding 30 days that he
or she cannot afford the outstanding loan, certain circumstances
indicating that the new loan is motivated by a desire to skip one or
more payments on the outstanding loan, and certain
[[Page 54687]]
circumstances indicating that the new loan is solely to obtain cash to
cover upcoming payments or payments on the outstanding loan. The Bureau
believed that the analysis required by proposed Sec. [thinsp]1041.6(d)
would have provided greater protection to consumers and certainty to
lenders than requiring that such transactions be analyzed under
proposed Sec. [thinsp]1041.5 alone. Proposed Sec. [thinsp]1041.5
would have required generally that the lender make a reasonable
determination that the consumer will have the ability to repay the
contemplated covered short-term loan, taking into account existing
major financial obligations that would include the outstanding loan
from the same lender or its affiliate. However, the presumption in
proposed Sec. [thinsp]1041.6(d) would have provided a more detailed
roadmap as to when a new covered short-term loan would not meet the
reasonable determination test.
In proposed Sec. 1041.6(f), the Bureau also would have established
a mandatory cooling-off period prior to a lender making a fourth
covered short-term loan in a sequence. As stated in the proposal, the
Bureau believed that it would be extremely unlikely that a consumer who
twice in succession returned to re-borrow during the re-borrowing
period, and who seeks to re-borrow again within 30 days of having the
third covered short-term loan outstanding, would be able to afford
another covered short-term loan. Because of lenders' strong incentives
to facilitate re-borrowing that is beyond the consumer's ability to
repay, the Bureau believed it appropriate, in proposed Sec. 1041.6(f),
to impose a mandatory 30-day cooling-off period after the third covered
short-term loan in a sequence, during which time the lender cannot make
a new covered short-term loan under proposed Sec. 1041.5 to the
consumer. This period was intended to ensure that after three
consecutive ability-to-repay determinations have proven inconsistent
with the consumer's actual experience, the lender could not further
worsen the consumer's financial situation by extending additional
unaffordable debt to the consumer.
In its discussion of proposed Sec. 1041.6(f), the Bureau stated
that the ability-to-repay determination required by proposed Sec.
1041.5 is intended to protect consumers from what the Bureau believes
may be the unfair and abusive practice of making a covered short-term
loan without making a reasonable determination of the consumer's
ability to repay the loan. If a consumer who obtains such a loan seeks
a second loan when, or shortly after, the payment on the first loan is
due, that suggests that the prior loan payments were not affordable and
triggered the new loan application, and that a new covered short-term
loan will lead to the same result. The Bureau stated that it believes
that if a consumer has obtained three covered short-term loans in quick
succession and seeks to obtain yet another covered short-term loan when
or shortly after payment on the last loan is due, the fourth loan will
almost surely be unaffordable for the consumer.
In the proposal, the Bureau described how the Bureau's research
underscores the risk that consumers who reach the fourth loan in a
sequence of covered short-term loans will wind up in a long cycle of
debt. Most significantly, the Bureau found that 66 percent of loan
sequences that reach a fourth loan end up having at least seven loans,
and 47 percent of loan sequences that reach a fourth loan end up having
at least 10 loans.\837\ For consumers paid weekly, bi-weekly, or
semimonthly, 12 percent of loan sequences that reach a fourth loan end
up having at least 20 loans during a 10-month period.\838\ And for
loans taken out by consumers who are paid monthly, more than 40 percent
of all loans to these borrowers were in sequences that, once begun,
persisted for the rest of the year for which data were available.\839\
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\837\ Results calculated using data described in Chapter 5 of
the CFPB Report on Supplemental Findings.
\838\ Results calculated using data described in Chapter 5 of
the CFPB Report on Supplemental Findings.
\839\ CFPB Report on Supplemental Findings, at Chapter 1.
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The Bureau explained in the proposal, further, that the opportunity
to overcome the presumption for the second and third loan in a sequence
means that by the time that the mandatory cooling-off period in
proposed Sec. 1041.6(f) would apply, three prior ability-to-repay
determinations will have proven inconsistent with the consumer's actual
experience. If the consumer continues re-borrowing during the term of
or shortly after repayment of each loan, the pattern suggests that the
consumer's financial circumstances do not lend themselves to reliable
determinations of ability to repay a covered short-term loan. After
three loans in a sequence, the Bureau stated that it believes it would
be all but impossible under the proposed framework for a lender to
accurately determine that a fourth covered short-term loan in a
sequence would be affordable for the consumer.
The Bureau stated in the proposal that in light of the data
described above, the Bureau believed that by the time a consumer
reaches the fourth loan in a sequence of covered short-term loans, the
likelihood of the consumer returning for additional covered short-term
loans within a short period of time warrants additional measures to
mitigate the risk that the lender is not furthering a cycle of debt on
unaffordable covered short-term loans. To prevent the unfair and
abusive practice identified in proposed Sec. 1041.4, the Bureau stated
the belief that it may be appropriate to impose a mandatory cooling-off
period for 30 days following the third covered short-term loan in a
sequence.
The Bureau's overall approach to the re-borrowing restrictions in
proposed Sec. 1041.6 was fairly similar to the framework included in
the Small Business Review Panel Outline, but contained some adjustments
in response to feedback from the SERs, agency participants, and other
stakeholders. For instance, the Bureau proposed a 30-day definition of
loan sequence and a 30-day cooling-off period rather than a 60-day
definition of loan sequence and a 60-day cooling-off period which was
in the Small Business Review Panel Outline. The Bureau also proposed to
provide greater specificity and flexibility about when a presumption of
unaffordability would apply, for example, by proposing in Sec.
1041.6(b)(2) certain exceptions to the presumption of unaffordability
for a sequence of covered short-term loans where the consumer is
seeking to re-borrow no more than half the amount that the consumer has
already paid on the loan. In those instances, the Bureau explained, the
predicate for the presumption of unaffordability may no longer apply.
The proposal also provided somewhat more flexibility about when a
presumption of unaffordability could be overcome by permitting lenders
to determine that there would be sufficient improvement in the
consumer's financial capacity for the new loan, under proposed Sec.
1041.6(e). This standard would have included both documented increases
in income or decreases in expenses since the prior borrowing (the Small
Business Review Panel Outline standard of ``changed circumstances'')
plus where reliable evidence indicated that the need to re-borrow was
caused by a specific income decline that would not recur. The Bureau
also continued to assess potential alternative approaches to the
presumptions framework, as
[[Page 54688]]
outlined in the proposal,\840\ and specifically sought comment in
response to the Small Business Review Panel Report on whether a loan
sequence should be defined with reference to a period shorter or longer
than 30 days.
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\840\ As discussed in the proposal, the Bureau had considered a
number of alternative approaches to address re-borrowing in
circumstances indicating the consumer was unable to afford the prior
loan. One alternative was to limit the overall number of covered
short-term loans that a consumer could take out within a specified
period, rather than using the loan sequence and presumption
concepts, and when and if a mandatory cooling-off period should
apply. Another was to simply identify circumstances that might be
indicative of a consumer's inability to repay that would be relevant
to whether a lender's determination under proposed Sec. 1041.5 or
Sec. 1041.9 is reasonable. A third was whether there was a way to
account for unusual expenses within the presumptions framework
without creating an exception that would swallow the rule. The
Bureau explained its concerns about each of these approaches in the
proposal and broadly sought comment on alternative approaches to
addressing the issue of repeat borrowing in a more flexible manner,
including the alternatives described above, and on any other
framework for assessing consumers' borrowing history as part of an
overall determination of ability-to-repay.
---------------------------------------------------------------------------
Proposed Sec. 1041.10 would have applied a parallel set of
presumptions of unaffordability to new covered longer-term loans where
consumers had had a covered short-term or covered longer-term balloon-
payment loan outstanding within the last 30 days or where there were
indicia that consumers were having difficulty repaying a current loan
of any type from the same lender or its affiliates. The Bureau's logic
in proposing to apply these presumptions was the same as described
above with regard to proposed Sec. 1041.6: Because covered longer-term
balloon-payment loans also involve lump-sum or other large irregular
payments that appear to exacerbate the challenge of repaying such loans
without needing to re-borrow, there is substantial reason for concern
that the need to re-borrow within a short time period is being
triggered by the unaffordability of the prior loan. The Bureau did not
specifically propose to impose a mandatory cooling-off period after a
sequence of covered longer-term loans (whether they had a balloon
payment or not), but sought comment on the general issue of whether a
consumer's intensity of use during a defined period of time warranted
additional protections.
Finally, proposed Sec. Sec. 1041.6 and 1041.10 would also have
established certain rules with regard to the prospect that consumers
might switch back and forth between different types of covered or non-
covered loans over time. In particular, proposed Sec. Sec. 1041.6(g)
and 1041.10(e) would have prohibited lenders under certain
circumstances from making a covered short-term loan or a covered
longer-term loan, respectively, while a prior covered short-term loan
to the same consumer made under the conditional exemption in proposed
Sec. 1041.7 was outstanding or for 30 days thereafter. Because loans
under that exemption are subject to certain principal reduction
requirements over a sequence of three loans, the Bureau was concerned
that the protections provided by that provision could be abrogated if a
consumer were induced instead to take out a different kind of covered
loan.
Also, proposed Sec. Sec. 1041.6(h) and 1041.10(f) would have
suspended the 30-day count for purposes of determining whether a loan
was subject to a presumption of unaffordability or the mandatory
cooling-off period for short-term loans if a lender or its affiliate
made a non-covered bridge loan within 30 days of a prior outstanding
covered short-term loan or covered longer-term balloon-payment loan.
The Bureau would have defined non-covered bridge loan in proposed Sec.
1041.2(a)(13) as a non-resource pawn loan made by the same lender or
its affiliate that is substantially repayable within 90 days of
consummation. In the proposal, the Bureau described how this provision
would address the concern that these types of loans could be used by
lenders or their affiliates to bridge gaps between the making of
covered loans, creating a continuous series of loans as a way of
evading the proposed re-borrowing restrictions.
Comments Received
The Bureau received numerous comments on the proposed re-borrowing
restrictions. Stakeholders generally supportive of the rule criticized
the restrictions for not going far enough, and stakeholders generally
critical of the rule thought these restrictions went too far in a
number of ways.
Many consumer groups and other commenters argued that the Bureau
should adopt a 45, 60, or 90 day cooling-off and re-borrowing period
instead of a 30-day period, asserting that it takes longer than 30 days
for a consumer to reach financial equilibrium. These arguments were
based largely on arguments that had already been raised in response to
the Small Business Review Panel Outline. The consumer advocates raised
additional arguments for why the 30-day period was too short, including
evidence from the U.S. Financial Diaries project and from national
delinquency data on unsecured debt that they interpreted to suggest
that consumers who take covered loans have monthly expense cycles
greater than 30 days, and often in excess of 60 days. A State Attorney
General urged that if the Bureau were not to adopt a 60-day cooling-off
period, the Bureau should consider a 45-day cooling-off period as a
more restrictive alternative to the proposed 30-day cooling-off period.
Consumer groups and a broad spectrum of other commenters--including
a group of U.S. Senators, several State Attorneys General, faith
leaders, civil rights organizations, and other stakeholders generally
supportive of the proposal--asked that the Bureau limit covered short-
term lending overall to 6 loans per year and 90 days per year. As
discussed in the section-by-section analysis for Sec. 1041.6, these
stakeholders opposed the inclusion of the exemption for covered short-
term loans, which contained these loan and time-in-debt limits as
conditions of the proposed exemption. They argued that those same
limits should apply to the making of all covered short-term loans, in
addition to the ability-to-repay requirements applicable to each loan
and the various presumptions of unaffordability. The consumer groups
asserted that these limits are ``rooted in significant precedent'' such
as the FDIC's 2005 guidelines on payday lending and State loan limits
in Washington and Delaware.
Consumer advocates also argued that that the Bureau should adopt a
two-loan cap instead of a three-loan cap, because they believed that
after two loans the ability-to-repay analysis already will have proven
to be flawed. They argued that the rationale for imposing the three-
loan limit in proposed Sec. 1041.6(f) was equally applicable after two
loans, i.e., it is extremely unlikely that a consumer attempting to
borrow a third loan within a short period of time will be able to repay
that loan given the prior re-borrowing.
A number of commenters urged the Bureau to adopt additional
restrictions under proposed Sec. 1041.6. Several commenters raised
concerns about the potential ability of consumers to take out multiple
loans at a time, or to switch back-and-forth either between covered and
non-covered loans or between short-term and longer-term loans, which
could be ways of evading the proposed rule's requirements. One
commenter argued that the Bureau should consider any type of loan to be
a non-covered bridge loan--rather than just non-recourse pawn loans of
90 days or fewer in duration--if it is used to bridge a gap between two
sequences (or through a cooling-off period). Similarly, a number of
other commenters argued that the Bureau should make the intra-sequence
[[Page 54689]]
presumptions stronger, arguing that lenders would likely still lend,
and allow some amount of re-borrowing, unless there were stronger
restrictions after the first and second loan. Consumer groups argued
that tighter verification requirements should apply to loans being made
that overcome the presumption of unaffordability. One State Attorney
General expressed concern about consumers taking out short-term and
longer-term loans in quick succession as a way of evading the proposal
and urged the Bureau to place greater restrictions on this type of
lending pattern. Several commenters argued that the presumptions should
apply in other scenarios, such as whenever a loan went delinquent, or
when a consumer had repaid a loan made by an unaffiliated lender within
30 days. Others asked whether lenders can rely on consumer statements
to determine whether a consumer had a prior loan with an unaffiliated
lender.
Consumer advocates also criticized the proposed exception to the
presumption of unaffordability when the amount being borrowed was no
more than half of the amount paid on the prior loan. They argued that
this would incentivize lenders to make loans larger than consumers
could initially afford at the outset and ``then flip the clearly
unaffordable portions, extracting excess costs each time.''
Industry commenters, along with some other stakeholders, generally
criticized the re-borrowing restrictions in proposed Sec. 1041.6. Many
of them focused specifically on the proposed presumptions of
unaffordability. Several industry commenters argued that the specific
standards for overcoming presumptions provided too little flexibility
or that they were vague and needed to be clarified. One trade group
commenter argued that lenders essentially would have to become
``financial planners'' to determine whether a consumer had a
``sufficient improvement in financial capacity''--the standard for
overcoming the presumption--which the commenter viewed as untenable.
Others asked for exceptions to the presumptions in various scenarios.
Some commenters offered alternatives, such as off-ramps or exemptions
for consumers who were taking out smaller or less expensive loans than
they had previously.
A State trade association for lenders also criticized the exception
to the presumption of unaffordability. The commenter argued that it
would harm a more responsible consumer who borrowed a smaller amount
initially but then developed a need for additional funds in excess of
50 percent of the initial loan amount.
Several commenters argued that the Bureau should eliminate the
presumptions against unaffordability and the cooling-off periods
because consumers who have previously repaid are the most likely to
repay in the future. One commenter, a specialty consumer reporting
agency, discussed its analysis of data which it interpreted to show
that a consumer who triggered the cooling-off period was more likely to
repay than a consumer who had not, citing default rates. Similarly,
commenters argued that consumers who pay off a loan have factually
proven that they have an ability to repay, and thus there should be no
limitation on future lending. Still other commenters argued that under
the proposal consumers would be penalized twice for taking out a new
loan while another loan remains outstanding, because the other loan
would already be considered a major financial obligation. One lender
commented that it was generally supportive of the proposed ability-to-
repay requirements and viewed those requirements as sufficient,
mitigating the need for additional re-borrowing restrictions.
More broadly, many commenters argued that the cooling-off period
should trigger after more loans have been made, or should be shorter,
primarily arguing that the cooling-off periods as proposed would have a
substantial impact on revenue, and would prevent consumers from
obtaining credit when they need it. One commenter argued that the
cooling-off period alone would reduce revenue by 71 to 76 percent.
Others claimed that a cooling-off period would bar consumers from
access to credit, and consumers cannot control when they might need it.
A small entity representative criticized the cooling-off period and the
impacts it would have on this person's small business. Several
commenters argued that setting loan limits would cause consumers to
over-borrow in order to tide themselves through the period when they
would be restricted from borrowing.
Commenters suggested a number of alternatives to the cooling-off
period proposed, arguing that these alternatives would be less
restrictive. Some commenters recommended that the Bureau create an off-
ramp or repayment plan as an alternative to a cooling-off period, or
alternatively, provide for exceptions where a consumer can prove that a
new need has arisen. And some commenters asked the Bureau to take a
more flexible approach when setting cooling-off periods, which would
allow lenders to fluidly set their own thresholds based on outcomes, or
give safe harbors while various industry participants try out different
options. Some commenters called this a ``sandbox'' regulatory approach.
A group of State Attorneys General opposed the proposed approach
and asked the Bureau to allow the States to set their own restrictions,
such as rollover caps, limits on the number of loans that may be taken
out in a given timeframe, and cooling-off periods, to better reflect
local conditions and allow for experimentation. They argued that States
that impose rollover or annual limits, such as Washington and Missouri,
should be allowed to continue that practice within a broader minimum
Federal regulatory framework.
The SBA Office of Advocacy encouraged the Bureau to reconsider the
proposed cooling-off period and suggested that, if one were deemed
necessary, it should be shortened from 30 days. The SBA Office of
Advocacy noted that small entity representatives had criticized the
cooling-off period based on its negative revenue impacts. It also
passed along feedback from small entities attending roundtables that
some of their clients do not operate on a 30-day billing cycle,
including some who pay their rent on a weekly basis; the 30-day
cooling-off period would prevent these consumers from obtaining funds
that may be needed for essential expenses. In its comment letter, the
SBA Office of Advocacy acknowledged and expressed appreciation for the
fact that the Bureau had shortened the period from the Small Business
Review Panel Outline, which contemplated a 60-day period, but
nonetheless argued that 30-days was too restrictive.
An industry trade group criticized what it perceived as the
proposal setting a blanket limit of six loans in a 12-month period for
all covered short-term loans, not just exempt loans. The commenter
argued the number was arbitrary and not backed by data. The commenter
wrote that a more ``appropriate limit that strikes the balance''
between preventing consumers from relying too much on short-term loans
and allowing the market for these loans to continue would be to limit
covered short-term loans to eight loans during a 12-month consecutive
period. The Bureau discusses substitutes and general considerations of
access to credit in the Section 1022(b)(2) Analysis, as well as in the
section-by-section analysis for Sec. 1041.4.
The Bureau received a significant number of comments from
individual consumers who wrote as part of organized letter-writing
campaigns.
[[Page 54690]]
Among the more common themes in the letters was opposition to loan
limits and cooling-off periods. Many individual consumers of such loans
argued vehemently that these measures would intrude on consumer choice,
would harm consumers who had no other credit options, and would cause
consumers to turn to unsavory lending options. A number of them were
concerned specifically about the burden and length of the 30-day
cooling-off period, noting that it ignored the urgency of the need for
immediate funds. Some were concerned that the re-borrowing limitations
would result in loan denials and impede their ability to access needed
funds easily and quickly. These commenters specifically noted the need
for funds for unexpected emergencies, like car repairs. Some simply
declared these limits ``unwarranted''. Many of these commenters
believed the proposal to be setting firm annual limits on the making of
all types of covered short-term loans.
Lastly, the Bureau received some comments on the requirement to
review borrowing history under proposed Sec. 1041.6(a) by obtaining
and reviewing information about a consumer's borrowing history from a
consumer report obtained from a registered information system. Consumer
groups argued that a lender should have to check a State registry, if
available, when a registered information system is unavailable. Others
asked whether lenders would need to establish a backup registered
information system in anticipation of potential periods in which the
one the lender regularly uses may be unavailable.
Final Rule
After carefully considering the comments, the Bureau has decided to
finalize only selected elements of Sec. Sec. 1041.6 and 1014.10 in
final Sec. 1041.5(d).\841\ In particular, the Bureau has decided not
to adopt the presumptions framework specified in the proposal, but
rather rely primarily on the mandatory 30-day cooling-off period after
the third loan in a sequence of covered short-term loans, covered
longer-term balloon-payment loans, or a combination thereof. As
specified below, the Bureau believes that this ``circuit breaker,''
when combined with the front-end ability-to-repay determination
required under final Sec. 1041.5(a) through (c), will protect
consumers from long cycles of debt and strongly incentivize lenders to
adopt more consumer-friendly business models rather than relying on
extensive consumer re-borrowing. At the same time, the Bureau believes
that this shift will substantially simplify the final rule relative to
the proposal, giving consumers more flexibility to manage their
finances within short sequences and reducing burden on lenders. The
Bureau is also adopting certain other parts of proposed Sec. Sec.
1041.6 and 1014.10 concerning the basic obligation to review consumers'
borrowing history to determine whether a cooling-off period is
triggered, and the restrictions on making covered short-term loans or
covered longer-term balloon-payment loans under Sec. 1041.5 within 30
days after an outstanding covered short-term loan under Sec. 1041.6.
The Bureau has made conforming changes to the commentary, as well as
adding examples and other clarifications as discussed further below.
---------------------------------------------------------------------------
\841\ As noted above, Sec. 1041.6(d) is a related provision
that restricts a lender and its affiliates from making loans within
30 days after a prior outstanding loan under Sec. 1041.6 by the
same lender or its affiliates.
---------------------------------------------------------------------------
Presumptions of unaffordability. The Bureau continues to believe
the basic premise articulated in the proposal, as summarized above,
that re-borrowing shortly after a previous covered short-term loan or
covered longer-term balloon-payment loan can be important evidence that
a consumer lacked the ability to repay the initial loan and that a
consumer likely will not be able to afford a similar subsequent loan.
When consumers have the ability to repay a covered short-term or
covered longer-term balloon-payment loan, the loan should not cause
consumers to have the need to re-borrow soon after repaying the
balance, or when the prior loan is outstanding. Thus, the Bureau
believes that the most likely explanation for a consumer returning to
re-borrow shortly after paying off a previous covered short-term loan
or covered longer-term balloon-payment loan is that the prior loan's
payment obligation left the consumer with insufficient income to make
it through the balance of their expenses.
However, the Bureau also recognizes that there are occasional
situations in which a consumer may experience an income or expense
shock while a loan is already outstanding, and that the proposed
presumptions framework did not provide a simple method of
distinguishing such cases. In particular, the Bureau recognizes that
defining the standard for overcoming the presumption would have either
required extremely detailed inquiries of consumers, risked substantial
evasion, or both. The Bureau agrees with the commenters who criticized
the vagueness and workability of that standard contained in the
proposal. As a result, the presumptions framework both would have
imposed substantial compliance burdens on lenders and would have risked
denying credit in some situations to consumers who had experienced an
intervening borrowing need while a loan was already outstanding and
would have been able to repay a second or third loan.
Upon further consideration, the Bureau believes that the general
ability-to-repay analysis under Sec. 1041.5 in combination with a
mandatory cooling-off period under Sec. 1041.5(d)(2) provides a more
appropriate way to balance the competing considerations with regard to
re-borrowing. The Bureau concludes that if a lender appropriately
complies with Sec. 1041.5(b) and (c) and makes a reasonable
determination that the consumer will have the ability to repay the
loan, the separate presumptions of unaffordability should be
unnecessary to prevent re-borrowing in cases where the re-borrowing is
attributable to the unaffordability of the prior loan. Of course, the
presumptions were intended to be triggered in instances where it
appeared that the lender was not making reasonable determinations of
ability to repay. In the final rule, the Bureau has instead decided to
rely on the reasonableness of ability-to-repay determinations. The
determination of reasonableness will be based on whether a lender
complies with the reasonable determination and verification
requirements in Sec. 1041.5(b) and (c), including whether the outcome-
related factors listed in comment 5(b)-2.iii indicate that the lender's
ability-to-repay determinations are reasonable as required in Sec.
1041.5(b). Those factors include the frequency with which a lender
makes multiple covered short-term or longer-term balloon-payment loans
within a sequence. The Bureau believes that these requirements and
measures will ensure that lenders shift their approach away from
relying on extended loan sequences, and that lenders will appropriately
factor in consumers' prior borrowing history in making ability-to-pay
determinations, especially with respect to loans that would constitute
second or third loans in a sequence. If a lender fails to do so, the
lender's determinations would not be considered reasonable under Sec.
1041.5(b).
For the same reasons, the final rule does not include the
presumptions framework of the proposal to address circumstances where
there are indicia that consumers are struggling to repay a current
loan--whether covered or non-covered or made by the same lender or its
affiliate--as had been proposed in Sec. Sec. 1041.6(d) and 1041.10(c),
[[Page 54691]]
respectively. Here, too, the Bureau believes that the combination of
the ability-to-pay requirements coupled with a 30-day cooling-off
period applied after the third covered short-term loan or covered
longer-term balloon-payment loan in a sequence will be sufficient to
prevent the unfair and abusive practice identified in Sec. 1041.4.
Cooling-off period. As noted above, a significant number of
commenters objected to the cooling-off period, which the Bureau is
finalizing largely as proposed for covered short-term loans and
extending to covered longer-term balloon-payment loans in Sec.
1041.5(d)(2). Thus, under the final rule, a lender cannot make a
covered short-term loan or covered longer-term balloon-payment loan
during the time period in which the consumer has one of those types of
loans outstanding or for 30 days thereafter if the new loan would be
the fourth loan in a sequence of covered short-term loans, covered
longer-term balloon-payment loans, or a combination thereof.
Some commenters argued that consumers who have repaid a previous
loan (or two or three loans in a sequence) and come back to borrow
again within 30 days are consumers who are able to repay because they
did not previously default, and thus, the Bureau should not impose
cooling-off periods based on patterns of re-borrowing. But this ignores
one of the central premises of Sec. Sec. 1041.4 and 1041.5 of the
final rule, which is that when a consumer avoids default by re-
borrowing, it does not reflect that the consumer has the ability to
repay the loan according to its terms. The industry's current
underwriting models do not account for re-borrowing risk because such
re-borrowing helps to ensure that the lenders' business model produces
consistent revenue. But the very purpose of this rule is to ensure that
lenders determine whether a consumer will be able to repay the loan and
pay basic living expenses and major financial obligations without the
need to re-borrow, thereby avoiding a significant harm identified above
in Market Concerns--Underwriting and in the section-by-section analysis
of Sec. 1041.4.
The Bureau's decision to finalize the cooling-off period is also
tied to its decision not to finalize the presumptions for the first or
second loan in a sequence, as described above. The Bureau continues to
believe that most consumers who return for a new loan within 30 days of
paying off a previous loan had trouble meeting their obligations and
needed to take out a new loan to cover the deficit left by paying off
the old loan. For these consumers, such an ``early return'' suggests
the consumer is beginning or continuing a cycle of re-borrowing, and
the prior ability-to-repay determination was insufficient in some way.
But there are other consumers who did have an ability to repay, but who
simply encountered an independent need for borrowing again within 30
days of paying off a prior loan, such as an unexpected car repair. The
Bureau did not finalize the presumptions, in part, because the high bar
for overcoming the presumptions would have prevented such consumers
from obtaining additional credit that they can repay. But when a
consumer returns to take out a fourth loan in a sequence, the Bureau
concludes that is sufficient evidence to suggest that the consumer is
not borrowing because of an independent need for funds, such as a non-
recurring, unusual, or emergency expense. After all, at that point, the
consumer would have had four such ``new needs'' during a relatively
short period of time, each within 30 days of each other. Rather, it is
much more likely that a cycle of re-borrowing has become manifest and
the need for additional borrowing is due to the spillover effects of
the prior borrowing.
This conclusion is borne out in the Bureau's data. The data show
that consumers who take out more than three loans in a row are
significantly more likely to be in a cycle of indebtedness that leads
to 10 or more loans in a sequence than they are to repay that fourth
loan and not re-borrow.\842\ Relatedly, the Bureau reiterates the data
points noted in the proposal as support for this conclusion. The Bureau
found that 66 percent of loan sequences that reach a fourth loan end up
having at least seven loans, and 47 percent of loan sequences that
reach a fourth loan end up having at least 10 loans.\843\ For consumers
paid weekly, bi-weekly, or semimonthly, 12 percent of loan sequences
that reach a fourth loan end up having at least 20 loans during a 10-
month period.\844\ And for loans taken out by consumers who are paid
monthly, more than 40 percent of all loans to these consumers were in
sequences that, once begun, persisted for the rest of the year for
which data were available.\845\ The Bureau thus concludes that though
it is not finalizing the presumptions, it is appropriate to finalize
the cooling-off period after three loans in a sequence to prevent the
unfair and abusive practice identified in Sec. 1041.4, and that doing
so will still leave room for consumers who experience a new need to
obtain credit via a second and even third loan in a sequence.
---------------------------------------------------------------------------
\842\ CFPB Report on Supplemental Findings, at Chapter 5.
Specifically, approximately 22 percent of consumers repaid their
first short-term loan without taking out another, and roughly 10
percent repaid the sequence with the second loan, but the percentage
of consumers who repaid after the third, fourth, fifth, and sixth
loans without re-borrowing continued to drop, to approximately 5
percent and below, and more than 20 percent of consumers took longer
than 10 loans to repay their loan sequence.
\843\ Results calculated using data described in Chapter 5 of
the CFPB Report on Supplemental Findings.
\844\ Results calculated using data described in Chapter 5 of
the CFPB Report on Supplemental Findings.
\845\ CFPB Report on Supplemental Findings, at Chapter 1.
---------------------------------------------------------------------------
Additionally, as the Bureau first stated in the proposal, if a
lender's ability-to-repay determinations resulted in re-borrowing three
consecutive times in a sequence, the Bureau believes that is sufficient
to suggest that either the lender's ability-to-repay determinations are
generally not reasonable, or the lender's underwriting methodology does
not work for the specific consumer's circumstances. Of course, even
well-underwritten credit includes some consumer defaults. But if a
consumer returns to re-borrow three times in a sequence, that would
likely suggest that the determinations are coming to erroneous results.
Again, the Bureau believes that if a lender's ability-to-repay
determinations lead to the need to re-borrow three times in a row, it
is unlikely that the fourth loan will produce a better outcome. The
Bureau is finalizing a three-loan cap, instead of a different threshold
such as a two-loan cap as suggested by certain consumer groups. As
discussed above, a consumer's taking three loans in a row is very
strong evidence that the consumer did not have the ability to repay the
prior loans and likely would not be able to repay another loan. It is
not as apparent whether a consumer's taking two loans in a row would
provide such clear evidence.
Furthermore, the Bureau notes that by including covered longer-term
balloon-payment loans, it has also changed the additional limitations
on lending for longer-term balloon-payment loans as compared to what
was in proposed Sec. 1041.10. Again, in proposed Sec. 1041.10(b), the
Bureau proposed a rebuttable presumption that a consumer would not have
the ability to repay a longer-term loan (including a longer-term
balloon-payment loan) if taken out while a covered short-term loan made
under Sec. 1041.5 or a longer-term balloon-payment loan made under
Sec. 1041.9 was outstanding and for 30-days thereafter. In the same
way and for the same reasons that the Bureau is not finalizing
[[Page 54692]]
the presumptions for covered short-term loans, the Bureau is not
finalizing the presumptions for longer-term balloon-payment loans in
proposed Sec. 1041.10. However, after three longer-term balloon-
payment loans in a sequence, or a combination of three covered short-
term and longer-term balloon-payment loans in a sequence, there will
now be a 30-day cooling-off period for all covered short-term and
longer-term balloon-payment loans. Because the Bureau views covered
short-term and longer-term balloon-payment loans as having similar
risks, as noted above in the section-by-section analysis for Sec.
1041.4, the Bureau's analysis on why cooling-off periods are warranted
for short-term loans made under Sec. 1041.5 is applicable to longer-
term balloon-payment loans made under Sec. 1041.5. Three longer-term
balloon-payment loans in a sequence, or a combination of three covered
short-term or longer-term balloon-payment loans in a sequence,
indicates both that the lender's ability-to-repay determinations have
not been reasonable, and that the consumer has begun a cycle of re-
borrowing.
Relatedly, the Bureau is not finalizing proposed comment 6(f)-1,
which clarified that the cooling-off period did not limit a lender's
ability to make covered longer-term loans. That is still the case for
most longer-term loans, because the cooling-off period only applies to
loans made under Sec. Sec. 1041.5 and 1041.6. However, as Sec. 1041.5
now includes covered longer-term balloon-payment loans, the cooling-off
period now prohibits that subset of longer-term loans. Again, as noted
above, the Bureau is concerned that covered longer-term balloon-payment
loans, where a large amount of funds are due at once and can
potentially drive consumers to need to re-borrow, may be joined
together, or joined with covered short-term loans to form a re-
borrowing sequence. For this reason, the Bureau believes covered short-
term loans and covered longer-term balloon-payment loans should be
treated the same with regard to the cooling-off period.
In crafting the preventive remedy to the unfair and abusive
practice identified, the Bureau is attempting to maintain a significant
amount of flexibility and not unduly restrain access to credit. And the
Bureau recognizes that, as one commenter put it, ``life happens.''
There are likely to be a number of consumers who have an ability to
repay when they take out the first loan, and who do repay the loan, but
then encounter a new emergency expense or other independent borrowing
need, and seek to take out a second loan to cover it (though as stated
earlier, the Bureau continues to believe that most will in fact be re-
borrowing even after the first loan due to the spillover effects of
that loan). That this would happen again, two times in a row, is much
less likely, but in the interest of maintaining access to credit and
flexibility, the Bureau does not wish to categorically prevent such
loans where there are likely to be at least some of these instances.
There may even be a few instances where this would occur three times in
a row, but the Bureau has made the judgment that at this point the
likelihood that the consumer is instead re-borrowing is overwhelmingly
more likely. The Bureau believes that very few consumers who return for
a fourth loan in row would have the ability to repay that loan.
With regard to comments about the negative revenue impacts of the
cooling-off period for lenders, the Bureau recognizes that this
cooling-off period will reduce revenue for covered lenders. The Bureau
has accounted for that revenue reduction in the costs, benefits, and
impacts analysis below. As the Bureau has previously noted, the
Bureau's data suggest that many payday lenders rely on continuous re-
borrowing for a substantial amount of their revenue. While a majority
of consumers currently finish their payday loan sequences within the
first three loans in a sequence, the majority of loans, and thus
revenue, comes from loans made in sequences of 10 or more in a
row.\846\ And as noted in the proposal, 21 percent of payday loans made
to borrowers paid weekly, bi-weekly, or semi-monthly are in loan
sequences of 20 loans or more. It is this very business model that is
at the core of the unfair and abusive act or practice identified in
Sec. 1041.4, and thus, the Bureau cannot prevent the identified unfair
and abusive practice without significantly impacting revenue made by
lenders with this kind of business model.
---------------------------------------------------------------------------
\846\ CFPB Report on Supplemental Findings, at Chapter 1.
---------------------------------------------------------------------------
The Bureau is sensitive to the comments from many individual
consumers who expressed concern and frustration over the proposed
cooling-off period. The Bureau has carefully considered these comments,
as well as related comments from consumers and other stakeholders about
whether consumers affected by the cooling-off period will have
available credit alternatives, and whether the rule will cause these
consumers to seek out loans from more expensive or less reputable
sources. And the Bureau recognizes that consumers who have obtained
three covered short-term or longer-term balloon-payment loans in a
sequence will be unable to obtain a fourth for 30 days, and that these
consumers may be at risk of defaulting on their loans, or
alternatively, defaulting on other expenses or obligations. However,
the Bureau concludes that by requiring an ability-to-repay
determination for each loan in a sequence, it is unlikely that many
consumers will obtain a third loan in a sequence and not be able to
repay that loan. Moreover, the cooling-off period will create an
incentive that would not otherwise exist for lenders to offer no-cost
payment plans to consumers who come to the end of a sequence and cannot
afford to repay since otherwise the lender may face a default. In
contrast, the Bureau believes that the risk of perpetuating cycles of
unaffordable loans would be far greater without a cooling-off period.
Further, the Bureau declines commenters' suggestions to create an
exception to the cooling-off period where a consumer can individually
prove an independent borrowing need. As discussed in detail above in
connection with Sec. 1041.5(a)(5) and (b)(1), differentiating between
re-borrowing that is prompted by a prior unaffordable loan and a new
need can be complicated in practice, such that an exception would be
very difficult to administer and would introduce significant risks of
evasion. Where consumers are already three loans into a sequence, the
Bureau believes for the reasons stated above that there is a
substantial risk that they have become trapped in what would otherwise
become a long-term cycle of debt. Further, such an approach would
effectively turn the cooling-off period into a presumption, which the
Bureau now disfavors for the reasons noted above.
Some industry commenters believed that requiring lenders to offer
an off-ramp option after a certain number of loans would be more
advisable than a prohibition on new loans during a cooling-off period.
As discussed in Market Concerns--Underwriting and in the introduction
to the section-by-section analysis for Sec. 1041.5, the Bureau is
concerned, however, that if lenders remained free to continue loan
sequences, they would find ways to do so and discourage consumers from
using an off-ramp. Thus, the Bureau does not believe that an off ramp
can substitute for a cooling-off period. The Bureau notes, however,
that under the rule a lender may offer a no-cost off ramp after a
consumer hits a cooling-off period and, indeed, may be required to do
so under some State laws. These further protections are not prohibited
by the
[[Page 54693]]
rule, and the Bureau encourages lenders to find ways to work with their
customers on repayment plans within the boundaries of the rule.
Similarly, the Bureau does not agree with the comment by a group of
State Attorneys General that the Bureau should allow the States to set
their own re-borrowing restrictions to better reflect local conditions
and that the Bureau should exempt from the requirements of this section
any State that has extended repayment plans. As discussed in Market
Concerns--Underwriting and in the introduction to the section-by-
section analysis for Sec. 1041.5, the Bureau has considered various
policy alternatives suggested by commenters as well as current State
laws, both of which include extended repayment plans, but the Bureau
has concluded that a Federal rule is necessary to protect consumers and
that extended repayment plans imposed at the State level would not be
adequate to prevent the unfair and abusive practice identified by the
Bureau in this rulemaking, in part because evidence suggests low take
rates for State mandated off-ramps or extended repayment plans.
The Bureau does not believe that the suggestion by some commenters
of a more flexible ``sandbox'' approach to the cooling-off periods, or
safe harbors while industry participants experiment with different
cooling-off periods, is warranted. The Bureau's rulemaking process has
involved several years of analysis and experience and the Bureau does
not believe that the potential benefits from a period of further
experimentation warrant delaying the consumer protection that would be
provided by this rule. The Bureau set the length of the cooling-off
period for the reasons described herein and in the proposed rule. This
final rule does, however, take a more flexible approach than the
proposal in prescribing how lenders must make ability-to-repay
determinations, which the Bureau accomplished, in part, by not
finalizing the proposed presumptions after each loan in a three-loan
sequence as described above. Given that those presumptions are not
being finalized, the Bureau believes that the remaining bright-line
backstop of a strict cooling-off period is warranted.
Length of Cooling-off Period. The Bureau concludes that, when a
consumer has borrowed three covered short-term or longer-term balloon-
payment loans in a sequence, the cooling-off period before the consumer
can take out another such loan should be set at 30 days rather than
some longer or shorter period of time. The Bureau believes that a 30-
day cooling-off period strikes the appropriate balance and accordingly
is finalizing that duration in Sec. 1041.5(d).
The Bureau's rationale for doing so is largely the same as the
reasons the Bureau chose a 30-day period to define the parameters of a
loan sequence: Namely, that major financial obligations generally are
due on a monthly basis. During the SBREFA process, and in considering
the comments on the proposal, including from the SBA Office of
Advocacy, the Bureau heard examples of some consumers who paid for
major financial obligation on a different cycle--like weekly rent.
However, that does not change the fact that the traditional billing
cycle in the United States is monthly. The Bureau has concluded that a
consumer who returns to a lender to borrow again after paying a loan
within a period consisting of a 30-day billing cycle is very likely to
have shifted money around to pay the loan instead of expenses. Again,
the Bureau's test for whether a consumer has the ability to repay is
whether the consumer has the ability to repay the loan as well as major
financial obligations and still meet basic living expenses. By
contrast, if a consumer makes it through an entire billing cycle
without needing to re-borrow, then it is more likely that she reached
equilibrium and if the consumer then returns to borrow that may well
reflect a new and independent borrowing need. As noted in the proposal,
there is always some chance that a consumer will have a new need for a
new loan within any re-borrowing period, no matter what time period it
is based on. There also is some chance that the spillover effects of
repaying an unaffordable loan will be felt for a prolonged period of
time after the payment. Nonetheless, the Bureau has concluded that a
30-day re-borrowing period is the appropriate threshold for the
definition of a sequence--accounting for one billing cycle, but not
extending so far as to capture a significant number of genuine new
credit needs. Similarly, the Bureau believes that a 30-day cooling-off
period is the appropriate length of time to ensure that a consumer who
has just re-borrowed twice in a row is sufficiently free from the
spillover effects of those unaffordable loans before she borrows
additional covered short-term or longer-balloon-payment loans.
The Bureau is also aligning the length of the cooling-off periods
with the length of the re-borrowing period for purposes of greater
simplicity and practicality. Extending the cooling-off period to 60 or
90 days, as some commenters recommended, would reduce access to credit
to a significant extent. The Bureau does not judge that approach to be
warranted at this time. The Bureau notes that it has considered whether
to impose a cooling-off period of a different length than the re-
borrowing period, and also has considered whether to impose a graduated
cooling-off period, an alternative on which the Bureau sought comment
(e.g., 30 days after the first full loan sequence, 60 days after the
second, 90 days after the third). The Bureau has judged these
alternatives to be too complex to administer. The Bureau again believes
that the logic for setting the re-borrowing period at 30 days is
applicable here as well, and that in addition setting the cooling-off
period and re-borrowing period at the same length is the simplest and
most intuitive approach.
Treatment of Covered Longer-Term Balloon-Payment Loans. As noted
above, the Bureau proposed to subject covered longer-term balloon-
payment loans to the same presumptions that would have applied to
covered short-term loans in situations in which the consumer's re-
borrowing or struggles to repay a current loan suggested that they may
not have the ability to repay a new loan. The Bureau did not
specifically propose to impose a 30-day cooling-off period after the
third longer-term balloon-payment loan in a sequence, but did seek
comment on whether particular patterns of re-borrowing within a
particular timeframe warranted additional protections. Consumer groups
responded with proposals to strengthen the presumptions for longer-term
loans, or add to the number of facts that would trigger a presumption.
After additional consideration, the Bureau has concluded that
covered longer-term balloon-payment loans should be treated in the same
manner as covered short-term loans where there is a sequence of three
loans (i.e., where the loans are each taken out within 30 days of each
other). In such circumstances, three prior ability-to-repay
determinations will have proven inconsistent with the consumer's actual
experience. For consumers who reach that point, the Bureau believes
that terminating a loan sequence may assist the consumer to escape from
the cycle of indebtedness. Particularly for loans with terms that
slightly exceed the limits for a covered short-term loan and that have
very large end payments--such as a 46-day lump-sum loan structure--the
Bureau believes that the risks of consumers becoming stuck in a long
cycle of borrowing absent a mandatory cooling-off period would be
[[Page 54694]]
similar to those for covered short-term loans.
Borrowing history. As in the proposal, a lender will need to obtain
a report from a registered information system to assess whether a
consumer has or had loans from other lenders that would make a new loan
violate either Sec. 1041.5(d)(2) or (3). The Bureau received comments
about what happens (or should happen) if no registered information
system is available. Section 1041.5(d)(1) requires that a lender obtain
a consumer report from a registered information system only if such a
report is available. If no report is available, either because no
entity has been registered as an information system for 180 days or
more or because no registered information system is capable of
producing a report at the time the lender is contemplating making a
covered loan (for example, due to temporary system outage), a lender
does not violate Sec. 1041.5 if it makes a covered loan without
obtaining a consumer report from a registered information system.\847\
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\847\ This is in contrast to loans under Sec. 1041.6, which are
not permitted if a consumer report from a registered information
system is unavailable.
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Regarding the comment from consumer groups that the rule should
provide for mandatory checking of State databases when no report from a
registered information system is available, the Bureau declines to
impose this requirement because it does not believe it would be useful
for compliance with this part.\848\ The Bureau also does not believe
such a requirement is necessary; State laws already require such
activity, and this rule would not preempt any such requirements. With
regard to comments asking whether lenders must obtain a consumer report
from another registered information system in the event the registered
information system from which the lender regularly obtains reports is
unavailable for some reason (e.g., a temporary system outage), the
Bureau believes that it is reasonable and appropriate to impose such a
requirement given the importance of the information contained in a
registered information system report in assessing whether the lending
limitations contained in Sec. 1041.5(d) are triggered. The Bureau
notes that lenders are required to furnish information to every
registered information system and thus a lender should not experience
difficulty in maintaining a backup purchasing relationship with a
registered information system other than the one from which the lender
regularly obtains reports.
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\848\ The Bureau does not believe that such State databases
provide information that lenders would need to comply with this
part. For example, the Bureau understands that most if not all of
such databases issue an eligibility determination under State law to
lenders contemplating making loans, rather than information about
outstanding and prior loans that lenders will need to comply with
this part. Such databases typically simply indicate whether the
contemplated loan may or may not be made under State law. Further,
certain information required for compliance with this part is
specific to this part and likely will not be required to be reported
to State databases by lenders under State law. For example, Sec.
1041.10(c)(1)(iii) requires lenders to furnish whether the loan is a
covered short-term loan or a covered longer-term balloon-payment
loan as those terms are defined in this part.
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Annual loan limits. The Bureau addresses the comments it received
regarding annual loan limits. At the outset, the Bureau finds it
necessary to address a common misperception in the comments, including
those submitted by many individual commenters and a trade group
commenter described above. Some commenters perceived that the
restrictions in proposed Sec. 1041.7 (now Sec. 1041.6 of the final
rule) on the number of exempt covered short-term loans and the time of
indebtedness on such loans within a 12-month period applied to all
covered short-term loans. However, under the proposal, if consumers
took out the maximum number of covered short-term loans under proposed
Sec. 1041.7 in a 12-month period and therefore could no longer obtain
an exempt covered short-term loan under that provision, the proposal
still would have permitted them to obtain a covered short-term loan
within the 12-month period as long as they met the ability-to-repay
requirements under proposed Sec. 1041.5.
The final rule contains a similar framework. Section 1041.6 permits
a consumer to obtain loans under that provision so long as the consumer
has not taken out six covered short-term loans or become indebted on
covered short-term loans for 90 days within a 12-month period. After
reaching either of those caps, a consumer could continue obtaining
loans under Sec. 1041.5, subject to the requirements of Sec. 1041.5,
including the ability-to-repay determination and the cooling-off period
that applies after three loans in a sequence.
The Bureau received many comments from stakeholders who were
supportive of the proposal in general, including consumer advocates,
elected officials, and others, but who urged the Bureau to impose a cap
on covered short-term lending of six loans or 90 days of indebtedness
in a 12-month period. The Bureau declines to impose such a limit. The
Bureau has imposed such a cap on loans made under Sec. 1041.6 because
such loans can be made without assessing the consumer's ability to
repay. As explained in the discussion of that section, the Bureau is
concerned about the risks of making such loans to consumers who have
demonstrated a pattern of extensive borrowing. However, that same logic
does not extend to Sec. 1041.5 since loans made under that section do
require an ability-to-repay determination.
The Bureau is concerned that blanket caps limiting all consumers to
no more than six covered short-term loans in a 12-month period and to
90 days of indebtedness within a 12-month period would unduly restrict
access to credit. A consumer may have several unusual and non-recurring
borrowing needs over the course of a 12-month period, with several
months in between any loan sequence. A cap of this sort would deny
access to credit to such consumers later in the year, regardless of
their particular circumstances, even if they have the ability to repay.
This restriction also would mean that a consumer who takes the maximum
number of permitted exempt covered short-term loans under Sec. 1041.6
could not take out another covered short-term loan during the 12-month
period--even one for which they have the ability to repay. The Bureau
is also mindful of the high number of individual consumers who
commented on the concerns they had about potential restrictions on
access to credit. The provisions in Sec. 1041.5 of the final rule
requiring ability-to-repay underwriting according to specific criteria
directly address the risks and harms created by the identified unfair
and abusive practice. That practice of making loans without reasonably
determining the borrower's ability to repay the loan according to its
terms enables lenders to make unaffordable loans that mire many
consumers in extended loan sequences through repeat re-borrowing--or
else leads them to experience default, delinquency, or the collateral
consequences of forgoing basic living expenses or major financial
obligations to avoid defaulting on their unaffordable loans. Without
moving to the stricter specification of an overall loan cap, the Bureau
believes that the measures in Sec. 1041.5 are sufficiently calibrated
to prevent consumers from experiencing the risks and harms associated
with the unfair and abusive practice.
Furthermore, the Bureau has eliminated the specific regulatory
requirements around non-covered bridge loans--in proposed Sec. Sec.
1041.6(h) and 1041.10(f)--because it has determined that these
requirements would be too complex to implement. At the same time, the
Bureau recognizes, as
[[Page 54695]]
noted by consumer groups, that any kind of non-covered loan could be
used as a means to bridge over a re-borrowing period or cooling-off
period. Thus, the Bureau is addressing the concerns animating these
proposed provisions by adding an example in comment 5(b)-2.iv.E, noting
that frequent instances of using any kind of non-covered loans to
bridge between loan sequences could indicate that the ability-to-repay
determinations are not reasonable.
In Sec. 1041.5(d)(3), the Bureau has finalized the prohibition
against making covered short-term loans or longer-term balloon payment
loans under Sec. 1041.5 within 30 days of a loan made under Sec.
1041.6 (as was proposed in proposed Sec. Sec. 1041.6(g) and, to a
certain extent, 1041.10(e)). These provisions were designed to ensure
that protections in proposed Sec. 1041.7 requiring a step-down of the
amount of principal over three loans in a sequence worked as intended,
and is otherwise based on the same rationale as was in the
proposal.\849\
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\849\ As noted above, Sec. 1041.6(d), which is also based on
proposed Sec. 1041.10(e), places a related limitation on lenders
and their affiliates making loans within 30 days of a prior
outstanding loan under Sec. 1041.6 by the same lender or its
affiliates.
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5(e) Prohibition on Evasion of Sec. 1041.5
The Bureau is also adding a new Sec. 1041.5(e), which states that
a lender must not take any action with the intent of evading the
requirements of Sec. 1041.5 of the final rule. The Bureau had proposed
a general anti-evasion provision in proposed Sec. 1041.19, and is
finalizing that more generalized anti-evasion provision at Sec.
1041.13 of the final rule. Nonetheless, the Bureau has decided to add
this more specific paragraph to Sec. 1041.5 so that it can provide
guidance on anti-evasion within the specific context of that section.
Comment 5(e)-1 clarifies that the standard for what constitutes evasion
is the same as that in the broader provision, Sec. 1041.13 of the
final rule, which is applicable to part 1041 in its entirety. The
Bureau addresses comments about that more general standard below in the
section-by-section analysis of Sec. 1041.13.
For illustrative purposes, the Bureau provided one example at
comment 5(e)-2, which is a particular fact pattern that may be
considered an evasion of Sec. 1041.5.\850\ Modified in response to
comments received, the substance of the example in comment 5(e)-2 is
based on the illustrative example that had been presented in proposed
comment 19-2.ii. For ease of reference, it has been moved here.
Consumer groups requested that the Bureau alter the example to clarify
that late fees are considered rollovers or re-borrowing, and that the
example was not viewed as exhaustive, meaning other scenarios could
lack elements from this fact pattern and still constitute possible
evasions. The Bureau does not believe these clarifications are
necessary. The example is not exhaustive. All late fees would not be
considered rollovers or re-borrowing, but as noted in the example, when
combined with other features, may prove intent to evade the rule. The
final comment 5(e)-2 consists, among other things, of a covered short-
term or longer-term balloon-payment loan structure that requires a
consumer to accrue a late fee for every two weeks of non-payment, in an
amount that meets or exceeds the normal finance charge. The comment
further explains that depending on the relevant facts and
circumstances, including the lender's prior practices, the lender may
have taken these actions with the intent of evading its obligations in
Sec. 1041.5(b) (underwriting) and Sec. 1041.5(d) (cooling-off period,
if the late fees accrue beyond the time when the cooling-off period
would begin if the late fees instead were new loans) and as a result
the lender may have violated Sec. 1041.5(e). The explanation of how
the conduct may violate Sec. 1041.5(e) was not contained in the
proposed comment, but was added to provide more clarity on specific
actions that may indicate an intent to violate the provision and
thereby support a possible violation of Sec. 1041.5(e) of the final
rule.
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\850\ Note that this example is similar to a real-life fact
pattern. See Press Release, S.D., Dep't of Labor and Regulation,
``Statement from Division of Banking on Dollar Loan Center,'' (Sept.
13, 2017), http://dlr.sd.gov/news/releases17/nr091317_dollar_loan_center.pdf.
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Section 1041.6 Conditional Exemption for Certain Covered Short-Term
Loans
Proposed Sec. 1041.7 would have exempted covered short-term loans
that satisfy certain conditions from proposed Sec. Sec. 1041.4,
1041.5, and 1041.6. The Bureau is finalizing the proposed conditional
exemption for certain covered short-term loans, largely as proposed,
but with several substantive adjustments and renumbered as Sec. 1041.6
in light of other changes to the rule. This section first describes the
Bureau's general approach to the exemption in the proposed rule, the
Bureau's legal authority for the exemption, some comments received on
the general approach to the exemption, and a high-level summary of the
final rule. Then the Bureau will discuss each portion of Sec. 1041.6,
the comments received, and the final rule in turn.
General Approach in the Proposed Rule
The Bureau proposed to exempt covered short-term loans under
proposed Sec. 1041.7 from proposed Sec. Sec. 1041.4, 1041.5, and
1041.6. Because loans made under proposed Sec. 1041.7 would not have
been subject to the underwriting criteria in proposed Sec. 1041.5 and
the additional borrowing limitations in proposed Sec. 1041.6, proposed
Sec. 1041.7 would have included a number of screening and structural
provisions to protect consumers in place of those other requirements.
The Bureau believed that these protections would reduce the likelihood
and magnitude of the kinds of risks and harms to consumers from
unaffordable payments on covered short-term loans that were discussed
in the section in the proposal on Market Concerns--Short-Term Loans,
including the harms that result to consumers from extensive re-
borrowing in long sequences of short-term loans.\851\
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\851\ The Bureau's legal authority to grant conditional
exemptions from its rules in certain circumstances is discussed
below, as is its authority to prescribe rules for accurate and
effective disclosures as well as the use of model forms.
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In the proposal, the Bureau recognized, based on its own research
and that of others, that even where lenders do not engage in any
meaningful underwriting, some consumers are in fact able to repay a
short-term loan when it comes due without further re-borrowing. These
consumers thus avoid at least some, if not all, of the risks and harms
with which the Bureau is concerned. For example, as described in the
CFPB Report on Supplemental Findings, approximately 22 percent of new
payday loan sequences do not result in any re-borrowing within the
ensuing 30 days.\852\ While the Bureau believed that most of these
consumers would be able to demonstrate their ability to repay and thus
could continue to obtain loans under the proposal, the Bureau
recognized there may be a subgroup of consumers for whom this is not
true and who would be denied loans even though they could, in fact,
afford to repay them.
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\852\ See CFPB Report on Supplemental Findings, Chapter 5. The
Bureau's finding may overstate the extent to which payday borrowers
are able to avoid re-borrowing, since the Bureau's study looked at
borrowing from a single lender. A study that tracks borrowers across
five large lenders, who together make up 20 percent of the
storefront payday market, found that 21 percent of borrowers switch
lenders and of those borrowers roughly two-thirds did so within 14
days of paying off a prior loan. See Clarity Services, ``Finding the
Silver Lining in Regulatory Storm Clouds: Consumer Behavior and
Borrowing Capacity in the New Payday Market,'' at 4, 9 (2015)
(hereinafter ``Finding the Silver Lining in Regulatory Storm
Clouds''), available at https://www.nonprime101.com/wp-content/uploads/2015/10/FISCA-10-15.pdf.
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[[Page 54696]]
The proposal noted that some of these consumers may take out a
payday or title loan, repay it on the contractual due date, and never
again use such a loan. Others may return on another occasion, when a
new need arises, likely for another single loan or a short
sequence.\853\ Further, even among those who do re-borrow, the Bureau's
research indicated that about 16 percent of payday sequences ended with
final repayment within three loans, without either defaulting or re-
borrowing within 30 days after the last payment has been made.\854\
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\853\ The study described in the previous footnote, using data
over a four-year period, found that 16 percent of borrowers took out
one payday loan, repaid it on the contractual due date, and did not
return again during the period reviewed; that the median such
borrower had 2 sequences over four years; and that the average such
borrower had 3.37 sequences. (This study defined sequence, as did
the Bureau's 2014 Data Point, by using a 14-day period.). See
Finding the Silver Lining in Regulatory Storm Clouds, at 8, 14.
\854\ CFPB Report on Supplemental Findings, Chapter 6.
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In addition, the proposal noted that the Bureau's research
suggested that even consumers who re-borrow many times might have
shorter loan sequences if they were offered the option of taking out
smaller loans each time they returned to re-borrow--instead of being
presented only with the binary option of either rolling over the loan
without paying down any principal (in States where rollovers are
permitted) or repaying the full amount of the loan plus the finance
charge, which often leads the borrower to take out another loan in the
same amount.\855\
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\855\ CFPB Report on Supplemental Findings, Chapter 6.
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Finally, the Bureau recognized that the verification and other
underwriting criteria in proposed Sec. Sec. 1041.5 and 1041.6 would
have imposed compliance costs that some lenders, especially smaller
lenders, may have found difficult to absorb for covered short-term
loans, particularly for those loans that are relatively small in
amount.
In light of these considerations, the Bureau believed that it would
further the purposes and objectives of the Dodd-Frank Act to provide a
simpler alternative to the specific underwriting criteria in proposed
Sec. Sec. 1041.5 and 1041.6 for covered short-term loans, but with
robust alternative protections against the harms that consumers
experience from loans with unaffordable payments. Proposed Sec. 1041.7
would have permitted lenders to extend to consumers a sequence of up to
three loans, in which the principal is reduced by one-third at each
stage and certain other conditions are met, without following the
underwriting criteria specified in proposed Sec. 1041.5 and without
satisfying the limitations of proposed Sec. 1041.6.
The Bureau's approach to a conditional exemption for covered short-
term loans garnered discussion from stakeholders even before the
proposal was issued. During the SBREFA process and the Bureau's
outreach following its release of the Small Business Review Panel
Report, many lenders and other industry stakeholders argued that the
alternative requirements for covered short-term loans presented in the
Report would not provide sufficient flexibility to sustain a lender's
profitability in making covered short-term loans.\856\ In contrast,
during the Bureau's outreach before and after the release of the
Report, many consumer advocates argued that permitting covered short-
term loans to be made without meeting specified underwriting criteria
would weaken the overall framework of an ability-to-repay rule, and
urged the Bureau not to adopt any alternatives that would sanction a
series of repeat loans.\857\
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\856\ See Small Business Review Panel Report, at 22. During and
after the SBREFA process, the Bureau was considering two options,
one of which would have allowed three-loan sequences with a
subsequent off-ramp stage for consumers who had not been able to
repay the principal, and one that would have required principal
step-downs similar to the approach the Bureau ended up proposing.
SERs and other industry stakeholders criticized both approaches
because they would have limited lending to three-loan sequences and
imposed limits on how many alternative loans could be taken out per
year.
\857\ Letter from Americans for Financial Reform to the Hon.
Richard Cordray, Director, Bureau of Consumer Fin. Prot., (Oct. 23,
2014) (regarding proposed payday loan rules), available at http://www.nclc.org/images/pdf/high_cost_small_loans/payday_loans/payday_letter_director_cordray_cfpb_102314.pdf.
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The Bureau carefully considered this feedback in developing the
proposed rule and in particular in developing proposed Sec. 1041.7.
With regard to the industry argument that the approach described in the
Report would not allow lenders to remain profitable, the Bureau
believed that reflected the heavy reliance of many lenders on revenue
from borrowers who experience long sequences of covered short-term
loans. Since the Bureau began studying the market for payday, vehicle
title, and similar loans several years ago, it has noted its
significant concern with the amount of long-term re-borrowing observed
in the market, and the apparent dependence of many lenders on such re-
borrowing for a significant portion of their revenues.\858\ The Bureau
was sensitive to the impact that the proposed rule would have had on
small entities, but to the extent they are relying on repeated re-
borrowing and long loan sequences for a substantial portion of their
revenues, the Bureau had the same concerns here about significant harm
to consumers that it found to exist more generally with this market.
Proposed Sec. 1041.7 would have permitted consumers with emergencies
or occasional shortfalls to receive a limited number of covered short-
term loans without having to meet the underwriting criteria in proposed
Sec. Sec. 1041.5 and 1041.6, but would have addressed the risks and
harms to consumers from such loans by providing them with an
alternative set of protective requirements.
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\858\ See Market Concerns--Underwriting. See also Richard
Cordray, Director, Bureau of Consumer Fin. Prot., ``Prepared Remarks
of CFPB Director Richard Cordray at the Field Hearing on Payday
Lending,'' (Mar. 26, 2015), Richmond, Virginia), available at http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-field-hearing-on-payday-lending/.
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The Bureau acknowledged in the proposal that a substantial number
of loans currently being made in the marketplace would not qualify for
the exemption under proposed Sec. 1041.7 because they are part of
extended cycles of re-borrowing that are very harmful to many
consumers. The Bureau noted that some lenders may be able to capture
scale economies and build a business model that relies solely on making
loans under proposed Sec. 1041.7, with their approach to underwriting
such loans likely having to be adjusted to take account of substantial
declines in re-borrowing revenue. For other lenders, the Bureau
expected that loans made under proposed Sec. 1041.7 would become one
element of a business model that would also incorporate covered short-
term and longer-term loans, loans that are not covered by this rule,
and perhaps other financial products and services as well.
As for the consumer advocates that disfavored any alternatives to
requiring lenders to meet specified underwriting criteria for covered
short-term loans, the Bureau issued its proposal because it did not
believe that providing a carefully constructed alternative to the
specific underwriting criteria proposed in Sec. Sec. 1041.5 and 1041.6
would significantly undermine consumer protections. The Bureau noted
that the proposed exemption would provide a simpler means of obtaining
a covered short-term loan for consumers where the loan is likely to
prove less harmful. That was so, the Bureau noted, because proposed
Sec. 1041.7 included a number of safeguards, including the principal
step-down requirements and the fixed limit on the number of loans in a
sequence of
[[Page 54697]]
such loans, to ensure that consumers cannot become trapped in long-term
debt on an ostensibly short-term loan. The Bureau believed that those
safeguards also would reduce the risk of harms from default,
delinquency, re-borrowing, and the collateral consequences of making
unaffordable loan payments while forgoing basic living expenses or
major financial obligations during a short sequence of these loans. The
proposal reflected the Bureau's view that the requirements in proposed
Sec. 1041.7 would appropriately balance the goal of providing strong
consumer protections with the goal of permitting access to less risky
credit on less prescriptive terms.
The Bureau noted that by including an alternative set of
requirements under proposed Sec. 1041.7, the Bureau was not suggesting
that regulation of covered short-term loans at the State, local, or
Tribal level should encompass only the provisions of proposed Sec.
1041.7. On the contrary, proposed Sec. 1041.7(a) would not have
provided an exemption from any other provision of law. The Bureau noted
that many States and other non-Federal jurisdictions have made and
likely will continue to make legislative and regulatory judgments about
how to treat such loans, including usury limits, prohibitions on making
high-cost covered short-term loans, and other strong consumer
protections under legal authorities that in some cases extend beyond
those conferred on the Bureau. The proposed regulation would have
coexisted with--rather than supplanted--State, local, and Tribal
regulations that impose a stronger framework that is more protective of
consumers, as discussed in part IV. In the same vein, the Bureau noted
that proposed Sec. 1041.7 also would not have permitted loans to
servicemembers and their dependents that would violate the Military
Lending Act and its implementing regulations.
The Bureau requested comment generally on whether to provide an
alternative to the requirement that lenders meet the specific
underwriting criteria in proposed Sec. Sec. 1041.5 and 1041.6 for
covered short-term loans that satisfy certain requirements. The Bureau
also sought comment on whether proposed Sec. 1041.7 would
appropriately balance the considerations regarding consumer protection
and access to credit that presents a lower risk of harm to consumers.
The Bureau sought further comment on whether covered short-term loans
could be made in compliance with proposed Sec. 1041.7 in States and
other jurisdictions that permit covered short-term loans. In addition,
the Bureau sought comment on the appropriateness of each of the
proposed requirements in proposed Sec. 1041.7, and more generally on
the costs and other burdens that would be imposed on lenders, including
small entities, by proposed Sec. 1041.7.
General Comments Received
The Bureau here is addressing the general comments that it received
on the conditional exemption in proposed Sec. 1041.7, and discusses
the comments pertaining to its more specific components when addressing
them below.
A significant number of industry members and trade associations
opposed the Bureau's proposed conditional exemption. Several argued
that the conditions in the proposed exemption are too restrictive and
would severely reduce revenue, profits, and access to credit. A number
of State Attorneys General similarly argued that the exemption in
proposed Sec. 1041.7 was not workable and would generate too little
revenue to allow lenders to remain in business. Some industry
commenters argued that the Bureau had not adequately justified the
conditions of the proposed exemption, arguing that there was no data
supporting the structural limitations of the exemption. One commenter,
in connection with its argument that the Bureau had not shown that
payday loans cause consumer harm, contended that the Bureau has
provided no justification for providing the exemption in proposed Sec.
1041.7.
Several industry commenters opposed Sec. 1041.7 as proposed
because, they argued, the conditionally exempt loans would fail to meet
the needs of borrowers, especially those who needed a loan for an
emergency expense.\859\ Commenters argued that the requirements of
proposed Sec. 1041.7 would reduce the speed and convenience of the
product, diminishing its value and therefore harming borrowers who are
currently able to repay. Some commenters argued that the Bureau had
underestimated how much its proposed approach would reduce lending
volumes and thus the availability of credit, citing either their own
studies or the studies of others.\860\
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\859\ Hereinafter these loans made pursuant to Sec. 1041.7 of
the proposed rule or Sec. 1041.6 of the final rule will be referred
to as ``conditionally exempt loans.''
\860\ Comments assessing the Bureau's estimates of the impact of
proposed Sec. 1041.7 are discussed below in part VII.
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One industry commenter argued that the disclosures that would have
been required by proposed Sec. 1041.7(e) for loans made under Sec.
1041.7 demonstrate that disclosures can be effective and maintained
that the rule as a whole should focus on disclosures rather than on
imposing more restrictive provisions such as ability-to-repay
requirements. Another industry commenter argued that instead of
offering an exemption under proposed Sec. 1041.7, the rule should
consider setting limits on the number of consecutive transactions a
consumer may obtain under proposed Sec. 1041.5 or requiring an ``off-
ramp'' after a certain period of indebtedness.
Some commenters argued that the exemption in proposed Sec. 1041.7
was not broad enough and that it should exempt lenders from other
requirements. For example, several commenters affiliated with banks or
credit unions urged the Bureau to expand the exemption. Commenters
asserted that even conditionally exempt loans would require banks or
credit unions to comply with other portions of the rule, and this
compliance would impose significant costs, causing them to leave the
market.
Some State officials took a different tack, urging the Bureau to
further limit the extent of the exemption in proposed Sec. 1041.7 and
arguing that if the exemption existed at all, it should be limited to
loans with APRs below 25 percent because loans with higher interest
rates risk being unaffordable to consumers. Another commenter urged the
Bureau to require lenders to refund finance charges if the borrower
paid back a loan early. The commenter asserted that requiring a partial
refund of fees when a borrower paid back a loan sequence early would
encourage borrowers to make earlier payments and would reduce the
amount of money that borrowers ultimately paid over the course of the
loan sequence.
Consumer groups and many individual commenters urged the Bureau to
eliminate the conditional exemption in proposed Sec. 1041.7. They
argued that ability-to-repay determinations are necessary to prevent
the identified unfair or abusive practice, and thus there should be no
exemptions from those portions of the rule. A coalition of consumer
groups argued that the exemption would not prevent substantial payments
from coming due in a short amount of time, which would not be
affordable to borrowers. Another commenter argued that lenders making
covered short-term loans will exploit any loophole, and thus lenders
would exploit the exemption. Some commenters also argued that the
exemption would allow for unaffordable loans and that unaffordable
loans cause substantial harm. Others pointed to data suggesting that
conditionally exempt
[[Page 54698]]
loans would be unaffordable for borrowers. They argued that even small
payments are often unaffordable and that even one unaffordable loan can
cause substantial harm. Because the exemption would allow loans to be
made without meeting specific underwriting criteria, they argued that
it would increase the incidence of these harms.
Consumer groups also urged the Bureau not to adopt the exemption in
proposed Sec. 1041.7 because they viewed it as inconsistent with the
rest of the rule. They said the Bureau had persuasively demonstrated in
proposed Sec. 1041.4 that loans made without an ability-to-repay
determination cause substantial harm. Because the exemption would allow
loans that did not meet that standard, they argued that it was
inconsistent with the rest of the rule. These commenters also suggested
that the proposal's reasoning about why conditionally exempt loans
under proposed Sec. 1041.7 should not be permitted to include a
security interest in an auto title applies to payday loans as well. And
they stated that they were unaware of any precedent from other
regulators for adopting a similar exemption.
A non-profit group argued that the exemption was likely to be
ineffective because lenders would make more money on longer-term loans
and therefore would not offer conditionally exempt loans under proposed
Sec. 1041.7. It also argued that the exemption would not allow lower-
cost lenders to make loans.
Several State Attorneys General argued that the rule should not
include any exemption from the ability-to-repay requirements, though
one stated that if the Bureau were to retain an exemption, it should be
structured as in proposed Sec. 1041.7. One attorney general urged the
Bureau to monitor the effectiveness of the exemption periodically in
order to ensure that it did not permit lenders to continue to make
unaffordable loans on a regular basis.
Some consumer groups criticized proposed Sec. 1041.7 because it
would not have required lenders to verify income for conditionally
exempt loans, which they argue is necessary for all loans. Others also
urged the Bureau not to adopt the proposed exemption because it could
risk undermining State laws that restrict payday lending if lenders
were to cite the exemption as evidence that payday loans are deemed to
be safe.
Both consumer group and industry commenters asked the Bureau to
clarify how the requirements of the proposed rule would interact with
existing State law. One commenter noted that some cities allow loans to
roll over three times--for a total of four loans--while the proposed
rule would only allow two rollovers. This commenter also urged the
Bureau to promulgate a definition to clarify when the provisions of the
rule would provide ``greater consumer protection'' than other measures,
especially State laws for purposes of preemption under the Dodd-Frank
Act. Industry commenters similarly expressed concerns about
interactions with State law, asserting that many States mandate
extended payment plans, and arguing that the Bureau does not have the
authority to displace those State laws.
Final Rule
The Bureau is finalizing proposed Sec. 1041.7 as Sec. 1041.6 of
the final rule to provide for conditionally exempt loans, with several
technical changes to accommodate other changes in the rule, and with
one more substantive change that is summarized below and explained in
more detail in the section-by-section analysis of Sec. 1041.6(d).
Proposed Sec. 1041.7(d) would have required that, for the purpose
of calculating the period for determining whether loans made under
proposed Sec. 1041.7 would be part of the same loan sequence, a lender
or its affiliate must not count the time when it had a non-covered
bridge loan (as defined in proposed Sec. 1041.2(a)(13)) outstanding
with the consumer. As discussed in more detail in the section-by-
section analysis of Sec. 1041.6(d), in the final rule, the Bureau has
replaced the ``tolling'' provision in proposed Sec. 1041.7(d) relating
to non-covered bridge loans with Sec. 1041.6(d), which prohibits a
lender or its affiliate from making any covered or non-covered loans
(other than a loan under Sec. 1041.6) within 30 days of a loan made
under Sec. 1041.6 of the final rule.
The Bureau is finalizing the exemption substantially as proposed
based on the grounds set forth in the proposal and discussed above. As
described and explained further in Sec. 1041.6(c)(3) and (d) below,
the exemption has been carefully designed to minimize the risk of
borrowers becoming trapped in cycles of re-borrowing. In Sec. 1041.4
of the final rule, the Bureau has identified the substantial risks and
harms to consumers associated with lending without making reasonable
determinations that borrowers have the ability to repay--default,
delinquency, re-borrowing, and other harms associated with avoiding
default. Because loans made under Sec. 1041.6 would not be required to
meet the specific underwriting criteria in Sec. 1041.5, the specific
features of this conditional exemption are designed to mitigate those
harms. Certain requirements for loans made under Sec. 1041.6 (and
described in more detail below), including the 3-loan cap, the cooling-
off period, and the specific limitation on indebtedness in a 12-month
period, are all intended to prevent extended re-borrowing. Other
requirements for loans made under Sec. 1041.6, including the
principal-reduction requirements, the prohibition on security interests
in vehicle titles, and the limits on loan amounts, are intended to
prevent re-borrowing, and prevent or reduce the risks and harms
associated with default, delinquency, and forgoing basic living
expenses or major financial obligations to avoid default.
The Bureau also has concluded that, compared to specific
alternatives suggested by certain commenters, the exemption in Sec.
1041.6 is likely to be more effective at balancing the need for
consumer protections with preservation of access to credit. As noted
above, an industry commenter argued that instead of offering an
exemption under proposed Sec. 1041.7, the rule should consider setting
limits on the number of consecutive transactions a consumer may obtain
under proposed Sec. 1041.5 or requiring an ``off-ramp'' after a
certain period of indebtedness. The Bureau agrees that prescribing
certain limits on sequential borrowing would help limit the harms that
result from repeated re-borrowing and has prescribed certain limits in
Sec. 1041.6(c)(2) for conditionally exempt loans made under Sec.
1041.6, as well as in Sec. 1041.5(d) for loans made under the ability-
to-repay requirements in Sec. 1041.5. However, as discussed in the
section-by-section analysis for Sec. Sec. 1041.5 and 1041.6, the
Bureau has concluded that additional protections are necessary to
protect consumers against the risks and harm from unaffordable loans.
The Bureau is not persuaded by the commenter's argument that
because the disclosures proposed for these conditionally exempt loans
under Sec. 1041.6 can be effective; it follows that the entire
substance of this rule can therefore be replaced with a disclosure-only
rule. The Bureau recognizes that disclosures like those finalized in
Sec. 1041.6(e) can be valuable and effective in educating consumers on
how their choices may be affected by the restrictions prescribed in the
final rule. Yet the Bureau does not believe that prescribing
disclosures to explain the provisions of Sec. 1041.6 is inconsistent
with the conclusion that disclosures alone do not suffice to protect
[[Page 54699]]
consumers against the harms targeted in this rulemaking. As discussed
above in the section-by-section analysis for Sec. 1041.5, the Bureau
has concluded that disclosures alone are not enough to protect
consumers against the risks and harms of unaffordable loans.
With respect to the recommendation to require off-ramps instead of
providing for a conditional exemption, the Bureau concludes that off-
ramps alone would not provide sufficient protection to consumers. As
discussed in the section-by-section analysis of Sec. 1041.6(b) through
(e), the Bureau believes those provisions offer important protections
against harms from default, delinquency, re-borrowing, and forgoing
basic living expenses or major financial obligations to avoid default.
While off-ramps likely would help consumers who are struggling to repay
their loans by giving them additional time and reducing their payments,
they would not mitigate the potential harms as effectively as the suite
of protections in Sec. 1041.6. Moreover, as some commenters noted,
lenders frequently have managed to find ways to discourage consumers
from taking advantage of off-ramp options under existing State laws,
and therefore the Bureau has determined that off-ramps would be less
effective at improving the chances that consumers will be able to repay
covered short-term loans without becoming mired in extended loan
sequences.
As noted above, the Bureau has concluded that the structural
requirements of the exemption are well-designed to prevent or mitigate
the harm that results from unaffordable short-term loans, but the
Bureau also has concluded that making the requirements of the exemption
more demanding would restrict its value to consumers and lenders. A
range of commenters argued that the exemption should be limited to
loans with certain APRs, that conditionally exempt loans should remain
subject to income verification, or that lenders should be required to
pay back finance charges if borrowers repay early. While the
requirements in Sec. 1041.5 of the final rule are designed to prevent
the harms identified in Sec. 1041.4, the Bureau has recognized that
those requirements may be burdensome to some lenders and consumers, and
thus finds it prudent to offer a less restrictive alternative to
address the identified harms.
As noted above, some industry commenters argued that the
underwriting requirements in proposed Sec. Sec. 1041.5 and 1041.6
would be unworkable and that the exemption in proposed Sec. 1041.7
would not provide a feasible alternative. The Bureau has endeavored to
substantially address the concerns raised about the complexity and
burdens of the underwriting requirements, as adopted in Sec. 1041.5,
through revisions to those requirements as discussed above. Section
1041.6 was intended to reduce burden and allow for a more feasible
alternative to loans made under Sec. 1041.5. In particular, it does
not require lenders to meet the specific underwriting criteria set out
in Sec. 1041.5. It does, however, still impose some restrictions,
which in turn involve some burden. The Bureau acknowledges this, but
considers each of the restrictions imposed in Sec. 1041.6 necessary or
appropriate to ensure that the exemption does not allow significant
amounts of harms to continue under the exemption.
Having said that, the Bureau recognizes, as commenters noted, that
allowing lenders to continue making covered short-term loans without
requiring the loans to meet the underwriting criteria specified in
Sec. 1041.5 poses some risk, even with the protections that are built
into the exemption. Those risks include the likelihood that at least
some loans meeting the conditions under Sec. 1041.6 may be
unaffordable at least to some consumers. The Bureau acknowledges these
concerns, and agrees that finalizing Sec. 1041.5 without this
exemption would create a more rigid framework that would more
completely prevent the risks and harms identified in Sec. 1041.4. But
a significant animating influence in the Bureau's decision to include
this exemption was the aim of acting prudently in fashioning its first
underwriting rule for this market, while recognizing as noted above
that some borrowers that likely cannot satisfy the ability-to-repay
test may still be able to repay their loans without re-borrowing.\861\
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\861\ It should be recognized that with the modifications made
to Sec. 1041.5, the Bureau has determined that the population of
people who cannot establish the ability to repay, yet can actually
repay, has reduced substantially.
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As some commenters suggested, the Bureau will monitor how lenders
use conditionally exempt loans to see if the risks and harms identified
in this rule are being perpetuated, and stands ready to take action if
it sees this occurring. Of course, lenders will also need to comply
with more restrictive State laws as applicable, which is consistent
with the notion that this rule is a floor and not a ceiling on consumer
protections, both in general and for purposes of preemption as
discussed in part IV.\862\ Additionally, the Bureau judges it likely
that lenders will find it in their self-interest to engage in
additional underwriting before making conditionally exempt loans given
that the re-borrowing restrictions with respect to such loans will mean
that lenders cannot count on revenue from extended loan sequences to
cover the costs of defaults. Put differently, the distinct conditions
for these loans will likely lead to modifications in the lending
practices of those lenders choosing to utilize the provisions of Sec.
1041.6. Those conditions are likely to prompt more caution in making
such loans, because the costs incurred by making unaffordable loans
cannot be offset by heavy volumes of re-borrowing fees.
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\862\ In response to commenters' that expressed concerns that
this exemption may influence State law, or be used by others to
influence State law, the Bureau has no comment on what State
legislatures should do in the future, and trusts that they will
advance their own policy goals while keeping in mind that, as a
matter of preemption, this rule acts as a floor rather than a
ceiling on consumer protections, and beyond that threshold the
States are free to engage in further regulation of covered loans as
they may determine to be appropriate, including by imposing usury
caps as a number of States have chosen to do, whereas Congress
prohibited the Bureau from imposing any usury limits. See 12 U.S.C.
5517(o) (Bureau may not impose a ``usury limit''); see also part II
(discussing different State approaches to these issues); part IV
(discussing legal authorities and preemption under section 1041 of
the Dodd-Frank Act).
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The Bureau also disagrees with the claim made by some commenters
that after having identified as an unfair and abusive practice the
making of covered short-term loans without reasonably determining that
the borrower has the ability to repay the loans according to their
terms, the Bureau must prohibit all such loans in all circumstances. As
explained further below, the Bureau has express legal authority to
issue exemptions from its rules. The Bureau agrees that the measures
intended to mitigate the harms caused by the practice identified as
unfair and abusive in Sec. 1041.4 may not entirely mitigate those
harms when lenders make conditionally exempt loans without underwriting
according to the criteria laid out in Sec. 1041.5. At this time,
however, the Bureau deems it prudent to accept that level of risk in
light of the positive effects that Sec. 1041.6 will have on reducing
burden and providing access to credit while continuing to mitigate most
of the harms caused by the practice identified in Sec. 1041.4.
Both consumer and industry commenters asked the Bureau to clarify
how the requirements of Sec. 1041.6 would interact with existing State
law. The provisions to which the commenters objected are merely
conditions for loans to satisfy the Sec. 1041.6 exemption, not
[[Page 54700]]
new requirements that the Bureau is imposing on all loans. If a lender
cannot legally offer a loan meeting such conditions in the State or
city where a conflicting requirement exists, then that lender simply
cannot offer loans that qualify for the Sec. 1041.6 exemption, though
it always can underwrite loans under the provisions of Sec. 1041.5
where State law permits such loans to be made. To be clear, however,
nothing in this rule categorically prohibits extended repayment plans.
To the extent that some jurisdictions presently allow loans to be
rolled over three times, the cap of two partial rollovers (subject to
the prescribed limits on the amounts that can be rolled over) in Sec.
1041.6 nevertheless must be met for loans to qualify for the
conditional exemption.
Legal Authority
Section 1041.6 establishes an alternative set of requirements for
covered short-term loans that, if complied with by lenders,
conditionally exempts them from Sec. 1041.4 and the specific
underwriting criteria in Sec. 1041.5.\863\ The requirements of Sec.
1041.6 have been developed pursuant to section 1022(b)(3)(A) of the
Dodd-Frank Act, which authorizes the Bureau to grant conditional
exemptions in certain circumstances from its rules. With respect to
Sec. 1041.6(e), the Bureau developed the proposed disclosures by
relying on its authority under section 1032(a) of the Act, which allows
it to prescribe rules to ensure that the features of a consumer
financial product or service are fully, accurately, and effectively
disclosed to consumers, and section 1032(b) of the Act, which provides
for the use of model forms. These sources of legal authority for Sec.
1041.6 of the final rule are explained more fully below.
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\863\ The Bureau finalizes those provisions pursuant to its
separate authority under section 1031(b) of the Dodd-Frank Act to
``prescribe rules identifying as unlawful unfair, deceptive or
abusive acts or practices'' and to include in such rules
``requirements for the purpose of preventing such acts or
practices.'' 12 U.S.C. 5531(b).
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Section 1022(b)(3)(A) of the Dodd-Frank Act--Exemption Authority
Section 1022(b)(3)(A) of the Dodd-Frank Act authorizes the Bureau,
by rule, to ``conditionally or unconditionally exempt any class of . .
. consumer financial products or services'' from any provision of Title
X of the Act or from any rule issued under Title X as the Bureau
determines ``necessary or appropriate to carry out the purposes and
objectives'' of Title X.\864\ The purposes of Title X are set forth in
section 1021(a) of the Act, which provides that the Bureau shall
implement and, where applicable, enforce Federal consumer financial law
consistently ``for the purpose of ensuring that all consumers have
access to markets for consumer financial products and services and that
[such markets] are fair, transparent and competitive.'' \865\
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\864\ 12 U.S.C. 5512(b)(3)(A).
\865\ 12 U.S.C. 5511(a).
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The objectives of Title X are set forth in section 1021(b) of the
Dodd-Frank Act.\866\ This section authorizes the Bureau to exercise its
authorities under Federal consumer financial law for five specified
purposes, two of which are relevant here. In particular, the Bureau may
exercise its authorities under Federal consumer financial law for the
purposes of ensuring that, with respect to consumer financial products
and services: (1) Consumers ``are provided with timely and
understandable information to make responsible decisions about
financial transactions;'' \867\ (2) consumers ``are protected from
unfair, deceptive, or abusive acts and practices and from
discrimination;'' \868\ (3) ``outdated, unnecessary, or unduly
burdensome regulations are regularly identified and addressed in order
to reduce unwarranted regulatory burdens;'' \869\ (4) ``Federal
consumer financial law is enforced consistently, without regard to the
status of a person as a depository institution, in order to promote
fair competition;'' \870\ and (5) ``markets for consumer financial
products and services operate transparently and efficiently to
facilitate access and innovation.'' \871\
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\866\ 12 U.S.C. 5511(b).
\867\ 12 U.S.C. 5511(b)(1).
\868\ 12 U.S.C. 5511(b)(2).
\869\ 12 U.S.C. 5511(b)(3).
\870\ 12 U.S.C. 5511(b)(4).
\871\ 12 U.S.C. 5511(b)(5).
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When issuing an exemption under section 1022(b)(3)(A) of the Dodd-
Frank Act, the Bureau is required under section 1022(b)(3)(B) of the
Act to take into consideration, as appropriate, three factors: (1) The
total assets of the class of covered persons; \872\ (2) the volume of
transactions involving consumer financial products or services in which
the class of covered persons engages; \873\ and (3) existing provisions
of law which are applicable to the consumer financial product or
service and the extent to which such provisions provide consumers with
adequate protections.\874\
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\872\ 12 U.S.C. 5512(b)(3)(B)(i).
\873\ 12 U.S.C. 5512(b)(3)(B)(ii).
\874\ 12 U.S.C. 5512(b)(3)(B)(iii).
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The conditional exemption for covered short-term loans in Sec.
1041.6 is appropriate to carry out the purposes and objectives of Title
X of the Dodd-Frank Act, for three primary reasons. First, Sec. 1041.6
is consistent with the Bureau's statutory purposes and its statutory
objective under section 1021(b)(5) of the Dodd-Frank Act: Seeking to
implement Federal consumer financial law consistently to ensure that
consumers have access to fair, transparent, and competitive markets for
consumer financial products and services; and ensuring that such
markets operate transparently and efficiently to facilitate access to
consumer financial products and services. Section 1041.6 will help
preserve access to credit by providing lenders with an option for
making covered short-term loans that is an alternative to--and a
conditional exemption from--the requirements of Sec. 1041.5. Because
lenders making these conditionally exempt loans under proposed Sec.
1041.6 will be conditionally exempt from complying with the specific
underwriting criteria under Sec. 1041.5, making loans under Sec.
1041.6 will reduce the compliance costs for lenders that make covered
short-term loans relative to the costs of complying with the
underwriting requirements under Sec. 1041.5.\875\ This reduction in
compliance costs will help facilitate access to credit.
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\875\ Note that the relative difference in compliance costs and
access in the proposal would likely be reduced in the final rule
because the Bureau made changes to proposed Sec. 1041.5 intended to
reduce complexity and burden and to maintain access to credit. For
example, in the proposal, the Bureau stated that borrowers who are
paid in cash would be able to obtain a loan under proposed Sec.
1041.7, even though they would be unable to obtain a loan under
proposed Sec. 1041.5. Now borrowers who are paid in cash can get a
loan under either Sec. 1041.5 or Sec. 1041.6 of the final rule.
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Second, the conditional exemption for covered short-term loans is
consistent with the Bureau's statutory objective under section
1021(b)(2) of the Dodd-Frank Act, which is to ensure that consumers are
protected from unfair or abusive acts and practices. In Sec. 1041.4,
the Bureau has stated that it is an unfair and abusive practice for a
lender to make covered short-term loans without making a reasonable
determination that consumers have the ability to repay the loans
according to their terms. In Sec. 1041.5, the Bureau prevents this
unfair and abusive practice by prescribing specific underwriting
criteria for lenders making certain covered loans. Although lenders
making conditionally exempt loans are not required to satisfy these
[[Page 54701]]
same requirements, they will be required to satisfy the alternative
requirements for the conditional exemption under Sec. 1041.6. These
alternative requirements are designed to protect consumers from the
harms that result from lenders making covered short-term loans that are
unaffordable--namely, default, delinquency, repeat borrowing, and
collateral harms from making unaffordable loan payments. These are the
same kinds of harms that the requirements in Sec. 1041.5 were designed
to address.
Third, the conditional exemption in Sec. 1041.6 is consistent with
the Bureau's statutory objective under section 1021(b)(1) of the Dodd-
Frank Act to ensure that consumers are provided with timely and
understandable information to make responsible decisions about
financial transactions. Under Sec. 1041.6(e), the Bureau is
prescribing a series of disclosure requirements in connection with the
making of these conditionally exempt loans. The disclosures notify the
consumer about important aspects of how these transactions operate, and
are designed to contribute significantly to consumers having timely and
understandable information about taking out these conditionally exempt
loans.
The Bureau also considered the statutory factors listed in section
1022(b)(3)(B) of the Dodd-Frank Act, as appropriate. The first two
factors are not materially relevant because they pertain to exempting a
class of covered persons, whereas Sec. 1041.6 conditionally exempts a
class of transactions from certain requirements of the rule. Nor did
the Bureau base the conditional exemption on the third factor. Certain
requirements under Sec. 1041.6 are similar to requirements under
certain applicable State and local laws. However, the Bureau is not
aware of any State or locality that has combined all the elements that
the Bureau has concluded are necessary or appropriate to adequately
protect consumers from the risks and harms associated with unaffordable
loans when covered short-term loans are not underwritten under the
terms of Sec. 1041.5.\876\
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\876\ See also discussion in Market Concerns--Underwriting about
the prevalence of harms in the short-term loan market in spite of
existing regulatory approaches.
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The Bureau emphasizes that the conditional exemption in Sec.
1041.6 is a partial exemption. That is, these conditionally exempt
loans are still subject to all of the requirements of the Bureau's
proposed rule other than the specific underwriting criteria in Sec.
1041.5.
Sections 1032(a) and (b) of the Dodd-Frank Act--Disclosures
In Sec. 1041.6(e), the Bureau is requiring disclosures related to
covered short-term loans made under Sec. 1041.6. The Bureau is doing
so pursuant to its authority under section 1032(a) and (b) of the Dodd-
Frank Act. Section 1032(a) of the Act provides that the Bureau may
prescribe rules to ``ensure that the features of any consumer financial
product or service,'' both initially and over the term of the product
or service, are ``fully, accurately, and effectively disclosed to
consumers'' in a manner that ``permits consumers to understand the
costs, benefits, and risks associated with the product or service, in
light of the facts and circumstances.'' \877\ This authority is broad,
and it empowers the Bureau to prescribe rules on disclosures about the
features of consumer financial products and services generally.
Accordingly, the Bureau may prescribe disclosure requirements for
particular features even if other Federal consumer financial laws do
not specifically require such disclosures. Specifically, the Bureau is
requiring lenders to provide notices before making the first and third
loan in a sequence of conditionally exempt loans, which would inform
consumers of the risk of obtaining such a loan and restrictions on
taking out further conditionally exempt loans in a sequence.
---------------------------------------------------------------------------
\877\ 12 U.S.C. 5532(a).
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Under section 1032(b)(1) of the Dodd-Frank Act, ``any final rule
prescribed by the Bureau under [section 1032] requiring disclosures may
include a model form that may be used at the option of the covered
person for provision of the required disclosures.'' \878\ Any model
form must contain a clear and conspicuous disclosure which, at a
minimum, must use plain language comprehensible to consumers, contain a
clear format and design, and succinctly explain the information that
must be communicated to the consumer. Section 1032(b)(3) of the Act
provides that any model form the Bureau issues shall have been
validated through consumer testing. Accordingly, in developing the
model forms for the proposed notices, the Bureau conducted two rounds
of qualitative consumer testing in September and October of 2015,
contracting with Fors March Group (FMG) to conduct qualitative user
testing of the forms, which presented its results in the FMG Report.
Dodd-Frank Act section 1032(d) provides that, ``Any covered person that
uses a model form included with a rule issued under this section shall
be deemed to be in compliance with the disclosure requirements of this
section with respect to such model form.'' \879\
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\878\ 12 U.S.C. 5532(b)(1).
\879\ 12 U.S.C. 5532(d).
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6(a) Conditional Exemption for Certain Covered Short-Term Loans
Proposed Rule
In proposed Sec. 1041.7(a), the Bureau proposed to establish a
conditional exemption for certain covered short-term loans. Under
proposed Sec. 1041.7(a), a covered short-term loan that is made in
compliance with the requirements set forth in proposed Sec. 1041.7(b)
through (e) would have been exempt from Sec. Sec. 1041.4 through
1041.6. The Bureau also proposed in Sec. 1041.7(a) to require the
lender, in determining whether the proposed requirements in paragraphs
(b), (c), and (d) are satisfied, to obtain information about the
consumer's borrowing history from the records of the lender or its
affiliates, and a consumer report from an information system registered
under proposed Sec. 1041.17(c)(2) or (d)(2).
Proposed comment 7(a)-1 explained that a lender could make a
covered short-term loan without making the ability-to-repay
determination under proposed Sec. 1041.5, provided it complied with
the requirements set forth in proposed Sec. 1041.7(b) through (e).
Proposed comment 7(a)-2 clarified that a lender cannot make a covered
short-term loan under proposed Sec. 1041.7 if no information system is
both registered under proposed Sec. 1041.17(c)(2) or (d)(2) and
available when the lender seeks to make the loan. Proposed comment
7(a)-2 also clarified that a lender may be unable to obtain a report on
the consumer's borrowing history if, for example, information systems
are not yet operational or are temporarily unavailable.
Comments Received
Commenters urged the Bureau not to adopt the prohibition on making
these conditionally exempt loans if no registered information system is
operational and available. They argued that this requirement would be
unfair or irrational because, even if a lender complied with all of the
regulatory requirements under the alternative approach, the lender
would still have to rely on a third-party reporting agency's compliance
with the new and untested rules. One commenter observed that this was
especially problematic given that most lenders will come to depend
[[Page 54702]]
primarily on the approach to lending provided in the conditional
exemption, and hence this restriction will reduce access to credit for
consumers.
Consumer groups supported the requirement that a lender check a
registered information system before making a conditionally exempt
loan. They asserted that restrictions based on borrower history are the
primary limit on conditionally exempt loans and that without this
requirement the exemption would only work on a lender-by-lender basis.
Because of the risk of multiple lenders making loans to the same
borrower absent the requirement, the commenters argued that this
requirement is appropriate.
Several commenters requested a safe harbor from the requirements in
the rule where the lender relies on information from a registered
information system where the information turns out to be incorrect. For
example, if a borrower were to have previously taken out three
consecutive conditionally exempt loans under proposed Sec. 1041.7 at a
different lender, and applied for a fourth such loan within 30 days at
a new lender, and those prior three loans did not appear on the report
obtained from the registered information system, one commenter believed
the new lender should not be held liable for failing to comply with the
requirements in proposed Sec. 1041.7 when it makes the loan in
accordance with the erroneous information that the registered
information system had provided to it.
Final Rule
The final rule adopts Sec. [thinsp]1041.7(a) as proposed,
renumbered in this final rule as Sec. 1041.6(a), with some technical
edits and one addition--that the information system from which the
lender obtains a consumer report must have been registered for 180 days
or more pursuant to Sec. 1041.11(c)(2) or registered pursuant to
paragraph (d)(2). In addition, the final rule clarifies that the lender
must use this borrowing history information to determine a potential
loan's compliance with the requirements in Sec. 1041.6(b) and (c); the
reference to Sec. 1041.6(d) is removed. Lenders will not need to
obtain a separate report from a registered information systems to
comply with Sec. 1041.6(d), which prohibits a lender from making a
loan within 30 days of a conditionally exempt loan made by that lender
itself (other than another conditionally exempt loan following the
conditions of Sec. 1041.6).\880\ And Sec. 1041.6(c), as well as Sec.
1041.5(d), restrict covered short-term loans made by other lenders, as
well as loans made by the same lender and its affiliates.
---------------------------------------------------------------------------
\880\ Lenders that make covered short-term loans under Sec.
1041.6 will have to check their own records and records of
affiliates before making loans to ensure that they are complying
with Sec. 1041.6(b) and (c).
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The Bureau added the provision specifying that, when a lender is
relying on a report from an information system registered pursuant to
Sec. 1041.11(c)(2) to satisfy Sec. 1041.6, the registered information
system must have been registered for 180 days or more. Under Sec.
1041.10(b), a lender is not required to begin furnishing information to
registered information systems registered pursuant to Sec.
1041.11(c)(2) until 180 days after they are registered. A consumer
report obtained from an information system registered for less than 180
days would not contain any information about borrowers' use of covered
short-term and longer-term balloon payment loans.
In the final rule, the Bureau is retaining the proposed requirement
that, prior to making a covered short-term loan under Sec. 1041.6, a
lender must review the consumer's borrowing history in its own records,
the records of the lender's affiliates, and a consumer report from a
registered information system. The Bureau concludes that lenders should
not be permitted to make conditionally exempt loans under Sec. 1041.6
if lenders do not obtain and review a report from a registered
information system, even in instances where a report from a registered
information system is unavailable. The Bureau maintains its view that
reports from registered information systems are important for ensuring
that the protections put in place by Sec. 1041.6 are fully realized,
and, based on outreach during the rulemaking process, the Bureau
expects to register at least one information system sufficiently in
advance of the compliance date of Sec. Sec. 1041.5 and 1041.6 that
reports from a registered information system will be available and may
be relied upon on such date.
If no report from a registered information systems is available and
a lender is therefore unable to obtain reliable information about a
consumer's borrowing history with other lenders, the Bureau is
concerned that conditionally exempt lending could result in consumers
continuing to experience extended cycles of re-borrowing. Consumers
could refinance a loan under Sec. 1041.6 from one lender with another
lender, and repeat continuously, severely undermining many of the
protections contained in Sec. 1041.6. In the unlikely circumstance
that no information system has been registered for at least 180 days as
of the compliance date of Sec. Sec. 1041.5 and 1041.6, the Bureau will
consider its options at that time, but does not at this time wish to
leave open the possibility of Sec. 1041.6 lending without lenders
first obtaining borrower history from a registered information system.
If lenders are unable to make loans under Sec. 1041.6 absent a report
from a registered information system, the Bureau has concluded that
lenders will have an incentive to ensure that there is at least one
registered information system that has been registered for at least 180
days as of the compliance date of Sec. Sec. 1041.5 and 1041.6. If the
Bureau were to allow lenders to make Sec. 1041.6 loans without
obtaining a report from a registered information system, the opposite
could be true--industry would have an incentive to impede or slow the
development of registered information systems.
The Bureau is finalizing comment 6(a)-1 as proposed, with the
addition of citations of Sec. Sec. 1041.8 and 1041.9 to clarify the
meaning of ``other applicable laws'' (which in essence means that these
conditionally exempt loans are still subject to the payment-related
provisions of this rule). The Bureau has adjusted comment 6(a)-2 to
clarify the requirement that the registered information system from
which the lender obtains a consumer report must have been registered
under Sec. 1041.11(c)(2) for 180 days or more or must be registered
under Sec. 1041.11(d)(2).
The Bureau has added comment 6(a)-3 in response to commenters
requesting a safe harbor when they rely on information obtained from a
registered information system to make a loan determination and the
information they are provided later turns out to have been erroneous.
This comment clarifies that a lender is not responsible for inaccurate
or incomplete information contained in a consumer report from a
registered information system. If a lender relies on information
obtained from a registered information system that is inaccurate, and
based on that inaccurate information makes a loan that does not comply
with the requirements of Sec. 1041.6 because of inaccurate information
in that report, the loan nonetheless qualifies for the exemption in
Sec. 1041.6.
6(b) Loan Term Requirements
In proposed Sec. 1041.7(b), the Bureau proposed to require a
covered short-term loan that is made under proposed Sec. 1041.7 to
comply with certain requirements as to the loan terms and
[[Page 54703]]
structure. The requirements under proposed Sec. 1041.7(b), in
conjunction with the other requirements set forth in proposed Sec.
1041.7(c) through (e), were presented as an alternative to the
underwriting criteria specified in Sec. 1041.5, and were likewise
intended to reduce the likelihood that consumers who take out these
conditionally exempt loans would suffer the competing harms of default,
delinquency, re-borrowing, or the collateral harms from making
unaffordable loan payments to avoid default. These proposed
requirements were also intended to limit the harm to consumers if they
are unable to repay the loan as scheduled.
6(b)(1)
Proposed Rule
In proposed Sec. 1041.7(b)(1), the Bureau proposed certain
principal amount limitations for a conditionally exempt loan.
Specifically, proposed Sec. 1041.7(b)(1)(i) would have required that
the first loan in a sequence of conditionally exempt loans have a
principal amount that is no greater than $500. Proposed Sec.
1041.7(b)(1)(ii) would have required that the second loan in a sequence
of conditionally exempt loans have a principal amount that is no
greater than two-thirds the principal amount of the first loan in the
sequence. Proposed Sec. 1041.7(b)(1)(iii) would have required that the
third loan in a sequence of conditionally exempt loans have a principal
amount that is no greater than one-third of the principal amount of the
first loan in the sequence.
Proposed comment 7(b)(1)-1 cross-referenced the definition and
commentary for loan sequences. Proposed comment 7(b)(1)-2 clarified
that the principal amount limitations apply regardless of whether the
loans are made by the same lender, an affiliate, or unaffiliated
lenders. Proposed comment 7(b)(1)-3 noted that the principal amount
limitations under proposed Sec. 1041.7 apply to both rollovers of an
existing loan when they are permitted under State law and new loans
that are counted as part of the same loan sequence. Proposed comment
7(b)(1)-4 gave an example of a loan sequence in which the principal
amount is stepped down or amortized in increments of one-third.
The Bureau believed that the principal cap and principal reduction
requirements under proposed Sec. 1041.7(b)(1) were critical to
reducing both the risk of extended loan sequences and the risk that the
loan payments over a limited, shorter loan sequence would prove
unaffordable for consumers. Because proposed Sec. 1041.7 would not
require the borrower to meet the underwriting criteria set forth in
proposed Sec. 1041.5 for a covered short-term loan, some consumers may
not be able to repay these loans as scheduled. Absent further
protections, these consumers would be in the position of choosing among
the harms that borrowers confront when they have to make the payments
on an unaffordable loan--default on the loan, or re-borrow, or fail to
meet basic living expenses or other major financial obligations in an
effort to avoid default as the loan comes due. As discussed in the
proposal, the Bureau found that in this predicament, consumers in the
market today generally re-borrow for the same amount as the prior loan,
rather than pay off a portion of the principal and reduce their debt
burden. As a result, consumers may face a similar situation when the
next loan comes due and all succeeding loans after that, except that
they have paid substantial fees for re-borrowing with every additional
loan. The Bureau has found that this lack of principal reduction, or
``self-amortization,'' over the course of a loan sequence is correlated
with higher rates of re-borrowing and default.\881\
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\881\ See CFPB Data Point: Payday Lending, at 16, 17 panel A &
panel B.
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Proposed Sec. 1041.7(b)(1) was designed to work in tandem with
proposed Sec. 1041.7(c)(3), which proposed to limit a loan sequence of
these conditionally exempt loans to no more than three loans. The
proposed requirements together would ensure that a consumer may not
receive more than three consecutive covered short-term loans under
proposed Sec. 1041.7 and that the principal would decrease from a
maximum of $500 on the first loan over the course of a loan sequence.
The proposed principal reduction feature was intended to steadily
reduce consumers' debt burden and permit them to pay off the original
loan amount in its entirety in more manageable increments over the
course of a loan sequence with three loans.
The Bureau believed that the proposed $500 limit for the first loan
was appropriate in light of current State regulatory limits and would
reduce the risks that unaffordable payments would cause consumers to
default, re-borrow, or fail to meet basic living expenses or other
major financial obligations during a loan sequence. Many State statutes
authorizing payday loans impose caps on the loan amount, with $500
being a common limit.\882\ In States that have lower limits on loan
amounts, those lower limits would prevail. In addition, the Bureau's
empirical research found that average loan sizes are well under this
threshold.\883\ Finally, without applying the underwriting criteria
under proposed Sec. 1041.5, the Bureau believed that loans with a
principal amount larger than $500 would carry a significant risk of
unaffordable payments.
---------------------------------------------------------------------------
\882\ E.g., Ala Code sec. 5-18A-12(a); Alaska Code sec.
06.50.010; Col. Code sec. 5-3.1-101; Fla. Code sec. 560.402; Iowa
Code sec. 533D.10(1)(b); Kan. Code secs. 16a-2-404-05; Ken. Code
sec. 286.9-010; Miss. Code sec.75-67-501; Mo. Code secs. 408.500-06;
Neb. Code sec. 45-901; N.H. Code sec. 399A:1; Ohio Rev. Code
sec.1321.35; Okla. Code sec. 59-3101; R.I. Code secs. 19-14.1-11;
S.D. Code sec. 54-4-36; Tenn. Code sec. 45-17-101; Va. Code sec.
6.2-1800.
\883\ The Bureau's analysis of supervisory data indicated that
the median loan amount for payday loans is around $350. See CFPB
Payday Loans and Deposit Advance Products White Paper, at 15.
Another study found that the average loan amount borrowed was $375.
See Pew Charitable Trusts, ``Payday Lending in America: Who Borrows,
Where They Borrow, and Why,'' at 9 (Report 1, 2012), available at
http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/
2012/pewpaydaylendingreportpdf.pdf.
---------------------------------------------------------------------------
The Bureau also gave extensive consideration to proposing an ``off-
ramp'' for consumers who are struggling to repay a covered short-term
loan, in lieu of the principal reduction structure.\884\ Under this
approach, lenders would be required to provide a no-cost extension of
the third loan in a sequence (the off-ramp) if a consumer is unable to
repay the loan according to its terms.
---------------------------------------------------------------------------
\884\ See Small Business Review Panel Report, at 8.
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The Bureau believed that the off-ramp approach would have three
significant disadvantages relative to the principal reduction structure
outlined above. First, an off-ramp, which began after a sequence of
three loans, would delay the onset of the principal reduction and
compel consumers to carry the burden of unaffordable payments for a
longer time, increasing the likelihood of default and collateral harms
from making unaffordable loan payments. Second, the Bureau believed
that an off-ramp provision likely could not be designed in a way so as
to ensure that consumers actually receive the off-ramp. The Bureau's
analysis of State regulatory reports indicated that even where off-
ramps are made available under State law, actual consumer use of
available off-ramps has been quite limited.\885\ Third, to make an off-
ramp
[[Page 54704]]
approach less susceptible to such defects, additional provisions would
be necessary, including disclosures alerting consumers to their rights
to take the off-ramp and prohibitions on false or misleading
information regarding off-ramp usage and collections activity prior to
completion of the full loan sequence. These measures would be of
uncertain effectiveness and would increase complexity, burdens on
lenders, and challenges for enforcement and supervision.
---------------------------------------------------------------------------
\885\ The experience in Florida also suggests that off-ramps are
not likely to be made available to all consumers who struggle to
repay covered short-term loans. For borrowers who indicate that they
are unable to repay the loan when due and agree to attend credit
counseling, Florida law requires lenders to extend the loan term on
the outstanding loan by 60 days at no additional cost. Although 84
percent of loans were made to borrowers with seven or more loans in
2014, fewer than 0.5 percent of all loans were granted a cost-free
term extension. See Brandon Coleman & Delvin Davis, ``Perfect Storm:
Payday Lenders Harm Florida Consumers Despite State Law,'' Ctr. for
Responsible Lending,'' at 4 & n.7 (2016), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
---------------------------------------------------------------------------
Comments Received
Several industry commenters urged the Bureau not to adopt the $500
cap in proposed Sec. 1041.7(b)(1) because it is too low. These groups
argued that the Bureau had not sufficiently demonstrated that $500 was
a large enough amount of money to meet consumer demand and that
consumers routinely needed more money, especially for potential
emergencies. One commenter was concerned that the $500 cap was
inconsistent with the definition of small-dollar loans in some States
and could lead to compliance problems and costs, causing lenders to
leave the market and producing a reduction in available credit.
In contrast, consumer groups urged the Bureau not to adopt the $500
cap in the proposed rule because it is too high. The group argued that
the median loan amount for current borrowers is $350 to $375 and this
smaller median loan amount did not support the $500 cap.
Several commenters supported the principal reduction requirements
in proposed Sec. 1041.7(b)(1). An academic commenter suggested this
feature would benefit borrowers by helping them make incremental
progress on their loans, and argued that a 3-loan sequence would help
provide borrowers with sufficient time to repay their loans.
Several consumer groups urged the Bureau not to adopt the
conditional exemption, yet supported the 3-loan framework with an
amortizing structure if the exemption was part of the final rule. Some
commenters argued that roughly two-thirds of borrowers are unable to
pay off these kinds of loans in three payments or less, so the
provision would likely be ineffective, but stated that it may be worth
trying nonetheless.
Several consumer groups and a legal services organization supported
the Bureau's choice to use principal reduction and amortization instead
of using off-ramps. These commenters asserted that consumers often are
not informed about or are discouraged from using off-ramps, which makes
them ineffective. In contrast, some industry commenters wrote in
support of adding an off-ramp option. One said it would be more in
keeping with existing approaches by the States and would adequately
address the Bureau's concerns about the number of consecutive
transactions in extended loan sequences.
Some industry commenters urged the Bureau not to adopt the proposed
structure of three loans with amortization. They asserted that
emergency expenses are not predictable, and so a rigid 3-loan schedule
with amortization would not meet borrower needs.
Several industry commenters urged the Bureau to allow more
conditionally exempt loans in order to reduce the size of the step-down
between each loan, and thus reduce the amount that the borrower would
be unable to re-borrow after each loan, which would also reduce the
burden and impact on lenders by allowing more re-borrowing. A number of
State Attorneys General similarly noted that some States have
implemented smaller principal-repayment requirements that permit more
rollovers and more time for consumers to repay. One commenter suggested
that five step-down loans was a better limit than three because it
would allow for smaller and more affordable payments. Another
recommended a 4-loan sequence with an indebtedness limit of 104 days
during a 12-month period.
In contrast, consumer groups urged the Bureau not to extend the
number of loans. These commenters argued that increasing the number of
loans from the proposed level of three loans even to four loans would
result in more harm to borrowers because of the longer payment period.
Final Rule
The Bureau has considered the comments and is adopting proposed
Sec. 1041.7(b)(1), renumbered in this final rule as Sec.
1041.6(b)(1), as proposed. The Bureau adopts proposed comments 7(b)(1)-
1 through 7(b)(1)-4 as proposed, renumbered in this final rule as
comments 6(b)(1)-1 through 6(b)(1)-4, with only technical
modifications.
The Bureau does not agree with the industry commenters that urged
the Bureau not to adopt the $500 cap because it is too low to meet
consumer demand, especially for potential emergencies. The Bureau also
does not agree with consumer groups that the Bureau should set the cap
closer to the median loan amount for current borrowers of $350 to $375.
For the reasons discussed in the proposed rule and noted above, the
Bureau has determined that the $500 limit for the first loan is
appropriate in light of current State regulatory limits and ordinances,
and will reduce the risks that unaffordable payments will cause
consumers to default, re-borrow, or seek to avoid default by failing to
meet basic living expenses or other major financial obligations over
the course of a loan sequence. The Bureau's empirical research,
confirmed by commenters, has also found that average loan sizes are
well under this threshold.\886\ In addition, without applying the
underwriting criteria set out in Sec. 1041.5, the Bureau concludes
that short-term loans with a principal amount larger than $500 would
carry a significant risk of having unaffordable payments with the
ensuing harms to consumers that are discussed more fully above in
Market Concerns--Underwriting. Of course, lenders could always choose
to proceed by underwriting loans according to the criteria set out in
Sec. 1041.5, or they could instead make other types of loans that are
not covered by the rule, in amounts higher than $500 to the extent
permitted by State law.
---------------------------------------------------------------------------
\886\ The Bureau's analysis of supervisory data indicated that
the median loan amount for payday loans is around $350. See CFPB
Payday Loans and Deposit Advance Products White Paper, at 15.
Another study found that the average loan amount borrowed was $375.
See Pew Charitable Trusts, ``Payday Lending in America: Who Borrows,
Where They Borrow, and Why,'' at 9 (Report 1, 2012), available at
http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/
2012/pewpaydaylendingreportpdf.pdf.
---------------------------------------------------------------------------
Similarly, the Bureau is not persuaded by the concern that the $500
cap is inconsistent with the definition of small-dollar loans in some
States, and could lead to compliance problems and costs that would
cause lenders to leave the market and reduce the availability of
credit. The Bureau determined that many State statutes authorizing
payday loans already impose caps on the loan amount, with $500 as a
common limit.\887\ In States with lower limits on
[[Page 54705]]
loan amounts, those lower limits would prevail. In States with higher
limits, lenders could still make underwritten loans under Sec. 1041.5
at those higher amounts.
---------------------------------------------------------------------------
\887\ See, e.g., Ala Code sec. 5-18A-12(a); Alaska Code sec.
06.50.010; Col. Code sec. 5-3.1-101; Fla. Code sec. 560.402; Iowa
Code sec. 533D.10(1)(b); Kan. Code secs. 16a-2-404-05; Ken. Code
sec. 286.9-010; Miss. Code sec.75-67-501; Mo. Code secs. 408.500-06;
Neb. Code sec. 45-901; N.H. Code sec. 399A:1; Ohio Rev. Code
sec.1321.35; Okla. Code sec. 59-3101; R.I. Code secs. 19-14.1-1;
S.D. Code sec. 54-4-36; Tenn. Code sec. 45-17-101; Va. Code sec.
6.2-1800.
---------------------------------------------------------------------------
The Bureau also concludes that the 3-loan step-down will provide
borrowers with sufficient time to repay the loan and mitigate harm to
borrowers. It adopted this framework for Sec. 1041.6(b)(1) of the
final rule in an attempt to balance the interests of limiting re-
borrowing while also providing for a gradual step-down. For each
additional loan, the step-down would be less steep (i.e., the amount
that would not be refinanced and thus would need to be ``repaid'' would
decrease), but the borrower would incur that much more re-borrowing.
For example, if the Bureau adopted a 5-loan limit, the second loan
would be 80 percent of the original, the third loan 60 percent, the
fourth loan 40 percent, and the fifth loan 20 percent. That would allow
for more affordable payments, but would also add two additional loans,
with the attendant costs. Ultimately, the Bureau had to determine where
to draw the line, which is often an unavoidable exercise in the
rulemaking process, and it concluded that the combination of the $500
cap and the 3-loan step-down, resulting in fees from three loans and a
maximum ``repayment amount'' of $166.66 (the amount not refinanced on
each step) in principal for each loan, strikes a reasonable balance
between these competing concerns.
The Bureau recognizes that some borrowers may not be able to use
loans under Sec. 1041.6 to meet new credit needs because of the step-
down in loan amounts for the second and third conditionally exempt
loan. For example, a borrower who takes out a first loan of $300 under
Sec. 1041.6, and then has a new need arise before 30 days has passed,
would only be able to take out a further loan of $200 (which is the
remaining amount under the principal cap), which may not be sufficient
to cover the need. But, as stated above, and in the discussion for
Sec. 1041.6(c) and (d), borrowers who return for loans within a 30-day
period are often re-borrowing because of difficulty in repaying their
previous loan and meeting their obligations rather than taking out a
new loan in response to a new need that is separate and independent
from the original need. Further, those borrowers may be able to get
other types of credit from other lenders to supplement the amount
obtainable under Sec. 1041.6, including a loan that would be
underwritten in accordance with the provisions of Sec. 1041.5.
One further benefit from the limitations on re-borrowing imposed in
the principal cap and the principal reduction feature in Sec.
1041.6(b)(1), as mentioned earlier, is that they are likely to improve
the care and consideration with which lenders make these conditionally
exempt loans, even though they are not required to be underwritten in
accordance with the criteria specified in Sec. 1041.5. As noted above
in Market Concerns--Underwriting, a major reason why lenders in this
market are willing to lend to borrowers who are unable to repay their
loans is that the costs of default are substantially offset by the
revenues generated by high levels of re-borrowing; and indeed, many
defaults may be deferred rather than immediate because the borrower can
opt to re-borrow some number of times--and often in extended loan
sequences--before finally defaulting. By strictly limiting the amount
of re-borrowing that can occur with loans made under Sec. 1041.6, the
Bureau's conditional exemption thus is likely to lead to improved
underwriting of these loans, even without imposing any mandatory
underwriting criteria upon their origination.
6(b)(2)
Proposed Rule
Proposed Sec. 1041.7(b)(2) would have imposed certain safeguards
in the event that a lender chose to structure the loan with multiple
payments, such as a 45-day loan with three required payments. Under the
proposed requirement, the loan would have required payments that are
substantially equal in amount, fall due in substantially equal
intervals, and amortize completely during the term of the loan.
Proposed comment 7(b)(2)-1 provided an example of a loan with an
interest-only payment followed by a balloon payment, which would not
satisfy the loan structure requirement under proposed Sec.
1041.7(b)(2).
The requirement under proposed Sec. 1041.7(b)(2) was intended to
address covered short-term loans made under proposed Sec. 1041.7 that
are structured to have multiple payments. Absent the requirements in
proposed Sec. 1041.7(b)(2), the Bureau was concerned that lenders
could structure loans to pair multiple interest-only payments with a
significantly larger payment of the principal amount at the end of the
loan term. The Bureau believed that consumers are better able to manage
repayment obligations for payments that are due with reasonable
frequency, in substantially equal amounts, and within substantially
equal intervals.
Comments Received
One commenter urged the Bureau not to adopt the approach in
proposed Sec. 1041.7(b)(2) that requires a payment schedule based on
applying a fixed rate of interest. It observed that the States
generally regulate payday loan finance charges by limiting fees charged
per amount lent instead of using an interest rate, and argued that
requiring a payment schedule based on an interest rate would force
lenders to reprogram their systems on a scale that goes beyond the
Bureau's statutory mandate.
On the other hand, several consumer groups supported the Bureau's
proposal to allow multi-payment loans under the exemption, assuming it
remained a part of the rule. They asserted that the risk of including
the multi-payment loans did not increase the inherent risk of the
exemption. They also supported the position taken in the proposal that
permitting balloon payments for multiple-payment loans under the
conditional exemption would be antithetical to the purpose of the
exemption.
Final Rule
The Bureau has considered the comments and is adopting proposed
Sec. 1041.7(b)(2), renumbered in this final rule as Sec.
1041.6(b)(2), as proposed. The Bureau also adopts proposed comment
7(b)(2)-1 as proposed, renumbered in this final rule as comment
6(b)(2)-1, with only technical modifications.
As discussed in more detail in the proposed rule and above, Sec.
1041.6(b)(2) provides certain safeguards in the event that a lender
chooses to structure a covered short-term loan with multiple payments.
Absent the requirements in Sec. 1041.6(b)(2), the Bureau is concerned
that lenders could structure loans to pair multiple interest-only
payments with a significantly larger payment of the principal amount at
the end of the loan term. The Bureau has concluded that consumers are
better able to manage repayment obligations for payments that are due
with reasonable frequency, in substantially equal amounts, and within
substantially equal intervals. The Bureau agrees with commenters that
the principal reduction feature will help borrowers make incremental
progress on loans. The Bureau also judges that the concern regarding
supposed inconsistency with State laws is overstated. Section
1041.6(b)(2) only applies in circumstances where one individual loan
has multiple payments, and there is nothing in the text of Sec.
1041.6(b)(2) that limits the imposition of fees, so long as the fees
are repaid
[[Page 54706]]
equally during every scheduled payment.
6(b)(3)
Proposed Rule
In proposed Sec. 1041.7(b)(3), the Bureau proposed to prohibit a
lender, as a condition of making a covered short-term loan under
proposed Sec. 1041.7, from obtaining vehicle security, as defined in
proposed Sec. 1041.3(d). A lender seeking to make a covered short-term
loan with vehicle security would have had to make an ability-to-repay
determination under proposed Sec. 1041.5 instead. Proposed comment
7(b)(3)-1 clarified this prohibition on a lender obtaining vehicle
security on a conditionally exempt loan.
The Bureau proposed this requirement because it was concerned that
some consumers obtaining a loan under proposed Sec. 1041.7, without
meeting the underwriting criteria in proposed Sec. 1041.5, would not
be able to afford the payments required to pay down the principal over
a sequence of three loans. Allowing lenders to obtain vehicle security
in connection with such loans could substantially increase the harm to
consumers by putting their vehicle at risk. The Bureau believed the
proposed requirement would protect consumers from the harms of default,
re-borrowing, and making unaffordable loan payments to avoid defaulting
on covered short-term vehicle title loans. First, the Bureau was
particularly concerned about default that could result in the loss of
the consumer's vehicle, which could jeopardize their livelihood or
their ability to carry out essential everyday affairs. The Bureau found
that sequences of short-term vehicle title loans are more likely to end
in default than sequences of payday loans are,\888\ and that fully 20
percent of loan sequences of single-payment vehicle title loans result
in repossession of the consumer's vehicle.\889\ Second, due to the
potentially serious consequences of defaulting on title loans, the
Bureau was concerned that consumers may take extraordinary measures to
repay such loans and, as a result, would suffer harm from failing to
meet basic living expenses or other major financial obligations. Third,
even with the other protections against re-borrowing in proposed Sec.
1041.7, the Bureau was concerned that, due to the serious consequences
of defaulting on vehicle title loans, consumers may feel pressure to
re-borrow up to the maximum allowed on unaffordable vehicle title
loans.\890\
---------------------------------------------------------------------------
\888\ CFPB Single-Payment Vehicle Title Lending, at 11; CFPB
Report on Supplemental Findings, at 120.
\889\ CFPB Single-Payment Vehicle Title Lending, at 23.
\890\ A single-payment short-term vehicle title loan is less
likely to be repaid after one loan than a payday loan. See CFPB
Single-Payment Vehicle Title Lending, at 11; CFPB Report on
Supplemental Findings, at 120.
---------------------------------------------------------------------------
Furthermore, the Bureau believed that proposed Sec. 1041.7(b)(3)
is necessary or appropriate to restrict lenders' incentives to make
these conditionally exempt loans with unaffordable payments. Because
loan sequences would be limited to a maximum of three conditionally
exempt loans under proposed Sec. 1041.7(c)(3) and subject to principal
reduction under Sec. 1041.7(b)(1), the Bureau believed a lender that
makes these conditionally exempt loans would have a strong incentive to
underwrite effectively, even without having to comply with the specific
underwriting criteria in proposed Sec. 1041.5. However, with vehicle
title loans, in which the lender obtains a security interest in an
asset of significantly greater value than the principal amount on the
loan,\891\ the Bureau was concerned that a lender would have much less
incentive to evaluate the consumer's ability to repay, because the
lender could always simply repossess the vehicle if the loan were not
repaid in full, even after the first loan in the sequence.
---------------------------------------------------------------------------
\891\ For further discussion of how vehicle security affects the
market for such loans, see CFPB Single-Payment Vehicle Title
Lending, and see also part II above.
---------------------------------------------------------------------------
Comments Received
Consumer groups supported the proposed prohibition on auto title
lending under the conditional exemption in proposed Sec. 1041.7. They
asserted that the repossession of a borrower's vehicle represented
significant harm, especially given the high rate of repossessions. They
argued that the harm from repossession is so severe that lenders should
not be allowed to make vehicle title loans without assessing ability to
repay.
In contrast, commenters associated with the vehicle title lending
industry wrote in opposition to the proposed prohibition on title
lending under the conditional exemption. An industry trade association
argued that requiring all short-term vehicle title loans to satisfy the
proposed ability-to-repay standards would have a devastating impact on
lenders and on the availability of such loans. They argued that the
Bureau had not sufficiently demonstrated that vehicle title lending
presents greater risks than other forms of short-term lending and had
overstated the rate and impact of repossession, asserting that only
about 8 percent of title loans result in repossession. The commenter
further argued that the Bureau had exaggerated the effects of
repossession, contending that many consumers own a second vehicle and
that surveys indicate consumers would have alternative transportation
options if their vehicle were repossessed. The industry trade
association also argued that the prohibition was inconsistent with the
Bureau's mandate to regulate the market fairly and consistently, and
that by prohibiting vehicle title lenders from using the conditional
exemption the proposed rule would provide an unfair advantage for other
types of lenders.
Final Rule
The Bureau has considered the comments and, for the reasons noted
in the proposal and above and for the additional reasons discussed
below, is adopting proposed Sec. 1041.7(b)(3), renumbered in this
final rule as Sec. 1041.6(b)(3), as proposed. The Bureau is also
adopting comment 7(b)(3)-1 as proposed, renumbered as comment 6(b)(3)-
1. The Bureau concludes, as the consumer groups argued, that the risk
of severe consumer harm from repossession of the borrower's vehicle
makes it inappropriate to allow lenders to make covered short-term
vehicle title loans without satisfying the underwriting requirements in
Sec. 1041.5. The Bureau does not agree with the argument of the title
lending industry commenters that the Bureau had not sufficiently
demonstrated that vehicle title lending presents greater risks than
other forms of short-term lending.
The structure of Sec. 1041.6 is intended to reduce defaults and
re-borrowing, and if lenders were permitted to make vehicle title loans
under this structure, the protections in Sec. 1041.6 might reduce
defaults and repossessions to some degree. But the Bureau is concerned
that the reduction in defaults may be less likely than for unsecured
short-term loans, such as payday loans. As noted in the proposal, as a
general matter in this market, sequences of short-term vehicle title
loans are more likely to end in default than sequences of payday loans
are.\892\ Although an industry commenter argued that the Bureau had
overstated the rate of repossession, that commenter focused on the per-
loan default rate. As discussed in Market Concerns--Underwriting, the
Bureau has concluded that a per-sequence
[[Page 54707]]
rather than per-loan default rate provides a better measure for short-
term loans. One in five loan sequences of single-payment vehicle title
loans result in repossession of the consumer's vehicle.\893\ Moreover,
as noted above, once the revenues from repeated re-borrowing are
constrained, as they are by the conditions imposed in Sec. 1041.6, the
incentive for lenders to make unsecured loans on which the borrower is
likely to default are sharply diminished. But the change in incentives
is far less pronounced for vehicle title loans, where even as re-
borrowing revenues decrease, the lender still has the leverage of a
fully securitized loan available to cope with any defaults.
---------------------------------------------------------------------------
\892\ CFPB Single-Payment Vehicle Title Lending, at 11; CFPB
Report on Supplemental Findings, at 120.
\893\ CFPB Single-Payment Vehicle Title Lending, at 23.
---------------------------------------------------------------------------
Therefore, even with the protections of Sec. 1041.6, there would
still be some borrowers who cannot afford to repay loans made under
Sec. 1041.6. And for the reasons just stated, there are likely to be
more such borrowers of vehicle title loans than of other covered short-
term loans. In addition, the harm produced by unaffordable title loans
is greater than for other such loans. If lenders could take vehicle
security for loans under Sec. 1041.6, then consumers who could not
afford to repay their loans would face the threat of having their
vehicles repossessed, and, in many cases, would suffer the severe harms
of repossession. The harms from repossession (and comments about those
harms) are discussed above in Market Concerns--Underwriting and in the
section-by-section discussion of Sec. 1041.4, and, contrary to the
assertions by industry commenters, the Bureau has concluded that such
harms are often severe. First, consumers facing repossession would
suffer the potential loss of transportation to work or school and for
many other everyday activities, such as securing food and health care,
with consequential losses that may greatly exceed the original cost of
the loan.\894\ Second, due to the potentially serious consequences of
defaulting on title loans, the Bureau is concerned that consumers may
take extraordinary measures to repay such loans and, as a result, would
suffer greater harm more frequently from failing to meet basic living
expenses or other major financial obligations. Third, even with the
other protections against re-borrowing in Sec. 1041.6, the Bureau is
concerned that, due to the serious consequences of defaulting on
vehicle title loans, consumers may feel greater pressure to re-borrow
up to the maximum allowed on unaffordable vehicle title loans, since a
vehicle title loan is less likely to be repaid after one loan than are
other types of covered short-term loans.\895\
---------------------------------------------------------------------------
\894\ Even for those consumers who may have access to some other
mode of transportation, the Bureau notes that there are hardships
and inconveniences associated with having to use other forms of
transportation, especially in non-urban areas of the country. And
for at least 15 percent of title loan borrowers, their personal
vehicles are essential for numerous transportation needs. See See
Pew Charitable Trusts, ``Auto Title Loans: Market Practices and
Borrowers' Experiences,'' at 14 (2015), available at http://
www.pewtrusts.org/~/media/Assets/2015/03/AutoTitleLoansReport
.pdf?la=en.
\895\ See CFPB Single-Payment Vehicle Title Lending, at 11; CFPB
Report on Supplemental Findings, at 120.
---------------------------------------------------------------------------
In addition, there are still other economic collateral harms of
repossession, which is usually a self-help process performed by agents
of the lender and which often results in significant consumer fees
associated with the costs of the repossession and preparing a vehicle
for auction.\896\ These processes can put the consumer at greater risk
of harm, and often more severe harm, than when a consumer defaults on
an unsecured loan. The Bureau has observed typical repossession fees
charged to borrowers ranging from $100 to $400 or even higher, which
could be larger than the small balance of the defaulted loan made under
Sec. 1041.6 (with a maximum of $500 on the first loan, $333.33 on the
second loan, and $166.66 on the third loan). And there are additional
harms often associated with repossessions, including the potential loss
of any property in the vehicle.\897\ These harms persist even in States
that limit vehicle title lending to so-called non-recourse loans.
---------------------------------------------------------------------------
\896\ Uniform Commercial Code section 9-615 provides that cash
proceeds of the sale of collateral should be applied first to the
``reasonable expenses of retaking, holding, preparing for
disposition, processing, and disposing'' incurred by the secured
party. Under the U.C.C., these expenses are repaid to the lender and
other third parties even before satisfying the outstanding balances
of the secured loan.
\897\ See, e.g., Bureau of Consumer Fin. Prot., ``Supervisory
Highlights,'' at 5-6 (Fall 2016), available at https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-no-13-fall-2016/.
---------------------------------------------------------------------------
For all of these reasons, vehicle title loans that are not subject
to the specific underwriting criteria of Sec. 1041.5 present
significant additional risks as compared to unsecured loans that are
not subject to Sec. 1041.5. Moreover, the harms to consumers that flow
from these risks are greater for vehicle title loans. Accordingly, the
Bureau has concluded that it is appropriate in Sec. 1041.6 to require
lenders making such loans not to take a security interest in the
consumer's vehicle.
The Bureau recognizes that, because lenders making short-term
vehicle title loans are highly dependent on the revenue from re-
borrowing, requiring short-term vehicle title loans to comply with the
ability-to-repay requirements in Sec. 1041.5 will have a significant
impact on such lenders. Title lenders that are unable to adjust their
business models or obtain a license to make unsecured small-dollar
loans or installment title loans thus may face greater challenges than
payday lenders because they would not be able to make loans under Sec.
1041.6 that would be exempt from the ability-to-repay requirements of
Sec. 1041.5. (The Bureau notes that, by its own count, 18 of the 24
States that permit title lending allow title installment lending that
would not be covered by Sec. 1041.5.) Nonetheless, the Bureau
concludes that, under Sec. 1041.6, covered short-term loans with
vehicle security would present more risks and more severe harms than
unsecured covered short-term loans. The Bureau therefore is requiring
that if a lender takes a security interest in the consumer's vehicle,
then it must underwrite any covered short-term loans that it makes
pursuant to Sec. 1041.5. Finally, since the rule does not
differentiate based on whether a lender is a depository or non-
depository lender, or based on any other characteristics of the lender,
and instead makes differentiations based on the loan products
themselves and the risks associated with them, the Bureau is not
imposing inconsistent obligations here on lenders based on their status
as depository or non-depository lender.
6(b)(4)
Proposed Sec. 1041.7(b)(4) would have required that, as a
condition of making a covered short-term loan under proposed Sec.
1041.7, the loan must not be structured as an open-end loan. Proposed
comment 7(b)(4)-1 clarified this prohibition on a lender structuring a
conditionally exempt loan as an open-end loan. The Bureau was concerned
that permitting open-end loans under proposed Sec. 1041.7 would
present significant risks to consumers, as consumers could repeatedly
draw down credit without the lender ever determining the consumer's
ability to repay. In practice, consumers could re-borrow serially on a
single conditionally exempt loan that was structured as an open-end
loan. The Bureau also believed that attempting to develop restrictions
for open-end loans in proposed Sec. 1041.7 would add undue complexity
without providing appreciable benefit for consumers. The Bureau
received very limited comments
[[Page 54708]]
on this provision, with consumer groups supporting the Bureau's
proposed prohibition on using the conditional exemption to extend open-
end credit and agreeing with its rationale.
For the reasons stated, the Bureau is adopting the proposed
prohibition against structuring loans as open-end loans under the
conditional exemption, now renumbered as Sec. 1041.6(b)(4). The Bureau
is also adopting proposed comment 7(b)(4)-1, renumbered as comment
6(b)(4)-1.
6(c) Borrowing History Requirements
The Bureau proposed to require lenders to determine that the
borrowing history requirements under proposed Sec. 1041.7(c),
renumbered in this final rule as Sec. 1041.6(c), are satisfied before
making a conditionally exempt loan. The Bureau is finalizing this
paragraph as proposed, with a few adjustments to reduce redundancy and
to reflect the fact that the Bureau is not finalizing the rule as to
covered longer-term loans at this time, yet is finalizing the
underwriting requirements for covered short-term and longer-term
balloon-payment loans in one section, Sec. 1041.5 of the final rule.
One adjustment that the Bureau is making, in particular, is not to
finalize proposed Sec. 1041.7(c)(1), which would have required a
lender to determine, before making a conditionally exempt loan, that
the consumer does not have a covered outstanding loan made under
proposed Sec. 1041.5, Sec. 1041.7, or Sec. 1041.9, not including a
loan made by the same lender or its affiliate under proposed Sec.
1041.7 that the lender is rolling over. As a result of this change, the
Bureau also is not adopting proposed comments 7(c)(1)-1 and 7(c)(1)-2.
For purposes of simplification and in light of other changes made to
the rule, the Bureau has concluded that this proposed provision could
be consolidated with Sec. 1041.7(c)(2), which addresses restrictions
on taking out conditionally exempt loans in light of prior loans in
specified circumstances. As a result of eliminating Sec. 1041.7(c)(1),
the other proposed paragraphs of Sec. 1041.7(c) and the proposed
comments are all renumbered in the final rule to conform to this
change.
6(c)(1)
Proposed Rule
Proposed Sec. 1041.7(c)(2) would have required that, prior to
making a covered short-term loan under proposed Sec. 1041.7, the
lender must determine that the consumer has not had an outstanding loan
in the past 30 days that was either a covered short-term loan made
under proposed Sec. 1041.5 or a covered longer-term balloon-payment
loan made under proposed Sec. 1041.9. The requirement under proposed
Sec. 1041.7(c)(2) would have prevented a consumer from obtaining a
covered short-term loan under proposed Sec. 1041.7 soon after repaying
a covered short-term made under proposed Sec. 1041.5 or a covered
longer-term balloon-payment loan made under proposed Sec. 1041.9.
Proposed comment 7(c)(2)-1 explained that this requirement would apply
regardless of whether the prior loan was made by the same lender, an
affiliate of the lender, or an unaffiliated lender. The proposed
comment also provided an illustrative example.
Proposed Sec. 1041.7(c)(2) would have protected consumers who lack
the ability to repay a current or recent covered short-term or longer-
term balloon-payment loan from the harms of a covered short-term loan
made without meeting the specific underwriting criteria in proposed
Sec. 1041.5. As explained above, the Bureau observed that such re-
borrowing frequently reflects the adverse budgetary effects of the
prior loan and the unaffordability of the new loan.
Moreover, the Bureau believed that permitting a consumer to
transition from a covered short-term loan made under proposed Sec.
1041.5 or a covered longer-term balloon-payment loan made under
proposed Sec. 1041.9 to a covered short-term loan made under proposed
Sec. 1041.7 would be inconsistent with the basic purpose of proposed
Sec. 1041.7. As previously noted, proposed Sec. 1041.7 creates an
alternative to the underwriting criteria specified in proposed Sec.
1041.5 and features carefully structured consumer protections. If
lenders were permitted to make a conditionally exempt loan shortly
after making a covered short-term loan under proposed Sec. 1041.5 or a
covered longer-term balloon-payment loan under proposed Sec. 1041.9,
it would be very difficult to apply all of the requirements under
proposed Sec. 1041.7 that are designed to protect consumers. If a
consumer were permitted to transition from a proposed Sec. 1041.5 loan
to a covered short-term loan made under proposed Sec. 1041.7, for
example, the principal reduction requirements under proposed Sec.
1041.7(b)(1) would be undermined.
The Bureau also believed that providing separate paths for covered
short-term loans that are made under the specific underwriting criteria
in proposed Sec. 1041.5 and under the framework in proposed Sec.
1041.7 would make the rule's application more consistent across
provisions and also simpler for both consumers and lenders. The Bureau
intended these two proposed lending frameworks to work in tandem, but
not in harness, to ensure that lenders could not transition consumers
back and forth between covered short-term loans made pursuant to the
underwriting criteria specified in proposed Sec. 1041.5 and those made
without the same criteria but subject to other consumer protections
under proposed Sec. 1041.7. Furthermore, with these proposed
provisions in place, and with the two lending frameworks largely kept
separate from one another, consumers and lenders would have clear
expectations of the types of covered short-term loans that they could
and could not make if the consumer were to re-borrow.
Comments Received
Several commenters, including a coalition of consumer groups, two
non-profit groups, three faith-based groups, and a State Attorney
General urged the Bureau to increase the cooling-off periods in
proposed Sec. 1041.7(c), including the cooling-off period in proposed
Sec. 1041.7(c)(2) so that, after making a covered short-term loan
under Sec. 1041.5, a lender would have to wait 60 days, rather than 30
days, before it could make a conditionally exempt loan under Sec.
1041.6. They argued that a 60-day cooling-off period was more
appropriate and more protective, and would do more to help ensure that
loans were affordable.
On the other hand, industry commenters generally opposed having a
cooling-off period of any length, arguing that it would restrict access
to credit for consumers with emergency or unexpected needs that may
arise during the cooling-off period. Commenters argued that covered
loans are often used for unexpected expenses, which can happen at any
time, and that a cooling-off period would harm consumers by restricting
their flexibility and reducing access to credit when borrowers needed
it.
A large number of individual commenters, including payday loan
customers, also criticized the cooling-off periods, objecting to the
prospect that they would be restricted from getting more credit after
paying off a prior loan.
Final Rule
The Bureau is finalizing proposed Sec. 1041.7(c)(2), renumbered as
Sec. 1041.6(c)(1), with a few adjustments. For purposes of
simplification and in light of other changes made to the rule, the
Bureau has concluded that proposed Sec. 1041.7(c)(1) and (2) can be
consolidated together, with technical
[[Page 54709]]
corrections to accommodate changes to other sections of the rule,
including the fact that the underwriting requirements for covered
longer-term loans (other than those with balloon payments) are not
being finalized. Accordingly, Sec. 1041.6(c)(1) provides that a
condition of making a loan under Sec. 1041.6 is that the consumer has
not had in the past 30 days an outstanding covered short-term loan
under Sec. 1041.5 or a covered longer-term balloon-payment loan under
Sec. 1041.5. The Bureau is also adopting proposed comment 7(c)(2)-1,
renumbered as 6(c)(1)-1, with similar adjustments.
In response to the commenters that had advocated extending the
cooling-off period to 60 days, the Bureau continues to rely on the
research and analysis that were used initially to set the 30-day re-
borrowing period. In the proposal, the Bureau had chosen the cooling-
off period to match the re-borrowing period because the primary
objective served by cooling-off periods in this rule is to prevent re-
borrowing. The main approach to preventing re-borrowing is to separate
out any linkage between different types of loans or different permitted
loan sequences by having sufficient time pass to diminish the
plausibility that the prior loan was paid off only by taking out
another loan that provided the money to do so. Under the Bureau's
definition, based on its analysis of the market, loans made after 30
days would not be considered re-borrowing. The Bureau's research found
that the number of loans in the average loan sequence increases when
the re-borrowing window for identifying a sequence increases from 14
days to 30 days, suggesting that borrowers are returning to re-borrow
within 30 days.
The Bureau also concluded that a 30-day cooling-off period is a
reasonable and sufficient representation of most consumers' debt and
payment cycles. Because payments for basic living expenses and most
major financial obligations are due at least monthly, if not more
frequently, the Bureau concludes that a consumer who goes more than 30
days between two short-term loans is more likely to be experiencing a
new need, rather than continuing to service the need that gave rise to
the prior loan, and thus extending the same cycle of indebtedness. The
Bureau thus has concluded that setting a cooling-off period of 30 days
between a Sec. 1041.5 loan and a Sec. 1041.6 loan is a reasonable
exercise in line-drawing that is likely to prevent the perpetuation of
hard-to-escape cycles of indebtedness, while allowing consumers greater
flexibility for borrowing to cover emergency or other unexpected
expenses. While the Bureau acknowledges that a 60-day cooling-off
period would do even more to prevent re-borrowing, as some consumers
might be able to shuffle around certain expenses in order to reach day
31 in order to re-borrow, the Bureau concludes that the number of such
loans is likely to be small given the data noted above, and that
preventing relatively few additional consumers from remaining in a
cycle of debt is not worth restricting credit to other consumers who
may need it for genuine emergency expenses and new needs that may arise
during that period (and subject to the protections conferred by this
rule).
As for the commenters who objected to cooling-off periods of any
kind, including many individual commenters, the effect of this
provision is that for 30 days after a Sec. 1041.5 loan, a borrower
would not be eligible for a Sec. 1041.6 loan. The Bureau notes that
where a lender has already made a Sec. 1041.5 loan, the borrower has
succeeded in demonstrating the ability to repay the loan in accordance
with the underwriting criteria set forth in Sec. 1041.5 and presumably
is likely to continue to qualify for further loans by meeting that same
standard. Therefore, if borrowers in that situation are now seeking a
Sec. 1041.6 loan instead, that may be because their circumstances have
changed and they are now struggling to repay their loans and could no
longer meet the underwriting criteria required by Sec. 1041.5. To
prevent lenders from using a mixture of Sec. 1041.5 loans and Sec.
1041.6 loans to create continuous cycles of debt where the borrower is
confronting unaffordable loans, which would defeat a central purpose of
Sec. 1041.6, the Bureau has set this specific restriction. For the
same reason of avoiding a mix of loans that could defeat the
protections that the Bureau has intended to confer upon consumers under
Sec. 1041.6 (although the circumstances are somewhat different), the
Bureau has also specified that no lender can make a Sec. 1041.5 loan
within 30 days of a Sec. 1041.6 loan.\898\
---------------------------------------------------------------------------
\898\ See Sec. 1041.5(d)(3).
---------------------------------------------------------------------------
6(c)(2)
Proposed Rule
Proposed Sec. 1041.7(c)(3) would have provided that a lender
cannot make a covered short-term loan under proposed Sec. 1041.7 if
the loan would result in the consumer having a loan sequence of more
than three conditionally exempt loans made by any lender. Proposed
comment 7(c)(3)-1 would have clarified that this requirement applies
regardless of whether any or all of the loans in the loan sequence are
made by the same lender, an affiliate, or unaffiliated lenders,
explained that loans that roll over count toward the sequence as well,
and included an example.
The Bureau proposed Sec. 1041.7(c)(3) for several reasons. First,
the limitation on the length of loan sequences was aimed at preventing
further harms from re-borrowing. Second, the Bureau believed that a 3-
loan limit would be consistent with evidence presented in the Bureau's
Supplemental Findings on Payday Loans, Deposit Advance Products, and
Vehicle Title Loans, that approximately 38 percent of new loan
sequences end by the third loan without default.\899\ Third, a 3-loan
limit would work in tandem with the main restrictions in proposed Sec.
1041.7(b)(1) to allow consumers to repay a covered short-term loan in
manageable one-third increments over a loan sequence. Fourth, the
Bureau concluded that a 3-loan limit would provide lenders with a
strong incentive to evaluate the consumer's ability to repay before
making conditionally exempt loans, albeit without complying with the
specific underwriting criteria in proposed Sec. 1041.5.
---------------------------------------------------------------------------
\899\ See CFPB Report on Supplemental Findings, at 122.
---------------------------------------------------------------------------
Comments Received
As noted above, a number of commenters urged the Bureau to increase
the cooling-off periods in proposed Sec. 1041.7(c) from 30 days to 60
days, including also the period after a borrower had received three
loans under the conditional exemption in proposed Sec. 1041.7. It
should be noted that though proposed Sec. 1041.7(c)(3) simply
prohibited a lender from making a loan that would result in a consumer
having a loan sequence of more than three loans under proposed Sec.
1041.7, this provision in combination with the definition of loan
sequence under proposed Sec. 1041.2(a)(12) in effect created a 30-day
cooling-off period after a three-loan sequence. Here too, consumer
groups and others argued that a 60-day cooling-off period would be more
protective of consumers and would help ensure that loans were more
affordable.
Industry commenters again were generally opposed to a cooling-off
period after the loan sequence had ended, contending that it would
restrict access to credit for consumers generally, including those with
unexpected needs that could come up during a time when the borrower is
not permitted to obtain
[[Page 54710]]
another loan. Relatedly, and as discussed above, several industry
commenters raised concerns about whether a three-loan sequence was the
appropriate length for sequences of loans made under the conditional
exemption, and suggested that the conditional exemption should permit
longer loan sequences.
As previously mentioned, large number of individual commenters,
including payday loan customers, took issue with the cooling-off period
and expressed concern that they might be blocked from getting a loan
when they need it.
Final Rule
The Bureau is finalizing proposed Sec. 1041.7(c)(3), renumbered as
Sec. 1041.6(c)(2) with certain technical edits. The Bureau is also
adopting proposed comment 7(c)(3)-1, renumbered as comment 6(c)(2)-1,
with technical edits.
Again, for much the same reasons as explained in the preceding
discussion, the Bureau has relied on the same basic research and
analysis to set the 30-day re-borrowing period and then has chosen this
cooling-off period to match the re-borrowing period. Again, at the end
of a 3-loan sequence the purpose of the cooling-off period remains
essentially the same, which is to prevent re-borrowing by preventing
the borrower from linking different types of loans or different
permitted sequences in such a manner as to continue taking out new
loans or re-borrowing as the means of paying off the prior loans.
Again, loans made after 30 days would not be considered re-borrowing
under the Bureau's definition.
As discussed above, the Bureau has determined that a 30-day period
is a sound representation of most consumers' debt and payment cycles.
Because payments for basic living expenses and most major financial
obligations are due at least monthly, if not more frequently, the
Bureau concludes that a consumer who goes more than 30 days between
loans is more likely to be experiencing a new need, rather than
continuing to labor under pressure from the need that gave rise to the
prior loan, and thus to be extending a cycle of indebtedness. The
Bureau therefore determines that 30 days is a reasonable line to draw
in setting a cooling-off period after completing a 3-loan sequence.
Again, it helps prevents the perpetuation of hard-to-escape cycles of
indebtedness, while allowing greater flexibility for further borrowing
as needed to cover emergency or other unexpected expenses. While the
Bureau acknowledges that a 60-day cooling-off period would be even more
protective of consumers, as some might be able to stretch certain
expenses in order to exceed the 30-day cycle before having to re-
borrow, the Bureau concludes that the number of such loans will be
small and is outweighed by the benefits of having more credit available
(with the other protections afforded by this rule) to consumers to meet
any new needs that may arise during that period.
As for the commenters that opposed a 30-day cooling-off period
after three Sec. 1041.6 loans, the Bureau acknowledges that some
borrowers may experience a bona fide new need during that 30-day period
and would be prevented from obtaining a new loan. As noted above when
discussing the re-borrowing period, the Bureau concludes that borrowing
within 30 days of a prior covered short-term loan will more typically
reflect the continuing pressure that leads to re-borrowing rather than
the emergence of a separate and independent need that prompts the
borrower to take out a new loan. One of the primary purposes of this
rule is to prevent consumers from falling into long-term re-borrowing
cycles that result from loans with unaffordable payments. The Bureau
concludes that the rule would fall far short of one of its chief
purposes of preventing the risks and harms associated with unaffordable
loans if Sec. 1041.6 were to allow re-borrowing to create extended
loan sequences in the period immediately after a 3-loan sequence has
just been completed. Some built-in mechanism to disrupt a re-borrowing
cycle is necessary or appropriate, and the Bureau has concluded that a
cooling-off period of 30 days is the most effective way to accomplish
that.
Finally, the rationale for limiting loan sequences under Sec.
1041.6(c)(3) to three loans is discussed above in the section-by-
section analysis of Sec. 1041.6(b)(1) and that discussion is
incorporated here.
6(c)(3)
Proposed Rule
Proposed Sec. 1041.7(c)(4) would have required that a covered
short-term loan made under proposed Sec. 1041.7 cannot result in the
consumer having more than six such loans outstanding during any
consecutive 12-month period or having covered short-term loans
outstanding for an aggregate period of more than 90 days during any
consecutive 12-month period. The lender would have to determine whether
any such loans were outstanding during the consecutive 12-month period.
If a consumer obtained a covered short-term loan prior to that period
and was obligated on the loan during part of the period, this loan and
the time it was outstanding during the consecutive 12-month period
would count toward these overall limits.
Under proposed Sec. 1041.7(c)(4), the lender would have to count
the proposed new loan toward the loan limit and count the anticipated
contractual duration of the new loan toward the indebtedness limit.
Under the proposal, because the new loan and its proposed contractual
duration would count toward these limits, the lookback period would not
start at the consummation date of the new loan. Instead, the lookback
period would start at the proposed contractual due date of the final
payment on the new loan and consider the full 12 months immediately
preceding this date.
Proposed comment 7(c)(4)-1 would have clarified that a consecutive
12-month period begins on the date that is 12 months prior to the
proposed contractual due date of the new conditionally exempt loan and
ends on the proposed contractual due date. Proposed comment 7(c)(4)-1
would have explained further that the lender would have to obtain
information about the consumer's borrowing history on covered short-
term loans for the 12 months preceding the proposed contractual due
date on that loan, and it also provided an example.
As a general matter, the Bureau was concerned about consumers'
frequent use of covered short-term loans made under proposed Sec.
1041.7 for which lenders would not have been required to underwrite the
loan in accordance with the criteria specified in proposed Sec.
1041.5. The frequent use of covered short-term loans that do not
require such an assessment may be a signal that consumers are
struggling to repay such loans without re-borrowing. For purposes of
determining whether the making of a loan would satisfy the loan and
indebtedness limits in proposed Sec. 1041.7(c)(4), the Bureau proposed
to require the lender also to count covered short-term loans made under
both proposed Sec. 1041.5 and proposed Sec. 1041.7. Although loans
made under proposed Sec. 1041.5 would require the lender to make a
reasonable determination of a consumer's ability to repay, the Bureau
believed that the consumer's decision to seek a conditionally exempt
loan, after previously obtaining a covered short-term loan based on the
underwriting criteria in proposed Sec. 1041.5, suggested that the
consumer may now lack the ability to repay the loan and that the
earlier loan approval may not have fully captured this particular
consumer's
[[Page 54711]]
expenses or obligations. Under proposed Sec. 1041.7(c)(4), consumers
could receive up to six conditionally exempt loans and accrue up to 90
days of indebtedness on these loans, assuming the consumer did not also
have any covered short-term loans made under proposed Sec. 1041.5
during the same period. Because the duration of covered short-term
loans is typically tied to how frequently a consumer receives income,
the Bureau believed that the two overlapping proposed requirements were
necessary to provide more complete protections for consumers.
Proposed Sec. 1041.7(c)(4)(i) included the proposed requirement
that a covered short-term loan made under proposed Sec. 1041.7 cannot
result in the consumer having more than six covered short-term loans
outstanding during any consecutive 12-month period. Proposed comment
7(c)(4)(i)-1 explained certain aspects of proposed Sec.
1041.7(c)(4)(i) relating to the proposed loan limit. Proposed comment
7(c)(4)(i)-1 clarified that, in addition to the new loan, all covered
short-term loans made under either proposed Sec. 1041.5 or proposed
Sec. 1041.7 that were outstanding during the consecutive 12-month
period would count toward the proposed loan limit. Proposed comment
7(c)(4)(i)-1 also clarified that, under proposed Sec. 1041.7(c)(4)(i),
a lender may make a loan that when aggregated with prior covered short-
term loans would satisfy the loan limit even if proposed Sec.
1041.7(c)(4)(i) would prohibit the consumer from obtaining one or two
subsequent loans in the sequence. Proposed comment 7(c)(4)(i)-2
provided examples.
The Bureau believed that a consumer who seeks to take out a new
covered short-term loan after having taken out six covered short-term
loans during a consecutive 12-month period may very well be exhibiting
an inability to repay such loans. The Bureau believed that if a
consumer were seeking a seventh covered short-term loan under proposed
Sec. 1041.7 in a consecutive 12-month period, this would be an
indicator that the consumer may, in fact, be using covered short-term
loans to cope with regular expenses and compensate for chronic income
shortfalls, rather than to cover an emergency or other non-recurring
need.\900\ In these circumstances, the Bureau believed that the lender
should make an ability-to-repay determination in accordance with
proposed Sec. 1041.5 before making additional covered short-term loans
and ensure that the payments on any subsequent loan are affordable for
the consumer.
---------------------------------------------------------------------------
\900\ See Market Concerns--Underwriting; Rob Levy & Joshua
Sledge, ``A Complex Portrait: An Examination of Small-Dollar Credit
Consumers,'' at 12 (Ctr. for Fin. Servs. Innovation, 2012),
available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
---------------------------------------------------------------------------
Proposed Sec. 1041.7(c)(4)(ii) included the proposed requirement
that a covered short-term loan made under proposed Sec. 1041.7 cannot
result in the consumer having covered short-term loans outstanding for
an aggregate period of more than 90 days during any consecutive 12-
month period. Proposed comment 7(c)(4)(ii)-1 clarified certain aspects
of the proposed rule as they relate to the proposed indebtedness limit.
Proposed comment 7(c)(4)(ii)-1 explained that, in addition to the new
loan, the period in which all covered short-term loans made under
either proposed Sec. 1041.5 or proposed Sec. 1041.7 were outstanding
during the consecutive 12-month period would count toward the
indebtedness limit. The same proposed comment also clarified that,
under proposed Sec. 1041.7(c)(4)(ii), a lender may make a loan with a
proposed contractual duration, which when aggregated with the time
outstanding of prior covered short-term loans, would satisfy the
indebtedness limit even if proposed Sec. 1041.7(c)(4)(ii) would not
prohibit the consumer from obtaining one or two subsequent loans in the
sequence. Proposed comment 7(c)(4)(ii)-2 provided examples.
The Bureau believed it was important to complement the proposed 6-
loan limit with the proposed 90-day indebtedness limit in light of the
fact that loan durations could vary under proposed Sec. 1041.7. For
the typical two-week payday loan, the two thresholds would have reached
the same result, since a limit of six loans under proposed Sec. 1041.7
means that the consumer could have been in debt on such loans for up to
approximately 90 days per year or one quarter of the year. For 30- or
45-day loans, however, a 6-loan limit would have meant that the
consumer could have been in debt for 180 or even 270 days out of a 12-
month period. The Bureau believed these kinds of results would be
inconsistent with protecting consumers from the harms associated with
long cycles of indebtedness.
Given the income profile and borrowing patterns of consumers who
borrow monthly, the Bureau believed that the proposed indebtedness
limit is an important protection for these consumers. Consumers who
receive 30-day payday loans are more likely to live on fixed incomes,
and typically are recipients of Social Security.\901\ Fully 58 percent
of monthly borrowers were identified as recipients of government
benefits in the Bureau's 2014 Data Point.\902\ These borrowers are
particularly vulnerable to default and collateral harms from making
unaffordable loan payments. The Bureau found that borrowers receiving
public benefits are more highly concentrated toward the lower end of
the income range. Nearly 90 percent of borrowers receiving public
benefits reported annual incomes of less than $20,000, whereas less
than 30 percent of employed borrowers reported annual incomes of less
than $20,000.\903\ Furthermore, because public benefits are typically
fixed and do not vary from month to month,\904\ in contrast to wage
income that is often tied to the number of hours worked in a pay
period, the Bureau believed that monthly borrowers are more likely than
bi-weekly borrowers to use covered short-term loans to compensate for a
chronic income shortfall rather than to cover an emergency or other
non-recurring need.
---------------------------------------------------------------------------
\901\ Due dates on covered short-term loans generally align with
how frequently a consumer receives income. Consumers typically
receive public benefits, including Social security and unemployment,
on a monthly basis. See CFPB Payday Loans and Deposit Advance
Products White Paper, at 19.
\902\ See CFPB Data Point: Payday Lending, at 14.
\903\ The Bureau previously noted in the CFPB White Paper from
April 2013 that a significant share of consumers (18 percent)
reported a form of public assistance or other benefits as an income
source (e.g., Social Security payments); these payments are usually
of a fixed amount, typically occurring on a monthly basis; and that
borrowers reporting public assistance or benefits as their income
source are more highly concentrated toward the lower end of the
income range for the payday borrowers in our sample. See CFPB Payday
Loans and Deposit Advance Products White Paper, at 18-20.
\904\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 19.
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The Bureau found that borrowers on fixed incomes are especially
likely to struggle with repayments and face the burden of unaffordable
loan payments for an extended period. As noted in the Supplemental
Findings on Payday Loans, Deposit Advance Products, and Vehicle Title
Loans, for loans taken out by consumers who are paid monthly, more than
40 percent of all loans to these borrowers were in sequences that, once
begun, persisted for the rest of the year for which data were
available.\905\ The Bureau also found that approximately 20 percent of
borrowers \906\ who were paid monthly
[[Page 54712]]
averaged at least one loan per pay period.
---------------------------------------------------------------------------
\905\ CFPB Report on Supplemental Findings, at 131.
\906\ CFPB Report on Supplemental Findings, at 125.
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In light of these considerations, the Bureau believed that a
consumer who has been in debt for more than 90 days on covered short-
term loans, made under either proposed Sec. 1041.5 or proposed Sec.
1041.7, during a consecutive 12-month period may very well be
exhibiting an inability to repay such loans. If a consumer is seeking a
covered short-term loan under proposed Sec. 1041.7 that would result
in a total period of indebtedness on covered short-term loans of
greater than 90 days in a consecutive 12-month period, the Bureau
believed that this consumer may, in fact, be using covered short-term
loans to cover regular expenses and compensate for chronic income
shortfalls, rather than to cover an emergency or other non-recurring
need.\907\ Under these circumstances, the Bureau believed that the
lender should make an ability-to-repay determination in accordance with
the underwriting criteria proposed Sec. 1041.5 before making
additional covered short-term loans and ensure that the payments on any
subsequent loan are affordable for the consumer.
---------------------------------------------------------------------------
\907\ See Market Concerns--Underwriting; Rob Levy & Joshua
Sledge, ``A Complex Portrait: An Examination of Small-Dollar Credit
Consumers,'' at 12 (Ctr. for Fin. Servs. Innovation, 2012),
available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
---------------------------------------------------------------------------
Comments Received
Consumer groups wrote in support of the Bureau's proposal to have
both a 6-loan limit and a 90-day limit. Some asserted that having these
overlapping limits was important because a limit that only covered the
number of loans would not protect borrowers who took out somewhat
longer 30-day or 45-day loans. A State Attorney General supported the
90-day limitation because it would limit many borrowers in that State
to three loans a year, which would be significant.
Two faith-based groups went further and urged the Bureau to further
limit the number of short-term conditionally exempt loans. They argued
that any re-borrowing is a sign of unaffordability, and suggested that
the rule allow at most a single short-term conditionally exempt loan
per year.
Consumer groups and legal aid organizations further suggested that
the 6-loan cap and the limitation of 90 days of indebtedness in a 12-
month period should apply to all loans. They pointed to existing
guidance from prudential regulators that provides no exceptions to the
limit of six deposit advances in a year. A coalition of consumer groups
also proposed that the Bureau adopt a further restriction on loans
where the borrower would be unable to take out a full sequence of three
conditionally exempt loans. The commenter noted that if a borrower took
out a conditionally exempt loan but was close to either the 6-loan
limit or the 90-day limit then the borrower would be unable to take
advantage of the principal step-down requirements. The commenter
asserted that this was inconsistent with the importance of the
principal step-down requirement and suggested either that no loan be
permitted in these circumstances or that the loan be capped at a lower
value based on the number of loans the borrower would still be
permitted to take out.
Some commenters urged the Bureau to expand some of the definitions
relevant to the conditional exemption to capture more conduct. In
response to the Bureau's solicitation, commenters suggested that when
computing the 90-day indebtedness limit it would be better to measure
the days by the longer of contractual indebtedness or actual
indebtedness because this measure is more relevant to whether borrowers
are able to afford a loan. They also argued that loans which fall
partially within the 12-month measuring period should be counted toward
the 6-loan limit. They further suggested that the look-back period for
determining whether a borrower had six loans or 90 days of indebtedness
should involve a two-step process: first the lender should look back
365 days from the first day of a new loan, then the lender should
consider whether any days when the borrower has the loan would result
in a violation of the 6-loan or 90-day limit.
Industry commenters urged the Bureau not to adopt the proposed 6-
loan and 90-day limits. They asserted that rigid limits on re-borrowing
were inappropriate because short-term loans are generally used to pay
for emergency expenses and thus are not predictable, so the limits
would be too inflexible to meet borrower needs. Industry commenters
also argued that the restrictions would negatively affect borrowers who
were paid monthly because they would only be able to take out three
loans. Some commenters asserted that limits on days of indebtedness and
numbers of loans would cause small lenders to go out of business,
reducing the supply of credit. One industry commenter argued that the
limit of six loans in a year was not supported by the data and urged
the Bureau to adopt a limit of eight loans per year instead, a comment
also discussed in the section-by-section analysis for Sec. 1041.5(d).
Another industry commenter suggested that the Bureau consider engaging
in more tests and experiments on loan limits. It argued that a limit on
the number of loans may encourage borrowers to take out larger loans
than they need because of uncertainty about their continuing ability to
access credit.
Another commenter opposed the proposed conditional exemption
because of concerns about communications with borrowers and adverse
action notices. This commenter observed that the rule might prohibit a
conditionally exempt loan during some periods and not others, because
of the restrictions, and that these variations would be difficult to
explain adequately to consumers both more generally, and in adverse
action notices.
Final Rule
For the reasons set forth in the proposal and discussed above and
for the further reasons explained below, the Bureau is adopting
proposed Sec. 1041.7(c)(4), renumbered as Sec. 1041.6(c)(3) of the
final rule with certain technical edits. In addition, the Bureau is
adopting proposed comment 7(c)(4)-1, renumbered as 6(c)(3)-1, with only
technical edits. The Bureau adopts proposed comments 7(c)(4)(i)-1,
7(c)(4)(i)-2, 7(c)(4)(ii)-1, and 7(c)(4)(ii)-2, renumbered in this
final rule as 6(c)(3)(i)-1, 6(c)(3)(i)-2, 6(c)(3)(ii)-1, and
6(c)(3)(ii)-2, with only technical adjustments. The Bureau modified the
respective examples in comments 6(c)(3)(i)-2 and 6(c)(3)(ii)-2,
however, in order to clarify that a lender could not make a
conditionally exempt loan if either the 6-loan cap or the limit of 90
days of indebtedness was reached, even if that means a borrower had not
yet reached the end of his 3-loan limit for a particular loan sequence.
The limits on making conditionally exempt loans pursuant to Sec.
1041.6 during a 12-month period are intended to ensure that the
conditional exemption does not become a mechanism that would allow for
extensive repeat borrowing of potentially unaffordable covered short-
term loans. The Bureau concludes that these limits on overall lending
are not necessary for loans made under Sec. 1041.5 because those loans
must be underwritten according to criteria designed to prevent them
from becoming unaffordable loans that pose special risks and harms to
consumers as described above in Market Concerns--Underwriting.
The Bureau has carefully considered the competing arguments that
many commenters raised about the
[[Page 54713]]
appropriate limits on lending under Sec. 1041.6 of the final rule,
with some suggesting that the Bureau should tighten the limits further
from the proposed levels and others arguing that the limits as proposed
should either be increased or eliminated entirely. The Bureau
originally proposed the 6-loan limit based on considerable feedback as
a reasonable limitation on the use of the conditionally exempt loans,
which generally comprises two full loan sequences under Sec. 1041.6.
As noted above, the Bureau also proposed the overlapping 90-day
limitation on indebtedness for such loans out of concerns specific to
borrowers who are paid monthly and take out 30-day or 45-day loans,
which, in the absence of a 90-day (or other durational) limit, could
result in borrowers being indebted on covered short-term loans under
Sec. 1041.6 for half or even three-quarters of the year. If a borrower
has the need to seek a loan more frequently than the exemption
contemplates, the borrower can still receive an underwritten loan under
Sec. 1041.5 of the final rule or many other types of loans not covered
by this rule. If in fact a borrower's credit needs can only be met by
arranging more extended credit than the limits under Sec. 1041.6 would
allow, the Bureau believes this may be a strong indicator that forms of
underwritten longer-term credit would be better suited to that consumer
than the kinds of covered short-term loans under consideration here.
In sum, the Bureau has considered the comments on both sides of
this issue and declines to set higher limits. The limits set on loans
made under Sec. 1041.6 are the conditions that lenders must follow in
order to be exempted from the underwriting criteria required in Sec.
1041.5, which do not include any similar annual lending limitations. In
setting these limitations, the Bureau has also relied in part on norms
and precedents that have been set in this market by other Federal
regulators, most notably the FDIC and the OCC, which both have issued
guidance to the banks under their supervisory authority and have
effectively limited borrowers of these kinds of loans to six loans in a
12-month period.\908\
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\908\ FDIC, ``Financial Institution Letters: Guidelines for
Payday Lending,'' (Revised Nov. 2015), available at https://www.fdic.gov/news/news/financial/2005/fil1405a.html. (stating that
institutions should ensure payday loans are not provided to
customers who had payday loans for a total of 3 months during the
previous 12-month period); Guidance on Supervisory Concerns and
Expectations Regarding Deposit Advance Products, 78 FR 70624 (Nov.
26, 2013); Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Products, 78 FR 70552 (Nov. 26, 2013).
---------------------------------------------------------------------------
As noted in the proposal, and in the Section 1022(b)(2) Analysis at
part VII below, the Bureau recognizes that the broader combination of
regulatory requirements in this rule, including the limitations on
making conditionally exempt loans under Sec. 1041.6 within a 12-month
period, will have a significant economic impact on lenders that rely on
extensive repeat re-borrowing for their operating revenue. The Bureau
has also concluded, however, that the availability of loans under the
exemption in Sec. 1041.6, as well as underwritten loans made under
Sec. 1041.5 and other loans not covered by this rule, taken
altogether, will still allow a large, albeit reduced, volume of lending
to continue in this market.\909\ As noted in the Section 1022(b)(2)
Analysis below at part VII, even as some market consolidation occurs,
consumers nevertheless are likely to retain convenient access to
covered short-term loans.
---------------------------------------------------------------------------
\909\ The Bureau's estimate in the Section 1022(b)(2) Analysis
below is that the rule will reduce credit by approximately 6
percent, which would be much higher without the exemption in Sec.
1041.6.
---------------------------------------------------------------------------
As clarified in Comments 6(c)(3)(i)-2 and 6(c)(3)(ii)-2, borrowers
who reach one of the 12-month lending limitations in the midst of a
loan sequence will not receive the full step-down for that sequence. In
this particular situation, the Bureau has weighed the alternatives and
concludes that the overall goal of limiting extensive repeat re-
borrowing--a concern that is closely tied to the unfair and abusive
practice identified in Sec. 1041.4 and its harmful effects on
consumers--takes precedence over the narrower goal of providing full
amortization on each conditionally exempt loan that is made in this
market. This decision involved a line-drawing exercise, and the Bureau
has determined that this resolution steers a middle course between
prohibiting the loan altogether in these circumstances, which seems too
restrictive of access to credit, or allowing a full loan sequence to
run its course, which would undermine the broader goal noted above of
imposing the aggregate limits on re-borrowing over a 12-month period.
The Bureau believes that were it to permit the full 3-loan sequence as
long as the first loan would comply with the limitations on lending
within a 12-month period, it could create incentives for lenders to
structure their lending practices in order to ensure that a sixth loan
is the beginning of a new sequence, and/or that a first loan in a
sequence would end right at 90 days of indebtedness for that 12-month
period, significantly undermining the effect of these limitations.
Other ways to resolve this situation are also possible, but as this
example demonstrates, as they become more complex, they would also
become more difficult to administer.
As for whether the 90-day limitation will negatively affect
borrowers who are paid monthly because they would only be able to take
out three conditionally exempt loans pursuant to Sec. 1041.6 in a 12-
month period, the Bureau notes that the situations of borrowers who are
paid monthly were one of the reasons that the 90-day limitation was
included in the rule. The Bureau is concerned that borrowers who take
out 30-day or 45-day loans, without the 90-day limit, could find
themselves indebted more often than not, which would be antithetical to
the purpose of the conditional exemption to allow for credit for an
emergency or other non-recurring need without having to comply with the
full underwriting regime in Sec. 1041.5. The Bureau recognizes that
this framework will limit the ability of some borrowers to take out
loans under the exemption, but reiterates that underwritten loans under
Sec. 1041.5 remain available, as do various loans not covered by this
rule.
6(d) Restrictions on Making Other Loans Following a Loan Made Under the
Conditional Exemption
Proposed Rule
The proposed rule included a number of provisions designed to
address the concern that lenders might seek to evade the protective
features of proposed Sec. 1041.7, such as the cooling-off period or
principal step-down--and thereby keep consumers in long cycles of re-
borrowing--through a combination of conditionally exempt loans and
other loans. That proposed framework would have worked as follows.
Under proposed Sec. 1041.6(g), lenders would not have been allowed to
make covered short-term loans pursuant to proposed Sec. 1041.5 while a
conditionally exempt loan is outstanding and for 30 days thereafter.
That provision, modified to include longer-term balloon-payment loans,
is being finalized as Sec. 1041.5(d)(3), as discussed above.
Similarly, under proposed Sec. 1041.10(e), lenders would not have been
allowed to make covered longer-term loans under proposed Sec. 1041.9
while a conditionally exempt loan made by the lender or its affiliate
is outstanding and for 30 days thereafter. And under proposed Sec.
1041.7(d), if the lender or its affiliate made a non-covered bridge
loan (a certain type of non-recourse pawn loan)
[[Page 54714]]
while a conditionally exempt loan made by the lender or its affiliate
is outstanding and for 30 days thereafter, the days during which the
non-covered bridge loan is outstanding would ``toll'' the running of
the 30-day re-borrowing and cooling-off periods included in proposed
Sec. 1041.7. The latter two provisions are discussed immediately below
because they are the basis of final Sec. 1041.6(d).
Proposed Sec. 1041.10(e) provided that, during the time period in
which a covered short-term loan made by a lender or its affiliate under
proposed Sec. 1041.7 is outstanding and for 30 days thereafter, the
lender or its affiliate must not make a covered longer-term loan under
proposed Sec. 1041.9 to a consumer. Proposed comment 10(e)-1 clarified
that, during the time period in which a covered short-term loan made by
a lender or its affiliate under proposed Sec. 1041.7 is outstanding
and for 30 days thereafter, a lender or its affiliate could make a
covered longer-term loan under proposed Sec. 1041.11 or proposed Sec.
1041.12 to a consumer.
In the proposal, the Bureau explained that although proposed Sec.
1041.10(e) was functionally a component of the proposed conditional
exemption in Sec. 1041.7, it was being included in proposed Sec.
1041.10 for ease of reference for lenders so they could look to a
single provision of the rule for a list of prohibitions and
presumptions that affect the making of covered longer-term loans under
proposed Sec. 1041.9. More substantively, the Bureau explained that it
was proposing the prohibition contained in Sec. 1041.10(e) to
effectuate the principal reduction requirements under proposed Sec.
1041.7(b)(1) and the three-loan limit on a sequence of loans under
proposed Sec. 1041.7(c)(3), which were designed to allow consumers to
repay the principal gradually over a three-loan sequence. The Bureau
noted that this proposed protection could be circumvented if, in lieu
of making a loan subject to such principal reduction, a lender were
free to make a high-cost covered longer-term loan under proposed Sec.
1041.9 during the 30 days following repayment of the first loan--or
second loan--in a sequence of covered short-term loans made under
proposed Sec. 1041.7 or while such first or second loan in the
sequence was outstanding.
Furthermore, the Bureau stated its belief that the prohibition in
proposed Sec. 1041.10(e) would prevent lenders from using a covered
short-term loan made under proposed Sec. 1041.7 to induce consumers
into taking a covered longer-term loan made under proposed Sec.
1041.9. The Bureau noted that, in the absence of the proposed
requirement, as a covered short-term loan made under proposed Sec.
1041.7 that was unaffordable comes due, the lender could leverage the
consumer's financial vulnerability and need for funds to make a covered
longer-term loan that the consumer otherwise would not have taken. For
a lender, this business model would generate more revenue than a
business model in which the lender adhered to the proposed path for a
sequence of loans made under proposed Sec. 1041.7 and would also
reduce the upfront costs of customer acquisition on covered longer-term
loans. Lenders who desire to make covered longer-term loans under
proposed Sec. 1041.9 ordinarily would have to take steps and perhaps
incur costs to acquire customers willing to take those loans and to
disclose the terms of those loans upfront. For the consumer, what is
ostensibly a short-term loan may, contrary to the consumer's original
expectations, result in long-term debt.
The Bureau sought comment, inter alia, on whether any alternative
approaches exist that would address the Bureau's concerns related to
effectuating the conditional exemption in proposed Sec. 1041.7 while
preserving the ability of lenders to make covered longer-term loans
under proposed Sec. 1041.9 close in time to covered short-term loans
under proposed Sec. 1041.7.
Turning to proposed Sec. 1041.7(d), it provided that if a lender
or an affiliate made a non-covered bridge loan during the time any
covered short-term loan made by the same lender or an affiliate under
proposed Sec. 1041.7 is outstanding and for 30 days thereafter, the
lender or affiliate would have had to modify its determination of loan
sequence for the purpose of making a subsequent conditionally exempt
loan. Specifically, the lender or an affiliate would not have been able
to count the days during which the non-covered bridge loan is
outstanding in determining whether a subsequent conditionally exempt
loan made by the lender or an affiliate is part of the same loan
sequence as the prior conditionally exempt loan. Non-covered bridge
loan was defined in proposed Sec. 1041.2(a)(13) as a non-recourse pawn
loan made within 30 days of an outstanding covered short-term or
longer-term balloon-payment loan that must be substantially repaid
within 90 days.
Proposed comment 7(d)-1 provided a cross-reference to proposed
Sec. 1041.2(a)(13) for the definition of non-covered bridge loan.
Proposed comment 7(d)-2 clarified that proposed Sec. 1041.7(d) would
provide certain rules for determining whether a loan is part of a loan
sequence when a lender or an affiliate makes both covered short-term
loans under Sec. 1041.7 and a non-covered bridge loan in close
succession. Proposed comment 7(d)-3 provided an example.
The Bureau intended proposed Sec. 1041.7(d) to maintain the
integrity of a core protection in proposed Sec. 1041.7(b). If a lender
could make a non-covered bridge loan to keep a consumer in debt and
reset a consumer's loan sequence after 30 days, it could make a lengthy
series of $500 loans and evade the principal step-down requirements in
proposed Sec. 1041.7(b)(1). In the absence of this proposed
restriction, the Bureau believed that a consumer could experience an
extended period of indebtedness after taking out a combination of
covered short-term loans under Sec. 1041.7 and non-covered bridge
loans and not have the ability to gradually pay off the debt obligation
and exit the loan sequence by means of the principal reduction
requirement in proposed Sec. 1041.7(b)(1). Proposed Sec. 1041.7(d)
paralleled the restriction in proposed Sec. 1041.6(h) applicable to
covered short-term loans made under proposed Sec. 1041.5.
The Bureau sought comment on whether this proposed restriction is
appropriate, and also sought comment on whether lenders would
anticipate making covered short-term loans under proposed Sec. 1041.7
and non-covered bridge loans to consumers close in time to one another,
if permitted to do so under a final rule.
Comments Received
The Bureau received a number of comments from consumer groups
generally supporting both proposed Sec. 1041.10(e) and proposed Sec.
1041.7(d). Echoing the rationale provided by the Bureau for proposed
Sec. 1041.10(e), they asserted that, absent the prohibition, lenders
would entrap consumers into an initial loan without assessing their
ability-to-repay and then switch them to a longer-term installment
loan. But they urged the Bureau to extend the 30-day period specified
in proposed Sec. 1041.10(e) to 60 days. As regards proposed Sec.
1041.7(d), the consumer groups urged the Bureau to expand the
definition of non-covered bridge loan to include any loan from a lender
or affiliate because the risks of evasion presented by non-covered
bridge loans were equally present with other types of loans. In
addition, they recommended that the proposed ``tolling' approach be
replaced with a ``reset'' approach. That is, instead of tolling the
running of the 30-day re-borrowing and cooling-off
[[Page 54715]]
periods in proposed Sec. 1041.7 during the pendency of a non-covered
bridge loan, the period should reset to 30 days at the end of such a
loan. Here as well, they urged the Bureau to extend the applicable
periods from 30 to 60 days.\910\
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\910\ The Bureau's response to the recommendations to extend the
re-borrowing and cooling-off periods from 30 to 60 days are provided
in the discussion of Sec. 1041.6(c)(2) above.
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Final Rule
In the final rule, the Bureau has made a number of changes to the
way it addresses the risk of lenders using other loans or a combination
of loans to undercut the limitations in the conditional exemption as a
way to evade the specific protections in Sec. 1041.6 of the final rule
and keep consumers in extended cycles of indebtedness. These changes
have been made against the backdrop of the Bureau's decisions not to
finalize the underwriting requirements for covered longer-term loans
(other than those with balloon payments) in proposed Sec. 1041.9; to
move the provisions on covered longer-term balloon-payment loans into
Sec. 1041.5; and not to finalize the presumptions in proposed Sec.
1041.6 and proposed Sec. 1041.10. As noted, one such change consists
in modifying proposed Sec. 1041.6(g) to include covered longer-term
balloon-payment loans as well as covered-short term loans, such that
lenders would not be allowed to make either type of loan while a
conditionally exempt loan is outstanding and for 30 days thereafter.
The resulting provision is being finalized as Sec. 1041.5(d)(3).
In the same vein, Sec. 1041.6(d) of the final rule is another
example of these changes. It combines aspects of proposed Sec.
1041.10(e) and proposed Sec. 1041.7(d) into a single provision that
applies to a broader range of loans. Under Sec. 1041.6(d) of the final
rule, a lender or its affiliate may not make any loan to a consumer,
other than one governed by Sec. 1041.6, for 30 days after making a
prior Sec. 1041.6 loan to that consumer. It thus applies to all loans
other than Sec. 1041.6 loans, not just covered longer-term loans (as
in proposed Sec. 1041.10(e)). Moreover, it prohibits all such loans
being made during that 30-day period, rather than merely tolling the
running of this period when the lender or its affiliate makes a non-
covered bridge loan. With this restriction in place, a lender may or
may not choose to opt in to the alternative lending framework created
by the conditional exemption by making a loan to a consumer under Sec.
1041.6 without meeting the specific underwriting criteria under Sec.
1041.5. But if the lender does choose to make a loan to the borrower
pursuant to Sec. 1041.6, then it must make any further loans to that
same consumer pursuant only to Sec. 1041.6 until 30 days after any
such conditionally exempt loans are no longer outstanding.
As noted, under Sec. 1041.5(d)(3), the lender also cannot make a
conditionally exempt loan under Sec. 1041.6 while a loan made under
Sec. 1041.5 is outstanding and for 30 days thereafter. The upshot is
that if lenders want to make covered short-term loans without meeting
the specified underwriting criteria under Sec. 1041.5, one temporary
condition they must accept is that the only loan they can make to the
same borrower during the 30-day periods following the first and second
loans in a sequence of loans made under Sec. 1041.6 is another
conditionally exempt loan, and that they cannot make any loans to the
borrower during the 30-day cooling-off period following the third loan
in such a sequence of loans
The Bureau has concluded that Sec. 1041.6(d) of the final rule is
necessary or appropriate for several reasons. As discussed, proposed
Sec. 1041.10(e) and proposed Sec. 1041.7(d) had each been proposed to
effectuate and prevent evasion of the protections provided by the
principal-reduction requirement and 30-day cooling-off period, as such
evasion could result in long cycles of indebtedness. Proposed Sec.
1041.7(d) was focused only on the limited bridging concern presented by
making certain non-recourse pawn loans. In considering whether this
restriction is appropriate--a point on which the Bureau explicitly
sought comment--the Bureau came to view this treatment of the issues as
much too narrow. The Bureau had been aware of some mergers and dual-
channel operations that had created increased links between payday
lending and pawn lending. But in thinking about the problems posed by
any kind of loan that could be used by lenders to bridge between
successive covered loans, the Bureau came to recognize that if the same
lender could make other loans to the same borrower during the temporary
period when the lender has opted into the alternative framework of the
conditional exemption, then the lender could disrupt and potentially
evade the alternative lending framework so carefully established in
proposed Sec. 1041.7. Instead of being restricted only to making
amortizing loans in limited step-down sequences that were established
as a means of protecting consumers against the dangers of unaffordable
loans that did not comply with the underwriting criteria specified in
Sec. 1041.5, it became clear that lenders could potentially move in
and out of this framework and gain certain advantages by doing so.
In considering the ways in which the proposed restriction might or
might not be appropriate, the Bureau needed to confront two distinct
issues: Whether the tolling provision as proposed was properly
calibrated and adequate to the task at hand, and which loans in
addition to certain non-recourse pawn loans should be identified as
improper bridge loans when viewed from within the framework of the
conditional exemption. As noted, consumer groups urged the Bureau to
expand proposed Sec. 1041.7(d) in two ways: (1) By including any type
of loan made by the lender or its affiliate, not just non-covered
bridge loans; and (2) by replacing the ``tolling'' approach with a
``reset'' approach. As regards the first comment, the Bureau agrees
that there is no significant difference between non-covered bridge
loans and all other loans when it comes to the potential to use the
loan to bridge between conditionally exempt loans and loan sequences,
and thus to potentially exacerbate their effects upon the borrower.
Accordingly, the Bureau has designed final Sec. 1041.6(d) of the final
rule to apply to any loan made by the lender or its affiliate (other
than a loan made under Sec. 1041.6 itself, of course). Regarding
longer-term loans, in particular, the Bureau has concluded that the
prohibition in proposed Sec. 1041.10(e) on lenders making such loans
during the 30-day period following a conditionally exempt loan is
needed for the reasons set forth in the proposal and reiterated above.
Indeed, the fact that the Bureau has decided not to finalize the
underwriting requirements on such loans in proposed Sec. 1041.9, and
the attendant presumptions in proposed Sec. 1041.10, only heightens
the need for this prohibition--which is now incorporated in Sec.
1041.6(d) of the final rule.
As regards the second comment, the Bureau generally agrees with the
commenters' concerns about the proposed tolling provision. The Bureau
has concluded that merely tolling the cooling-off or re-borrowing
periods is an inadequate measure to prevent lengthy debt cycles or
bridging between conditionally exempt loans or sequences in an effort
to evade the requirements of the rule. Merely tolling the running of
the 30-day re-borrowing period or the 30-day cooling-off period for the
duration of any loan--including those the proposed rule defined as non-
covered bridge loans--could negate the
[[Page 54716]]
purpose of the period being tolled because the time periods are
intended to run continuously. For example, a non-covered bridge loan
made in the middle of the cooling-off period would mean that a consumer
would not be in debt for only 15 days at a time, on either end of the
non-covered bridge loan, which may be an inadequate period for the
consumer's finances to recover. Similarly, the justification for
setting the re-borrowing period at 30 days is undermined where a
borrower only has 15 days between a Sec. 1041.6 loan and a bridge
loan, on either end. The bridge loan would effectively be a re-
borrowing of the prior loan, and the loan after the bridge loan would
effectively be a re-borrowing of the bridge loan, if there was only 15
days in between each. Further, the principal step-down would not work
as designed if a second or third conditionally exempt loan under Sec.
1041.6 came after an intervening non-covered bridge loan in a higher
amount than the prior loan.
The Bureau recognizes that the reset approach suggested by consumer
groups would be somewhat more protective than the tolling approach in
certain respects. However, several of the weaknesses of the tolling
approach detailed above likewise apply to the reset approach. In
addition, the reset approach would not address the concern animating
proposed Sec. 1041.10(e)--which has been intensified by the Bureau's
decision not to finalize the underwriting requirements for covered
longer-term loans--that a lender could leverage the consumer's
financial vulnerability and need for funds after having taken out an
unaffordable conditionally exempt loan to make a longer-term loan that
the consumer otherwise would not have taken, indeed one that would be
unaffordable in its own right. Further, the tolling provision would
have added considerable complexity to the rule, and for that reason may
have been difficult to comply with and enforce. The same would be
largely true of a revised provision using the reset approach.
For all of these reasons, the Bureau concludes that the most
effective means of fully achieving the purposes of proposed Sec.
1041.10(e) and proposed Sec. 1041.7(d)--as well as the simplest
means--is a straightforward limitation on any other lending occurring
between the specific lender and borrower who had opted in to the Sec.
1041.6 framework by choosing to consummate a conditionally exempt loan
during the 30-day re-borrowing and cooling-off periods of Sec. 1041.6.
The Bureau also concludes, as discussed above in the discussion of
Sec. 1041.6(c), that by prohibiting loans within 30 days of a
conditionally exempt loan, the finalized approach will protect the
effectiveness of the principal reduction requirements of Sec.
1041.6(b), and will also best serve the purposes of the 30-day re-
borrowing and cooling-off periods.
The Bureau therefore has reframed Sec. 1041.6(d) to prohibit all
loans that may be made within 30 days after a covered short-term loan
is made under the exemption, rather than prohibiting covered loans and
tolling or resetting time periods during non-covered bridge loans. The
final rule provides that the only loan that a lender or its affiliate
may make to a borrower, while a loan made under Sec. 1041.6(d) from
that lender is outstanding to the borrower or for 30 days thereafter,
is a short-term loan that complies with the principal reduction and
other provisions of Sec. 1041.6.
As was true of both proposed Sec. 1041.10(e) and proposed Sec.
1041.7(d), Sec. 1041.6(d) of the final rule does not apply to all
lenders, but only to the lender or affiliate that has made a Sec.
1041.6 loan to the consumer, for essentially the same reasons provided
in the proposal with respect to this aspect of proposed Sec.
1041.10(e) and proposed Sec. 1041.7(d). A lender in a non-covered
market would not otherwise have a reason or a need to check a
registered information system, and thus would be unaware of a prior
Sec. 1041.6 loan. This also reduces the impact that Sec. 1041.6(d)
will have on limiting access to credit that is not used for bridging,
but nonetheless falls within the period of a conditionally exempt loan.
If, for example, a borrower wants to take out a 5-year installment loan
15 days after he obtains a loan under Sec. 1041.6, the borrower could
do so, as long as he did so with a different lender. Moreover, the
concerns that animated proposed Sec. 1041.10(e) and are in part the
basis for final Sec. 1041.6(d)--that a lender could use an
unaffordable loan it had made under Sec. 1041.6 to induce a consumer
to take out a different kind of loan--are not present or are present to
a much lesser degree if a consumer is considering a loan from a
different lender.
Two new comments have been added to reflect the revisions to Sec.
1041.6(d). Comment 6(d)-1 explains that while a covered short-term loan
made under Sec. 1041.6 is outstanding from a lender to a consumer, and
for 30 days thereafter, that lender and its affiliates may only make a
covered short-term loan to that borrower if it complies with Sec.
1041.6. The comment also expressly clarifies that the lender and its
affiliates may not make any other types of loans to the same borrower
during that period.
Comment 6(d)-2 includes an example involving a consumer who seeks a
loan from a lender during the 30 days after repaying a prior
conditionally exempt loan from that lender. The example explains that
the rule does not prohibit the lender from making a covered short-term
loan under Sec. 1041.6, and clarifies that the consumer could obtain a
non-covered installment loan from a lender that is unaffiliated with
the original lender. The example also illustrates how the 30-day
cooling-off period works by identifying the first date on which the
lender or its affiliate could make a non-covered installment loan (or a
covered loan under Sec. 1041.5) to the consumer.
6(e) Disclosures
Proposed Rule
In proposed Sec. 1041.7(e), renumbered in this final rule as Sec.
1041.6(e), the Bureau proposed to require a lender to provide
disclosures before making the first and third loan in a sequence of
conditionally exempt loans under Sec. 1041.6. Under the proposal, the
notices in proposed Sec. 1041.7(e)(2)(i) and (ii) would have had to be
substantially similar to model forms provided in the proposal. Proposed
Sec. 1041.7(e) would have required a lender to provide the notices
required under proposed Sec. 1041.7(e)(2)(i) and (ii) before the
consummation of a loan. Proposed comment 7(e)-1 would have clarified
the proposed disclosure requirements.
The proposed disclosures were designed to provide consumers with
key information about how the principal amounts and the number of loans
in a sequence would be limited for covered short-term loans made under
proposed Sec. 1041.7 before they take out their first and third loans
in a sequence. The Bureau developed model forms for the proposed
disclosures through consumer testing.\911\
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\911\ See generally FMG Report, ``Qualitative Testing of Small
Dollar Loan Disclosures, Prepared for the Consumer Financial
Protection Bureau,'' at 2-6 (Apr. 2016), available at http://files.consumerfinance.gov/f/documents/Disclosure_Testing_Report.pdf.
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The Bureau believed that the proposed disclosures would, consistent
with section 1032(a) of the Dodd-Frank Act, ensure that these costs,
benefits, and risks are fully, accurately, and effectively disclosed to
consumers. In the absence of the proposed disclosures, the Bureau was
concerned that consumers would be less likely to appreciate the risk of
taking out a loan with mandated principal reductions or understand the
proposed restrictions on conditionally exempt loans that were
[[Page 54717]]
designed to protect consumers from the harms of unaffordable loan
payments.
The Bureau believed that it was important for consumers to receive
the proposed notices before they would be contractually obligated on a
conditionally exempt loan. By receiving the proposed notices before
consummation, a consumer could make a more fully informed decision,
with greater awareness of the features of such loans, including
specifically the limits on taking out more conditionally exempt loans
in the near future.
Proposed Sec. 1041.7(e)(1), renumbered in this final rule as Sec.
1041.6(e)(1), provided the form of disclosures that would be utilized
under proposed Sec. 1041.7. The format requirements generally would
have paralleled the format requirements for disclosures related to
payment transfers under proposed Sec. 1041.15 (now renumbered as Sec.
1041.9 of the final rule). Proposed Sec. 1041.7(e)(1)(i) would have
required that the disclosures be clear and conspicuous. Proposed Sec.
1041.7(e)(1)(ii) would have required that the disclosures be provided
in writing or through electronic delivery. Proposed Sec.
1041.7(e)(1)(iii) would have required the disclosures to be provided in
retainable form. Proposed Sec. 1041.7(e)(1)(iv) would have required
the notices to be segregated from other items and to contain only the
information in proposed Sec. 1041.7(e)(2), other than information
necessary for product identification, branding, and navigation.
Proposed Sec. 1041.7(e)(1)(v) would have required electronic notices
to have machine readable text. Proposed Sec. 1041.7(e)(1)(vi) would
have required the disclosures to be substantially similar to the model
forms for the notices set out under proposed Sec. 1041.7(e)(2)(i) and
(ii). Proposed Sec. 1041.7(e)(1)(vii) would have allowed lenders to
provide the disclosures that would have been required by proposed Sec.
1041.7(e) in a foreign language, provided that the disclosures must be
made available in English upon the consumer's request.
Proposed comment 7(e)(1)(i)-1, renumbered in this final rule as
6(e)(1)(i)-1, clarified that disclosures are clear and conspicuous if
they are readily understandable and their location and type size are
readily noticeable to consumers. Proposed comment 7(e)(1)(ii)-2,
renumbered in this final rule as 6(e)(1)(ii)-2, explained that the
disclosures required by proposed Sec. 1041.7(e)(2) may be provided
electronically without regard to the Electronic Signatures in Global
and National Commerce Act.\912\ Proposed comment 7(e)(1)(iii)-1,
renumbered in this final rule as 6(e)(1)(iii)-1, explained that
electronic disclosures are considered retainable if they are in a
format that is capable of being printed, saved, or emailed by the
consumer. Proposed comment 7(e)(1)(iv)-1, renumbered in this final rule
as 6(e)(1)(iv)-1, explained how segregated additional content can be
provided to a consumer. Proposed comment 7(e)(1)(vi)-1, renumbered in
this final rule as 6(e)(1)(vi)-1, explained the safe harbor provided by
the model forms, providing that although the use of the model forms and
clauses is not required, lenders using them would be deemed to be in
compliance with the disclosure requirement with respect to such model
forms.
---------------------------------------------------------------------------
\912\ Also known as the E-Sign Act, 15 U.S.C. 7001 et seq.
---------------------------------------------------------------------------
In proposed Sec. 1041.7(e)(2), renumbered in this final rule as
Sec. 1041.6(e)(2), the Bureau proposed to require a lender to provide
notices to a consumer before making a first and third loan in a
sequence of conditionally exempt loans. Proposed Sec. 1041.7(e)(2)(i)
would have required a lender before making the first loan in a sequence
of conditionally exempt loans to provide a notice. Proposed Sec.
1041.7(e)(2)(ii) would have required a lender before making the third
loan in a sequence of conditionally exempt loans to provide another,
different notice. More generally, these proposed notices were intended
to help consumers understand the availability of conditionally exempt
loans in the near future.
In proposed Sec. 1041.7(e)(2)(i) the Bureau proposed to require a
lender before making the first loan in a sequence of conditionally
exempt loans to provide a notice that warns the consumer of the risk of
a conditionally exempt loan that is unaffordable and informs the
consumer of the Federal restrictions governing subsequent conditionally
exempt loans. Specifically, the proposed notice would have warned the
consumer not to take the loan if the consumer is unsure whether the
consumer can repay the loan amount, which would include the principal
and the finance charge, by the contractual due date. In addition, the
proposed notice would have informed the consumer, in text and tabular
form, of the Federally-required restriction, as applicable, on the
number of subsequent loans and their respective amounts in a sequence
of conditionally exempt loans. The proposed notice would have been
required to contain the identifying statement ``Notice of restrictions
on future loans,'' using that phrase. The other language in the
proposed notice would have had to be substantially similar to the
language provided in proposed Model Form A-1 in appendix A. Proposed
comment 7(e)(2)(i)-1, renumbered in this final rule as 6(e)(2)(i)-1,
explained the ``as applicable'' standard for information and statements
in the proposed notice. It stated that, under proposed Sec.
1041.7(e)(2)(i), a lender would have to modify the notice when a
consumer is not eligible for a sequence of three covered short-term
loans under proposed Sec. 1041.7.
The Bureau believed the proposed notice would ensure that certain
features of conditionally exempt loans are fully, accurately, and
effectively disclosed to consumers in a manner that permits them to
understand certain costs, benefits, and risks of such loans. Given that
the restrictions on obtaining covered short-term loans under proposed
Sec. 1041.7 would be new and conceptually unfamiliar to many
consumers, the Bureau believed that disclosing them would be critical
to ensuring that consumers understand the restriction on the number of
and principal amount on subsequent loans in a sequence of conditionally
exempt loans. The Bureau's consumer testing of the notice under
proposed Sec. 1041.7(e)(2)(i) indicated that it aided consumer
understanding of the proposed requirements on conditionally exempt
loans.\913\ In contrast, the consumer testing of notices for covered
short-term loans made under Sec. 1041.5 indicated that these notices
did not improve consumer understanding of the ability-to-repay
requirements under proposed Sec. 1041.5.\914\ Since the notice under
proposed Sec. 1041.7(e)(2)(i) would be provided in retainable form,
the
[[Page 54718]]
Bureau believed that the incremental informational value of providing
the same or similar notice before the consummation of the second loan
in a sequence of conditionally exempt loans would be limited.
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\913\ In Round 1 of consumer testing of the notice under
proposed Sec. 1041.7(e)(2)(i), ``[n]early all participants who saw
this notice understood that it was attempting to convey that each
successive loan they took out after the first in this series had to
be smaller than the last, and that after taking out three loans they
would not be able to take out another for 30 days.'' FMG Report,
``Qualitative Testing of Small Dollar Loan Disclosures, Prepared for
the Consumer Financial Protection Bureau,'' at 11(Apr. 2016),
available at http://files.consumerfinance.gov/f/documents/Disclosure_Testing_Report.pdf. In Round 2 of consumer testing of the
notice under proposed Sec. 1041.7(e)(2)(i), ``participants . . .
noticed and understood the schedule detailing maximum borrowable
amounts, and the schedule appeared to influence their responses when
asked about the form's purpose.'' Id. at 40.
\914\ See FMG Report, ``Qualitative Testing of Small Dollar Loan
Disclosures, Prepared for the Consumer Financial Protection
Bureau,'' at 9-11, 38-39 (Apr. 2016), available at http://files.consumerfinance.gov/f/documents/Disclosure_Testing_Report.pdf.
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Proposed Sec. 1041.7(e)(2)(ii), renumbered in this final rule as
Sec. 1041.6(e)(2)(ii), would have required a lender before making the
third loan in a sequence of conditionally exempt loans to provide a
notice that informs a consumer of the restrictions on the new and
subsequent loans. Specifically, the Bureau's proposed notice would
state that the new conditionally exempt loan must be smaller than the
consumer's prior two loans and that the consumer cannot take another
similar loan for at least another 30 days after repaying the new loan.
Under the proposal, the language in this proposed notice must be
substantially similar to the language provided in proposed Model Form
A-2 in appendix A. The proposed notice would have to contain the
identifying statement ``Notice of borrowing limits on this loan and
future loans,'' using that phrase. The other language in this proposed
notice would have to be substantially similar to the language provided
in proposed Model Form A-2 in appendix A.
The Bureau believed the proposed notice would be necessary to
ensure that the restrictions on taking conditionally exempt loans are
fully, accurately, and effectively disclosed to consumers. Since
several weeks or more may have elapsed since a consumer received the
notice under proposed Sec. 1041.7(e)(2)(i), this proposed notice would
remind consumers of the prohibition on taking another similar loan for
at least the next 30 days. Importantly, it would present this
restriction more prominently than it is presented in the notice under
proposed Sec. 1041.7(e)(2)(i). The Bureau's consumer testing of the
notice under proposed Sec. 1041.7(e)(2)(ii) indicated that it would
aid consumer understanding of the prohibition on taking a subsequent
conditionally exempt loan.\915\
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\915\ In Round 1 of consumer testing of the notice under
proposed Sec. 1041.7(e)(2)(ii), ``[t]he majority of participants
who viewed this notice understood it, acknowledging that it would
not be possible to refinance or roll over the full amount of the
third loan they had taken out, and that they would have to wait
until 30 days after it was paid off to be considered for another
similar loan.'' FMG Report, ``Qualitative Testing of Small Dollar
Loan Disclosures, Prepared for the Consumer Financial Protection
Bureau,'' at 14-15 (Apr. 2016), available at http://files.consumerfinance.gov/f/documents/Disclosure_Testing_Report.pdf.
The notice under proposed Sec. 1041.7(e)(2)(ii) was not tested in
Round 2.
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Proposed Sec. 1041.7(e)(3), renumbered in this final rule as Sec.
1041.6(e)(3), proposed to require a lender to provide the notices
required under proposed Sec. 1041.7(e)(2)(i) and (ii) before the
consummation of a loan. Proposed comment 7(e)(3)-1, renumbered in this
final rule as 6(e)(3)-1, explained that a lender can provide the
proposed notices after a consumer has completed a loan application but
before the consumer has signed the loan agreement. It further clarified
that a lender would not have to provide the notices to a consumer who
merely makes an inquiry about a conditionally exempt loan but does not
complete an application for this type of loan. Proposed comment
7(e)(3)-2, renumbered in this final rule as 6(e)(3)-2, stated that a
lender must provide electronic notices, to the extent permitted by
Sec. 1041.7(e)(1)(ii), to the consumer before a conditionally exempt
loan is consummated. It also offered an example of an electronic notice
that would satisfy the timing requirement.
The Bureau believed that it would be important for consumers to
receive the proposed notices before they are contractually obligated on
a conditionally exempt loan. By receiving the proposed notices before
consummation, a consumer could make a more fully informed decision,
with an awareness of the restrictions on the current loan and on
additional conditionally exempt loans or similar loans in the near
future.
Comments Received
A number of stakeholders commented on the Bureau's consumer testing
process for the model forms. Some commenters believed that the Bureau's
sample size of 28 consumers was too small, noting that the Bureau and
other agencies had used larger sample sizes for the qualitative testing
of other disclosures (such as the TILA-RESPA integrated
disclosure),\916\ and supplemented them with quantitative testing.
These commenters asked the Bureau to clarify that the notices do not
need to be exactly the same as the model forms, so that lenders could
conduct their own testing. Others claimed that the level of research
rigor for the model disclosures was weak as compared to what would be
considered a best practice in the industry. One commenter criticized
both the sample size and the geographical representation of the sample,
and recommended that the Bureau remove the model forms from the
proposal. This commenter stated that it conducted its own user testing
of the ``Notice of Restrictions on Future Loans,'' a notice that would
have been required by Sec. 1041.7(e), with 50 participants, and found
that 18 percent understood the table accurately (with 54 percent having
a limited understanding and 24 percent who did not understand) and 22
percent had a solid understanding of the purpose of the notice (with 48
percent noting limited knowledge and 30 percent having no knowledge or
an inaccurate understanding). The commenter also argued that the
Bureau's use of qualitative testing on its own, without pairing it with
quantitative testing, suggested that its findings may not be
projectable to the broader population. However, other industry
commenters supported the Bureau's use of a model form.
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\916\ 78 FR 79730 (Dec. 31, 2013).
---------------------------------------------------------------------------
Several consumer groups commented that the proposed disclosures
were well designed. But they doubted that disclosures would effectively
prevent the harm they perceived as persisting under the exemption. They
did support the Bureau's proposed requirements that disclosures contain
machine readable text, be clear and conspicuous, be retainable, be
segregated, contain only the specified information, and be
substantially similar to the model forms.
Industry commenters generally supported the proposal's approach to
electronic disclosures, and urged the Bureau not to adopt a rule
requiring email or paper disclosures. Commenters argued that if a
borrower chooses to receive disclosures via text, including texts with
click-through links, then the borrower should not need email or paper
disclosures.
The Bureau received a number of comments about the proposed
approach to foreign language disclosures. Several commenters argued
against requiring foreign language notices (which the Bureau did not
propose but did seek comment on) because doing so would impose
substantial costs and could involve wide-ranging consequences that
deserve thoughtful consideration in a separate rulemaking. Other
commenters argued that lenders should offer the model form in the
language of the consumer's preference, or in the language that the
lender uses to negotiate the transaction. A consumer group asked the
Bureau to go further and prescribe specific contract language in
addition to the specific language for disclosures.
A legal aid group proposed that the Bureau add a provision that
would make the failure to provide any required disclosure or provision
of a dissimilar disclosure a deceptive act.
A coalition of consumer groups wrote in support of more extensive
requirements regarding disclosures, urging the Bureau to go further by:
[[Page 54719]]
Requiring a disclosure for the second loan in a sequence; requiring
disclosures at application and just before consummation; requiring
paper disclosures for in-person transactions (with electronic
disclosures as a supplement); allowing text or mobile disclosures only
as supplements to paper or email disclosures because of problems with
retainability; imposing a requirement that a URL should be persistent
for at least three years after the final payment; imposing a
requirement that the full text of a disclosure be provided in an email
without a click-through; imposing a requirement that a paper disclosure
should be sent if an email is returned; and imposing a requirement that
lenders follow E-SIGN requirements, specifically requiring confirmation
that borrowers are able to receive and view electronic communications.
Final Rule
The Bureau is finalizing proposed Sec. 1041.7(e) and all of its
subparagraphs as Sec. 1041.6(e) of the final rule with identical
subparagraphs. The only differences between proposed Sec. 1041.7(e)
and final Sec. 1041.6(e) are numbering changes: The number of the
section itself is updated to Sec. 1041.6, and one internal reference
to proposed Sec. 1041.7 is replaced with an internal reference to
Sec. 1041.6 of the final rule. The Bureau is also finalizing all
proposed commentary to proposed Sec. 1041.7(e), again only making
renumbering changes. The Bureau continues to believe that the
disclosures will, consistent with section 1032(a) of the Dodd-Frank
Act, ensure that costs, benefits, and risks associated with Sec.
1041.6 loans are fully, accurately, and effectively disclosed to
consumers.
The Bureau concludes, based on its considerable experience with
consumer testing, that the qualitative user testing process for the
model forms and notices is sufficient for purposes of this rule. That
is because, unlike the TILA-RESPA model disclosures, the model forms
for this rule are relatively short and less complicated. The Bureau
contracted with FMG to conduct qualitative user testing of the forms.
While the sample size was relatively small--28 test subjects--each
subject was given a one-on-one interview with FMG for about an hour.
The interviews were conducted in two geographical locations--New
Orleans and Kansas City. After the round of testing in New Orleans,
Bureau staff used the feedback to improve the model forms before the
second round of testing in Kansas City. The Bureau did not conduct
quantitative testing, which could have provided some additional
information, but the Bureau finds that the testing suffices to show
that the disclosures use plain language that is comprehensible to
consumers, contains a clear format and design, and succinctly explains
the information that must be imparted to the consumer.
The commenter that tested the notice of restrictions on future
lending, which purportedly found that 18 percent understood the table
accurately and 54 percent had a limited understanding, while 22 percent
had a solid understanding of the purpose and 48 percent had a limited
knowledge of the form's purpose, does not necessarily discount the
efficacy of the model forms. The Bureau does not know whether
participants were shown the letters in an appropriate environment and
manner, and does not know whether the wording or substance of the
questions asked could have contributed to the lower numbers.
Participants who did not understand the content of the table may not
have had enough of the context to understand the form being tested (in
fact, the commenter suggested that the participants did not understand
its purpose).
In response to comments relating to text message disclosures, the
Bureau notes that nothing in Sec. 1041.6(e) prohibits transmission by
text. Without being able to review a specific method of delivery, the
Bureau cannot opine on whether any specific provision of disclosures
via text with a click-through link satisfies the requirements for
disclosures in Sec. 1041.6(e)--particularly the requirement of
retainability in Sec. 1041.6(e)(1)(iii)--but the Bureau acknowledges
that such disclosures could, if correctly administered, satisfy the
requirements of Sec. 1041.6(e).
In response to the commenter contending that the initial
disclosure, if sent by email, could be prevented by a spam filter, the
Bureau does not find this to be a valid ground for not finalizing the
text of Sec. 1041.6(e). While the Bureau understands that email
disclosures may not be feasible for all lenders, it concludes that
providing paper disclosures in those instances where companies cannot
provide an adequate text or email message notification to all borrowers
is necessary or appropriate to ensure that borrowers receive notice of
their first scheduled payment--receipt of such notice is particularly
important to both borrowers and lenders, as it will begin the repayment
cycle. More broadly, the Bureau is not convinced that it is difficult
for industry to provide a written or electronic disclosure to borrowers
before the borrower enters a loan agreement. After all, the Bureau
would expect that the lender would need to transmit or provide a loan
agreement and TILA disclosure to the borrower through some means; and
the lender could use those means to provide the disclosure.
As proposed, the Bureau is not requiring non-English disclosures;
instead, it is finalizing the rule as proposed, which merely allows
non-English disclosures. Certain of the Bureau's rules, like its
remittance rule,\917\ require disclosures in foreign languages in
certain circumstances. The Bureau continues to view disclosures in
languages other than English as a positive development in all markets
for consumer financial products or services, where the customer base
has become increasingly more diverse. The Bureau is not, however,
prepared to make non-English disclosures mandatory at this time with
respect to these forms. The Bureau so concludes for several reasons,
including its recognition that the current final rule will involve a
significant amount of implementation work, including the work needed to
design and implement the disclosures in English. The Bureau is making
the judgment not to add required foreign language notices at this time,
but may consider supplemental rulemakings or model forms in the future
when industry has fewer regulatory adjustments to manage and has
developed more experience with the English-language forms.
---------------------------------------------------------------------------
\917\ 12 CFR 1005.31(g).
---------------------------------------------------------------------------
In response to commenters asking the Bureau to go further and
prescribe specific contract language in addition to the specific
language for disclosures, the Bureau concludes that a loan made
pursuant to any contract which creates terms that are incompatible with
the requirements of Sec. 1041.6 would disqualify the loan from
coverage under the Sec. 1041.6 exemption. Accordingly, the Bureau
believes there would be minimal benefit to prescribing specific
contract language, and that doing so would restrict the ability of
individual lenders to comply with specific requirements of local
contract law.
In response to commenters proposing that the Bureau add a provision
to the rule that would make failure to provide any required disclosure
or provision of a dissimilar disclosure a deceptive act, the Bureau
concludes that such a provision is unnecessary. A lender that fails to
make required disclosures would already be in violation of the rule,
and labeling that violation as deceptive would not add anything to the
lender's liability.
[[Page 54720]]
The Bureau does not find that it needs to require a notice before
the second loan. That would be inconsistent with the more general
approach the Bureau is taking in finalizing this rule, which is to
attempt to make the rule more streamlined and capable of being
administered more easily and practically. The payment notices, for
example, now only require a notice before the first withdrawal and any
unusual withdrawals, under the theory that borrowers could refer back
to the initial notice. Similarly, borrowers here could refer back to
the notice sent before the first loan was made under Sec. 1041.6 of
the final rule.
The Bureau also finds insufficient evidence to support the claim
that additional prescriptive requirements are necessary to ensure that
borrowers receive electronic or written notices in any particular
manner. Unlike with the payment notices, the Bureau concludes that the
risk associated with borrowers missing the notice is lower. The payment
notices are intended to warn borrowers of an impending event--thus,
borrowers are not engaged in a decision at the very moment when those
notices are sent. For this reason, the Bureau has provided further
requirements for those notices to ensure they are received. However,
here, the Bureau expects that the notices associated with making loans
under Sec. 1041.6 would be provided as part of the pre-loan package
when the borrower is inquiring about the contours of the transaction.
In order to take out the loan, the borrower already must engage with
that pre-loan package, so the Bureau concludes that a more permissive
approach to transmission is sufficient for these specific notices.
Subpart C--Payment Practices
Overview of the Proposal
In the proposed rule, the Bureau proposed to identify it as an
unfair and abusive act or practice for a lender to attempt to withdraw
payment from a consumer's account in connection with a covered loan
after the lender's second consecutive attempt to withdraw payment from
the account has failed due to a lack of sufficient funds, unless the
lender obtains the consumer's new and specific authorization to make
further withdrawals from the account. To avoid committing this unfair
and abusive practice, a lender would have to cease attempting to
withdraw payments from the consumer's account or obtain a new and
specific authorization to make further withdrawals.
Using the Bureau's authority in section 1031 of the Consumer
Financial Protection Act, the proposed rule would have prevented the
unlawful practice by prohibiting further payment withdrawal attempts
after two unsuccessful attempts in succession, except when the lender
has obtained a new and specific authorization for further withdrawals.
It also included requirements for determining when the prohibition on
further payment withdrawal attempts has been triggered and for
obtaining a consumer's new and specific authorization to make
additional withdrawals from the consumer's account.
The predicate for the proposed identification of an unfair and
abusive act or practice that the Bureau identified in the proposed
rule--and thus for the prevention requirements--was a set of
preliminary findings with respect to certain payment practices for
covered loans and the impact on consumers of those practices. Those
preliminary findings, the comments received on them, and the Bureau's
responses to the comments are addressed below in Market Concerns--
Payments.
The proposed rule would have provided a different set of
interventions based on the Bureau's disclosure authority found in
section 1032, which would have required lenders to provide a notice to
a consumer prior to initiating a payment withdrawal from the consumer's
account. It also proposed to require lenders to provide a notice
alerting consumers to the fact that two consecutive payment withdrawal
attempts to their accounts have failed--thus triggering operation of
the new authorization requirements--so that consumers can better
understand their repayment options and obligations in light of the
severely distressed condition of their accounts.
Market Concerns--Payments
As the Bureau laid out in the proposal, at the time of loan
origination, it is a common practice among many lenders to obtain
authorization to initiate payment withdrawal attempts from the
consumer's transaction account. Such authorization provides lenders
with the ability to initiate withdrawals without further action from
the consumer. Like other industries that commonly use such
authorizations for future withdrawals, consumers and lenders have found
that they can be a substantial convenience for both parties. However,
they also expose the consumer to a range of potential harms. Indeed,
Congress has recognized that such authorizations can give lenders a
special kind of leverage over borrowers, for instance by prohibiting in
EFTA the conditioning of credit on the consumer granting authorizations
for a series of recurring electronic transfers over time.\918\
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\918\ Electronic Fund Transfer Act, 15 U.S.C. 1693k(1);
Regulation E, 12 CFR 1005.10(e).
---------------------------------------------------------------------------
This section reviews the available evidence on the outcomes that
consumers experience when lenders obtain and use the ability to
initiate withdrawals from consumers' accounts to secure payments on
covered loans, including the comments that were submitted on the
proposed rule. As detailed below, the available evidence reinforces the
Bureau's conclusion that despite various regulatory requirements,
lenders in this market are using their ability to initiate payment
withdrawals in ways that harm consumers. Moreover, the Bureau finds
that, as a practical matter, consumers have little ability to protect
themselves from the injuries caused or likely caused by these
practices, and that private network attempts to restrict these
behaviors are limited in various ways.
The Bureau's research with respect to payment practices focused on
online payday and payday installment loans, where payment attempts
generally occur through the ACH network and thus can be readily tracked
at the account and lender level. Other publicly available data and the
Bureau's enforcement experience indicate that returned payments
likewise occur with great frequency in the storefront payday market;
indeed, a comparison of this data with the Bureau's findings suggests
that the risks to consumers with respect to failed payments may be as
significant or even greater in the storefront market than in the online
market.
The Bureau reviewed the available evidence, which can be summarized
as follows:
Lenders in these markets often take broad, ambiguous
payment authorizations from consumers and vary how they use these
authorizations, thereby increasing the risk that consumers will be
surprised by the amount, timing, or channel of a particular payment and
will be charged overdraft or NSF fees as a result. Commenters took both
sides on these factual points, with industry commenters arguing that
the Bureau had overstated the extent of the problems and any lack of
understanding on the part of consumers, and consumer groups arguing
that problems exist and cause harm that often is not understood by
consumers.
When a particular withdrawal attempt fails, lenders in
these markets often make repeated attempts at re-presentment, thereby
further multiplying the fees imposed on
[[Page 54721]]
consumers. Some commenters said that the Bureau had overstated the
occurrence of re-presentments, arguing that the Bureau's reliance on
data from 2012 was improper in light of recent developments that may
have driven down re-presentment rates; others disagreed.\919\
---------------------------------------------------------------------------
\919\ Note that in this rule preamble, the Bureau uses
``presentment,'' and ``re-presentment'' to refer to payment attempts
and payment re-attempts. Technically, these terms are often reserved
for ACH payment attempts only. However, in the context of this rule,
which is applicable across all payment methods, the Bureau uses the
terms interchangeably with other types of payment withdrawals.
---------------------------------------------------------------------------
These cumulative practices contribute to return rates that
vastly exceed those in other markets, substantially increasing
consumers' costs of borrowing, their overall financial difficulties,
and the risk that they will lose their accounts. Here again, commenters
offered perspectives on both sides of these factual issues, with
critics disputing the fact and the evidence that return rates here are
disproportionately higher than in other markets and taking issue with
the extent of the effect on consumers having their accounts closed, and
others providing additional evidence that return rates were in fact
disproportionately high.
Consumers have little practicable ability to protect
themselves from these practices. This point was sharply disputed by
industry and trade association commenters, with others such as consumer
groups and some research organizations offering support for this point.
Private network protections necessarily have limited reach
and impact, and are subject to change. This point was also disputed by
commenters who argued that the private networks do provide appropriate
and sufficient protections, while others strongly disagreed and
supported the preliminary views as stated by the Bureau.
a. Multiple Presentments Varied by Timing, Frequency, and Amount of
Payments
As discussed in the proposal and in the Background section,
obtaining authorization to initiate withdrawals from consumers'
transaction accounts is a standard practice among payday and payday
installment lenders. Lenders often control the parameters of how these
authorizations are used. Storefront payday lenders typically obtain a
post-dated paper check signed by the consumer, which in fact can be
deposited before the date listed and can be converted into an ACH
withdrawal. Online lenders typically obtain bank account information
and authorizations to initiate ACH withdrawals from the consumer's
account as part of the consumer's agreement to receive the funds
electronically.\920\ Many lenders obtain authorization for multiple
payment methods, such as taking a post-dated check along with the
consumer's ACH authorization or debit card information. Banks and
credit unions often have additional payment channel options, such as
using internal transfers from a consumer's deposit account to collect
loan payments. One commenter provided additional information on
internal bank transfers, explaining that, when initiating internal bank
transfers, financial institutions do not necessarily coordinate
internally so that the initiator knows the amount of funds in a
consumers' account. Generally, commenters did not take issue with this
account of the types of payment methods obtained by lenders.
---------------------------------------------------------------------------
\920\ Although, as noted above, the EFTA and Regulation E
prohibit lenders from conditioning credit on a consumer
``preauthorizing'' recurring electronic fund transfers, in practice
online payday and payday installment lenders are able to obtain such
authorizations from consumers for almost all loans through various
methods. Lenders are able to convince many consumers that advance
authorizations will be more convenient, and some use direct
incentives such as by making alternative methods of payment more
burdensome, changing APRs, or providing slower means of access to
loan proceeds for loans without preauthorized withdrawals. The
Bureau is not addressing in this rulemaking the question of whether
any of the practices described are consistent with the EFTA and
Regulation E.
---------------------------------------------------------------------------
Once lenders have obtained the authorizations, payday and payday
installment lenders frequently execute the withdrawals in ways that
consumers do not expect. In some cases, these actions may violate
authorizations, contract documents, Federal and State laws, and/or
private network rules, and in other cases they may exploit the
flexibility provided by these sources, particularly when the underlying
contract materials and authorizations are broadly or vaguely phrased.
The unpredictability for consumers can be exacerbated by the fact that
lenders often also obtain authorizations to withdraw varying amounts up
to the full loan amount, in an apparent attempt to bypass EFTA
notification requirements that would otherwise require notification of
transfers of varying amounts.\921\
---------------------------------------------------------------------------
\921\ See part II.D for a more detailed discussion of the
flexibility provided under laws and private network rules and other
lender practices with regard to obtaining initial authorizations.
---------------------------------------------------------------------------
The Bureau's study on online payday and payday installment loan
payments shows how common multiple payment presentments are.\922\ In
the study, the Bureau reviewed presentment activity relating to online
payday and payday installment loans using checking account files from
several large depository institutions. The data was from 2011-2012. The
study showed that lenders re-presented after one failed attempt 75
percent of the time, re-presented after the second failed attempt 66
percent of the time, re-presented after the third failed attempt 50
percent of the time, and re-presented after the fourth failed attempt
29 percent of the time.\923\ The data also showed that re-presentments
tend to come much sooner than do withdrawal attempts that follow a
successful payment.\924\
---------------------------------------------------------------------------
\922\ CFPB, Online Payday Loan Payments (April 2016), available
at http://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf.
\923\ Id. at 14.
\924\ Id. at 16.
---------------------------------------------------------------------------
Industry commenters disputed the Bureau's point that withdrawals
are executed in ways that consumers do not expect, or at least asserted
that the Bureau failed to present sufficient evidence to support this
point. Part of this criticism took issue with the Bureau's partial
reliance on confidential supervisory data to support its position,
which some commenters viewed as improper. This line of comments echoed
a broader concern from several commenters, who argued that it was
improper for the Bureau to rely on confidential data in the rulemaking.
Some commenters argued that data from 2012 is no longer indicative of
current practices, given several changes in the market since that time
in light of enforcement actions and adjustments to the NACHA Rules.
They also argued that the data may have been based on only a few
lenders, or lenders that were no longer in the market. Commenters
further argued that the Bureau did not establish that these negative
payment practices extended to all lenders, and should not have lumped
together online and storefront lenders, unlicensed and State-licensed
lenders, and bank products with non-bank products. On the other side,
consumer groups and some research organizations submitted comments and
data in support of the Bureau's points, providing consumer stories
about payment experiences and citing several reports that are publicly
available on overdraft and NSF fees caused by lender re-presentments
and irregular debiting of consumer accounts.
The Bureau also does not agree that it is improper to cite
supervisory information in the rulemaking process; this is information
the Bureau collects as part of its lawful and authorized
[[Page 54722]]
activities, and it provides insight into the issues addressed here.
Data from the Bureau's published reports were collected through its
supervision function, and the Bureau's regulations protect confidential
supervisory information from disclosure.\925\ Courts have held that an
agency can rely on confidential information in its rulemaking so long
as the agency discloses information to allow interested parties to
comment on the methodology and general data.\926\ The Bureau disclosed
how it obtained the data, the methodologies used to analyze the data,
the number of accounts reviewed, characteristics about the accounts
reviewed, and the results of the various studies.\927\ For example, in
the Bureau's payments report, most applicable to this section, the
Bureau disclosed the number of accounts reviewed (19,685) and the
methodology and results in a 25-page report.\928\ That was enough
information to allow commenters to adequately comment on the proposed
rule. The Bureau believes that more detail could have revealed the
identity of depository institutions, running counter to the Bureau's
rules governing confidential supervisory information.
---------------------------------------------------------------------------
\925\ 12 U.S.C. 5512(c)(6)(A); 12 CFR part 1070.
\926\ See NRDC v. Thomas, 805 F.2d 410, 418 n.13 (D.C. Cir.
1986); see also Riverkeeper Inc. v. EPA, 475 F.3d 83, 112 (2d Cir.
2007) (Sotomayor, J.); rev'd on other grounds, 556 U.S. 208 (2009).
\927\ For a summary of the Bureau's reports in this market, see
CFPB, Payday Loans, Auto Title Loans, and High-cost Installment
Loans: Highlights from CFPB Research (June 2, 2016), available at
http://files.consumerfinance.gov/f/documents/Payday_Loans_Highlights_From_CFPB_Research.pdf.
\928\ CFPB, Online Payday Loan Payments (April 2016), available
at http://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf.
---------------------------------------------------------------------------
The Bureau continues to adhere to the view that its study based on
2012 data is relevant. Commenters were very concerned about impacts of
the NACHA same-day ACH program, the impact of more recent enforcement
actions, and more recent innovations like ApplePay, arguing that more
recent market developments render the 2012 data stale. It is true that
NACHA has revised some of its rules, and provided more explicit
guidance on others. The NACHA Rule most relevant to lender payment
presentments--the reinitiation limit of a total of three presentments
per entry--was already in place during the sample period, though NACHA
has since provided further guidance on that rule. Various enforcement
actions relating to problematic use of payment authorizations (or lack
thereof) by payday lenders--including various cases pursued by the
FTC--had become public before the 2012.\929\ It is also true that
various enforcement actions have come after,\930\ but it is the
Bureau's common experience that industry often does not react uniformly
to the Bureau's enforcement actions. Despite pre-existing enforcement
actions, the NACHA reinitiation cap, other NACHA Rules about
authorizations, and Regulation E requirements, the Bureau observed a
high amount of returned presentments that were causing harm to
consumers. Even if industry has stopped or lessened the prevalence of
problematic payment practices since the report sample period--a claim
that the Bureau did not receive any evidence on and is purely
speculative--consumer harm from repeated re-presentments continues to
be of concern to the Bureau. Furthermore, as some commenters
acknowledged, recent changes in the market (such as the NACHA return
rate inquiry threshold) do not apply to all payment channels and
lenders may be continuing problematic practices through other payment
channels, like remotely created checks. Moreover, the Bureau continues
to receive complaints on payment practices.
---------------------------------------------------------------------------
\929\ See, e.g., Press Release, FTC (Aug. 1, 2011), FTC Charges
Marketers with Tricking People Who Applied for Payday Loans; Used
Bank Account Information to Charge Consumers for Unwanted Programs,
available at https://www.ftc.gov/news-events/press-releases/2011/08/ftc-charges-marketers-tricking-people-who-applied-payday-loans;
Press Release, FTC, FTC Obtains Court Order Halting Internet Payday
Lenders Who Failed to Disclose Key Loan Terms and Used Abusive and
Deceptive Collection Tactics (Feb. 23, 2009), available at https://www.ftc.gov/news-events/press-releases/2009/02/ftc-obtains-court-order-halting-internet-payday-lenders-who.
\930\ See, e.g., Press Release, Bureau of Consumer Fin. Prot.,
CFPB Takes Action Against Moneytree for Deceptive Advertising and
Collection Practices (Dec. 16, 2016), https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-moneytree-deceptive-advertising-and-collection-practices/; Press
Release, Bureau of Consumer Fin. Prot., CFPB Orders EZCORP to Pay
$10 Million for Illegal Debt Collection Tactics (Dec. 16, 2015),
available at http://www.consumerfinance.gov/newsroom/cfpb-orders-ezcorp-to-pay-10-million-for-illegal-debt-collection-tactics/; Press
Release, Bureau of Consumer Fin. Prot., CFPB Takes Action Against
Online lender for Deceiving Borrowers (Nov. 18, 2015), available at
https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-online-lender-for-deceiving-borrowers/.
---------------------------------------------------------------------------
Some commenters raised that NACHA has passed a 15 percent return
rate inquiry threshold, which allows NACHA to request information from
merchants who have high return rates, and that NACHA issued guidance to
reiterate the two re-presentment threshold. For reasons discussed
below, the Bureau believes that there are still significant risks to
consumers despite these rule changes and clarifications. Even if this
inquiry threshold has affected ACH payment practices, NACHA Rules do
not apply to other types of payments. As for the 2014 clarification
regarding NACHA's re-presentment cap, even assuming that clarification
significantly impacted compliance rates for the pre-existing rule,
there are a number of ways for lenders to avoid the cap, the cap allows
more re-presentments than this rule, and again, it only applies to ACH
and not other payment methods. NACHA itself raised concerns that
lenders are shifting towards other payment methods when they tightened
the restrictions--suggesting that the practices that the NACHA Rules
were trying to address may have shifted off of the ACH network.
As for the makeup of the participants included in the study, the
participant with the largest amount of ACH transactions accounted for
14 percent of the transactions, while the next largest accounted for
six percent. Given the high number of transactions and that individual
participants accounted for a relatively small share of the
transactions, the Bureau believes that it is unlikely the overall
results of its 2012 study would be primarily driven by potential
departure of any one participant from the market.
More generally, the commenters only questioned whether the data is
still relevant as to the current prevalence of lenders making multiple
repeated payment presentments. They did not suggest that the practice
has ceased entirely or that the likelihood that a payment attempt would
succeed has been impacted by new NACHA Rules or intervening enforcement
actions. Thus the Bureau does not find any reason to conclude that the
last few years have cast in doubt the relevance of those aspects of its
study.
The Bureau acknowledges that the payments report was based on
online payday and payday installment loans only, and did not include
loans by storefronts or depository institutions. The study, however, is
informative of what occurs when a lender re-presents multiple times,
and data from other sources--including public enforcement actions about
depository institution practices, public filings for storefront
lenders, and industry data about return rates--shows that these lenders
have outlier payment practices. The Bureau believes that this
information shows that lenders of loans covered by this rule are more
likely to engage in harmful payment practices.
The data and analysis that the Bureau presented in the proposal is
further bolstered by the studies cited by other
[[Page 54723]]
commenters such as consumer groups and other research organizations.
One published study on checking account activity showed that one-third
of payday borrowers experienced at least one incident in which their
checking account was overdrawn on the same day that the payday lender
withdrew a payment, triggering one or more fees, even where the payment
withdrawal itself succeeded.\931\ Nearly half of them incurred an
overdraft or NSF fee in the two weeks after a payday loan transaction.
A 2013 report found that 27 percent of payday borrowers said that a
payday lender making a withdrawal from their bank account caused an
overdraft.\932\ Among storefront borrowers, 23 percent had this
experience while 46 percent of online borrowers reported that a payday
lender's withdrawal caused an overdraft.\933\ The same study went on to
note that while these borrowers may choose payday loans in order to
avoid overdrafts, a finding consistent with an earlier national survey
which found that 90 percent of those who overdrew their account did so
by mistake, many end up paying both payday loan and overdraft fees.
Another national survey showed that 22 percent of borrowers reported
closing their checking accounts or having them closed by the bank in
connection with an online payday loan.\934\
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\931\ Center for Responsible Lending, Payday Mayday: Visible and
Invisible Payday Lending Defaults (March 31, 2015), available at
http://www.responsiblelending.org/research-publication/payday-mayday-visible-and.
\932\ The PEW Charitable Trusts, Payday Lending in America:
Report 2, How Borrowers Choose and Repay Payday Loans, p. 35 (Feb.
2013), available at http://www.pewtrusts.org/~/media/assets/2013/02/
20/pew_choosing_borrowing_payday_feb2013-(1).pdf.
\933\ Id.
\934\ The PEW Charitable Trusts, Payday Lending in America:
Report 4, Harmful Practices in Internet Payday Lending, p. 16 (Oct.
2014).
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Going back to the discussion in the proposal, these payment
practices increase the risk that the payment attempt will be made in a
way that triggers fees on a consumer's account. Unsuccessful payment
attempts typically trigger bank fees. According to deposit account
agreements, banks charge an average NSF fee of approximately $34 for
returned ACH and check payments.\935\ Some prepaid card providers
charge fees for returned or declined payments.\936\ Even if the payment
goes through, the payment may exceed the funds available in the
consumer's account, thereby triggering an overdraft fee, which also
averages approximately $34, and in some cases ``extended'' overdraft
fees ranging from $5 to $38.50, if the consumer is unable to clear the
overdraft within a specified period of time.\937\ These failed payment
fees charged to the consumer's deposit account may be exacerbated by
returned payment fees and late fees charged by lenders, since many
lenders also charge a returned-item fee for any returned check or
returned electronic payment.\938\ The Bureau noted in the proposal that
some depository institutions have charged overdraft and NSF fees for
payments made within the institutions' internal systems, including a
depository institution that charged overdraft and NSF fees on payments
related to its own small-dollar loan product.\939\ The commenters
generally did not dispute that attempted withdrawals generate these
kinds of fees to consumers, though some said that if the issue is the
high fees that are charged, then the Bureau should pursue that problem
separately rather than by adopting this rule.
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\935\ CFPB Study of Overdraft Programs White Paper, at 52.
\936\ There does not appear to be a standard charge for returned
and declined payments by prepaid card providers, though the fees
currently appear to be lower than those on depository accounts. The
Bureau has observed fees ranging from 45 cents to $5.
\937\ CFPB Study of Overdraft Programs White Paper. Some
extended overdraft fees are charged repeatedly if the overdraft is
not cleared.
\938\ See, e.g., ACE Cash Express, Loan Fee Schedule--Texas,
available at https://www.acecashexpress.com/~/media/Files/Products/
Payday/Internet/Rates/TX_FeeSchedule.pdf (last visited May 18, 2016)
(charging $30 ``for any returned check, electronic payment, or other
payment device''); Cash America, Rates and Fees--Texas, available at
http://www.cashamerica.com/LoanOptions/CashAdvances/RatesandFees/Texas.aspx (last visited May 18, 2016) (``A $30 NSF charge will be
applied for any returned payment.''); Advance America 2011 Annual
Report (Form 10-K), at 8 (``Fees for returned checks or electronic
debits that are declined for non-sufficient funds (`NSF') vary by
State and range up to $30, and late fees vary by State and range up
to $50. For each of the years ending December 31, 2011 and 2010,
total NSF fees collected were approximately $2.9 million and total
late fees collected were approximately $1 million and $0.9 million,
respectively.''); Mypaydayloan.com, FAQs, https://www.mypaydayloan.com/faq#loancost (last visited May 17, 2016) (``If
your payment is returned due to NSF (or Account Frozen or Account
Closed), our collections department will contact you to arrange a
second attempt to debit the payment. A return item fee of $25 and a
late fee of $50 will also be collected with the next debit.'');
Great Plains Finance, Installment Loan Rates, https://www.cashadvancenow.com/rates.aspx) (last visited May 16, 2016)
(explaining returned payment fee of $25 and, for payments more than
15 days late, a $30 late fee).
\939\ See, e.g., CFPB Consent Order, Regions Bank, CFPB No.
2015-CFPB-0009 (Apr. 28, 2015), available at http://files.consumerfinance.gov/f/201504_cfpb_consent-order_regions-bank.pdf (finding that Regions charged overdraft and NSF fees with
its deposit advance product, despite stating that it would not do so
after a change in policy. Specifically, if the bank collected
payment from the consumer's checking account and the payment was
higher than the amount available in the account, it would cause the
consumer's balance to drop below zero. When that happened, the bank
would either cover the transaction and charge an overdraft fee, or
reject its own transaction and charge an NSF fee.), available at
http://files.consumerfinance.gov/f/201504_cfpb_consent-order_regions-bank.pdf.
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Despite these potential risks to consumers, many lenders vary the
timing, frequency, and amount of payment attempts over the course of
the lending relationship. For example, the Bureau has received a number
of consumer complaints about lenders initiating payments before the due
date, sometimes causing the borrower's accounts to incur NSF or
overdraft fees. The Bureau has received consumer complaints about bank
fees triggered when lenders initiated payments for more than the
scheduled payment amount. The Bureau is also aware of payday and payday
installment lender policies that vary the days on which a payment is
initiated based on prior payment history, payment method, and
predictive products provided by third parties. Bureau analysis of
online loan payments shows differences in how lenders space out payment
attempts and vary the amounts sought in situations when a payment
attempt has previously failed.\940\
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\940\ CFPB Online Payday Loan Payments, at 16-17 figs. 2-3.
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Same-Day Attempts
The Bureau also noted in the proposal that some lenders make
multiple attempts to collect payment on the same day, contributing to
the unpredictable nature of how payment attempts will be made and
further exacerbating fees on consumer accounts. For example, the Bureau
has observed storefront \941\ and online payday and payday installment
lenders that, as a matter of course, break payment attempts down into
multiple attempts on the same day after an initial attempt fails. This
practice has the effect of increasing the number of NSF or overdraft
fees for consumers because, in most cases when the account lacks
sufficient funds to pay the balance due, attempts will trigger NSF or
overdraft fees.\942\ In the Bureau's analysis of ACH payments submitted
by online payday lenders, approximately 35 percent \943\ of the
payments were attempted on the same day as another payment attempt.
This includes situations in which a lender makes three attempts in one
day
[[Page 54724]]
(four percent of payments observed) and four or more attempts in one
day (two percent of payments observed). The most extreme practice the
Bureau has observed was a lender who attempted to collect payment from
a single account 11 times in one day. The Bureau also has received
consumer complaints about lenders making multiple attempts to collect
in one day, including an instance of a lender reported to have made
nine payment attempts in a single day.
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\941\ See Consent Order, EZCORP, CFPB No. 2015-CFPB-0031 (Dec.
16, 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf.
\942\ With the exception that overdraft fees cannot be charged
on one-time debit card transactions when a borrower does not opt in.
12 CFR 1005.17.
\943\ CFPB Online Payday Loan Payments, at 20 tbl.3.
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When multiple payment requests are submitted to a single account on
the same day by an online payday lender, the payment attempts usually
all succeed (76 percent) or all fail (21 percent), leaving only three
percent of cases where one but not all attempts succeed.\944\ In other
words, multiple presentments are seven times more likely to result in
multiple NSF events for the consumer than they are to result in a
partial collection by the lender.
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\944\ Id. at 21 tbl.4.
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Re-Presentment
The Bureau also finds that when a lender's presentment or multiple
presentments on a single day fail, online payday lenders typically
repeat the attempt to collect payment multiple times on subsequent
days.\945\ According to the Bureau's analysis of ACH payments, 75
percent of ACH payments presented by online payday lenders that
initially fail are re-presented by the lender.\946\ Because six percent
of initial payments originally fail, the result is that four and half
percent of all initial payments had an accompanying re-presentment. Of
those re-presentments, 70 percent fail, and after the second failed
attempt, 66 percent of failed payments are re-presented. That means a
little over two percent of all initial payments involved three
presentments (this rule would cut off the third presentment). Of these
third re-presentments, 73 percent fail, and 50 percent are re-presented
after three failures. Consumers have complained to the Bureau that
lenders attempt to make several debits on their accounts within a short
period of time, including one consumer who had taken out multiple loans
from several online payday lenders and reported that the consumer's
bank account was subject to 59 payment attempts over a two-month
period.\947\
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\945\ See, e.g., First Cash Fin. Servs., 2014 Annual Report
(Form 10-K), at 5 (Feb. 12, 2015), available at https://www.sec.gov/Archives/edgar/data/840489/000084048915000012/fcfs1231201410-k.htm
(explaining that provider of online and storefront loans
subsequently collects a large percentage of returned ACH and check
payments by redepositing the customers' checks, ACH collections, or
receiving subsequent cash repayments by the customers); CashNet USA,
FAQs, https://www.cashnetusa.com/faq.html (last visited Dec. 18,
2015) (``If the payment is returned for reason of insufficient
funds, the lender can and will re-present the ACH Authorization to
your bank'').
\946\ CFPB Online Payday Loan Payments, at 14. In the CFPB
analysis, any payment attempt following a failed payment attempt is
considered a ``re-presentment.'' Failed requests submitted on the
same day are analyzed separately from re-presentments submitted over
multiple days.
\947\ This consumer reported that their bank account was
ultimately closed with charges of $1,390 in bank fees.
---------------------------------------------------------------------------
Online payday lenders appear to make a second payment attempt more
quickly after a failed payment than after a successful payment.
According to Bureau analysis, 60 percent of payment attempts following
a failed payment came within one to seven days of the initial failed
attempt, compared with only three percent of payment attempts following
a successful payment.\948\ The Bureau observed a lender that, after a
returned payment, made a payment presentment every week for several
weeks.
---------------------------------------------------------------------------
\948\ CFPB Online Payday Loan Payments, at 16.
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In addition to deviations from the payment schedule, some lenders
adopt other divergent practices to collect post-failure payments. For
example, the Bureau preliminarily found in the proposal that after an
initial failure, one storefront payday and payday installment lender
had a practice of breaking an ACH payment into three smaller pieces on
the consumer's next payday: One for 50 percent of the amount due, one
for 30 percent of the amount due, and one for 20 percent of the amount
due.\949\ Approximately 80 percent of these smaller attempts resulted
in all three presentments being returned for non-sufficient funds, thus
triggering multiple NSF fees. Some commenters suggested that they
believe the Bureau's points about same-day attempts and re-presentment
were overstated. For example, they cited the Bureau's data showing a
high level of storefront payment failures by ACH transfer failures and
bounced checks, and suggested that these figures did not take
sufficient account of other cash transactions that were completed
successfully. It is true that many payday loan payments are made in
cash, and so not implicated by this rule. The Bureau' study also
focused on only online payday and payday installment lenders, which do
not take cash payments. Online payday and payday installment lenders
continue to have high outlier return rates despite having all payments
included in the denominator. The Bureau believes, however, that many
cash transactions are likely to come from the population of consumers
who would have funds in their accounts if instead the only method of
payment were ACH (as in the studied online payday markets), and many
would not come out of the population for which a payment withdrawal
fails (because we know those consumers do have the funds to cover a
payment).
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\949\ See Consent Order, EZCORP, CFPB No. 2015-CFPB-0031 (Dec.
16, 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf.
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The Bureau received a number of comments, including some from
industry, asserting that lenders continue to engage in making repeat
attempts to debit payments from consumer accounts.
b. Cumulative Impacts
These practices among payday and payday installment lenders have
substantial cumulative impacts on consumers. Industry analyses,
outreach, and Bureau research suggest that the industry is an extreme
outlier with regard to the rate of returned items. As a result of
payment practices in these industries, consumers suffer significant
NSF, overdraft, and lender fees that substantially increase financial
distress and the cumulative costs of their loans.
Outlier Return Rates
Financial institution analysis and Bureau outreach indicate that
the payday and payday installment industry is an extreme outlier with
regard to the high rate of returned items generated. These returns are
most often for non-sufficient funds, but also include transactions that
consumers have stopped payment on or reported as unauthorized. The high
rate of returned payment attempts suggests that the industry is causing
a disproportionate amount of harm relative to other markets.\950\
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\950\ High return rates for non-sufficient funds may also be
indicative of lenders' problematic authorization practices. In
developing its rules to monitor overall ACH return rates, NACHA
explained:
Moreover, while some level of Returns, including for funding-
related issues such as insufficient funds or frozen accounts, may be
unavoidable, excessive total Returns also can be indicative of
problematic origination practices. For example, although some
industries have higher average return rates because they deal with
consumers with marginal financial capacity, even within such
industries there are outlier originators whose confusing
authorizations result in high levels of Returns for insufficient
funds because the Receiver did not even understand that s/he was
authorizing an ACH transaction. Although such an Entry may be better
characterized as ``unauthorized,'' as a practical matter it may be
returned for insufficient funds before a determination regarding
authorization can be made.
NACHA, Request for Comment and Request for Information--ACH
Network Risk and Enforcement Topics, Rule Proposal Description, at 3
(Nov. 11, 2013), available at https://www.shazam.net/pdf/ach_networkRisk_propRulesDesc_1113.pdf (last visited May 17, 2016).
See also Federal Financial Institutions Examinations Council
(``FFIEC''), Bank Secrecy Act/Anti-Money Laundering Exam Manual, at
237 (2014), available at https://www.ffiec.gov/bsa_aml_infobase/documents/BSA_AML_Man_2014_v2.pdf (``High levels of RCCs and/or ACH
debits returned for insufficient funds or as unauthorized can be an
indication of fraud or suspicious activity. Therefore, return rate
monitoring should not be limited to only unauthorized transactions,
but include returns for other reasons that may warrant further
review, such as unusually high rates of return for insufficient
funds or other administrative reasons.''); FDIC, Financial
Institution Letter FIL-3-2012, Payment Processor Relationships, at 5
(rev'd July 2014), available at https://www.fdic.gov/news/news/financial/2012/fil12003.pdf (``Financial institutions that initiate
transactions for payment processors should implement systems to
monitor for higher rates of returns or charge backs and/or high
levels of RCCs or ACH debits returned as unauthorized or due to
insufficient funds, all of which often indicate fraudulent
activity.'').
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[[Page 54725]]
A major financial institution has released analysis of its consumer
depository account data to estimate ACH return rates for payday
lenders, including both storefront and online companies.\951\ In a 2014
analysis of its consumer account data, the institution found that
industry lenders had an overall return rate of 25 percent for ACH
payments.\952\ The institution observed individual lender return rates
ranging from five percent to almost 50 percent. In contrast, the
average return rate for debit transactions in the ACH network across
all industries was just 1.36 percent. Among individual industries, the
industry with the next highest return rate was cable television at 2.9
percent, then mobile telephones at 1.7 percent, insurance at 1.2
percent, auto and mortgage at 0.8 percent, utilities at 0.4 percent,
and credit cards at 0.4 percent.\953\ Clearly, the numbers for the
kinds of loans covered under this rule are so high as to contrast
dramatically with consumer's experience with payment practices in the
markets for all of these other types of consumer services, including
consumer financial services. The Bureau also considers this evidence
that the practices identified in Sec. 1041.7 are more common or more
likely to occur in the covered markets than in other markets.
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\951\ JP Morgan Chase is one of the largest banks in the
country, with $2.4 trillion in assets and an average of $200 billion
in consumer checking accounts. See JP Morgan Chase, About Us,
https://www.jpmorganchase.com/corporate/About-JPMC/about-us.htm
(last visited Mar. 17, 2015); JP Morgan Chase & Co., Annual Report
2014 (2015), available at http://files.shareholder.com/downloads/ONE/1717726663x0x820066/f831cad9-f0d8-4efc-9b68-f18ea184a1e8/JPMC-2014-AnnualReport.pdf.
\952\ Monitoring for Abusive ACH Debit Practices, Presentation
by Beth Anne Hastings of JP Morgan Chase at Spring 2014 NACHA
Conference in Orlando, FL (Apr. 7, 2014). This RDFI analysis
included returns due to non-sufficient funds, stop-payment orders,
and unauthorized activity; administrative returns were not included.
However, most of these returns were triggered by non-sufficient
funds; lenders generally had an unauthorized return rate below 1
percent. See also First Cash Fin. Servs., 2014 Annual Report (Form
10-K), at 5 (``Banks return a significant number of ACH transactions
and customer checks deposited into the Independent Lender's account
due to insufficient funds in the customers' accounts.'') (discussion
later in the document indicates that the CSO section covers both
online and storefront loans).
\953\ NACHA Q4 2014.
---------------------------------------------------------------------------
In addition to this combined financial institution analysis, Bureau
research and outreach suggest extremely high rates of returned payments
for both storefront and online lenders. As noted earlier, for example,
storefront lenders report failure rates of approximately 60 to 80
percent when they deposit consumers' post-dated checks or initiate ACH
transfers from consumer accounts in situations where the consumer has
not come into the store to repay in cash.\954\ Bureau research of ACH
payments finds that online lenders experience failure rates upwards of
70 percent where they attempt to re-present an ACH withdrawal one or
more times after an initial failure.\955\ Moreover, of the 30 percent
of second attempts and 27 percent of third attempts that succeed,
Bureau research indicates that approximately a third of them only do so
by creating overdrafts on the consumer's account, which trigger further
fees.\956\
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\954\ QC Holdings 2014 Annual Report (Form 10-K), at 7
(reporting a return rate of 78.5 percent); Advance America 2011
Annual Report (Form 10-K), at 27 (reporting return rates of 63
percent for checks and 64 percent for ACH attempts).
\955\ Bureau analysis of ACH payments by online lenders shows an
initial ACH payment failure rate due to NSFs of six percent.
However, among the ``successful'' payments, Bureau research
indicates that approximately six percent are paid only by
overdrawing the consumer's account. CFPB Report: Online Payday Loan
Payments, Table 1, at 13. The Bureau's analysis includes payday
lenders and payday installment lenders that only operate online; the
dataset excludes lenders that provide any storefront loans. In
comparison, the Chase dataset includes both storefront and online
payday lenders. As discussed in the proposal, many payments to
storefront lenders are provided in person at the store. The fact
that the consumer has not shown up at the store is a sign that the
consumer may be having trouble making the payment. In contrast,
online lenders generally collect all payments electronically and
succeed more often on the initial payment attempt. Given that
storefront lenders have higher rates of return on the first payment
attempt, this sample difference may explain the relatively lower
failure rate for first-attempt online ACH payments observed by the
Bureau.
\956\ CFPB Online Payday Loan Payments, at 13, tbl. 1.
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It may be the case that, as commenters noted, high return payment
rates are influenced significantly by the fact that lenders are making
loans to borrowers who are less likely to have funds in their accounts,
or that the one-time balloon payment structure of these loans are more
prone to failed payment attempts. But that argument also implies that
borrowers in this market are more vulnerable to harm from engaging in
multiple presentments than consumers are in other markets.
Account Fees
The proposal cited the Bureau's analysis, consumer complaints, and
public litigation documents, which show that the damage done to
consumers from these payment attempts can be substantial.\957\ Fifty
percent of checking accounts of online borrowers in the Bureau's
analysis of online payday and payday installment loans incurred at
least one overdraft or NSF return in connection with their loans, with
average fees for these consumers at $185.\958\ Indeed, 10 percent of
these accounts experienced at least 10 payment withdrawal attempts that
resulted in an overdraft or NSF return over an 18-month period.\959\ A
small but significant percentage of consumers suffer extreme incidences
of overdraft and NSF fees on their accounts; for consumers with at
least one online payday attempt that resulted in an overdraft or NSF
return, 10 percent were charged at least $432 in related account fees
over the 18-month sample period.\960\ This recounting of the types and
amounts of fees charged to consumers in these circumstances was
generally accepted by commenters on both sides of the proposed rule,
though one commenter took issue with the Bureau's use of averages,
noting that they can be skewed by outliers and that citing the median
experience would be more reliable. While that may be so as a logical
matter, the Bureau cited the average fees because it was interested in
assessing the total harm of the conduct in question, and not just the
harm incurred by the typical borrower.
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\957\ See, e.g., Complaint at 19, Baptiste v. JP Morgan Chase
Bank, No. 1:12-CV-04889 (E.D.N.Y. Oct. 1, 2012) (alleging that
during a two-month period, 6 payday lenders debited the plaintiff's
bank account 55 times, triggering a total of approximately $1,523 in
NSF, overdraft, and service fees).
\958\ CFPB Online Payday Loan Payments, at 10-11.
\959\ Id. at 10.
\960\ Id. at 12.
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Account Closure
Lender attempts to collect payments from an account may also
contribute to account closure. The Bureau has observed that the
accounts of borrowers who use loans from online payday lenders are more
likely to be closed than accounts generally (17 percent versus
[[Page 54726]]
three percent, respectively).\961\ In particular, 36 percent of
borrowers had their account closed involuntarily following an
unsuccessful attempt by an online payday lender to collect a payment
from the account, a rate that is four times greater than the closure
rate for accounts that only had NSFs from non-payday transactions.
Additionally, the Bureau found that borrowers with two consecutive
failures by the same lender are significantly more likely to experience
an involuntary closure than accountholders generally (43 percent versus
three percent, respectively).\962\ For accounts with failed online
payday loan transactions, account closures typically occur within 90
days of the last observed online payday loan transaction; in fact, 74
percent of account closures in these situations occur within 90 days of
the first NSF return triggered by an online payday or payday
installment lender.\963\ This suggests that the online loan played a
role in the closure of the account, or that payment attempts failed
because the account was already headed toward closure, or both.\964\
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\961\ Id. at 24 tbl. 5.
\962\ CFPB Report on Supplemental Findings, at p. 151.
\963\ Id. at 23.
\964\ See also Complaint at 14, Baptiste, No. 1:12-CV-04889
(alleging plaintiff's bank account was closed with a negative
balance of $641.95, which consisted entirely of bank's fees
triggered by the payday lenders' payment attempts); id. at 20-21
(alleging plaintiff's bank account was closed with a negative
balance of $1,784.50, which consisted entirely of banks fees
triggered by the payday lender's payment attempts and payments
provided to the lenders through overdraft, and that plaintiff was
subsequently turned down from opening a new checking account at
another bank because of a negative ChexSystems report stemming from
the account closure).
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Commenters provided further data suggesting a connection between
payment presentment practices and account closures. For example, a Pew
survey found that 22 percent of online payday borrowers claimed to have
lost bank accounts because of online payday loans.\965\ Some commenters
took issue with the Bureau's reliance on its 2016 report on online
payday loan payments to establish the link between payday payment
practices and account closures. They asserted certain methodological
limitations of the report and accused the Bureau of using the data to
assert causation when all it showed was correlation. They noted that
the report itself had recognized the possibility that other confounding
factors might explain the correlation. But the Bureau did not fail to
recognize these points; on the contrary, the Bureau had been careful to
note the limitations of its study and to caution that correlation is
not necessarily show causation.
---------------------------------------------------------------------------
\965\ Pew Charitable Trusts, ``Payday Lending in America: Report
4, Harmful Practices in Internet Payday Lending,'' at 16 (Oct.
2014).
---------------------------------------------------------------------------
Similarly, commenters contended that the Bureau's report did not
sufficiently distinguish between truly voluntary and truly involuntary
account closures. Yet the Bureau did distinguish between voluntary
account closures by the consumer and involuntary account closures
initiated by the bank. Practically, it would be quite difficult to
parse individual circumstances any further. A consumer might have
pulled all of his money out of an account, making the eventual bank
closure seem more ``voluntary,'' but those kinds of individual
circumstances are difficult to account for in a broader study. Due to
variations in borrower circumstances, the Bureau agrees that the study
does not necessarily show that the presentment practices described were
the actual cause of every observed involuntary account closure.
However, the Bureau believes the high correlation between account
closure and problematic payment practices indicates that these
consumers may be experiencing harms beyond the fees immediately
triggered by the transactions.
c. Limited Consumer Control
Consumers' ability to protect their accounts from these types of
payment attempt problems is limited due to a combination of factors,
including the nature of the lender practices themselves, lender
revocation procedures (or lack thereof), costs imposed by depository
institutions in connection with consumer efforts to stop-payment
attempts, and the operational limits of individual payment methods. In
some cases, revoking authorization and stopping payment may be
infeasible, and at a minimum they are generally both difficult and
costly.
Consumers Have Difficulty Stopping Lenders' Ability to Access Their
Accounts
In the proposal, the Bureau indicated its preliminary view that
lenders and account-holding institutions may make it difficult for
consumers to revoke account access or stop withdrawals. \966\ One way
that consumers could attempt to stop multiple attempts to collect from
their accounts would be to direct their lender to stop initiating
payments. To do so, however, the consumer must be able to identify and
contact the lender, which can be difficult or impossible for consumers
who have borrowed from an online lender. Moreover, lenders that can be
contacted often make it difficult to revoke access. For example,
several lenders require consumers to provide another form of account
access in order to effectively revoke authorization with respect to a
specific payment method--some lenders require consumers to provide this
back-up payment method as part of the origination agreement.\967\ Some
lenders require consumers to mail a written revocation several days
before the effective date of revocation.\968\ These same lenders
automatically debit payments through another method, such as a remotely
created check, if a consumer revokes the ACH authorization. Others
explicitly do not allow revocation, even though ACH private network
rules require stop-payment rights for both one-time and recurring ACH
transactions.\969\ For example, one lender Web site states that ACH
revocation is not allowed for its single-payment online loans.\970\
Other lenders may not have obtained proper authorization in the first
place \971\ or
[[Page 54727]]
take broad authorizations to debit any account associated with the
consumer.\972\
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\966\ The Bureau is not addressing in this rulemaking the
question of whether any of the practices described are consistent
with the EFTA and Regulation E.
\967\ See, e.g., Castle Payday Loan Agreement, Ex. A, Parm v.
BMO Harris Bank, N.A., No. 13-03326 (N.D. Ga. Dec. 23, 2013), ECF
No. 60-1 (``You may revoke this authorization by contacting us in
writing at [email protected] or by phone at 1-888-945-2727. You
must contact us at least three (3) business days prior to when you
wish the authorization to terminate. If you revoke your
authorization, you authorize us to make your payments by remotely-
created checks as set forth below.''); Press Release, Bureau of
Consumer Fin. Prot., CFPB Takes Action Against Online Lender for
Deceiving Borrowers (Nov. 18, 2015), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-online-lender-for-deceiving-borrowers/.
\968\ See id.
\969\ See NACHA Rule 3.7.1.2, RDFI Obligation to Stop Payment of
Single Entries (``An RDFI must honor a stop-payment order provided
by a Receiver, either verbally or in writing, to the RDFI at such
time and in such manner as to allow the RDFI a reasonable
opportunity to act upon the order prior to acting on an ARC, BOC,
POP, or RCK Entry, or a Single Entry IAT, PPD, TEL, or WEB Entry to
a Consumer Account.'').
\970\ Advance America provides the following frequently asked
question in regard to its online loan product:
Can I revoke my ACH payment?
No. The ACH Authorization can only be revoked AFTER we have
received payment in full of the amount owed. Because our advances
are single payment advances (that is, we advance a sum of money that
is to be repaid in a lump sum), we are permitted to require ACH
repayment in accordance with the Federal Electronic Funds Transfer
Act (``EFTA'').
See Advance America, Frequently Asked Questions, https://www.onlineapplyadvance.com/faq (last visited May 17, 2016).
\971\ Hydra Group, a purported online payday lender against
which the Bureau brought an enforcement action, allegedly used
information bought from online lead generators to access consumers'
checking accounts to illegally deposit payday loans and withdraw
fees without consent. The Bureau alleged that Hydra Group falsified
loan documents to claim that the consumers had agreed to the phony
online payday loans. The scam allegedly added up to more than $100
million worth of consumer harm. Hydra had been running its
transactions through the ACH system. Complaint, CFPB v. Moseley, No.
4:14-CV-00789 (W.D. Mo. Sept. 8, 2014), ECF No. 3, available at
http://files.consumerfinance.gov/f/201409_cfpb_complaint_hydra-group.pdf. See also Stipulated Order, FTC v. Michael Bruce
Moneymaker, Civil Action No. 2:11-CV-00461 (D. Nev. Jan. 24, 2012),
available at https://www.ftc.gov/sites/default/files/documents/cases/2012/02/120201moneymakerorder.pdf (purported lead generator
defendants used information from consumer payday loan applications
to create RCCs to charge consumer accounts without authorization).
\972\ See, e.g., Great Plains Lending d/b/a Cash Advance Now,
Frequently Asked Questions (FAQs), https://www.cashadvancenow.com/FAQ.aspx (last visited May 16, 2016) (``If we extend credit to a
consumer, we will consider the bank account information provided by
the consumer as eligible for us to process payments against. In
addition, as part of our information collection process, we may
detect additional bank accounts under the ownership of the consumer.
We will consider these additional accounts to be part of the
application process.'').
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Consumer complaints sent to the Bureau also indicate that consumers
struggle with anticipating and stopping payment attempts by lenders of
covered loans. As of December 31, 2016, complaints where the consumer
has identified the issues ``can't stop lender from charging my bank
account'' or ``lender charged my bank account on wrong day or for wrong
amount'' account for nearly 10 percent of the more than 16,600 payday
loan complaints the Bureau has handled since November 2013.\973\ In
addition, the Bureau handled approximately 31,000 debt collection
complaints relating to payday loans during this same period. More than
11 percent of debt collection complaints received by the Bureau stem
from payday loans. The Bureau also handled more than 15,800 installment
loan complaints. Review of those complaints suggests that there are
consumers who labeled their complaints as falling under those
categories who also experience difficulties anticipating and stopping
payment attempts.
---------------------------------------------------------------------------
\973\ This figure excludes debt collection payday loan
complaints because consumers filing debt collection payday loan
complaints have a different set of issues to choose from when
completing the complaint form.
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The other option for consumers is to direct their bank to stop
payment, but this too can be challenging. Depository institutions
typically charge a fee of approximately $32 for processing a stop-
payment order, making this a costly option for consumers.\974\ In
addition, some lenders charge returned-item fees if the stop-payment
order successfully blocks an attempt.\975\ The Bureau has received
complaints from consumers who were charged overdraft and NSF fees after
merchants with outstanding stop-payment orders were able to withdraw
funds despite the presence of the orders; in some instances, banks
refused to refund these charges.
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\974\ This is the median stop-payment fee for an individual
stop-payment order charged by the 50 largest financial institutions
in 2015. Informa Research Services, Inc. (Aug. 7, 2015), Calabasas,
CA. www.informars.com. Although information has been obtained from
the various financial institutions, the accuracy cannot be
guaranteed.
\975\ See, e.g., Complaint at 19, Baptiste v. JP Morgan Chase
Bank, No. 1:12-CV-04889 (E.D.N.Y. Oct. 1, 2012) (alleging that
during a two-month period, six payday lenders debited the
plaintiff's bank account 55 times, triggering a total of
approximately $1,523 in non-sufficient funds, overdraft, and service
fees); CFPB Online Payday Loan Payments.
---------------------------------------------------------------------------
The ease of successfully stopping a payment also varies by channel.
To execute a stop-payment order on a check, banks usually use the check
number provided by the consumer. As ACH payments do not have a number
equivalent to a check number for the bank to identify them, ACH
payments are more difficult to stop. To block the payment, banks may
need to search the ACH transaction description for information that
identifies the lender. Determining an effective search term is
difficult, given that there is no standardization of how originators of
a payment--in this case, lenders--identify themselves in the ACH
network. Lenders may use a parent company name or an abbreviated name,
or may vary names based on factors like branch location. Other lenders
use the name of their third-party payment processor. During the
Bureau's outreach, some depository institutions indicated that certain
payday lenders use multiple merchant ID codes and different names on
their ACH transactions in an apparent attempt to reduce the risk of
triggering scrutiny for their ACH presentments.
Moreover, remotely created checks (RCCs) and remotely created
payment orders (RCPOs) are virtually impossible to stop because the
consumer does not know the check number that the payee will generate,
and the transaction information does not allow for payment
identification in the same way that an ACH file does. RCCs and RCPOs
have check numbers that are created by the lender or its payment
processor, making it unlikely that consumers would have this
information.\976\ Industry stakeholders, including members of the
Bureau's Credit Union Advisory Council, indicate that it is virtually
impossible to stop payments on RCCs and RCPOs because the information
needed to stop the payment--such as check number and payment amount--is
generated by the lender or its payment processor. Consumers also may
not realize that a payment will be processed as a RCC, so they may not
even know to ask their bank to look for a payment processed as a check
rather than as an ACH payment.
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\976\ See Letter to Ben Bernanke, Chairman, Board of Governors
of the Federal Reserve System, from the National Consumer Law
Center, Consumer Federation of America, Center for Responsible
Lending, Consumer Action, Consumers Union, National Association of
Consumer Advocates, National Consumers League, and U.S. PIRG,
Comments on Improving the U.S. Payment System, at 8 (Dec. 13, 2013),
available at https://fedpaymentsimprovement.org/wp-content/uploads/2013/12/Response-Natl_Consumer_Law_Center_et_al-121313.pdf.
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Some financial institutions impose additional procedural hurdles,
for instance by requiring consumers to provide an exact payment amount
for a stop-payment order and allowing payments that vary by a small
amount to go through.\977\ Others require consumers to provide the
merchant identification code that the lender used in the ACH file.\978\
Because there is no standardization of merchant names or centralized
database of merchant identification codes in the ACH system, however,
the only way for consumers to know the exact merchant identification
code is if they observed a previous debit by that lender. Even if a
consumer located a lender's identification code on a previous debit,
which may or may not be practicable, lenders may vary this code when
they are debiting the same consumer account again.\979\ As mentioned
previously, during the Bureau's outreach, some depository institutions
indicated that payday
[[Page 54728]]
lenders sometimes use multiple merchant ID codes and different names on
their ACH transactions in an apparent attempt to reduce the risk of
triggering scrutiny for their ACH presentments. Moreover, banks may
require consumers to navigate fairly complex procedures in order to
stop a payment, and these procedures may vary depending on whether the
payment is presented through the ACH system or the check system. For
example, one major depository institution allows consumers to use its
online system to stop payment on a check, but requires notification
over the phone to stop a payment on an ACH item.\980\
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\977\ For example, Regions Bank instructs consumers that ``If
you are attempting to stop payment on an ACH draft, you must provide
the exact amount of the draft or the stop payment cannot be
placed.'' See Regions Bank, Frequently Asked Questions, http://www.regions.com/FAQ/lost_stolen.rf (last visited May 17, 2016).
\978\ See Wells Fargo, Instructions for Stopping Payment,
https://www.wellsfargo.com/help/faqs/order-checks/ (last visited May
17, 2016) (``ACH items--Please provide the Company Name, Account
Number, ACH Merchant ID and/or Company ID (can be found by reviewing
a previous transaction) and Amount of item.'').
\979\ Through market outreach, the Bureau has learned that the
ACH channel used to be allowed only for recurring authorizations.
Future transactions could be stopped relatively easily because the
bank could use the merchant identification information (in this
case, the name that the lender or its payment processor puts in the
ACH file) that was on prior preauthorized debits. However, now that
the ACH network can also be used to initiate one-time payments, a
bank may not know which merchant identifier to use. In addition,
some merchants (including lenders) seem to be gaming the system by
changing the merchant identifiers to work around stop payments.
\980\ See Wells Fargo Instructions for Stopping Payment (``You
can request a stop payment online (check only), by phone (check and
ACH items) or by visiting your local store and speaking with a
banker.''), https://www.wellsfargo.com/help/faqs/order-checks/ (last
visited May 17, 2016).
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The Bureau also identified in the proposal some risk that bank
personnel may misinform consumers about their rights. During outreach,
the Bureau learned that the ACH operations personnel at some banks do
not believe consumers have any right to stop payment or send back
unauthorized transactions initiated by payday lenders. The Bureau has
received consumer complaints to this effect.\981\ Recent Federal court
cases and information from legal aid organizations \982\ also provide
evidence that bank personnel may not correctly implement consumer
payment rights in all cases.\983\
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\981\ The Bureau has received complaints from consumers alleging
that banks told consumers that the bank could not do anything about
unauthorized transactions from payday lenders and that the bank
would not stop future debits.
\982\ See also, New Economy Project Letter to Federal Banking
Regulators, at 1-2 (September 2014), available at http://www.neweconomynyc.org/wp-content/uploads/2014/11/letter.pdf
(``People have often found that their financial institution fails to
honor requests to stop payment of recurring payments; has inadequate
systems for implementing stop payment orders and preventing evasions
of those orders; charges inappropriate or multiple fees; and refuses
to permit consumers to close their accounts.'').
\983\ See Jessica Silver-Greenberg, Major Banks Aid in Payday
Loans Banned by States, NY Times (Feb. 23, 2013), available at
http://www.nytimes.com/2013/02/24/business/major-banks-aid-in-payday-loans-banned-by-states.html (discussing allegations against
JP Morgan Chase about consumer difficulties in revoking
authorization and stopping payment on online payday loans);
Complaint at 11, Baptiste, No. 1:12-CV-04889 (alleging that a bank
employee told the plaintiff that the bank ``could not stop the
debits from payday lenders, and that she should instead contact the
payday lenders to tell them to stop debiting her account'').
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d. Private Network Protections Have Limited Impact
Finally, while the presentment practices of the payday industry are
so severe that they have prompted recent actions by the private
rulemaking body that governs the ACH network, the Bureau stated in the
proposal that these efforts likely would be insufficient to solve the
problems discussed above. The private NACHA Rules do provide some
protections in addition to those currently provided by law.
Specifically, the NACHA Rules now limit the re-presentment of any one
single failed payment to two additional attempts and provide that any
lender with a total return level of 15 percent or above may be subject
to an inquiry process by NACHA. They also impose a ``company name
rule'' mandating that originators of ACH transactions use names that
consumers would recognize, and impose a fee on payment originators when
payments are returned. NACHA has also undertaken various efforts to
improve the enforcement of their rules in recent years, and to
encourage more developed self-monitoring across all industries. As
NACHA set forth in its comment responding to this rulemaking, it has
engaged in a number of reforms more recently, including several reforms
in 2014. However, the narrower scope of these rules, the limited
private network monitoring and enforcement capabilities over them, and
their applicability to only one payment method, taken together, mean
that private network protections are not well positioned to completely
solve problematic practices in the payday and payday installment
industries.
Re-Initiation Cap
The Bureau observed in the proposal that the NACHA Rules have
historically provided a re-initiation cap, which limits re-presentment
of a failed payment to two additional attempts. Compliance with this
requirement is difficult to monitor and enforce.\984\ Although ACH
files are supposed to distinguish between collection of a new payment
and the re-initiation of a prior one, some originators do not comply
with this requirement to label re-initiated transactions.\985\ Because
the ACH system does not record whether the payment is for a loan and
accordingly cannot identify the terms of the loan, including whether it
is a single-payment loan or an installment loan with a series of
scheduled payments, there is limited ability to distinguish re-
initiations (and potential NACHA rule violations) from the next
installment payment. Unless a lender explicitly labels the attempt as a
re-initiation, the ACH system cannot otherwise distinguish between, for
example, the second attempt to collect a payment for January 1 and the
first attempt to collect the next payment that is due on February
1.\986\
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\984\ See FFIEC, Bank Secrecy Act/Anti-Money Laundering Exam
Manual, at 238 (``Transactions should be monitored for patterns that
may be indicative of attempts to evade NACHA limitations on returned
entries. For example, resubmitting a transaction under a different
name or for slightly modified dollar amounts can be an attempt to
circumvent these limitations and are violations of the NACHA
Rules.'').
\985\ NACHA Request for Comment and Request for Information--ACH
Network Risk and Enforcement Topics, Rule Proposal Description, at
6-7 (proposing amendments in response to lack of compliance with
requirement to label reinitiated transactions) (``NACHA has reason
to believe that some high-risk Originators may ignore or attempt to
evade the requirements of the Reinitiation Rule, including by
changing content in various fields to make an Entry appear to be a
new Entry, rather than a reinitiationze . . . . For additional
clarity, NACHA proposes to include in the Reinitiation Rule common
examples that would be considered reinitiating an Entry to avoid
arguments, for example, that adding a fee to an Entry creates a new
Entry or that attempting to resubmit for a lesser amount takes the
Entry outside of these limitations.'').
\986\ NACHA explicitly excludes scheduled payments from its
reinitiation rule. See id. at 7 (explaining that ``the proposal
would clarify that a debit Entry in a series of preauthorized
recurring debit Entries will not be treated as a reinitiated Entry,
even if the subsequent debit Entry follows a returned debit Entry,
as long as the subsequent Entry is not contingent upon whether an
earlier debit Entry in the series has been returned.'').
---------------------------------------------------------------------------
Even if the rule were not subject to ready evasion by originating
entities, the cap also does not apply to future payments in an
installment payment schedule. Accordingly, if a failed payment on a
previously scheduled payment is followed by a payment attempt on the
next scheduled payment, that second attempt is not considered a re-
initiation and does not count toward the cap. For example, for a loan
payment that does not go through, NACHA Rules allow that payment to be
presented a total of three times, thereby generating three fees to the
consumer, and the following payment due can still proceed despite any
prior failures. Commenters suggested that the Bureau should distinguish
between re-presentments and new payments on the payment schedule, and
suggested that the Bureau should not have counted payments 14 days out
as ``re-presentments'' in its studies. The Bureau did include them
because payments in short succession would look quite similar to re-
presentments from the consumer's perspective. And as the Bureau's study
showed, even when counting presentments 14 days apart as ``re-
presentments,'' the rates of rejection are quite high for second,
third, fourth, and further presentments, especially when compared to
the rejection rate for the first presentment.
[[Page 54729]]
There were a number of comments stating that NACHA has recently
clarified its re-initiation cap in 2014, and that the Bureau should
wait to see if that effort fixed the problems the Bureau had
identified. In a similar vein, commenters suggested that the Bureau's
study is stale because it was based on data from 2012, which was before
these NACHA reforms were enacted. On this topic, NACHA wrote to the
Bureau that its pre-existing re-initiation cap has acted to protect
consumers against excessive debits to their accounts for many years,
while providing a reasonable opportunity for duly authorized
transactions to be paid when the account to be debited inadvertently
has inadequate funds at the time of the original charge. NACHA also
clarified that it took steps in 2014 to clarify the application of the
re-initiation rule because of concerns regarding evasion and non-
compliance with the rule. As discussed in the proposal, NACHA had
concerns that originators were not labeling re-initiated transactions
or were using scenarios where a payment had changed in some way--such
as by adding a fee--to avoid considering it as a re-initiation under
the cap. The Bureau notes that the cap is longstanding and existed
during the 2011-2012 study period, and the Bureau's data shows that the
problems identified above remained. NACHA clarified the application of
the rule thereafter, and the Bureau agrees that this effort to focus
more industry attention on the cap is likely to be helpful in
addressing the problem. However, as noted in the NPRM, NACHA has
limited to ability to monitor and enforce its reinitiation cap.
Although it is possible that fewer industry participants violated the
cap after the 2014 clarification, the fact that industry was evading
the rule pre-2014 suggests that they may be still evading it today.
NACHA claims that the overall NSF return rates for all ACH debits fell
by 21 percent since 2012, and by 31 percent for online payments. Those
are market-wide numbers, and it is unclear whether the payday industry
made similar improvements. But even if it did, much of the problems
that the Bureau's study identified would remain, though they may have
been depressed somewhat. Furthermore, NACHA stated in its comment that
the new NACHA Rules have resulted in a shift to other riskier payment
methods, such as remotely created checks and debit network transactions
that are not governed by the NACHA Rules. The Bureau believes that this
final rule will be a beneficial supplement to the NACHA Rules in that
this rule will apply across multiple payment methods (including those
riskier methods that the NACHA Rules cannot reach). Additionally, the
NACHA Rules cap re-presentments at two of the original entry, which
allows one more re-presentment than does this rule (and, as discussed
above, allows the reinitiation clock to re-start with the next
scheduled payment). A substantial amount of the consumer harm found in
the Bureau's study data occurred on the second re-presentment, and
since the NACHA Rules did not affect that, the Bureau concludes that
its data is not stale as to that issue. Lastly, as stated earlier in
this section, while the NACHA reforms may impact the prevalence of re-
presentment practices to some degree, they would not alter the type and
extent of consumer harm that re-presentments cause when they do occur.
Total Return Rate Level
According to a NACHA rule that went into effect in September 2015,
originators \987\ with a total return rate of 15 percent or above are
subject to an inquiry process by NACHA.\988\ This return rate threshold
includes returns for reasons such as non-sufficient funds,
authorization that was revoked by the consumer, administrative issues
(such as an invalid account number), and stop-payment orders. It does
not include the returns of re-presented checks, which are ACH re-
presentments of payments that were first attempted through the check-
clearing network. Exceeding this threshold does not necessarily violate
NACHA Rules, but rather simply allows NACHA to demand additional
information from the lender's originating depository financial
institution (ODFI) for the purpose of determining whether the ODFI
should lose access to the ACH system.\989\
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\987\ The return rate level is calculated for individual
entities like lenders and payment processors that direct an ODFI to
debit a consumer's account on the entities' behalf. See NACHA Rule
2.17.2; NACHA Rule 8.6 (defining ``originator'').
\988\ See NACHA Rule 2.17.2; NACHA, ACH Network Risk and
Enforcement Topics, https://www.nacha.org/rules/ach-network-risk-and-enforcement-topics (last visited May 17, 2016) (``The Rule will
establish an inquiry process that will provide NACHA with a
preliminary evaluation point to research the facts behind an
Originator's ACH activity. Preliminary research, as part of the
inquiry process, begins when any Originator exceeds the established
administrative return rate or overall return rate level. The review
process involves eight steps, and includes an opportunity for NACHA
and an industry review panel to review an Originator's ACH activity
prior to any decision to require a reduction in a return rate. The
inquiry process does not automatically trigger a Rules enforcement
activity.'') (``The rule does not automatically require an ODFI to
reduce an Originator's return rate below 15 percent; as such, it is
meant to be flexible in accounting for differing needs of a variety
of businesses. The rule would require an ODFI to reduce an
Originator's return rate below 15 percent if directed to do so by
the industry review panel.'').
\989\ See NACHA Rule 2.17.2.
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During this process, the ODFI may be able to justify a high return
rate depending on the lender's business model and other factors.\990\
NACHA set the threshold at 15 percent to allow flexibility for a
variety of business models while identifying originators that were
burdening the ACH system.\991\ However, in the proposal the Bureau
stated its concern that lenders can adopt problematic payment practices
and remain below this inquiry level. This concern is borne out by the
data, as the Bureau in fact has observed an overall lender NSF return
rate of 10.1 percent in its analysis of ACH payments attempts by online
payday and payday installment lenders.\992\
---------------------------------------------------------------------------
\990\ See NACHA, ACH Network Risk and Enforcement Topics: FAQs,
available at https://www.nacha.org/rules/ach-network-risk-and-enforcement-topics (last visited May 16, 2016).
The inquiry process is an opportunity for the ODFI to present,
and for NACHA to consider, specific facts related to the
Originator's or Third-Party Sender's ACH origination practices and
activity. At the conclusion of the preliminary inquiry, NACHA may
determine that no further action is required, or may recommend to an
industry review panel that the ODFI be required to reduce the
Originator's or Third-Party Sender's overall or administrative
return rate below the Return Rate Level. . . . In reviewing the
results of a preliminary inquiry, the industry review panel can
consider a number of factors, such as: (1) The total volume of
forward and returned debit Entries; (2) The return rate for
unauthorized debit Entries; (3) Any evidence of Rules violations,
including the rules on reinitiation; (4) Any legal investigations or
regulatory actions; (5) The number and materiality of consumer
complaints; (6) Any other relevant information submitted by the
ODFI.
\991\ See NACHA, Request for Comment and Request for
Information, at 5 (``By setting the threshold at approximately 10
times the ACH Network average, NACHA believes that sufficient leeway
will be permitted for businesses that attempt to service high risk
communities without creating return rates that significantly
increase costs on RDFIs and raise questions about the quality of the
origination practices.'').
\992\ This return rate does not include same-day presentments;
with same-day presentments included, the overall return rate is
14.4%. The NACHA reinitiation cap was in effect during the Bureau's
sample period of 2011-2012. The NACHA rule on overall return rate
levels went into effect in September 2015.
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Monitoring and Enforcement of the New Total Return Rate Level
In the proposal, the Bureau preliminarily found that NACHA has a
limited ability to monitor return rates. First, NACHA has no ability to
monitor returns based on a particular lender. All of the return
information it receives is sorted by the ODFIs that are processing the
transactions, rather than at the level of the individual lenders that
are
[[Page 54730]]
accessing the ACH network. Because lenders sometimes use multiple ODFI
relationships to process their payments,\993\ the returns used in the
NACHA threshold do not provide a full picture of those lenders' payment
activity. In addition, NACHA has no ability to monitor or calculate
return rates on an ongoing basis. Although it receives return volume
reports from the ACH operators (the Federal Reserve and The
Clearinghouse), these reports do not contain the successful payment
volume information that is necessary to calculate a return rate.
Rather, NACHA relies on financial institutions to bring suspect
behavior to its attention, which even then only provides it with a
basis to investigate further and request more detailed payment reports.
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\993\ In order to access the ACH network, lenders must use an
ODFI. A lender may not have a direct ODFI relationship if it is
sending payments through a third-party payment processor. In that
case, the processor would have an ODFI relationship. A lender may
have multiple ODFI and processor relationships, such as different
relationships for different loan products or regions.
---------------------------------------------------------------------------
The Bureau also emphasized in the proposal that lenders often
obtain access to multiple payment methods, such as check, ACH, and
debit card. As private payment networks do not combine return activity,
there is no monitoring of a lender's overall returns across all payment
types. Payments that begin as checks and then are re-presented as ACH
payments, a practice that is not uncommon among storefront payday
lenders, are excluded from the NACHA return rate threshold. The Bureau
is also aware that lenders sometimes alternate between payment networks
to avoid triggering scrutiny or violation of particular payment network
rules. Processor marketing materials, Bureau staff conversations with
industry, and documents made public through litigation indicate that
the NACHA unauthorized return and total return rate thresholds have
already prompted migration to remotely created checks and debit network
transactions, none of which is covered by the NACHA Rules.\994\
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\994\ See, e.g., FTC Final Amendments to Telemarketing Sales
Rule, 80 FR 77520, 77532 (Dec. 14, 2015) (discussing marketing by
payment processors).
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In light of the available evidence, including the comments received
on the points discussed in this section of the proposed rule, the
Bureau concludes that substantial risk to consumers remains. Although
private network rules may improve lender practices in some respects,
they have many gaps, impose limited consequences, and do not eliminate
all consumer harm. There is no systematic way to monitor lender payment
practices in the current ACH system, or more broadly for practices
across all payment channels, leaving only weak enforcement mechanisms
in place for applying the NACHA Rules. In addition, because these rules
are private, the public has no guarantee or assurance of any kind that
they will exist in the same form or an improved form in the future. And
perhaps most importantly, the NACHA Rules only apply to the ACH system,
and not all payment methods. For all of these reasons, the Bureau
concludes that the private ACH network rules do not provide an adequate
solution to the problematic payment practices in this market. The
Bureau values NACHA's continued efforts to improve payment practices,
both for this lending market and across the entirety of the ACH
networks, and will continue to consider NACHA as a partner while the
Bureau proceeds with its own work to address the harms it identifies to
consumers.
Section 1041.7 Identification of Unfair and Abusive Practice--Payments
The Bureau's Approach in the Proposal
In the proposal, the Bureau stated its belief that the act or
practice of obtaining a consumer's authorization in advance to initiate
electronic fund transfers (EFTs) from the consumer's bank account often
can be beneficial for creditors and consumers alike by providing a
relatively speedy, predictable, and low-cost means of repayment.
Nonetheless, for all of the reasons discussed in Markets Concerns--
Payments of the proposed rule, the Bureau also stated its belief that
lenders in the markets for payday and payday installment loans often
use such payment authorizations in ways that may cause substantial
harms to consumers who are especially vulnerable, particularly when
lenders continue making payment withdrawal attempts after one or more
attempts have failed due to non-sufficient funds.
Based on the available evidence and pursuant to its authority under
section 1031 of the Dodd-Frank Act, the Bureau proposed in Sec.
1041.13 \995\ to identify it as both an unfair and an abusive act or
practice for a lender to attempt to withdraw payment from a consumer's
account in connection with a covered loan after the lender's second
consecutive attempt has failed due to a lack of sufficient funds,
unless the lender obtains the consumer's new and specific authorization
to make further withdrawals from the account. In this context, an
``attempt to withdraw payment from a consumer's account'' was defined,
in proposed Sec. 1041.14, to mean a lender-initiated debit or
withdrawal from the account for purposes of collecting any amount due
or purported to be due in connection with a covered loan, regardless of
the particular payment method used by the lender to initiate the debit
or withdrawal. The proposed identification thus would apply to all
common methods of withdrawing payment from consumers' accounts,
including but not limited to the following methods: EFTs (including
preauthorized EFTs), without regard to the particular type of payment
device or instrument used; signature checks; remotely created checks;
remotely created payment orders; and an account-holding institution's
withdrawal of funds held at the same institution. The Bureau sought
comment on the evidence it had presented on these issues, and on the
preliminary findings and conclusions it had reached in the proposal.
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\995\ Because changes made to the proposal have led to omissions
of certain sections, the sections on payment attempts, along with
certain others, have been renumbered in the final rule. Thus, for
example, Sec. 1041.13 of the proposed rule has now become Sec.
1041.7 of the final rule. The numbering of the sections in the final
rule will be used here, unless specifically indicated otherwise.
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General Comments Received
The Bureau received a number of general comments about the Bureau's
use of its authority to prohibit unfair, deceptive, or abusive acts or
practices. The Bureau addresses those more general comments immediately
below; the specific comments on the prongs of unfairness or abusiveness
are addressed further below.
Some commenters claimed the proposed intervention was not necessary
because of the NACHA Rules described above or, alternatively, that the
data the Bureau used was stale because of the new NACHA Rules. Other
commenters suggested that the Bureau should simply enforce Regulation
E, or use its UDAAP enforcement authority, to address the issue. Others
argued that State law sufficiently addressed the issues identified by
the Bureau, or that leveraged payment mechanisms were required by State
law, and that this meant the rule was in conflict with those
requirements.
Some commenters argued that it was improper or inappropriate to
write a rule that only implicates a small subset of the total market's
transactions, and that these issues should be addressed instead by
supervisory oversight or enforcement activity.
Several commenters argued that the rule was overbroad, arguing that
the Bureau's primary source of data was
[[Page 54731]]
from online payday lenders, and that the data were not applicable to
depository institutions, traditional installment loans, or storefront
lenders. Other commenters argued that the Bureau had not shown that
there was any difference in payment presentment practices between
covered industries and industries the rule would not cover--for
example, longer-term installment lending with interest rates below 36
percent APR.
Still others argued that the Bureau had not identified, as an
unfair or abusive practice, the failure to provide the consumer notice
before initiating a transfer, and thus did not properly identify any
UDAAP predicate to support the notice interventions in the proposed
rule (proposed Sec. 1041.15, final Sec. 1041.9).
Lastly, commenters argued that this part of the rule was
unnecessary because proposed Sec. Sec. 1041.4 to 1041.6 would ensure
that more borrowers have an ability to repay, and thus would be much
more likely to have funds in their accounts when the first presentment
is made (meaning there would be no need for multiple payment attempts).
Final Rule
The Bureau now concludes that the practice of making attempts to
withdraw payment from consumers' accounts in connection with a covered
loan after the lender's second consecutive attempts to withdraw
payments from the accounts from which the prior attempts were made have
failed due to a lack of sufficient funds, unless the lender obtains the
consumers' new and specific authorization to make further withdrawals
from the accounts, is unfair and abusive. The Bureau's analysis of why
this practice meets the elements of unfairness and the elements of
abusiveness, as well as its responses to the comments received on those
topics, are provided below. But first the Bureau responds to the
broader comments concerning the Bureau's general approach.
The Bureau addressed the comments regarding whether the Bureau's
data are stale because of new NACHA Rules in the Market Concerns--
Payments section above. This final rule would only allow one re-
presentment, as opposed to the two re-presentments allowed by the NACHA
Rules, and this marginal difference will have a significant impact on
an identifiable set of consumers. Additionally, as noted above, this
rule governs all payment methods, which is important because NACHA only
addresses ACH payments and accordingly has seen many lenders shift
towards other, non-ACH payment methods in response to NACHA's efforts
to address the payment practices at issue in this rule. Further, the
final rule clarifies that, as further explicated in the section-by-
section analysis for Sec. 1041.8, the payment presentment cap applies
across multiple loans, contrary to the NACHA Rules. The Bureau values
NACHA's efforts and looks forward to working in a partnership on these
issues, but concludes that the provisions in the NACHA Rules do not
eliminate the need for regulatory intervention here.
In addition, the Bureau concludes that merely continuing to enforce
Regulation E would not be enough to remedy the harms from the
identified practice. Regulation E does not impose a limit on multiple
failed presentments. It does give consumers certain rights to stop
payments and cancel authorizations, which may mitigate some of the harm
caused by multiple failed presentments, if exercised successfully.
However, as the Bureau highlighted in the Market Concerns--Payments
section above, consumers often have difficulty exercising these rights,
and many of the reasons for this difficulty result from conduct and
other factors that may not violate Regulation E or even be subject to
that regulation. Furthermore, even when entities are in compliance with
Regulation E, consumers may not be aware of their rights under that
regulation, and may not be able to exercise them quickly enough. Given
these limitations, the Bureau believes that individual enforcement
actions under Regulation E would not sufficiently address the
problematic payment practices and resulting consumer harms in markets
for payday and payday installment loans. As discussed below, the Bureau
is now deciding to use its UDAAP authority to address these problems in
a more fundamental and comprehensive manner, instead of on a case-by-
case basis. To the extent there are State laws that could address the
problems identified, the Bureau believes, based on the evidence of
payments-related consumer harms in markets for payday and payday
installment loans, that those laws have not succeeded in preventing the
harms caused by the identified practice, and the Bureau has thus
decided that a more fundamental and comprehensive approach is in order.
The Bureau has authority to bring UDAAP enforcement actions without
issuing a rule. It could do so on a case-by-case basis, focusing only
on those actors that engage in the most egregious payment practices.
And it has already been doing so.\996\ However, the Bureau believes
that addressing only the most egregious payment practices on a case-by-
case basis would not sufficiently address consum er harms that occur
when lenders in markets for payday and payday installment loans make
multiple failed attempts to withdraw payment from consumers' accounts.
Accordingly, the Bureau has decided to address those harms more
holistically with a rule.
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\996\ See, e.g., Consent Order, In the Matter of EZCORP, Inc.,
CFPB No. 2015-CFPB-0031 (Dec. 16, 2015).
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Several industry commenters made the point that the Bureau was
proposing to take action on the basis of a fairly small set of payment
presentments, as compared to the total presentments in the industry
(which are often successful on the first try). The Bureau acknowledges
this point, but finds that it does not undermine the case for this
portion of the rule. The Bureau finds that there is substantial injury
to a significant population of consumers, even though those affected do
not constitute a majority of all consumers. The Bureau finds that this
practice meets the prongs of unfairness and abusiveness, as discussed
below, and believes this finding suffices for a rule that is narrowly
tailored to address the minority of transactions at issue.
The Bureau's primary study on this topic was a report based on
online payday and high cost payday installment lenders only, which
includes covered short-term loans and covered longer-term loans as
defined in this rule. The report and other evidence showed, generally,
what happens to consumers when lenders re-present after two previous
and consecutive failed attempts. The Bureau's decision to apply the
rule specifically to covered loans (short-term loans, high-cost longer-
term loans, and long-term balloon payment loans), but not other lending
markets, was based on the fact that consumers in the markets for
covered loans have similar characteristics--as discussed in the
proposal, Market Concerns--Underwriting, and Market Concerns--
Payments--which make them vulnerable to harms that occur from the
identified unfair and abusive practice. The Bureau also has evidence
suggesting that lenders making covered loans are more likely to engage
in the practice. Based on the higher return rates observed in the
markets for covered loans, the payments report, the Bureau's
enforcement experience, and consumer complaints, the Bureau believes
the practice of continuing to make attempts to withdraw payment
[[Page 54732]]
from a consumer's account after two consecutive attempts have failed is
more likely to occur in the markets for covered loans, and that
consumers of loans in those markets are therefore more likely to incur
the observed harms that result from that practice. The Bureau has not
observed similar evidence in other markets, and thus makes the
reasonable determination to confine the rule to those markets where it
has data, evidence, and experience. Additionally, the fact that
leveraged payment mechanisms are generally a feature of loans covered
by the rule suggests that these lenders are more likely to have the
opportunity to engage in the practice than are lenders in credit
markets that are not so dependent on leveraged payment mechanisms. Of
course, if the Bureau were to receive evidence suggesting that
participants in other markets are engaging in this practice in ways
that similarly harm consumers, it would consider expanding the rule to
those markets, or perhaps taking supervisory or enforcement action as
appropriate.
With respect to the Bureau's determination to apply the final rule
to covered longer-term loans with an APR of more than 36 percent but
not to those with a lower APR, the Bureau has substantial evidence that
the identified practice is occurring in the market for higher-cost
installment loans, specifically as shown in the payments report and
through enforcement actions.\997\ The Bureau does not have similar
evidence as to installment loans of all kinds, including traditional
lower-cost credit, which makes up a much broader and more varied
portion of the credit market, and is therefore limiting application of
the rule so as to not reach all credit markets. If the Bureau were to
obtain evidence that lenders in other installment loan markets are
engaged in the identified practice or similarly harmful payment
practices, it could initiate supervisory or enforcement actions, or
expand the coverage of the rule, depending on the circumstances.\998\
The Bureau chose the 36 percent threshold specifically because of the
long history of States and Federal regulators that have exercised their
judgment to rely on that particular rate as a point of distinction
between high-cost loans and other loans, as described in more detail in
the Background section.
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\997\ CFPB, Online Payday Loan Payments (April 2016), available
at http://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf; Consent Order, EZCORP, CFPB No. 2015-CFPB-0031
(Dec. 16, 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf. Both involved high-cost
installment or longer-term payday loans.
\998\ In the Military Lending Act rule limiting the terms of
consumer credit extended to servicemembers and their dependents, the
Department of Defense noted its unwillingness to define the total
cost of credit so as to exclude ``certain fees, or all non-periodic
fees, [which] could be exploited by a creditor who would be allowed
to preserve a high-cost, open-end credit product by offering a
relatively lower periodic rate coupled with an application fee,
participation fee, or other fee.'' 80 FR 43563. Under the cost of
credit adopted here from Regulation Z to govern the applicability of
subpart C to covered lenders, the Bureau would note that if a lender
sought to structure its loans in such a manner as to shift the cost
of credit from the periodic rate to unusual application fees,
participation fees, or other fees that bore no relation to the
actual cost of credit in order to avoid coverage under this rule,
then supervisory or enforcement authority could be invoked and this
structuring of the loans could be cited as evidence of attempted
evasion of the rule.
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Commenters are correct in asserting that the Bureau did not
identify an unfair or abusive practice that would warrant the notice
requirements in Sec. 1041.15 of the proposed rule (Sec. 1041.9 of the
final rule). But the Bureau did not attempt to do so. Instead, as
discussed in the section-by-section analysis of Sec. 1041.9, below,
the notice requirements were proposed pursuant to the Bureau's
disclosure authority under section 1032 of the Dodd-Frank Act.
Lastly, the Bureau acknowledges that covered lenders may have less
opportunity to subject consumers to the practice identified in Sec.
1041.7 after the underwriting provisions in Sec. Sec. 1041.4 to 1041.6
are implemented. As a covered lender's customer base for covered short-
term loans skews more towards borrowers with an ability to repay their
loans, fewer initial payments will be returned, and thus lenders will
have fewer opportunities to make multiple failed payment attempts. This
will not be the case, however, for covered longer-term loans, which are
not subject to Sec. 1041.5. The Bureau also notes that covered short-
term loans made under Sec. 1041.6 will not be subject to rigorous
underwriting requirements. Additionally, it is implausible that the
underwriting requirements in Sec. Sec. 1041.4 to 1041.6 will eliminate
all failed payment attempts. No provisions in Sec. Sec. 1041.4 to
1041.6 would stop a lender from engaging in the practice the Bureau
identified in Sec. 1041.7 if a borrower did not have enough funds in
his account. In every credit market, even ones with substantial
underwriting, consumers experience some rate of default.
For these reasons, and those set forth below, the Bureau finalizes
the language in Sec. 1041.7, identifying the specified practice of
payment attempts on covered loans as unfair and abusive, in the same
form as it was proposed in the comparable section of the proposed rule,
with two exceptions. The Bureau has added official commentary, at
comment 7-1, which clarifies that a lender who complies with Sec.
1041.8 with regard to a covered loan has not committed the unfair and
abusive practice under Sec. 1041.7. This comment is added to clarify
that Sec. 1041.8 is intended to prevent the practice in Sec. 1041.7.
Thus, if a lender complies with Sec. 1041.8, then it will not be in
violation of Sec. 1041.7.
Second, during inter-agency consultations, the Bureau received
input from a Federal prudential regulator about the singular nature of
the statement of the unfair and abusive act or practice. The regulator
believed that supervisory or enforcement actions of this particular
rule should be based on a pattern or practice of activity, rather than
an isolated and inadvertent instance, which the regulator believed
could deter responsible lenders from making covered loans. In the
interest of inter-agency cooperation, the Bureau is adopting the
suggestion to pluralize the statement of the unfair and abusive
practice. Relatedly, the Bureau does not intend to bring supervisory or
enforcement actions against a lender for a single isolated violation of
Sec. 1041.8.
a. Unfair Practice
Under section 1031(c)(1) of the Dodd-Frank Act, the Bureau has no
authority to declare an act or practice unfair, unless it has a
reasonable basis to conclude that it ``causes or is likely to cause
substantial injury to consumers which is not reasonably avoidable by
consumers,'' and such substantial, not reasonably avoidable injury ``is
not outweighed by countervailing benefits to consumers or to
competition.'' \999\ In the proposal, the Bureau indicated that it
could be an unfair act or practice to attempt to withdraw payment from
a consumer's account in connection with a covered loan after the second
consecutive attempt has failed due to a lack of sufficient funds,
unless the lender obtained the consumer's new and specific
authorization to make further withdrawals from the account. The Bureau
received many comments from stakeholders on all sides of this issue,
which are reviewed and addressed below.
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\999\ 12 U.S.C. 5531(c).
---------------------------------------------------------------------------
In sum, after having reviewed the comments, the Bureau concludes
that the practice preliminarily identified in the proposal is unfair.
It causes substantial injury to consumers because borrowers subjected
to the practice incur repeated fees. Based on the
[[Page 54733]]
Bureau's study of online payday and payday installment lending, about
two percent of borrowers in the market are subject to the practice, and
of those subject to the practice, most previously incurred NSF or
overdraft fees associated with the second failed attempt and more than
80 percent incurred additional NSF or overdraft fees as a result of the
third, fourth, and further attempts, which are now prohibited. The
practice is not reasonably avoidable because it is difficult to stop
payments at the borrower's account-holding institution, and difficult
to revoke payment authorizations. The injury is not outweighed by
countervailing benefits to consumers or competition. Third and
subsequent re-presentments have low expected values because of how
often they fail, and consumers otherwise see very little benefit when
lenders are allowed to re-present after two failed attempts without a
new borrower authorization.
1. Causes or Is Likely To Cause Substantial Injury
Proposed Rule
As noted in part IV, the Bureau's interpretation of the various
prongs of the unfairness test is informed by the FTC Act, the FTC
Policy Statement on Unfairness, and FTC and other Federal agency
rulemakings and related case law.\1000\ Under these authorities,
substantial injury may consist of a small amount of harm to a large
number of individuals or a larger amount of harm to a smaller number of
individuals.
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\1000\ Over the past several decades, the FTC and Federal
banking regulators have promulgated a number of rules addressing
acts or practices involving financial products or services that the
agencies found to be unfair under the FTC Act (the 1994 amendments
to which codified the FTC Policy Statement on Unfairness). For
example, in the Credit Practices Rule that the FTC promulgated in
1984, the FTC determined that certain remedies that creditors
frequently included in credit contracts for use when consumers
defaulted on the loans were unfair, including confessions of
judgments, irrevocable wage assignments, security interests in
household goods, waivers of exemption, pyramiding of late charges,
and cosigner liability. 49 FR 7740 (Mar. 1, 1984) (codified at 16
CFR part 444). The D.C. Circuit upheld the FTC rule as a permissible
exercise of unfairness authority. AFSA, 767 F.2d at 957 (1985). The
Federal Reserve Board adopted a parallel rule applicable to banks in
1985. (The Federal Reserve Board's parallel rule was codified in
Regulation AA, 12 CFR part 227, subpart B. Regulation AA has been
repealed as of March 21, 2016, following the Dodd-Frank Act's
elimination of the Federal Reserve Board's rule-writing authority
under the FTC Act. See 81 FR 8133 (Feb. 18, 2016)). In 2009, in the
HPML Rule, the Federal Reserve Board found that disregarding a
consumer's repayment ability when extending a higher-priced mortgage
loan or HOEPA loan, or failing to verify the consumer's income,
assets, and obligations used to determine repayment ability, is an
unfair practice. See 73 FR 44522 (July 30, 2008). The Federal
Reserve Board relied on a statutory basis for its exercise of
unfairness authority pursuant to TILA section 129(l)(2), 15 U.S.C.
1639(l)(2) (renumbered to 15 U.S.C. 1639(p)(2), which incorporated
the provisions of HOEPA. The Federal Reserve Board interpreted the
HOEPA unfairness standard to be informed by the FTC Act unfairness
standard. See 73 FR 44529 (July 30, 2008). That same year, the
Federal Reserve Board, the OTS, and the NCUA issued the interagency
Subprime Credit Card Practices Rule, where the agencies concluded
that creditors were engaging in certain unfair practices in
connection with consumer credit card accounts. See 74 FR 5498 (Jan.
29, 2009).
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As the Bureau discussed in the proposal, the lender act or practice
of attempting to withdraw payment from a consumer's account in
connection with a covered loan after the lender's second consecutive
attempt has failed due to a lack of sufficient funds, unless the lender
obtains the consumer's new and specific authorization to make further
withdrawals from the account, appears to cause or to be likely to cause
substantial injury to consumers. And each additional attempt by the
lender is likely to trigger substantial additional fees for the
consumer but is unlikely to result in successful collection for the
lender. These additional attempts can cause serious injury to consumers
who are already in substantial financial distress, including the
cumulative fees that the consumers owe to both the lender and their
account-holding institution.
Specifically, the Bureau conducted an analysis of online lenders'
attempts to collect payments through the ACH system on loans with
various payment structures, including payday loans with a single
balloon payment and high-cost installment loans, typically with
payments timed to coincide with the consumer's payday. The Bureau's
analysis indicated that the failure rate after two consecutive
unsuccessful attempts is 73 percent, even when re-presentments appear
to be timed to coincide with the consumer's next payday or the date of
the next scheduled payment, and further worsens on subsequent
attempts.\1001\ Return rates for resubmissions of returned signature
checks, RCCs, and RCPOs through the check system are not as readily
observable. Nonetheless, it is reasonable to assume that lenders'
resubmissions of failed payment withdrawal attempts through the check-
clearing system would yield high failure rates as well.\1002\
Similarly, when a lender that is also the consumer's account-holding
institution has already initiated two consecutive failed internal
transfers to withdraw payment on a loan, despite having more
information about the condition of the consumer's account than other
lenders generally have, there is no reason to assume that the lender's
next attempt to withdraw payment from the severely distressed account
is any more likely to yield better results.\1003\
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\1001\ The analysis indicates that of the 20 percent of payment
requests following a second failed payment request that occur
between 14 and 15 days, 84 percent fail. CFPB Online Payday Loan
Payments, at 16. In addition, the analysis indicates that while re-
presentments at 30 days are rare, more than half of all that occur
at 30 days fail. Id. at 17. In the Bureau's analysis, these data
show that even if the re-presentment is on the consumer's next
payday, which is likely to be the date of the consumer's next
scheduled payment on an installment loan, it is also likely to fail.
Id. at 17 fig. 3.
\1002\ Indeed, as discussed in the proposal, information
reported by storefront lenders suggests that when such lenders make
payment withdrawal attempts using the consumer's check--typically in
cases where the consumer does not come into the store to repay--the
failure rates for such attempts are as high as or higher than those
for presentments through the ACH system.
\1003\ As discussed in the proposal, the Bureau is aware of some
depository institutions that have charged overdraft and NSF fees for
payments made within the institutions' internal systems, including a
depository institution that charged overdraft and NSF fees on
payments related to its small-dollar loan product. The Bureau has
decided to exempt depository institutions from this rule when the
depository institution is also the account-holding institution and
when that depository institution does not charge fees for failed
attempts or allow an internal transfer to cause an overdraft or
account closure. That decision was made not because these
presentments are more likely to succeed, but because in those
instances, no fees are charged (either by the lender or by the
account-holding institution, which are one and the same), and thus
no injury occurs.
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Consumers who are subject to the lender practice of attempting to
withdraw payment from an account after two consecutive attempts have
failed are likely to have incurred two NSF fees from their account-
holding institution \1004\ and, where permitted, two returned-payment
fees from the lender by the time the third attempt is made.
Accordingly, these consumers already may have incurred more than $100
in fees in connection with the first two failed attempts. As a result
of lenders' attempts to withdraw payment from their accounts after the
failure of a second consecutive attempt, most of these consumers will
incur significant additional monetary and other harms. In the vast
majority of cases, the third withdrawal attempt fails and thereby
triggers additional NSF fees charged by the consumer's account-holding
institution and may trigger additional returned-item fees charged by
the lender. Indeed, the Bureau's evidence with respect to online payday
and payday installment loans indicated that 73 percent of consumers who
[[Page 54734]]
experience a third withdrawal attempt after two prior failures incur at
least one additional NSF fee (bringing their total to three and total
cost in NSF fees to over $100), 36 percent end up with at least two
additional fees, and 10 percent end up with at least three additional
fees (meaning in most cases they will have been charged approximately
$175 in fees by their account-holding institution). When returned-item
fees are added, that can double these costs. These lender fees may be
imposed even for returned or declined payment withdrawal attempts for
which the account-holding institution may not charge a fee, such as
attempts made by debit cards and certain prepaid cards. Moreover, in
the relatively small number of cases in which such a withdrawal attempt
does succeed, Bureau research suggests that roughly one-third of the
time, the consumer is likely to have been charged an overdraft fee of
approximately $34.\1005\
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\1004\ Although lenders do not directly charge these particular
fees, their actions cause the fees to be charged by the account-
holding institution. Furthermore, lenders know that consumers
generally will incur fees from their account-holding institutions
for failed payments.
\1005\ Thus, even when the consumer does not incur NSF fees from
her account-holding institution as a result of a lender payment
withdrawal attempt made in connection with a covered loan after two
consecutive attempts have failed, the consumer still has a roughly
one-in-three chance of incurring an overdraft fee as a result of the
subsequent lender attempt. Moreover, at the time lenders choose to
make further attempts to withdraw payment from the account, the
lenders should be on notice that the account is severely distressed
(as evidenced by the prior two consecutive returns) and that
additional attempts thus are likely to cause further injury to the
consumer, be it from NSF fees, lender-charged returned-item fees or,
as the Bureau's analysis indicates, overdraft fees charged by the
consumer's account-holding institution.
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In addition to incurring these types of fees, in the proposal, the
Bureau preliminarily found that consumers who experience two or more
consecutive failed lender payment attempts appear to be at greater risk
of having their accounts closed by their account-holding institution.
Specifically, the Bureau's analysis of ACH payment withdrawal attempts
made by online payday and payday installment lenders indicates that 43
percent of accounts with two consecutive failed lender payment
withdrawal attempts were closed by the depository institution, as
compared with only three percent of accounts generally.\1006\
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\1006\ CFPB Report on Supplemental Findings, at Chapter 6.
---------------------------------------------------------------------------
Comments Received
The primary thrust of the comments that claimed the Bureau had not
satisfied this element was that the Bureau either had insufficient
evidence or had evidence that was inapplicable to certain sub-
categories of products--such as longer-term installment loans, bank
loans, or loans made by Tribal entities or, relatedly, that the
Bureau's evidence was only applicable to online lending.
There were also various other discrete comments. Some commenters
suggested that identification of the third payment attempt as injurious
as opposed to, for example, the fifth attempt, was arbitrary. Others
suggested that even the second payment attempt is injurious and should
be constrained under the terms of the rule. Commenters claimed that the
Bureau had not shown why submitting payments more than two times is a
unique characteristic of covered lenders, and had not shown why it was
not similarly injurious when other industries did so. Several
commenters identified that the third presentment after two consecutive
failed presentments was a small portion of the total number of
presentments initiated by lenders of covered loans, thereby suggesting
that the injury was not substantial.
Some commenters also noted that the Bureau had not provided
evidence showing that covered lenders have knowledge of the fact that
their actions will result in repeated fees at consumers' authorizing
banks. Others claimed that the lenders covered by the proposed rule
were not the cause of the injury, but rather it was the consumers'
banks that caused the injury. A number of commenters objected to the
Bureau's assertion that its evidence suggested that some account
closures were caused by the identified practice. A few commenters
argued that fees were not necessarily injury, and others suggested that
some of the affected consumers were fraudsters or never intended to
repay, and thus should not be considered injured parties.
Final Rule
After having reviewed the comments received, the Bureau concludes
that the practice of attempting to withdraw payment from a consumer's
account in connection with a covered loan after the lender's second
consecutive attempt to withdraw has failed due to a lack of sufficient
funds, unless the lender obtains the consumer's new and specific
authorization for the withdrawal, causes or is likely to cause
substantial injury.
It is true that the Bureau's proposal relied significantly on a
study of re-presentments and ACH withdrawal attempts in the online
payday and payday installment lending market. But the Bureau relied on
other data as well. For example, as stated above, one very large
depository institution presented its own statistical analysis
demonstrating that storefront and online lenders shared a 25% overall
return rate, as compared to the 1.36% return rate industry-wide. And
the Bureau reviewed the financial records of lenders that provide
covered loans other than online loans, and preliminarily found
disclosures of high return rates and/or a practice of engaging in re-
presentments.\1007\
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\1007\ QC Holdings 2014 Annual Report (Form 10-K), at 7
(reporting a return rate of 78.5 percent); Advance America 2011
Annual Report (Form 10-K), at 27 (reporting return rates of 63
percent for checks and 64 percent for ACH attempts); First Cash Fin.
Servs., 2014 Annual Report (Form 10-K), at 5 (Feb. 12, 2015)
(explaining that provider of online and storefront loans
subsequently collects a large percentage of returned ACH and check
payments by redepositing the customers' checks, ACH collections, or
receiving subsequent cash repayments by the customers); CashNet USA,
``Frequently Asked Questions,'' https://www.cashnetusa.com/faq.html
(last visited Dec. 18, 2015) (``If the payment is returned for
reason of insufficient funds, the lender can and will re-present the
ACH Authorization to your bank'').
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But more generally, the Bureau agrees with commenters that injury
would result when any vendor initiates a third withdrawal attempt after
two failed attempts (absent a new and specific authorization). The
Bureau decided to take action as to lenders of the loans covered by
this rule because the Bureau has reason to find, based on evidence and
data available to it, that lenders in these markets are or were engaged
in the identified practice, per the discussion in Market Concerns--
Payments above. Were the Bureau presented with evidence that other
markets are also engaged in the practice, it would consider expanding
this rule.
The Bureau does not agree that the evidence before it suggests that
third and subsequent presentments (which, again, are second re-
presentments) result in a small amount of injury. Of the borrowers who
are subjected to a third presentment, the data showed that 73 percent
incur an NSF fee and an additional 8 percent incur an overdraft fee. As
the Bureau noted in the Market Concerns--Payments section, and as
commenters correctly noted, the Bureau's study showed that around two
percent of all initial presentments were followed by two more attempts.
The average overdraft and NSF fee was around $34, which means 1.6
percent of all initial payment attempts involved an estimated $34 in
injury from a third payment attempt. Given the size of the market, the
injury caused just by third presentments alone is substantial,
amounting to millions of dollars. The Bureau also analyzed the harms of
the practice in a different manner--by looking at the total percentage
of payment requests that this rule would prevent, and the average
overdraft and NSF fees that the rule will prevent from being charged
per impacted borrower.
[[Page 54735]]
Based on the Bureau's study, around seven to ten percent of all
presentments in the studied market consisted of a presentment after at
least two consecutive failed attempts, while the average borrower
subjected to the practice incurred an average of $64 to $87 in
overdraft and NSF fees as a result of the practice.\1008\
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\1008\ CFPB Report on Supplemental Findings, at Chapter 6.
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Notably, these estimates do not take into consideration all the
further risks and harms that occur to some consumers whose accounts are
closed as a result of these situations. When adding to that the fee
amounts charged cumulatively for further re-presentments, which occur
in certain instances, plus the unquantifiable amounts for return fees
charged by lenders themselves, the injury is even more substantial.
Additionally, this injury would be incurred by borrowers who are
more likely to be unable to absorb small to midsized financial burdens.
The impact is likely to be significant given that impacted borrowers
will have already incurred fees after the first two failed payment
attempts. Also, as noted in Market Concerns--Underwriting, consumers of
covered loans are typically in financial distress, which is often the
reason for seeking covered loans in the first place. For a borrower
that is in financial distress, incurring an average of $64-$87 in bank
fees, plus any lender return fees and the risk of account closure,
after having already incurred approximately $70 in bank fees and
additional lender fees due to the first two failed payment attempts,
would be quite substantial. As for the decision to finalize a limit of
two re-presentments, the Bureau recognizes that every re-presentment--
whether the first, second, third, fourth, or any other ordinal--
individually generates fees, and hence causes injury to consumers. In
fact, looking individually at each presentment, the fee injury is
likely identical for each instance (one NSF fee, overdraft fee, and
perhaps return fee). But the Bureau does not view the injury and
benefits of each additional presentment individually. Instead, it takes
into account the cumulative impact of the string of presentments. The
Bureau did not decide on a limit of two re-presentments because the
first re-presentment does not cause injury. It did so because the
injury after each failed attempt is cumulative, meaning the injury
after two re-presentments is approximately double the injury after one,
and the first re-presentment implicates certain additional
countervailing benefits.\1009\ Lenders may have simply tried the first
presentment at the wrong time, and consumers may find it convenient to
not have to reauthorize after one failed attempt.
---------------------------------------------------------------------------
\1009\ Note that the Bureau's study, CFPB Online Payday Loan
Payments, found that the second payment request had a 70 percent
failure rate, while the third had a 73 percent failure rate. CFPB
Online Payday Loan Payments at 13.
---------------------------------------------------------------------------
The Bureau draws the line at two re-presentments in an abundance of
caution, in an attempt to avoid regulating potentially more legitimate
justifications for re-presentment. But this discussion should not be
interpreted to minimize the harms that can occur even from a single re-
presentment. Indeed, depending on the facts and circumstances, even
payment practices involving a single re-presentment may be unfair,
deceptive, or abusive. The Bureau also notes that this rule does not
provide a safe harbor against misconduct that is not explicitly
addressed by the rule, and the Bureau can and will continue to monitor
these practices under its supervisory and enforcement authorities, and
will take appropriate action as warranted by the circumstances.\1010\
---------------------------------------------------------------------------
\1010\ This discussion reflects the fact that rules identifying
and preventing certain unfair or abusive practices as determined on
a categorical basis--as is true, for example, of this rule--do not
divest the Bureau of authority to address other unfair, deceptive,
or abusive acts or practices that are identified in the particular
facts or circumstances of a specific examination or enforcement
investigation. For example, the Bureau has taken enforcement action
in cases that involved payment practices which do not specifically
track the unfair and abusive practice that is identified in Sec.
1041.7. See, e.g., Consent Order, In the Matter of EZCORP, Inc., No.
2015-CFPB-0031 (Dec. 16, 2015).
---------------------------------------------------------------------------
The Bureau disagrees with commenters' assertions that the
identified practice does not cause the injury, either because
consumers' banks were the primary cause or because the Bureau did not
prove that the lender knew fees would result. One commenter argued more
specifically that lenders are not responsible for overdraft fees
because borrowers opt in to overdraft fees with their banks. Another
argued that fees are not necessarily an injury. As an initial matter,
actual knowledge of the harm is not a requirement for an unfairness
finding.\1011\ Even if it were, the Bureau assumes that market
participants understand the natural consequences of their actions.
Additionally, the fact that consumers' banks are the actors that
actually charge the fees does not suggest that the identified practice
does not cause the substantial injury. The ``contribution of
independent causal agents'' does not erase the role lenders play in
causing the harm.\1012\ The Bureau's proposal provided ample evidence
that lenders are aware of high rejection rates, and any industry
participant should know that a natural consequence of rejected
transfers is that the consumer will incur fees. The Bureau study
analyzed overdraft fees charged in connection with ACH transactions.
Fees on such transactions are not subject to an opt-in requirement like
overdraft fees on debit card transactions, meaning that while it is
true borrowers may have opted into overdraft fees for some instances,
that is not true for many instances in which overdraft fees are
incurred. Further, it is a settled matter that fees which borrowers
cannot reasonably avoid should be considered injury.\1013\
---------------------------------------------------------------------------
\1011\ FTC v. Neovi, 604 F.3d 1150, 1156 (9th Cir. 2010).
\1012\ Neovi, 604 F.3d at 1155 (9th Cir. 2010).
\1013\ FTC Statement on Unfairness, Appended to International
Harvester Co., 104 F.T.C. 949, 1070 (1984) (``In most cases a
substantial injury involves monetary harm.'').
---------------------------------------------------------------------------
It may be true that some of the affected consumers may be
fraudsters, or never intended to repay their loans. To the extent a
person had used another individual's account number, any re-
presentments would further victimize a victim of identity theft. But
the Bureau agrees that there may be a small population of borrowers who
took out a loan with no intention of trying to repay either the loan or
any associated bank fees. This small population of borrowers does not
change the Bureau's overall assessment of whether there was substantial
injury, or whether that injury was outweighed by countervailing
benefits.
Lastly, several commenters stated that the Bureau's evidence on
high account-closure rates did not prove that the identified practice
caused all of the closures. The Bureau acknowledged in the proposal
that some accounts could be closed for other reasons. To the extent
depository institutions do involuntarily close accounts as a result of
repeated failed presentments, that result is injury. And one commenter
provided a study in which 22 percent of the surveyed payday consumers
did self-report that their account was closed because of payday
loans.\1014\ The Bureau does not know the full extent of how often
borrowers' accounts are closed due to multiple presentments, but it can
point to evidence showing that payday borrowers' accounts are closed
involuntarily much more often
[[Page 54736]]
than other consumers. It is reasonable to assume that some portion of
the closures result from the practice and some are a result of other
circumstances. Either way, the Bureau neither thinks this injury is
necessary to make the total injury ``substantial,'' nor that it tips
the balance regarding whether the injury is outweighed by
countervailing benefits.
---------------------------------------------------------------------------
\1014\ Pew Charitable Trusts, ``Payday Lending in America Fraud
and Abuse Online: Harmful Practices in Internet Payday Lending, at
16 (Report 4, 2014), available at http://www.pewtrusts.org/~/media/
Assets/2014/10/Payday-Lending-Report/
Fraud_and_Abuse_Online_Harmful_Practices_in_Internet_Payday_Lending.p
df.
---------------------------------------------------------------------------
2. Injury Not Reasonably Avoidable
Proposed Rule
As previously noted in part IV, under the FTC Act and Federal
precedents that inform the Bureau's interpretation and application of
the unfairness test, an injury is not reasonably avoidable where ``some
form of seller behavior . . . unreasonably creates or takes advantage
of an obstacle to the free exercise of consumer decision-making,'' or
unless consumers have reason to anticipate the injury and the means to
avoid it. In the proposal, the Bureau observed that in a significant
proportion of cases, unless the lender obtains the consumer's new and
specific authorization to make further payment withdrawals from the
account, consumers may be unable to reasonably avoid the injuries that
result from the lender practice of attempting to withdraw payment from
a consumer's account in connection with a covered loan after two
consecutive payment withdrawal attempts by the lender have failed.
The Bureau noted that consumers could avoid the above-described
substantial injury by depositing into their accounts enough money to
cover the lender's third payment withdrawal attempt and every attempt
that the lender may make after that, but that for many consumers this
is not a reasonable or even an available way of avoiding the
substantial injury discussed above. Even if a consumer had sufficient
funds to do so and knew the amount and timing of the lender's next
attempt to withdraw payment, which are unlikely to be the case, any
funds deposited into the consumer's account likely would be claimed
first by the consumer's bank to repay the NSF fees charged for the
prior two failed attempts. Thus, even a consumer who had some available
cash could have difficulties in avoiding the injury resulting from the
lender's third attempt to withdraw payment, as well as in avoiding the
injury resulting from any attempts that the lender may make after the
third one.\1015\
---------------------------------------------------------------------------
\1015\ In proposed Sec. 1041.15, the Bureau proposed to require
lenders to provide a notice to consumers in advance of each payment
withdrawal attempt. The Bureau believed that the notices would help
consumers make choices that may reduce potential harms from a
payment withdrawal attempt--by reminding them, for example, to
deposit money into their accounts prior to the attempt and thus
avoid a late payment fee. The Bureau's treatment of these issues is
discussed further below in the section-by-section analysis of Sec.
1041.9 of the final rule.
---------------------------------------------------------------------------
Moreover, as a practical matter, in the vast majority of cases in
which two consecutive attempts to withdraw payment have failed, the
consumer is in severe financial distress and thus does not have the
money to cover the next payment withdrawal attempt.\1016\ Although the
Bureau's consumer testing indicates that consumers generally have a
strong commitment to repaying their legal obligations,\1017\ a consumer
who has already experienced two consecutive failed payment attempts and
incurred well over $100 in related fees may at that point consider, as
the only other options to avoid further fee-related injury, either
closing the account or attempting to stop payment or revoking
authorization. Given that consumers use their accounts to conduct most
of their household financial transactions, the Bureau did not believe
that voluntarily closing down the account was a reasonable means for
consumers to avoid injury.
---------------------------------------------------------------------------
\1016\ The Bureau noted that even when consumers have agreed to
make a series of payments on an installment loan, the substantial
injuries discussed above are not reasonably avoidable, based on its
analysis of ACH payment withdrawal attempts made by online payday
and payday installment lenders, which indicates that after two
failed presentments, even payment withdrawal attempts timed to the
consumer's next payday, which is likely to be the date of the next
scheduled payment on an installment loan, are likely to fail.
\1017\ FMG Report, ``Qualitative Testing of Small Dollar
Disclosures, Prepared for the Consumer Financial Protection
Bureau,'' at 53 (Apr. 2016) available at http://files.consumerfinance.gov/documents/Disclosure_Testing_Report.pdf.
---------------------------------------------------------------------------
Further, as discussed in the proposal, the option of attempting to
stop payment or revoke authorization is not a reasonable means of
avoiding the injuries either, for several reasons. First, as listed in
the Market Concerns--Payments section above, consumers often face
considerable challenges in issuing stop-payment orders or revoking
authorization as a means to prevent lenders from continuing to attempt
to make payment withdrawals from their accounts. Complexities in
payment processing systems and the internal procedures of consumers'
account-holding institutions, combined with lender practices, often
make it difficult for consumers to stop payment or revoke authorization
effectively. With respect to preauthorized EFTs authorized by the
consumer, for example, even if the consumer successfully stops payment
on one transfer, the consumer may experience difficulties in blocking
all future transfers by the lender. In addition, payment withdrawal
attempts made via RCC or RCPO can be especially challenging for the
consumer's account-holding institution to identify and be able to stop
payment on them.
Various lender practices exacerbate these challenges. Lenders often
obtain several different types of authorizations from consumers--e.g.,
authorizations to withdraw payment via both ACH transfers and RCCs--
such that if the consumer successfully revokes one type of
authorization, the lender has the ability to continue making payment
collection attempts using another type of authorization. The procedures
of consumers' account-holding institutions for stopping payment often
vary depending on the type of authorization involved. Thus, when a
lender has obtained two different types of authorizations from the
consumer, the considerable challenges associated with stopping payment
or revocation in connection with just one type of authorization are
effectively doubled. Many consumers also may not understand that they
must navigate two different sets of stop-payment or revocation
procedures to prevent the lender from making additional withdrawal
attempts.
In addition, the costs to the consumer for issuing a stop-payment
order or revoking authorization are often as high as some of the fees
that the consumer is trying to avoid, as depository institutions charge
consumers a fee of approximately $32, on average, for placing a stop-
payment order. The consumer incurs this fee regardless of whether the
consumer is seeking to stop payment on a check, a single EFT, or all
future EFTs authorized by the consumer. Moreover, issuing a stop-
payment order at a cost of $32 does not guarantee success. Some
depository institutions require the consumer to provide the exact
payment amount or the lender's merchant ID code, and thus fail to block
payments when the payment amount varies or the lender varies the
merchant code. In addition, some depository institutions require
consumers to renew stop-payment orders after a certain period of time.
In such cases, consumers may incur more than one stop-payment fee in
order to continue blocking future payment withdrawal attempts by the
lender.
As a result of these stop-payment fees, the cost to the consumer of
stopping payment with the consumer's account-holding institution is
comparable to the NSF or overdraft fee that the institution would
charge the consumer if the payment withdrawal attempt that the consumer
is seeking to stop were made. Thus, even if the consumer successfully
[[Page 54737]]
stops payment, they would not avoid this particular fee-related injury,
but rather would be exchanging the cost of one comparable fee for
another. In addition, some consumers may be charged a stop-payment fee
by their account-holding institution even when, despite the stop-
payment order, the lender's payment withdrawal attempt goes through. In
such cases, the consumer may be charged both a fee for the stop-payment
order and an NSF or overdraft fee triggered by the lender's payment
withdrawal attempt.
In addition to the challenges consumers face when trying to stop
payment or revoke authorization with their account-holding
institutions, consumers often face lender-created barriers that prevent
them from pursuing this option as an effective means of avoiding
injury. Lenders may discourage consumers from pursuing this course of
action by including language in loan agreements purportedly prohibiting
the consumer from stopping payment or revoking authorization. In some
cases, lenders may charge consumers a substantial fee in the event that
they successfully stop payment with their account-holding institution.
Lenders' procedures for revoking authorizations directly with the
lender create additional barriers. As discussed in the proposal,
lenders often require consumers to provide written revocation by mail
several days in advance of the next scheduled payment withdrawal
attempt. A consumer who took out the loan online, but now wishes to
revoke authorization, may have difficulty even identifying the lender
that holds the authorization, especially if the consumer was paired
with the lender through a third-party lead generator. These lender-
created barriers make it difficult for consumers to stop payment or
revoke authorization.
Comments Received
Several industry commenters stated that the substantial injury
identified by the Bureau could be reasonably avoided by consumers
because consumers could choose not to borrow, and do not need to agree
to a leveraged payment mechanism. Others claimed that borrowers have
the ability to revoke authorizations and stop payments, and that these
options make the injury reasonably avoidable. Some also claimed that
the Bureau overestimated or had no evidence of the difficulty in
obtaining a stop-payment order or revoking the authorization.
A number of industry commenters argued that borrowers should simply
place sufficient funds in their account or pay the lender before the
scheduled transfer date, and should generally be aware that fees would
result from failed payment withdrawals. Still other commenters claimed
that borrowers could avoid the injury by re-borrowing.
Final Rule
After reviewing the comments received, the Bureau concludes that
the substantial injury identified above is not reasonably avoidable by
consumers.
As an initial matter, the Bureau disagrees with comments that
claimed that the Bureau did not have any convincing evidence of the
difficulty of obtaining a stop-payment order or revoking an
authorization. The proposed rule and the Market Concerns--Payments
sections refer to significant evidence on this point.\1018\ As
described above, many lenders have obfuscated or interfered with
consumers' ability to revoke authorization, and stop-payment orders can
involve their own fees and are not always comprehensive. In particular,
they are quite difficult to process for RCCs and RCPOs.
---------------------------------------------------------------------------
\1018\ See specific Market Concerns--Payments sub-section
entitled ``Consumers Have Difficulty Stopping Lenders' Ability to
Access Their Accounts'' for that evidence.
---------------------------------------------------------------------------
One lender noted that it cancels hundreds of payment authorizations
each year, and argued that lenders cannot be held responsible if third-
party financial institutions mishandle stop-payments or charge
excessive fees. Again, lenders are causing harm that is not reasonably
avoidable. That harm manifests itself, and is difficult to avoid, in
part because of the actions of third-party financial institutions.
Although it is fair to say that lenders do not necessarily bear all the
responsibility for any problems that ensue, this does not change the
fact that consumers are not able to withdraw their prior authorizations
or stop payments in a reasonably effective manner. That one lender may
process hundreds of canceled payment authorizations each year neither
suggests that all of its borrowers who seek to cancel payment
authorization are successful, nor suggests that many other lenders do
the same thing.
The Bureau does not agree that simply repaying is a viable way to
avoid the harm. Many borrowers will not have the funds (again, only
approximately 20 percent of third presentments succeed without an
overdraft fee). But, additionally, as laid out in the Market Concerns--
Payments section, subsequent presentments can occur very quickly, often
on the same day, making it difficult to ensure funds are in the right
account before the re-presentment hits.\1019\
---------------------------------------------------------------------------
\1019\ In one demonstrative enforcement case, the Bureau found a
payday and installment lender that regularly made three debit
attempts on the same day. Consent Order, In the Matter of EZCORP,
Inc., No. 2015-CFPB-0031 (Dec. 16, 2015).
---------------------------------------------------------------------------
As in the section-by-section analysis for Sec. 1041.4, the Bureau
finds that simply replacing the injury with re-borrowing is not a
satisfactory mechanism for reasonably avoiding the harm because it
simply substitutes one injury for another. The Bureau has discussed, at
length, the harms incurred by repeated re-borrowing in the section-by-
section analysis of part B.
Moreover, under the traditional unfairness analysis established by
prior precedents, the suggestion that a consumer can simply decide not
to participate in the market is not considered to be a valid means of
reasonably avoiding the injury.\1020\ The Bureau addressed a similar
line of comments in subpart B, and noted that if this view were
adopted, no market practice could ever be determined to be unfair. That
response is applicable here as well.
---------------------------------------------------------------------------
\1020\ See, e.g., 49 FR 7740 (Mar. 1, 1984).
---------------------------------------------------------------------------
As stated in the proposal and above, lenders often take broad,
ambiguous payment authorizations from consumers and vary how they use
these authorizations, thereby increasing the risk that consumers will
be surprised by the amount, timing, or channel of a particular payment.
Borrowers do not have the ability to shop, at the time of origination,
for covered loans without leveraged payment mechanisms, as that is a
central feature of these loans. As some commenters noted, leveraged
payment mechanisms are sometimes even required by State law.
3. Injury Not Outweighed by Countervailing Benefits to Consumers or
Competition
Proposed Rule
As noted in part IV, the Bureau's interpretation of the various
prongs of the unfairness test is informed by the FTC Act, the FTC
Policy Statement on Unfairness, and FTC and other Federal agency
rulemakings and related case law. Under those authorities, the
countervailing benefits prong of the unfairness standard makes it
appropriate to consider both the costs of imposing a remedy and any
benefits that consumers enjoy as a result of the practice; yet this
determination does not require a precise quantitative analysis of
benefits and costs.
The Bureau preliminarily found that the lender practice of making
additional
[[Page 54738]]
payment withdrawal attempts from a consumer's account in connection
with a covered loan after two consecutive attempts have failed does not
generate benefits to consumers or competition that outweigh the
injuries caused by the practice. As discussed above, a substantial
majority of additional attempts are likely to fail. Indeed, the
Bureau's analysis in the proposal of ACH payment withdrawal attempts
made by online payday and payday installment lenders preliminarily
found that the failure rate on the third attempt is 73 percent, and it
increases to 83 percent on the fourth attempt, and to 85 percent on the
fifth attempt. Furthermore, of those attempts that succeed, 33 percent
or more succeed only by overdrawing the consumer's account and
generally incurring fees for the consumer.
When a third or subsequent attempt to withdraw payment does
succeed, the consumer making the payment may experience some benefit in
the form of avoiding further collection activity and consumer
reporting, to the extent the lender is reporting the delinquency.
According to the Bureau's study, it appears that third presentments
succeed approximately 20 percent of the time without an overdraft fee,
while an additional eight percent succeed with an overdraft fee. In any
event, the Bureau preliminarily found that to the extent some consumers
are able, after two consecutive failed attempts, to muster sufficient
funds to make the next required payment or payments, these consumers
would be able to arrange to make their payment or payments even if
lenders were first required to get a new and specific authorization
from the consumer before making additional payment attempts.
Turning to the potential benefits of the practice to competition,
the Bureau recognizes that to the extent payment withdrawal attempts
succeed when made after two consecutive failed attempts, lenders may
collect larger payments or may collect payments at a lower cost by
seeking payment from the consumer's account rather than being required
to seek payment directly from the consumer. Given their high failure
rates, however, these additional attempts generate relatively small
amounts of revenue for lenders. For example, the Bureau's analysis of
ACH payment withdrawal attempts made by online payday and payday
installment lenders indicates that whereas the expected value of a
first payment request is $152, the expected value of a third successive
payment attempt is only $46, and that the expected value drops to $32
for the fourth attempt and to $21 for the fifth attempt.\1021\
---------------------------------------------------------------------------
\1021\ Expected values are calculated by multiplying the average
successful payment amount by the success rate.
---------------------------------------------------------------------------
Furthermore, the Bureau indicated that lenders could obtain much of
this revenue without making multiple attempts to withdraw payment from
demonstrably distressed accounts. For instance, lenders could seek
payments in cash or ``push'' payments from the consumer or, in the
alternative, could seek a new and specific authorization from the
consumer to make further payment withdrawal attempts. Indeed,
coordinating with the consumer to seek a new authorization may be more
likely to result in successful payment withdrawal attempts than does
the practice of repeatedly attempting to withdraw or transfer funds
from an account in distress. Finally, in view of the pricing structures
observed in the markets for loans that would be covered under the
proposed rule, the Bureau preliminarily found that any incremental
revenue benefit to lenders from subsequent attempts, including revenue
from the fees charged for failed attempts, does not translate into more
competitive pricing. In other words, the Bureau preliminarily found
that prohibiting such attempts would not adversely affect pricing. In
sum, the Bureau preliminarily determined in the proposal that consumers
incur substantial injuries as a result of the identified practice that
are not outweighed by the minimal benefits that this practice generates
for consumers or competition.
Comments Received
Several industry commenters stated that the cost of credit would
increase as a result of the remedy proposed by the Bureau, which the
commenters interpreted to include the burden of sending payment
reminders and of tracking unsuccessful debit attempts and new payment
authorizations. Many commenters argued more generally that covered
loans help borrowers, improve financial health, or are otherwise
beneficial. Some commenters argued that recurring payment
authorizations are a benefit to consumers because they are more
convenient and enable consumers to designate their due date around the
timing of when they will have available funds. Some commenters argued
that consumers would feel frustrated and inconvenienced whenever a
lender is required to request a new and specific authorization. Still
others argued that barring withdrawals after the second attempt would
limit payment options that are available to consumers. Finally, some
argued that limiting payment attempts would harm consumers by causing
them to default or slip further into delinquency.
Final Rule
After reviewing the comments received, the Bureau concludes that
the substantial injury identified above is not outweighed by
countervailing benefits to consumers or competition. A number of
industry commenters presented arguments that would be inappropriate to
consider in the weighing of countervailing benefits against consumer
injury. First, several commenters argued that the costs of complying
with the notices and disclosures that would be provided in proposed
Sec. 1041.15 constitute compliance costs that should be considered as
the Bureau weighs countervailing benefits. Because that remedy is a
result of exercising the Bureau's authority under section 1032 of the
Dodd-Frank Act, and does not result from this finding of unfairness,
the Bureau does not consider that remedy as part of its countervailing
benefits analysis. Instead, it considers only the cost of those
remedies that are being required to remediate the injury from the
identified practice. It also did not identify the notices contained in
proposed Sec. 1041.15 as a remedy for the identified practice.
Second, commenters' claims that covered loans are generally
beneficial, and that this should be accounted for in the weighing of
benefits, cast too wide a net. The Bureau is not identifying the unfair
practice as making covered loans, or even making covered loans with
leveraged payment mechanisms. The Bureau is taking a much narrower
approach here, by identifying the unfair practice as being limited to
making a third payment request after two failed attempts, without first
obtaining a new and specific payment authorization. The general
benefits these commenters posit from the making of covered loans are
not a result of that practice, and the Bureau has no reason to believe
lenders will not make covered loans because they are unable to re-
present after two attempts without obtaining a new authorization.
Third, because the Bureau is not prohibiting leveraged payment
mechanisms, it does not consider the convenience of recurring payment
authorizations, or scheduled payments, to be a benefit for purposes of
this analysis. Lenders can still provide the benefits to consumers of
convenience and scheduling after this rule is finalized. In other
words, those benefits
[[Page 54739]]
are not a result of the identified practice, which is the initiation of
additional payment requests after two failed attempts, absent a new and
specific authorization.
Commenters have correctly identified the cost of tracking
unsuccessful debits and of either securing new payment authorizations
or obtaining payment through other means if two consecutive
presentments fail as a cost of compliance applicable to this analysis.
The effect that this cost will have on pricing is mitigated by other
market forces including the fact that, as noted in the proposal, many
loans in this market are priced at the maximum possible price permitted
under State law. Nonetheless, these are costs the market must bear and
some of those costs may be passed to consumers. Our analysis suggests
that those costs likely will not be overly substantial because lenders
already have processes in place to track payment attempts, and thus
will only need to augment them slightly to accommodate the particular
details for this rule (see Section 1022(b)(2) Analysis in part VII for
more on this point). These costs are not sufficient to change the
Bureau's overall conclusion that the substantial injury to consumers
outweighs the countervailing benefits.
The Bureau does not agree that the consumer frustration caused by
requests for new and specific payment authorizations would be
significant. These requests would provide consumers with a choice about
whether the lender can debit the consumer's bank account. Especially
after two failed attempts, and the likely resulting fees, the Bureau
judges that it is very likely that consumers will benefit from the
opportunity to decide whether another attempt should occur. The
Bureau's conclusion on this point is consistent with its statutory
objective to ensure that ``consumers are provided with timely and
understandable information to make responsible decisions about
financial transactions.'' \1022\
---------------------------------------------------------------------------
\1022\ 12 U.S.C. 5511(b)(1).
---------------------------------------------------------------------------
Commenters argued that some borrowers could default or slip further
into delinquency if the payment would have succeeded, but had not gone
through because of the limitations created by the rule. As the Bureau
stated in the proposal, however, borrowers will retain the ability to
choose to pay their loans as they wish, including by reauthorizing
automatic debits. Although there may be some borrowers for whom a third
or subsequent presentment would succeed but who would not manage to
repay the loan absent such presentments, the Bureau believes that this
population is too small to affect the countervailing benefits analysis.
Lastly, the Bureau addressed the fact that the rule will limit
consumers' payment options in the proposal. The rule covers all payment
methods, and thus affects them evenly. To the extent that it limits
payment options after two attempts, it limits them to any optional
payment method at the specific initiation of the borrower. As consumers
will have the choice of whether to re-authorize a payment authorization
after two consecutive failed attempts--and they can always use any
specifically initiated method for payment--the Bureau determines that
the costs associated with limiting payment options (and thus the
countervailing benefits of no limits) are quite minimal.
4. Consideration of Public Policy
Proposed Rule
Section 1031(c)(2) of the Dodd-Frank Act allows the Bureau to
``consider established public policies as evidence to be considered
with all other evidence'' in determining whether a practice is unfair,
as long as the public policy considerations are not the primary basis
of the determination. This is an optional basis for justifying the
rule, and in the proposal the Bureau did not make a preliminary
determination to cite public policy as evidence to be considered in
deciding that the identified payment practices are unfair. Yet some of
the comments received invite further scrutiny of whether public policy
should be viewed as a basis for either supporting or undermining the
proposed rule. For that reason, the issue will be considered further
here.
Comments Received
Some industry and other commenters suggested that the Bureau's
purported role here is superfluous, since State law governs consumer
credit. They argued that some States already cap presentments. They
also suggested that the proposed rule may obstruct State efforts to
craft regulatory approaches that appropriately protect consumers,
because the Bureau's proposed intervention would interfere with policy
experimentation by the States, and would shift the balance between
consumer protection and access to credit in ways not intended by
different State regulatory regimes. Rather than develop new provisions
in a Federal rule to address these issues, these commenters argued that
the Bureau instead should support changes in State law to address
concerns about the misuse of payment instruments; or that it should
increase its enforcement of existing Federal laws like the EFTA,
Regulation E, and the Bureau's authority to enforce against unfair,
deceptive, or abusive acts or practices.
Final Rule
The Bureau does not find that the public policy considerations
raised by some of the commenters militate against the adoption of this
final rule. Federal law has governed consumer credit, and specifically
electronic payments, for 50 years, dating as far back as the Truth in
Lending Act (TILA). The EFTA is the most applicable example, and a
Federal rule in this area would be consistent with that history.
Ultimately, the issue here is simply whether the Bureau has the legal
authority to adopt rules to address the identified practice of making
repeated withdrawal attempts after two consecutive failures by first
determining that the identified practice is unfair and abusive. Under
the Dodd-Frank Act, the Bureau is authorized to do so. That authority
is not affected by other provisions of Federal and State law, most
notably because those provisions preceded this authorization by
Congress. Thus, the more recent statute opened the door to policy
changes that would affect the application of those pre-existing legal
requirements. Moreover, Congress placed it within the Bureau's
discretion whether to address unfair, deceptive, or abusive acts or
practices through enforcement, supervision, regulation, or some
combination of these authorities.\1023\ By expressly permitting the
Bureau to adopt UDAAP rules, as it is doing here, Congress authorized
this very endeavor as fully consistent with current notions of sound
public policy and the established framework of Federal and State law.
---------------------------------------------------------------------------
\1023\ See 12 U.S.C. 5531(c).
---------------------------------------------------------------------------
b. Abusive Practice
Under section 1031(d)(2)(A) and (B) of the Dodd-Frank Act, the
Bureau may declare an act or practice abusive if it takes unreasonable
advantage of ``a lack of understanding on the part of the consumer of
the material risks, costs, or conditions of the product or service,''
or of ``the inability of the consumer to protect the interests of the
consumer in selecting or using a consumer financial product or
service.'' \1024\ In the proposal, the Bureau preliminarily found that,
with respect to covered loans, it is an abusive act or practice for a
lender to attempt to withdraw payment from a consumer's account in
connection with a covered loan after two consecutive
[[Page 54740]]
failed attempts, unless the lender obtains the consumer's new and
specific authorization to make further withdrawals from the account.
---------------------------------------------------------------------------
\1024\ 12 U.S.C. 5531(d).
---------------------------------------------------------------------------
After reviewing the comments received, as described and responded
to below, the Bureau now concludes that the practice identified in the
proposal is abusive. Borrowers do not understand the material risks,
costs, or conditions that are posed by lenders engaging in repeated re-
presentments. Similarly, borrowers are unable to protect their
interests in using the product by revoking authorizations or enacting
stop payments. Lenders take advantage of these conditions by re-
presenting, and those re-presentments are unreasonable.
Before delving into the statutory prongs of abusiveness on which
the Bureau relies for these conclusions, two broader comments can be
addressed here. First, some commenters argued that the Bureau only has
the authority to identify a practice as abusive if it ``materially
interferes with the ability of a consumer to understand a term or
condition of a consumer financial product or service.'' This
suggestion, that section 1031(d)(1) must be satisfied in order to make
a finding of abusiveness, is a misreading of the statute. Section
1031(d) articulates four disjunctive categories of abusive practices--
this one set forth in section 1031(d)(1), and three others that are set
forth in section 1031(d)(2). Congress defined a practice to be
``abusive'' if it satisfies any of these four independent criteria.
Congress clearly indicated as much with its use of the conjunction
``or'' throughout the text of section 1031(d).
Other commenters argued that Congress only intended abusiveness to
cover conduct beyond what is prohibited as unfair or deceptive. The
Bureau agrees that the abusiveness standard can reach practices that
are not covered by the unfairness or deception standards if the prongs
of abusiveness are met, but it does not agree that it can only reach
practices that are not covered by the unfairness or deception
standards. The Bureau is guided and limited by the definitional prongs
of unfairness and abusiveness that are expressly articulated in the
statute. A practice might meet these standards either alone or in
combination (and, of course, lawful practices will meet none of the
standards). There is little practical effect of any such overlap, as a
practice is just as illegal if it violates one, two, or three of the
standards. But as a matter of statutory interpretation, the Bureau has
no textual basis to conclude that a practice meeting the statutory
prongs of abusiveness cannot be considered abusive because it also
meets the prongs of one of the other two standards.
1. Consumers Lack Understanding of Material Risks and Costs
Proposed Rule
In the proposal, the Bureau stated that when consumers grant
lenders an authorization to withdraw payment from their account, they
understand as a general matter that they may incur an NSF fee from
their account-holding institution as well as a returned-item fee
charged by the lender. However, the Bureau preliminarily found that
such a generalized understanding does not suffice to establish that
consumers understand the material costs and risks of a product or
service. Rather, the Bureau determined that it is reasonable to
interpret ``lack of understanding'' in this context to mean more than
mere awareness that it is within the realm of possibility that a
particular negative consequence may follow or a particular cost may be
incurred as a result of using the product. For example, consumers may
not understand that such a risk is very likely to happen or that--
though relatively rare--the impact of a particular risk would be
severe. In this instance, precisely because the practice of taking
advance authorizations to withdraw payment is so widespread across
markets for other credit products and non-credit products and services,
the Bureau preliminarily concluded that consumers lack understanding of
the risk they are exposing themselves to by granting authorizations to
lenders that make covered loans. Rather, consumers are likely to expect
these payment withdrawals to operate in a convenient and predictable
manner, similar to the way such authorizations operate when they are
granted to other types of lenders and in a wide variety of other
markets. Consumers' general understanding that granting authorization
can sometimes lead to fees does not prepare them for the substantial
likelihood that, in the event their account becomes severely
distressed, the lender will continue making payment withdrawal attempts
even after the lender should be on notice (from two consecutive failed
attempts) of the account's distressed condition. Nor does it prepare
them for the result that thereby they will be exposed to substantially
higher overall loan costs in the form of cumulative NSF or overdraft
fees from their account-holding institution and returned-item fees from
their lender, as well as the increased risk of account closure.
Moreover, this general understanding does not prepare consumers for the
array of significant challenges they will encounter if, upon
discovering that their lender is still attempting to withdraw payment
after their account has become severely distressed, they take steps to
try to stop the lender from using their authorizations to make any
additional attempts.
Comments Received
Industry commenters argued that the Bureau's findings on
abusiveness rested on the unsubstantiated assumption that consumers did
not understand the risks of covered loans, or the effects of leveraged
payment mechanisms. These commenters questioned the Bureau's purported
reliance on ``optimism bias.'' Others commented that consumers
generally did understand the risks and benefits of covered loans before
taking them out. They advanced that awareness of due dates and the fact
that payment requests will be initiated, often provided by lenders in
conjunction with TILA disclosures, suggest that borrowers understand
the material costs and risks of covered loans. Some commenters provided
data on borrower expectations about default and re-borrowing, but not
about practices around how a lender would use a leveraged payment
mechanism to initiate multiple payment requests. Consumer group
commenters suggested that the industry acknowledges that covered
borrowers do not understand the risks, costs, and conditions of these
loans. To support this assertion, one commenter cited a 2016 law review
article written by Jim Hawkins, stating that consumers ``are overly
optimistic.''
One industry commenter stated that ``understanding'' did not mean
anything more than a general sense that a negative consequence would
follow. It asserted that consumers did not need to understand both the
probability and depth of potential adverse consequences, and cited as
support a dictionary definition of ``understanding,'' which is ``to
know how (something) works or happens.'' It further argued that the
level of understanding the Bureau required under the proposed rule was
equivalent to expecting a borrower to become an expert on the lending
industry.
Other commenters said that the Director of the Bureau had once
publicly stated that whether a borrower has a lack of understanding is
``unavoidably situational'' and that abusiveness claims ``can differ
from circumstance to circumstance.'' These commenters claimed that the
statements confirmed that the Bureau could not address abusiveness in
the market with
[[Page 54741]]
a general rule, and must exercise its abusiveness authority on a case-
by-case basis instead.
Final Rule
The Bureau now concludes that consumers lack understanding of
material risks, costs, or conditions of the product or service,
specifically the practice of repeated re-presentments.
Evidence suggests that lenders in many non-covered markets take
advanced authorizations to initiate electronic payments, yet do not
appear to engage in the practice with any particular frequency. This
means borrowers do not have experience with the practice, and thus,
likely do not understand the specific risks at issue. The contrast in
these markets again was shown by the analysis performed by a major
financial institution of its consumer depository account data, which
estimates ACH return rates for payday lenders, including both
storefront and online companies, at 25 percent, with individual lender
return rates ranging from five percent to almost 50 percent,\1025\
whereas the average return rate for debit transactions in the ACH
network across all industries was just 1.36 percent (with the next
highest return rate of any other industry being cable television at 2.9
percent, auto and mortgage at 0.8 percent, utilities at 0.4 percent,
and credit cards at 0.4 percent).\1026\ It is reasonable to assume that
many of that 25 percent consisted of rejected re-presentments, given
that the Bureau's own data showed a failure rate for first presentments
of only six percent for transactions initiated by online payday and
payday installment lenders.\1027\ Six percent is very close to the
rejection rates of payday lenders with rejection rates at the low end
in the financial institution's analysis (five percent), suggesting that
lenders at the low end may not have been re-presenting. Lenders at the
high end, with 50 percent total rejection rates, were likely re-
presenting, bringing up the average. The failure rates for re-
presentments in the Bureau's study (70 to 85 percent) were much higher
than those for initial presentments.\1028\ The comparatively much lower
return rates in other markets do not similarly suggest high rates of
re-presentment, and are more likely to simply constitute the typical
rejection rate for initial presentments. This evidence suggests that
the covered markets have much higher rates of re-presentment than
consumers experience in other markets.
---------------------------------------------------------------------------
\1025\ Beth Anne Hastings, ``Monitoring for Abusive ACH Debit
Practices,'' (Presentation by JP Morgan Chase at Spring 2014 NACHA
Conference in Orlando, FL, Apr. 7, 2014). See also First Cash Fin.
Servs., 2014 Annual Report (Form 10-K), at 5 (``Banks return a
significant number of ACH transactions and customer checks deposited
into the Independent Lender's account due to insufficient funds in
the customers' accounts.'') (discussion later in the document
indicates that the CSO section covers both online and storefront
loans).
\1026\ NACHA Q4 2014.
\1027\ CFPB Online Payday Loan Payments, at 13.
\1028\ CFPB Online Payday Loan Payments, at 13.
---------------------------------------------------------------------------
Additionally, the Bureau concludes that the complexity of payment
presentment practices and their effects makes it likely that a
significant number of borrowers lack a sufficient understanding of
those practices and their effects. These presentment practices are
material because they could result in significant risks and costs to
the borrower, including NSF fees, overdraft fees, returned payment
fees, and potentially account closures.
The Bureau does not rest its legal conclusion on the premise that
borrowers are unaware that when they take out covered loans with
leveraged payment mechanisms, a payment will be deducted on the due
date. Nor does it rest on the premise that borrowers are unaware that
when a payment is deducted, and the account lacks the funds to cover
the payment, they are likely to incur a fee. Rather, the Bureau
concludes that consumers are unaware of the severity of the risk they
are exposing themselves to in the circumstances of the identified
practice. In other words, the Bureau's analysis rests on the fact that
borrowers are not aware of the risks and harms associated with engaging
in the identified practice of multiple re-presentments. The risks,
costs, or conditions of covered loans that borrowers do not understand
are based on the fact that lenders will re-present repeatedly when
borrowers default. Those risks, costs, or conditions are material
because--as stated in the unfairness analysis above--borrowers incur
substantial injury in the form of fees that are charged and other
consequences of the identified practice when lenders repeatedly re-
present payments. Data provided by commenters on borrower expectations
about default and re-borrowing did not pertain to how lenders use
leveraged payment mechanisms to initiate multiple payment requests and
thus were not germane to the identified practice here.
Many of the commenters' arguments around whether consumers
understand the risks, costs, or conditions of the covered loans focused
on the fact that consumers knew a payment would be requested once, knew
there would be fees, or knew about the likelihood of default. But those
are not the risks, costs, or conditions at issue here, which, again,
stem from multiple re-presentments. Similarly, commenters' assertions
about the Bureau's reliance on ``optimism bias''--which rests on the
assumption that borrowers are overly optimistic that they will be able
to repay their loans--are misplaced here. The Bureau is not relying on
the premise that borrowers underestimate the likelihood of default or
re-borrowing for this part of the rule. Instead, the Bureau is merely
concluding that borrowers underestimate the extent of fees resulting
from default, because most of them have no basis to recognize that a
lender will present multiple times in quick succession after the first
payment request fails.
The Bureau also disagrees with the complaint that the proposal sets
too high a standard for what borrowers are able to understand. The
statute merely states that when risks, costs, or conditions are
material and consumers lack understanding of them, lenders cannot take
unreasonable advantage of that fact. The Bureau agrees with the
industry commenters that it is unreasonable to expect borrowers to
understand the lending, banking, and payments system well enough to
fully understand all the details of how lenders will initiate repeated
re-presentments if the borrower defaults. But if the identified
practice constitutes a material risk of the product, as the Bureau
concludes here, then lenders are not at liberty to take unreasonable
advantage of their consumers' lack of understanding.
The Bureau also disagrees with the claim that it is using a
definition of ``understanding'' that differs from ``to know how
(something) works or happens.'' This suggestion is flawed because it
obfuscates the material risks, costs, or conditions to which that
definition should be applied. The Bureau has found that most consumers
do not realize that the identified practice involving multiple failed
re-presentments happens. This conclusion is consistent with the
accepted dictionary definition of ``understanding.''
Lastly, the Bureau rejects the claim that it cannot base any rule
on the abusiveness authority defined in the statute, and instead can
only enforce against abusive practices on a case-by-case basis, even
where the Bureau has evidence and data that would justify a more
general rule. Congress granted the Bureau explicit authority under
section 1031(b) of the Dodd-Frank Act to issue rules grounded on its
abusiveness
[[Page 54742]]
authority. The Bureau believes that by giving the Bureau rulemaking
authority using its abusiveness authority, Congress expressed its clear
intent to give the Bureau authority to make more general assessments
where it has evidence and data regarding an identified practice that
meets the statutory prongs for abusiveness. Based on the facts and
evidence described in the proposed rule, this section, and Market
Concerns--Payments, the Bureau is concluding that consumers generally
lack an understanding of the material costs, risks, or conditions of
lenders' repeated re-presentment practices, especially the extent of
the risks and the severity of the costs. Accordingly, the Bureau is
authorized to exercise its rulemaking authority in this area.
2. Consumers Are Unable To Protect Their Interests
Proposed Rule
The Bureau proposed that when a lender attempts to withdraw payment
from a consumer's account in connection with a covered loan after the
lender's second consecutive failed attempt, unless the lender obtains
the consumer's new and specific authorization to make further
withdrawals from the account, consumers are unable to protect their
interests. By the time consumers discover that lenders are using their
authorizations in this manner, it is often too late for them to take
effective action. Although consumers could try to protect themselves
from the harms of additional payment withdrawal attempts by closing
down their accounts entirely, the Bureau did not interpret taking this
action as being a practicable means for consumers to protect their
interests, given that consumers use their accounts to conduct most of
their household financial transactions. As discussed in the proposal,
often the only option for most consumers to protect themselves (and
their accounts) from the harms of lender attempts to withdraw payment
after two consecutive attempts have failed is to stop payment or revoke
authorization.\1029\ However, as also explained in the proposal,
consumers often face considerable challenges and barriers when trying
to stop payment or revoke authorization, both with their lenders and
with their account-holding institutions. These challenges and barriers
thus also make this option an impracticable means for consumers to
protect themselves from the harms of further payment withdrawal
attempts.
---------------------------------------------------------------------------
\1029\ As discussed in the proposal, even if consumers have
enough money to deposit into their accounts prior to the next
payment withdrawal attempt, those funds likely would be claimed
first by the consumer's account-holding institution to repay the NSF
fees charged for the prior two failed attempts. Thus, there is still
a risk of additional consumer harm from a third attempt in such
situations, as well as from any attempts the lender may make after
the third one, unless the consumer carefully coordinates the timing
and amounts of the attempts with the lender, which is generally not
possible.
---------------------------------------------------------------------------
As discussed in the proposal, lenders sometimes discourage
consumers from stopping payment or revoking authorization by including
language in loan agreements purporting to prohibit revocation. For
instance, some lenders may charge consumers a substantial fee for
stopping payment with their account-holding institutions. Others may
have in place procedures for revoking authorizations directly with the
lender that create additional barriers to stopping payment or revoking
authorization effectively. For example, as discussed above, lenders
often require consumers to provide written revocation by mail several
days in advance of the next scheduled payment withdrawal attempt, among
other requirements. Some consumers may even have difficulty identifying
the lender that holds the authorization, particularly if the consumer
took out the loan online and was paired with the lender through a
third-party lead generator. These and similar lender-created barriers--
while challenging for consumers in all cases--can make it particularly
difficult for consumers to revoke authorizations for repayment by
recurring transfers, given that a consumer's account-holding
institution is permitted under Regulation E to confirm the consumer has
informed the lender of the revocation (e.g., by requiring a copy of the
consumer's revocation as written confirmation to be provided within 14
days of an oral notification). Thus, if the institution does not
receive the required written confirmation within this time frame, then
it may continue to honor subsequent debits to the account.
In the proposal, the Bureau explained that consumers encounter
additional challenges when trying to stop payment with their account-
holding institutions. For example, due to complexities in payment
processing systems and the internal procedures of consumers' account-
holding institutions, consumers may be unable to stop payment on the
next payment withdrawal attempt in a timely and effective manner. Even
if the consumer successfully stops payment with her account-holding
institution on the lender's next payment attempt, the consumer may
experience difficulties blocking all future attempts by the lender,
particularly when the consumer has authorized the lender to make
withdrawals from her account via recurring EFTs. Some depository
institutions require the consumer to provide the exact payment amount
or the lender's merchant ID code, and thus fail to block payments when
the payment amount varies or the lender varies the merchant code.
Consumers are likely to experience even greater challenges in stopping
payment on lender attempts made via RCCs or RCPOs, given the difficulty
that account-holding institutions have identifying such payment
attempts. Further, if the lender has obtained multiple types of
authorizations from the consumer--such as authorizations to withdraw
payment via both ACH transfers and RCCs--the consumer likely will have
to navigate different sets of complicated stop-payment procedures for
each type of authorization held by the lender, thereby making it even
more challenging to stop the payment effectively.
As further laid out in the proposal, the fees charged by consumers'
account-holding institutions for stopping a payment are often
comparable to the NSF fees or overdraft fees from which the consumers
are trying to protect themselves. Depending on the policies of their
account-holding institutions, some consumers may be charged a second
fee to renew a stop-payment order after a period of time. As a result
of these costs, even if the consumer successfully stops payment on the
next payment withdrawal attempt, the consumer will not have effectively
protected herself from the fee-related injury that otherwise would have
resulted from the attempt, but rather will have just exchanged the cost
of one fee for another. Additionally, in some cases, consumers may be
charged a stop-payment fee by their account-holding institution even
when the stop-payment order fails to stop the lender's payment
withdrawal attempt from occurring. As a result, such consumers may
incur both a fee for the stop-payment order and an NSF or overdraft fee
for the lender's withdrawal attempt.\1030\
---------------------------------------------------------------------------
\1030\ Even when consumers' account-holding institutions may not
charge a fee for returned or declined payment withdrawal attempts
made using a particular payment method, such as attempts made by
debit cards and certain prepaid cards, consumers still incur lender-
charged fees from which they cannot protect themselves. In addition,
consumers sometimes incur lender-charged fees for successfully
stopping payment or revoking authorization.
---------------------------------------------------------------------------
Comments Received
One commenter suggested that the statutory phrase ``inability of
the
[[Page 54743]]
consumer to protect the interests of the consumer in selecting or using
a consumer financial product or service'' is similar to section 4(c)(1)
of the Uniform Consumer Sales Practices Act. That provision bans
unconscionable contracts that take ``advantage of the inability of the
consumer reasonably to protect his interests because of his physical
infirmity, ignorance, illiteracy, [or] inability to understand the
language of an agreement.'' This commenter suggested that the Bureau
should thus deem this prong met only if the consumers in question are
physically infirm, ignorant, illiterate, or unable to understand.
Several commenters suggested again that borrowers typically are able to
appreciate the general consequences of failing to pay, or contended
that this prong of the definition of abusiveness is only met where it
is literally impossible for consumers to protect their interests in
selecting or using the product.
Many other comments pointed to the mechanisms that the Bureau
identified in the proposal--authorization revocations, account
closures, and stop payments--stating that these prove borrowers do have
the ability to protect their interests. Some commenters argued more
simply that borrowers can protect their interests by just making a
payment when it is due, or by not taking out loans in the first place.
Consumer groups, by contrast, argued that it is difficult, if not
impossible, for consumers to revoke account access or stop payment
withdrawals when lenders initiate multiple attempts.
Final Rule
The Bureau now concludes, as discussed below, that consumers are
unable to protect their interests--specifically the interest of
preventing the harms identified--in selecting or using a consumer
financial product or service.
The Bureau does not agree that the language in the Dodd-Frank Act
should be interpreted as synonymous with the passage cited from the
Uniform Consumer Sales Practices Act. In fact, there is no basis
whatsoever for this suggestion. The statutory definition of abusiveness
does not limit instances where a company can take advantage of an
inability to protect one's own interests to a narrow set of instances
where that inability is caused by infirmity, ignorance, illiteracy, or
inability to understand the language of an agreement.
The Bureau also rejects the interpretation, presented by
commenters, that the prong of ``inability of the consumer to protect
the interests of the consumer in selecting or using a consumer
financial product or service'' can be met only when it is literally
impossible for consumers to take action to protect their
interests.\1031\ One dictionary defines ``inability'' to mean a ``lack
of sufficient power, strength, resources, or capacity,'' \1032\ and the
Bureau believes the clause ``inability of the consumer to protect'' is
similarly reasonably interpreted to mean that consumers are unable to
protect their interests when it is impracticable for them to do so in
light of the circumstances.
---------------------------------------------------------------------------
\1031\ At least one court has rejected a similar interpretation.
See Consumer Financial Protection Bureau v. ITT Educational
Services, Inc., 219 F. Supp. 3d 878, 919 (S.D. Ind. 2015).
\1032\ ``Webster's Third New International Dictionary,''
(Merriam Webster Inc., 2002).
---------------------------------------------------------------------------
As for comments that mechanisms are available to avoid undesirable
outcomes, or that borrowers can protect their interests by just making
a payment when it is due or by not taking out loans in the first place,
these are arguments the Bureau already addressed in the ``reasonable
avoidability'' part of the unfairness section above, and its responses
to those points apply here.
As stated in the proposal and discussed further above in Market
Concerns--Payments, evidence in the record supports the conclusion that
consumers are, in fact, unable to protect their own interests in
relation to payment re-presentments by initiating stop payments or
revoking authorizations.\1033\ Commenters' assertions that borrowers
have a literal ability to protect their interests in some conceivable
but impractical circumstances rest on a misunderstanding of the
statutory test and the actual facts of these types of situations. On
the basis of the evidence presented, the Bureau thus concludes that
consumers are generally and practicably unable to use these methods to
protect their interests.
---------------------------------------------------------------------------
\1033\ See specific Market Concerns--Payments subsection
entitled ``Consumers Have Difficulty Stopping Lenders' Ability to
Access Their Accounts'' for that evidence.
---------------------------------------------------------------------------
3. Practice Takes Unreasonable Advantage of Consumer Vulnerabilities
Proposed Rule
Under section 1031 of the Dodd-Frank Act, an act or practice is
abusive when it takes ``unreasonable advantage'' of consumers' lack of
understanding of the material risks, costs, or conditions of selecting
or using a consumer financial product or service or of their inability
to protect their interests in selecting or using such a product or
service. The Bureau proposed that, with respect to covered loans, the
lender act or practice of attempting to withdraw payment from a
consumer's account after two consecutive attempts have failed, unless
the lender obtains the consumer's new and specific authorization to
make further withdrawals, may take unreasonable advantage of consumers'
lack of understanding and inability to protect their interests and is
therefore abusive. In making this proposal, the Bureau was informed by
the evidence discussed in the proposal and above in Markets Concerns--
Payments.
In the proposal, the Bureau recognized that in any transaction
involving a consumer financial product or service, there is likely to
be some information asymmetry between the consumer and the financial
institution. Often, the financial institution will have superior
bargaining power as well. Section 1031(d) of the Dodd-Frank Act does
not prohibit financial institutions from taking advantage of their
superior knowledge or bargaining power to maximize their profit.
Indeed, in a market economy, market participants with such advantages
generally pursue their self-interests. However, section 1031 of the
Dodd-Frank Act makes plain that at some point, a financial
institution's conduct in leveraging consumers' lack of understanding or
inability to protect their interests becomes unreasonable advantage-
taking that is abusive.\1034\
---------------------------------------------------------------------------
\1034\ A covered person also may take unreasonable advantage of
one or more of the three consumer vulnerabilities identified in
section 1031(d) of the Dodd-Frank Act in circumstances in which the
covered person lacks such superior knowledge or bargaining power.
---------------------------------------------------------------------------
The Dodd-Frank Act delegates to the Bureau the responsibility for
determining when that line has been crossed. In the proposal, the
Bureau stated that such determinations are best made with respect to
any particular practice by taking into account all of the facts and
circumstances that are relevant to assessing whether the practice takes
unreasonable advantage of consumers' lack of understanding or inability
to protect their interests. The Bureau recognized that taking a
consumer's authorization to withdraw funds from her account without
further action by the consumer is a common practice that frequently
serves the interest of both lenders and consumers, and does not believe
that this practice, standing alone, takes unreasonable advantage of
consumers. However, at least with respect to covered loans, the Bureau
proposed to conclude, based on the evidence discussed in the proposal
and above in Markets Concerns--Payments, that when lenders use such
[[Page 54744]]
authorizations to make another payment withdrawal attempt after two
consecutive attempts have failed, lenders take unreasonable advantage
of consumers' lack of understanding and inability to protect their
interests, absent the consumer's new and specific authorization.
As discussed above, with respect to covered loans, the lender
practice of continuing to make payment withdrawal attempts after a
second consecutive failure generates relatively small amounts of
revenues for lenders, particularly as compared with the significant
harms that consumers incur as a result of the practice. Moreover, the
cost to the lender of re-presenting a failed payment withdrawal attempt
is nominal; for this reason, lenders often repeatedly re-present at
little cost to themselves, and with little to no regard for the harms
that consumers incur as a result of the re-presentments.
Specifically, the Bureau's analysis of ACH payment withdrawal
attempts made by online payday and payday installment lenders, laid out
in greater detail in the proposal, indicates that the expected value of
a third successive payment withdrawal attempt is only $46 (as compared
with $152 for a first attempt), and that the expected value drops to
$32 for the fourth attempt and to $21 for the fifth attempt. And yet,
despite these increasingly poor odds of succeeding, many lenders
continue to re-present. This further suggests that at this stage, the
consumers' payment authorizations have ceased to serve their primary
purpose of convenience, but instead have become a means for the lenders
to seek to extract small amounts of revenues from consumers any way
they can. In addition, lenders often charge consumers a returned-item
fee for each failed attempt.\1035\ This provides lenders with an
additional financial incentive to continue attempting to withdraw
payment from consumers' accounts even after two consecutive attempts
have failed. Although lenders may not be able to collect such fees
immediately, the fees are added to the consumer's overall debt and thus
can be pursued and perhaps collected later through the debt collection
process. The Bureau preliminarily concluded that lenders could obtain
much of this revenue without engaging in the practice of trying to
withdraw payment from consumers' accounts after the accounts have
exhibited clear signs of being in severe distress. For example, lenders
could seek further payments in cash or ACH ``push'' payments from the
consumer or, in the alternative, could seek a new and specific
authorization from consumers to make further payment withdrawal
attempts. Indeed, the Bureau determined that coordinating with the
consumer to seek a new authorization may be more likely to result in
successful payment withdrawal attempts than does the practice of
repeatedly attempting to withdraw payments from an account that is
known to be in distress.
---------------------------------------------------------------------------
\1035\ In addition, as discussed in the proposal, the Bureau is
aware of some depository institutions that have charged NSF and
overdraft fees for payment attempts made within the institutions'
internal systems, including a depository institution that charged
such fees in connection with collecting payments on its own small-
dollar loan product.
---------------------------------------------------------------------------
Comments Received
Most of the comments relevant to this prong were already addressed
in the two sections above. The Bureau also received comments suggesting
that it provided no evidence that the practice takes unreasonable
advantage of consumers. Commenters also argued that the Bureau should
focus on how certain roadblocks imposed by financial institutions
relating to stop-payment orders take unreasonable advantage of
consumers rather than on the identified practice engaged in by lenders.
Final Rule
As described more fully above in Market Concerns--Payments, the
Bureau does have ample evidence that the identified practice takes
unreasonable advantage of consumers. Lenders take advantage by imposing
financial harm on consumers when they make repeated efforts to extract
funds from consumer accounts, and those actions are unreasonable in
light of the low expected value of those re-presentments. Indeed,
lenders should be well aware that borrowers will likely not have funds
in their distressed accounts, as shown by the two prior failed
presentments and the lenders' general experience of the low expected
value of multiple re-presentments. They also should be well aware of
the kinds of harms that consumers are likely to experience in these
situations; nonetheless, they routinely make a conscious choice to
engage in the identified practice by proceeding with their re-
presentments.
It may be the case that financial institutions engage in practices
that hinder borrowers' ability to stop payments. Whether this takes
unreasonable advantage of consumers has no bearing on whether lenders
also take unreasonable advantage of consumers by engaging in the
identified practice.
The Bureau finalizes its conclusion that the practice of attempting
to withdraw payment from a consumer's account in connection with a
covered loan after the lender's second consecutive failed attempt to
withdraw payment from the account, unless the lender obtains the
consumer's new and specific authorization to make further withdrawals
from the account, takes unreasonable advantage of consumers' lack of
understanding of the material risks, costs, or conditions of the
product or service, as well as their inability to protect their
interests in selecting or using a consumer financial product or
service.
Section 1041.8 Prohibited Payment Transfer Attempts
For the reasons discussed in the section-by-section analysis of
Sec. 1041.7, the Bureau has concluded that it is an unfair and abusive
practice for a lender to attempt to withdraw payment from a consumer's
account in connection with a covered loan after the lender's second
consecutive attempt to withdraw payment from the account has failed due
to a lack of sufficient funds, unless the lender obtains the consumer's
new and specific authorization to make further withdrawals from the
account. Thus, after a lender's second consecutive attempt to withdraw
payment from a consumer's account has failed, the lender could avoid
engaging in the unfair or abusive practice either by not making any
further payment withdrawals or by obtaining from the consumer a new and
specific authorization and making further payment withdrawals pursuant
to that authorization.
Section 1031(b) of the Dodd-Frank Act provides that the Bureau may
prescribe rules ``identifying as unlawful unfair, deceptive, or abusive
acts or practices'' and may include requirements in such rules for the
purpose of preventing unfair, deceptive, or abusive acts or practices.
The Bureau is preventing the unfair and abusive practice described
above by including in Sec. 1041.8 specific requirements for
determining when making a further payment withdrawal attempt
constitutes an unfair or abusive act and for obtaining a consumer's new
and specific authorization to make further payment withdrawals from the
consumer's account. In addition to its authority under section 1031(b),
the Bureau is issuing two other provisions--Sec. 1041.8(c)(3)(ii) and
(c)(3)(iii)(C)--pursuant to its authority under section 1032(a) of the
Dodd-Frank Act. Section 1032(a) authorizes the Bureau to prescribe
rules to ensure that the
[[Page 54745]]
features of consumer financial products and services, ``both initially
and over the term of the product or service,'' are disclosed ``fully,
accurately, and effectively . . . in a manner that permits consumers to
understand the costs, benefits, and risks associated with the product
or service, in light of the facts and circumstances.'' \1036\ Both of
the proposed provisions relate to the requirements for obtaining the
consumer's new and specific authorization after the prohibition on
making further payment withdrawals has been triggered.
---------------------------------------------------------------------------
\1036\ 12 U.S.C. 5532(a).
---------------------------------------------------------------------------
In addition to the provisions in Sec. 1041.8, the Bureau is
finalizing a complementary set of provisions in Sec. 1041.9, pursuant
to its authority under section 1032 of the Dodd-Frank Act, to require
lenders to provide notice to a consumer prior to initiating a payment
withdrawal from the consumer's account. These disclosures inform
consumers in advance of the timing, amount, and channel of upcoming
initial and unusual withdrawal attempts, in order to help consumers
detect errors or problems with upcoming payments and contact their
lenders or account-holding institutions to resolve them in a timely
manner. The disclosures will also help consumers take steps to ensure
that their accounts contain enough money to cover the payments, when
taking such steps is feasible for consumers. In Sec. 1041.9, the rule
also provides for a notice that lenders are required to provide to
consumers, alerting them to the fact that two consecutive payment
withdrawal attempts to their accounts have failed--thus triggering
operation of the requirements in Sec. 1041.8(b)--so that consumers can
better understand their repayment options and obligations in light of
their accounts' severely distressed conditions. The two payments-
related sections in the proposed rule thus complement and reinforce
each other.
As described earlier, because the Bureau is not finalizing at this
time the provisions relating to the underwriting of covered longer-term
loans by assessing the borrower's ability to repay (other than for
covered longer-term balloon-payment loans), various sections of the
final rule have been renumbered differently than in the proposed rule.
In particular, Sec. 1041.14 of the proposed rule on prohibited payment
transfer attempts, and Sec. 1041.15 of the proposed rule on disclosure
of payment transfer attempts, have now been renumbered, respectively,
as Sec. Sec. 1041.8 and 1041.9 of the final rule.
8(a) Definitions
Proposed Sec. 1041.14(a) defined key terms to be used throughout
proposed Sec. Sec. 1041.14 and 1041.15. The central defined term in
both proposed sections was ``payment transfer,'' which would apply
broadly to any lender-initiated attempt to collect payment from a
consumer's account, regardless of the type of authorization or
instrument used. The Bureau also proposed to define ``single immediate
payment transfer at the consumer's request,'' which is described below.
8(a)(1) Payment Transfer
Proposed Rule
Proposed Sec. 1041.14(a)(1) defined a payment transfer as any
lender-initiated debit or withdrawal of funds from a consumer's account
for the purpose of collecting any amount due or purported to be due in
connection with a covered loan. It also provided a non-exhaustive list
of specific means of debiting or withdrawing funds from a consumer's
account that would constitute payment transfers if the general
definition's conditions are met. They included a debit or withdrawal
initiated through: (1) An EFT, including a preauthorized EFT as defined
in Regulation E, 12 CFR 1005.2(k); (2) a signature check, regardless of
whether the transaction is processed through the check network or
another network, such as the ACH network; (3) a remotely created check
as defined in Regulation CC, 12 CFR 229.2(fff); (4) a remotely created
payment order as defined in 16 CFR 310.2(cc); and (5) an account-
holding institution's transfer of funds from a consumer's account that
is held at the same institution.
The Bureau proposed a broad definition focused on the collection
purpose of the debit or withdrawal rather than on the particular method
by which the debit or withdrawal is made, to help ensure uniform
application of the proposed rule's payment-related consumer
protections. In the proposal the Bureau stated that in markets for
loans that would be covered under the proposed rule, lenders use a
variety of methods to collect payment from consumers' accounts. Some
lenders take more than one form of payment authorization from consumers
in connection with a single loan. Even lenders that take only a
signature check often process the checks through the ACH system,
particularly for purposes of re-submitting a returned check that was
originally processed through the check system.
At the proposal stage the Bureau believed that, for a rule designed
to apply across multiple payment methods and channels, a single defined
term was necessary to avoid the considerable complexity that would
result if the rule merely adopted existing terminology that may be
unique to every specific method and channel. The Bureau believed that
defining payment transfer in this way would enable the rule to provide
for the required payment notices to be given to consumers regardless of
the payment method or channel used to make a debit or withdrawal.
Similarly, the Bureau believed that the proposed definition would
ensure that the prohibition in proposed Sec. 1041.14(b) on additional
failed payment transfers would apply regardless of the payment method
or channel used to make the triggering failed attempts and regardless
of whether a lender moves back and forth between different payment
methods or channels when attempting to withdraw payment from a
consumer's account.
Proposed comment 14(a)(1)-1 explained that a transfer of funds
meeting the general definition would be a payment transfer regardless
of whether it is initiated by an instrument, order, or other means not
specified in Sec. 1041.14(a)(1). Proposed comment 14(a)(1)-2 explained
that a lender-initiated debit or withdrawal includes a debit or
withdrawal initiated by the lender's agent, such as a payment
processor. Proposed comment 14(a)(1)-3 provided examples to illustrate
how the proposed definition would apply to a debit or withdrawal for
any amount due in connection with a covered loan. Specifically,
proposed comments 14(a)(1)-3.i through (a)(1)-3.iv explained,
respectively, that the definition would apply to a payment transfer for
the amount of a scheduled payment, a transfer for an amount smaller
than the amount of a scheduled payment, a transfer for the amount of
the entire unpaid loan balance collected pursuant to an acceleration
clause in a loan agreement for a covered loan, and a transfer for the
amount of a late fee or other penalty assessed pursuant to a loan
agreement for a covered loan.
Proposed comment 14(a)(1)-4 clarified that the proposed definition
would apply even when the transfer is for an amount that the consumer
disputes or does not legally owe. Proposed comment 14(a)(1)-5 provided
three examples of covered loan payments that, while made with funds
transferred or withdrawn from a consumer's account, would not be
[[Page 54746]]
covered by the proposed definition of a payment transfer. The first two
examples, provided in proposed comments 14(a)(1)-5.i and (a)(1)-5.ii,
were of transfers or withdrawals that are initiated by the consumer--
specifically, when a consumer makes a payment in cash withdrawn by the
consumer from the consumer's account and when a consumer makes a
payment via an online or mobile bill payment service offered by the
consumer's account-holding institution. The third example, provided in
proposed comment 14(a)(1)-5.iii, clarified that the definition would
not apply when a lender seeks repayment of a covered loan pursuant to a
valid court order authorizing the lender to garnish a consumer's
account.
Additionally, proposed comments relating to Sec. 1041.14(a)(1)(i),
(ii), and (v) clarified how the proposed payment transfer definition
applies to particular payment methods. Specifically, proposed comment
14(a)(1)(i)-1 explained that the general definition of a payment
transfer would apply to any EFT, including but not limited to an EFT
initiated by a debit card or a prepaid card. Proposed comment
14(a)(1)(ii)-1 provided an illustration of how the definition of
payment transfer would apply to a debit or withdrawal made by signature
check, regardless of the payment network through which the transaction
is processed. Lastly, proposed comment 14(a)(1)(v)-1 clarified, by
providing an example, that an account-holding institution initiates a
payment transfer when it initiates an internal transfer of funds from a
consumer's account to collect payment on a deposit advance product.
Comments Received
NACHA agreed with the Bureau's decision to cover all payment
methods with the rule, noting that their presentment cap is only
applicable to payments processed on the ACH system and that since they
clarified the cap on ACH presentments, they have seen vendors shift
towards using other payment methods.
The Bureau received a number of comments arguing that the
compliance burden of, among other things, tracking payment presentments
across multiple payment methods would be significant.
Other commenters argued that payment withdrawal rules should be
relaxed in cases where a depository institution is both the lender and
the deposit account holder, provided that the depository institution
does not charge a fee after attempting and failing to collect from the
account. Similarly, a group representing community banks argued that
the Bureau should not prohibit community banks from accessing consumer
accounts held by the bank to pay for a loan made by the bank. This
commenter claimed that the disclosures provided to borrowers before the
authorization should suffice. More generally, commenters asked for
further clarity on the rule's treatment of internal transfers at
account-holding institutions.
Consumer group commenters were generally supportive of the proposed
definition but argued that the Bureau should amend it in two ways.
First, they argued that it should include both transactions initiated
by the lender and transactions initiated by the lender's agent in the
definition of payment transfer. Second, the commenters argued that the
definition should not be tied to the term ``account'' because a nonbank
might be able to evade this requirement by pulling funds from a source
of funds other than an ``account.''
Commenters suggested that the Bureau use the term ``installment''
instead of ``payment'' in the definition so as to clarify that the rule
covers each payment on an installment contract, which the commenters
believed would expand the rule and be more consistent with State and
local laws.
Several commenters, including State Attorneys General, argued that
payments made using debit cards should be exempt because they generally
do not engender NSF fees, and thus, the harm justifying the identified
unfair and abusive act or practice is diminished for debit card
payments.
Final Rule
The Bureau is generally finalizing the rule as proposed, with some
technical changes, and the addition of an exclusion for lenders that
are also acting as the borrower's account-holding institution when
certain conditions are met. The Bureau concludes, in particular, that
it is essential for the rule to cover all payment methods in order to
prevent harm to consumers from the practice identified as unfair and
abusive. Additionally, the Bureau maintains its view that a single
definition is a simpler approach that is more administrable as a
practical matter than using separate terminology for each type of
payment method.
In adding the exclusion, the Bureau is reorganizing the numbering
of Sec. 1041.8(a)(1). The Bureau is also converting proposed comment
14(a)(1)-1 into the text of the regulation at Sec. 1041.8(a)(1)(i).
The initial examples of covered payment methods are now all listed
there. The Bureau had proposed, as an example of a payment method
included in the definition, ``[a]n account-holding institution's
transfer of funds from a consumer's account that is held at the same
institution.'' In light of the added conditional exclusion relating to
account-holding institutions, the Bureau is adding at the end of that
sentence ``other than such a transfer meeting the description in
paragraph (a)(1)(ii) of this section.''
In response to the sound suggestion received from several
commenters, the Bureau is adding paragraph (a)(1)(ii) to Sec. 1041.8,
which is a conditional exclusion for certain lenders that are also the
borrower's account-holding institution. That exclusion only applies to
instances where the lender has set forth in the original loan agreement
or account agreement that it will not charge the consumer a fee for
payment attempts when the account lacks sufficient funds to cover the
payment, and that it will not close the account in response to a
negative balance that results from a transfer of funds initiated in
connection with the covered loan. If lenders do not charge NSF,
overdraft, return payment fees, or similar fees, and do not close
accounts because of failed payment attempts, the harms underpinning the
unfair and abusive practice identified in Sec. 1041.7 would not occur,
and thus the Bureau concludes that the rule does not need to cover
those instances.
The Bureau did not exclude transfers made by lenders that are also
the borrower's account-holding institution where the harms would
continue (i.e., fees are charged or accounts are closed) because that
would be inconsistent with the Bureau's efforts in the rule to prevent
the harms associated with the unfair and abusive practice. Paragraph
(a)(1)(ii) would allow late fees because the Bureau considers those
charges to be distinct from, and not caused by, the practice identified
in Sec. 1041.7. It bears emphasis that, under the terms of the rule,
the borrower's account or loan agreement must state, at the time the
consumer takes out the first covered loan, that the account-holding
institution does not charge such fees in connection with a failed
payment attempt on a loan made by the institution or close the account
in response to a negative balance resulting from the lender's
collection of a payment on the covered loan. This is meant to prevent
lenders from avoiding the presentment cap for failed payments involving
fees by simply switching back and forth between charging fees and not
charging fees, as well as to ensure that both conditions apply for the
duration of the covered loan. The Bureau has not
[[Page 54747]]
finalized a similar exclusion for non-account-holding lenders where the
account-holding institution otherwise does not charge fees or close
accounts, because those lenders do not have control over whether those
events occur, as do the lenders excluded by paragraph (a)(1)(ii).
In light of changes made to the text of the rule and the
incorporation of proposed comment 14(a)(1)-1 into the text, the
commentary to the rule has been renumbered accordingly. In addition,
the Bureau has amended proposed comment 14(a)(1)(v)-1, now comment
8(a)(1)(i)(E)-1 of the final rule, to reflect the changes made to
accommodate the conditional exclusion. In response to requests from
commenters, the Bureau also has added comment 8(a)(1)(i)(E)-2, which to
further clarifies the application of the payment transfer definition to
internal transfers of funds within an account-holding institution. The
Bureau notes that under the final rule, the payment transfer
definition--and thus the cap on failed payment transfers--still applies
to such lenders when the conditions for the exclusion from the
definition are not met. The additional examples include: (1) Initiating
an internal transfer from a consumer's account to collect a scheduled
payment on a covered loan; (2) sweeping the consumer's account in
response to a delinquency on a covered loan; and (3) exercising a right
of offset to collect against an outstanding balance on a covered loan.
The Bureau also added some comments on the conditional exclusion.
Comment 8(a)(1)(ii)(A)-1 clarifies that the loan or account agreement
must contain a term to restrict the charging of fees that is in effect
at the time the covered loan is made, which must remain in effect for
the duration of the loan. Again, this comment is intended to ensure
that lenders that are account-holding institutions do not avoid the
rule's cap on failed payment attempts by switching back and forth
between charging fees and not charging fees for failed attempts.
Comment 8(a)(2)(ii)(A)-2 provides examples of the types of fees that
must be restricted in order to qualify for the conditional exclusion.
It clarifies that those fees include NSF fees, overdraft fees, and
returned-item fees. It also explains that a lender may charge late fees
if such fees are permitted under the terms of the loan agreement, and
still qualify for the conditional exclusion if the conditions in Sec.
1041.8(a)(1)(ii) are met.
Comment 8(a)(1)(ii)(B)-1 clarifies that in order to be eligible for
the exclusion in Sec. 1041.8(a)(1)(ii), the lender cannot close the
borrower's account in response to a negative balance that results from
a lender-initiated transfer of funds in connection with the covered
loan, but that the lender is not restricted from closing the account in
response to another event. Specifically, the comment provides that a
lender is not restricted from closing the consumer's account in
response to another event, even if the event occurs after a lender-
initiated transfer of funds has brought the account to a negative
balance. Further, the comment provides, as examples, that a lender may
close the account at the consumer's request, for purposes of complying
with other regulatory requirements, or to protect the account from
suspected fraudulent use or unauthorized access, and still meet the
condition in Sec. 1041.8(a)(1)(ii)(B). The Bureau believes it is
important to clarify that lenders collecting payments pursuant to the
conditional exclusion in Sec. 1041.8(a)(1) are not restricted from
closing a consumer's account when circumstances unrelated to the
covered loan payments dictate that they do so. Finally, comment
8(a)(1)(ii)(B)-2 clarifies that the loan or account agreement must
contain a term providing that the lender will not close the consumer's
account in the circumstances specified in the rule at the time the
covered loan is made, and that the term must remain in effect for the
duration of the loan.
The Bureau recognizes the industry commenters' concern that lenders
will incur compliance burdens associated with keeping track of payment
presentments across different payment methods. However, as stated in
the proposal, the Bureau continues to maintain ongoing compliance costs
associated with tracking presentments will likely be minimal following
the initial investment. There may be additional compliance burdens
associated with tracking presentments across payment methods, but the
alternative of only tracking presentments on certain payment methods
would undermine the purposes of the rule, and would not fully prevent
the full scope of consumer harm identified above in Market Concerns--
Payments, and further discussed in the section-by-section analysis of
Sec. 1041.7.
The Bureau also does not find it helpful to use the term
``installment'' to make clear that the rule applies to multiple
payments initiated under an installment agreement. The definition of
``payment transfer'' is meant to cover any kind of payment attempt,
including multiple attempts made to cover a single installment under a
loan agreement. Replacing the term ``payment'' with ``installment'' may
confuse that point.
In addition, the Bureau does not see the need for further
clarification with regard to how the rule covers agents of lenders that
initiate payment presentments on the lender's behalf. A lender's use of
third-party processors or servicers does not provide a basis to
circumvent the payment presentment cap. In fact, a lender using a
third-party service provider is still liable under the rule, as the
service provider also may be, depending on the facts and circumstances.
Lastly, the Bureau is not aware of any methods by which a non-bank
lender could circumvent the rule based on the definition of the term
``account.'' The definition is the same as in 12 CFR 1005.2, and
therefore includes normal deposit accounts at financial institutions,
payroll card accounts, and (by the time compliance with Sec. Sec.
1041.2 through 1041.10, 1041.12, and 1041.13 is required) prepaid
accounts. To the extent a lender is debiting something other than an
``account,'' that event may not involve the same kinds of fees
associated with the identified practice. To provide greater clarity to
industry, the Bureau finds it appropriate at this time to use a pre-
existing definition. If in the future a lender or lenders cause
repeated fees to consumers by attempting to take funds from something
other than an ``account'' after multiple failed attempts, the Bureau
would consider exercising its supervision, enforcement, or rulemaking
authority to address the problem, as appropriate.
Lastly, the Bureau has decided not to exempt payments made using
debit cards from the rule. First, while failed debt card transactions
may not trigger NSF fees, some of them do trigger overdraft fees, even
after two failed attempts, as our study showed. Second, lenders may
still charge return fees for each presentment. And third, the Bureau
does not believe an exclusion based on payment type would work to
alleviate much compliance burden associated with Sec. 1041.8 because
the lender would need to develop processes and procedures for those
payment types that are covered regardless. In fact, juggling multiple,
disparate processes and procedures depending on payment type would
involve its own compliance burdens.
8(a)(2) Single Immediate Payment Transfer at the Consumer's Request
Proposed Rule
Proposed Sec. 1041.14(a)(2) would have defined a single immediate
payment transfer at the consumer's request as,
[[Page 54748]]
generally, a payment transfer that is initiated by a one-time EFT or by
processing a consumer's signature check within one business day after
the lender obtains the consumer's authorization or check. Such payment
transfers would be exempted from certain requirements in the proposed
rule. The principal characteristic of a single immediate payment
transfer at the consumer's request is that it is initiated at or near
the time the consumer chooses to authorize it. During the SBREFA
process, and in outreach with industry in developing the proposal, the
Bureau received feedback that consumers often authorize or request
lenders to make an immediate debit or withdrawal from their accounts
for various reasons including, for example, to avoid a late payment
fee. As discussed in the proposed rule, stakeholders expressed concerns
primarily about the potential impracticability and undue burden of
providing a notice of an upcoming withdrawal in advance of executing
the consumer's payment instructions in these circumstances. More
generally, the SERs and industry stakeholders suggested that a transfer
made at the consumer's immediate request presents fewer consumer
protection concerns than a debit or withdrawal authorized by the
consumer several days or more in advance, presuming that the consumer
makes the immediate request based on current and first-hand knowledge
of their account balance.
In the proposal, the Bureau stated that applying fewer requirements
to payment transfers initiated immediately after consumers request the
debit or withdrawal was both warranted and consistent with the
important policy goal of providing consumers with greater control over
their payments on covered loans. Accordingly, the proposed definition
would be used to apply certain exceptions to the proposed rule's
payments-related requirements in two instances. First, a lender would
not be required to provide the payment notice in proposed Sec.
1041.15(b) when initiating a single immediate payment transfer at the
consumer's request. Second, a lender would be permitted under proposed
Sec. 1041.14(d) to initiate a single immediate payment transfer at the
consumer's request after the prohibition in proposed Sec. 1041.14(b)
on initiating further payment transfers has been triggered, subject to
certain requirements and conditions.
Proposed Sec. 1041.14(a)(2) provided that a payment transfer is a
single immediate payment transfer at the consumer's request when it
meets either one of two sets of conditions. The first of these prongs
applied specifically to payment transfers initiated via a one-time EFT.
Proposed Sec. 1041.14(a)(2)(i) generally defined the term as a one-
time EFT initiated within one business day after the consumer
authorizes the transfer. The Bureau believed that a one-business-day
time frame would allow lenders sufficient time to initiate the
transfer, while providing assurance that the account would be debited
in accordance with the consumer's timing expectations. Proposed comment
14(a)(2)(i)-1 explained that for purposes of the definition's timing
condition, a one-time EFT is initiated at the time that the transfer is
sent out of the lender's control and that the EFT thus is initiated at
the time the lender or its agent sends the payment to be processed by a
third party, such as the lender's bank.
The proposed comment further provided an illustrative example of
this concept. The second prong of the definition, in proposed Sec.
1041.14(a)(2)(ii), applied specifically to payment transfers initiated
by processing a consumer's signature check. Under this prong, the term
would apply when a consumer's signature check is processed through
either the check system or the ACH system within one business day after
the consumer provides the check to the lender. Proposed comments
14(a)(2)(ii)-1 and -2 explained how the definition's timing condition
in proposed Sec. 1041.14(a)(2)(ii) applies to the processing of a
signature check. Similar to the concept explained in proposed comment
14(a)(2)(i)-1, proposed comment 14(a)(2)(ii)-1 explained that a
signature check is sent out of the lender's control and that the check
thus is processed at the time that the lender or its agent sends the
check to be processed by a third party, such as the lender's bank. The
proposed comment further cross-referenced proposed comment 14(a)(2)(i)-
1 for an illustrative example of how this concept applies in the
context of initiating a one-time EFT. Regarding the timing condition in
proposed Sec. 1041.14(a)(2)(ii), proposed comment 14(a)(2)(ii)-2
clarified that when a consumer mails a check to the lender, the check
is deemed to be provided to the lender on the date it is received.
As with the similar timing condition for a one-time EFT in proposed
Sec. 1041.14(a)(2)(i), the Bureau believed that these timing
conditions would help to ensure that the consumer has the ability to
control the terms of the transfer and that the conditions would be
practicable for lenders to meet. In addition, the Bureau noted that the
timing conditions would effectively exclude from the definition the use
of a consumer's post-dated check, and instead would limit the
definition to situations in which a consumer provides a check with the
intent to execute an immediate payment. The Bureau believed that this
condition was necessary to ensure that the exceptions concerning single
immediate payment transfers at the consumer's request apply only when
it is clear that the consumer is affirmatively initiating the payment
by dictating its timing and amount. Under the proposal, these criteria
would not be met when the lender already holds the consumer's post-
dated check.
Comments Received
The Bureau received some comments pertaining to the definition of a
single immediate payment transfer at the consumer's request. Because
the definition is closely related to the exception in Sec. 1041.8(d),
the Bureau addresses those comments below in the discussion of final
Sec. 1041.8(d).
Final Rule
The Bureau is finalizing this definition as proposed, except for
renumbering proposed Sec. 1041.14(a) as Sec. 1041.8(a).
8(b) Prohibition on Initiating Payment Transfers From a Consumer's
Account After Two Consecutive Failed Payment Transfers
Proposed Rule
Proposed Sec. 1041.14(b) stated that a lender cannot attempt to
withdraw payment from a consumer's account in connection with a covered
loan when two consecutive attempts have been returned due to a lack of
sufficient funds. This proposal was made pursuant to section 1031(b) of
the Dodd-Frank Act, which provides that the Bureau may prescribe rules
for the purpose of preventing unlawful unfair, deceptive, or abusive
acts or practices.\1037\ As discussed in the section-by-section
analysis of proposed Sec. 1041.13, it appeared that, in connection
with a covered loan, it was an unfair and abusive practice for a lender
to attempt to withdraw payment from a consumer's account after the
lender's second consecutive attempt to withdraw payment from the
account fails due to a lack of sufficient funds, unless the lender
obtains the consumer's new and specific authorization to make further
payment withdrawals. This proposed finding would have applied to any
lender-
[[Page 54749]]
initiated debit or withdrawal from a consumer's account for purposes of
collecting any amount due or purported to be due in connection with a
covered loan, regardless of the particular payment method or channel
used.
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\1037\ 12 U.S.C. 5531(b).
---------------------------------------------------------------------------
In accordance with this proposed finding, a lender would be
generally prohibited under proposed Sec. 1041.14(b) from making
further attempts to withdraw payment from a consumer's account upon the
second consecutive return for nonsufficient funds, unless and until the
lender obtains the consumer's authorization for additional transfers
under proposed Sec. 1041.14(c), or obtains the consumer's
authorization for a single immediate payment transfer in accordance
with proposed Sec. 1041.14(d). The prohibition under proposed Sec.
1041.14(b) would apply to, and be triggered by, any lender-initiated
attempts to withdraw payment from a consumer's checking, savings, or
prepaid account. In addition, the prohibition under proposed Sec.
1041.14(b) would apply to, and be triggered by, all lender-initiated
withdrawal attempts regardless of the payment method used including,
but not limited to, signature check, remotely created check, remotely
created payment orders, authorizations for one-time or recurring EFTs,
and an account-holding institution's withdrawal of funds from a
consumer's account that is held at the same institution.
In developing the proposed approach to restricting lenders from
making repeated failed attempts to debit or withdraw funds from
consumers' accounts, the Bureau had considered a number of potential
interventions. As detailed in Market Concerns--Payments of the proposal
and final rule, for example, the Bureau is aware that some lenders
split the amount of a payment into two or more separate transfers and
then present all of the transfers through the ACH system on the same
day. Some lenders make multiple attempts to debit accounts over the
course of several days or a few weeks. Also, lenders that collect
payment by signature check often alternate submissions between the
check system and ACH system to maximize the number of times they can
attempt to withdraw payment from a consumer's account using a single
check. These and similarly aggressive payment practices potentially
cause harms to consumers and may each constitute more specific unfair,
deceptive, or abusive acts or practices, as well as fitting within the
broader unfair and abusive practice identified in the proposal.
However, the Bureau believed that tailoring requirements in this
rulemaking for each discrete payment practice would add considerable
complexity to the proposed rule and yet still could leave consumers
vulnerable to harms from aggressive practices that may emerge in
markets for covered loans in the future.
Accordingly, while the Bureau stated that it would continue to use
its supervisory and enforcement authorities to address such aggressive
payment practices in particular circumstances as appropriate, it
proposed to address categorically the broader practice of making
repeated failed attempts to collect payment on covered loans, which it
preliminarily believed to be unfair and abusive. In addition, the
Bureau proposed requirements to prevent that practice which would help
protect consumers from a range of harmful payment practices in a
considerably less complex fashion. For example, as applied to the
practice of splitting payments into multiple same-day presentments, the
proposed approach would effectively curtail a lender's access to the
consumer's account when any two such presentments fail. As applied to
checks, the proposed approach would permit a lender to resubmit a
returned check no more than once, regardless of the channel used,
before triggering the prohibition if the resubmission failed. The
Bureau framed the proposed prohibition broadly so that it would apply
to depository lenders that hold the consumer's asset account, such as
providers of deposit advance products or other types of proposed
covered loans that may be offered by such depository lenders. Because
depository lenders that hold consumers' accounts have greater
information about the status of those accounts than do third-party
lenders, the Bureau believed that depository lenders should have little
difficulty in avoiding failed attempts that would trigger the
prohibition. Nevertheless, if such lenders elect to initiate payment
transfers from consumers' accounts when--as the lenders know or should
know--the accounts lack sufficient funds to cover the amount of the
payment transfers, they could assess the consumers substantial fees
permitted under the asset account agreement (including NSF and
overdraft fees), as well as any late fees or similar penalty fees
permitted under the loan agreement for the covered loan. Accordingly,
the Bureau believed that applying the prohibition in this manner would
help to protect consumers from harmful practices in which such
depository lenders may sometimes engage. As discussed above in Market
Concerns--Payments, for example, the Bureau notably found that a
depository institution that offered loan products to consumers with
accounts at the institution charged some of those consumers NSF fees
and overdraft fees for payment withdrawals initiated within the
institution's internal systems.
Proposed comment 14(b)-1 explained the general scope of the
prohibition. Specifically, it provided that the prohibition would
restrict a lender from initiating any further payment transfers from
the consumer's account in connection with the covered loan, unless the
requirements and conditions in either proposed Sec. 1041.14(c) or (d)
were satisfied. To clarify the ongoing application of the prohibition,
proposed comment 14(b)-1 provided an example to show that a lender
would be restricted from initiating transfers to collect payments that
later fall due or to collect late fees or returned-item fees. The
Bureau believed it was important to make clear that the proposed
restriction on further transfers--in contrast to restrictions in
existing laws and rules like the NACHA cap on re-presentments--would
not merely limit the number of times a lender could attempt to collect
a single failed payment. Lastly, proposed comment 14(b)-1 explained
that the prohibition would apply regardless of whether the lender held
an authorization or instrument from the consumer that was otherwise
valid under applicable law, such as an authorization to collect
payments via preauthorized EFTs under Regulation E or a post-dated
check.
Proposed comment 14(b)-2 clarified that when the prohibition is
triggered, the lender is not prohibited under the rule from initiating
a payment transfer in connection with a bona fide, subsequent covered
loan made to the consumer, provided that the lender had not attempted
to initiate two consecutive failed payment transfers in connection with
the bona fide subsequent covered loan. The Bureau believed that
limiting the restriction in this manner was appropriate to ensure that
a consumer who had benefitted from the restriction at one time would
not be effectively foreclosed from borrowing a covered loan from the
lender after their financial situation had improved.
Proposed 14(b)(1) General
Proposed Sec. 1041.14(b)(1) provided specifically that a lender
must not initiate a payment transfer from a consumer's account in
connection with a covered loan after the lender has attempted to
initiate two consecutive failed payment transfers from the consumer's
account in connection with
[[Page 54750]]
that covered loan. It further proposed that a payment transfer would be
deemed to have failed when it resulted in a return indicating that the
account lacks sufficient funds or, for a lender that was the consumer's
account-holding institution, if it resulted in the collection of less
than the amount for which the payment transfer was initiated because
the account lacked sufficient funds. The specific provision for an
account-holding institution thus would apply when such a lender elected
to initiate a payment transfer resulting in the collection of either no
funds or a partial payment.
Proposed comments 14(b)(1)-1 to 14(b)(1)-4 provided clarification
on when a payment transfer would be deemed to have failed.
Specifically, proposed comment 14(b)(1)-1 explained that for purposes
of the prohibition, a failed payment transfer included but was not
limited to a debit or withdrawal that was returned unpaid or is
declined due to nonsufficient funds in the consumer's account. This
proposed comment clarified, among other things, that the prohibition
applied to debit card transactions that were declined. Proposed comment
14(b)(1)-2 stated that the prohibition would apply as of the date on
which the lender or its agent, such as a payment processor, received
the return of the second consecutive failed transfer or, if the lender
was the consumer's account-holding institution, the date on which the
transfer was initiated. The Bureau believed that, in contrast to other
lenders, a consumer's account-holding institution would or should have
the ability to know that an account lacked sufficient funds before
initiating a transfer (or immediately thereafter, at the latest).
Proposed comment 14(b)(1)-3 clarified that a transfer that would result
in a return for a reason other than a lack of sufficient funds was not
a failed transfer for purposes of the prohibition, citing as an example
a transfer that returned due to an incorrectly entered account number.
Lastly, proposed comment 14(b)(1)-4 explained how the concept of a
failed payment transfer would apply to a transfer initiated by a lender
that was the consumer's account-holding institution. Specifically, the
proposed comment provided that if the consumer's account-holding
institution had initiated a payment transfer that resulted in the
collection of less than the amount for which the payment transfer was
initiated, because the account lacked sufficient funds, then the
payment transfer would be a failed payment transfer for purposes of the
prohibition. This would be the case regardless of whether the result
was classified or coded as a return for nonsufficient funds in the
lender's internal procedures, processes, or systems. The Bureau
believed that, unlike other lenders, such a lender would or should have
the ability to know the result of a payment transfer and the reason for
that result, without having to rely on a ``return'' as classified in
its internal procedures, processes, or systems, or on a commonly
understood reason code. Proposed comment 14(b)(1)-4 further stated that
a consumer's account-holding institution would not be deemed to have
initiated a failed payment transfer if the lender had merely deferred
or forgone the debit or withdrawal of a payment from a consumer
account, based on having observed a lack of sufficient funds. For such
lenders, the Bureau believed it was important to clarify that the
concept of a failed payment transfer incorporates the central concept
of the proposed definition of payment transfer that the lender must
engage in the affirmative act of initiating a debit or withdrawal from
the consumer's account in order for the term to apply.
During the SBREFA process and in outreach with industry in
developing the proposal, some lenders recommended that the Bureau take
a narrower approach in connection with payment attempts by debit cards.
One such recommendation suggested that the prohibition against
additional withdrawal attempts should not apply when neither the lender
nor the consumer's account-holding institution charges an NSF fee in
connection with a second failed payment attempt involving a debit card
transaction that is declined. As explained in the proposal, the Bureau
understood that depository institutions generally do not charge
consumers NSF fees or declined authorization fees for such
transactions, although it was aware that such fees are charged by some
issuers of prepaid cards. It thus recognized that debit card
transactions present somewhat less risk of harm to consumers.
For a number of reasons, however, the Bureau did not believe that
this potential effect was sufficient to propose excluding such
transactions from the rule. First, the recommended approach would not
protect consumers from the risk of incurring an overdraft fee in
connection with the lender's third withdrawal attempt. As discussed in
Market Concerns--Payments, the Bureau's research focusing on online
lenders' attempts to collect covered loan payments through the ACH
system indicates that, in the small fraction of cases in which a
lender's third attempt succeeds--i.e., after the lender has sufficient
information indicating that the account is severely distressed--up to
one-third of the successful attempts are paid out of overdraft
coverage. Second, the Bureau believed that the recommended approach
would be impracticable to comply with and enforce, as the lender
initiating a payment transfer would not necessarily know the receiving
account-holding institution's practice with respect to charging fees on
declined or returned transactions. Additionally, the Bureau was
concerned that lenders might respond to such an approach by seeking to
evade the rule by re-characterizing their fees in some other manner. It
thus believed that it was not appropriate to propose that payment
withdrawal attempts by debit cards or prepaid cards be carved out of
the rule, in light of the narrow range of those situations, the
administrative challenges, and the residual risk to consumers.
During the SBREFA process that preceded its issuance of the
proposal, the Bureau received two other recommendations regarding the
proposed restrictions on payment withdrawal attempts. One SER suggested
that the Bureau delay imposing any restrictions until the full effects
of NACHA's recent 15 percent return rate threshold rule could be
observed. As discussed in Markets Background--Payments, the NACHA rule
that went into effect in 2015 can trigger inquiry and review by NACHA
if a merchant's overall return rate for debits made through the ACH
network exceeds 15 percent. The Bureau considered the suggestion
carefully but did not believe that a delay would be warranted. As
noted, the NACHA rule applies only to returned debits through the ACH
network. Thus, it places no restrictions on lenders' attempts to
withdraw payment through other channels. In fact, as discussed in the
proposal (and confirmed by NACHA's comment to the proposed rule),
anecdotal evidence suggests that lenders are already shifting to use
other channels to evade the NACHA rule. Further, exceeding the
threshold merely triggers closer scrutiny by NACHA. To the extent that
lenders making covered loans were to become subject to the review
process, the Bureau believed that they might be able to justify their
higher return rates by arguing that those higher rates are consistent
with the rates for their market as a whole.
Another SER recommended before the proposal was issued that lenders
should be permitted to make up to four payment collection attempts per
month
[[Page 54751]]
when a loan is in default. The Bureau's evidence indicates that for the
covered loans studied, after a second consecutive attempt to collect
payment fails, the third and subsequent attempts are also very likely
to fail. The Bureau therefore believed that two consecutive failed
payment attempts, rather than four presentment attempts per month, was
the appropriate point at which to trigger the rule's payment
protections. In addition, the Bureau believed that in many cases where
the proposed prohibition would apply, the consumer could technically be
in default on the loan, considering that the lender's payment attempts
would have been unsuccessful. Thus, the suggestion to permit a large
number of payment withdrawal attempts when a loan is in default could
have effectively circumvented the proposed rule.
Proposed 14(b)(2) Consecutive Failed Payment Transfers
Proposed Sec. 1041.14(b)(2) would have defined a first failed
payment transfer and a second consecutive failed payment transfer for
purposes of determining when the prohibition in proposed Sec.
1041.14(b) applies; the proposed commentary to this provision presented
illustrative examples to explain and clarify the application of these
terms. Proposed Sec. 1041.14(b)(2)(i) provided that a failed transfer
would be the first failed transfer if it met any of three conditions.
First, proposed Sec. 1041.14(b)(2)(i)(A) stated that a transfer would
be the first failed payment transfer if the lender had initiated no
other transfer from the consumer's account in connection with the
covered loan. This would apply to the scenario in which a lender's very
first attempt to collect payment on a covered loan had failed. Second,
proposed Sec. 1041.14(b)(2)(i)(B) provided that, generally, a failed
payment transfer would be a first failed payment transfer if the
immediately preceding payment transfer had been successful, regardless
of whether the lender had previously initiated a first failed payment
transfer. This proposed provision set forth the general principle that
any failed payment transfer that followed a successful payment transfer
would be the first failed payment transfer for the purposes of the
prohibition in proposed Sec. 1041.14(b). Lastly, proposed Sec.
1041.14(b)(2)(i)(C) provided that a payment transfer would be a first
failed payment transfer if it was the first failed attempt after the
lender obtained the consumer's authorization for additional payment
transfers pursuant to proposed Sec. 1041.14(c). Proposed comment
14(b)(2)(i)-1 provided two illustrative examples of a first failed
payment transfer.
Proposed Sec. 1041.14(b)(2)(ii) provided that a failed payment
transfer would be the second consecutive failed payment transfer if the
previous payment transfer was a first failed transfer, and defined the
concept of a previous payment transfer to include a payment transfer
initiated at the same time or on the same day as the failed payment
transfer. Proposed comment 14(b)(2)(ii)-1 provided an illustrative
example of the general concept of a second consecutive failed payment
transfer, while proposed comment 14(b)(2)(ii)-2 provided an
illustrative example of a previous payment transfer initiated at the
same time and on the same day. Given the high failure rates for same-
day presentments, the Bureau believed it was important to clarify that
the prohibition would be triggered when two payment transfers initiated
on the same day fail, including instances where they had been initiated
concurrently. Proposed comment 14(b)(2)(ii)-3 clarified that if a
lender initiated a single immediate payment transfer at the consumer's
request pursuant to the exception in Sec. 1041.14(d), then the failed
transfer count would remain at two, regardless of whether the transfer
succeeded or failed. Thus, as the proposed comment further provided,
the exception would be limited to the single transfer authorized by the
consumer. Accordingly, if a payment transfer initiated pursuant to the
exception failed, then the lender would not be permitted to reinitiate
the transfer--e.g., by re-presenting it through the ACH system--unless
the lender had first obtained a new authorization from the consumer,
pursuant to Sec. 1041.14(c) or (d). The Bureau believed this
limitation was necessary, as the authorization for an immediate
transfer would be based on the consumer's understanding of their
account's condition only at that specific moment in time, as opposed to
its possible condition in the future.
Proposed Sec. 1041.14(b)(2)(iii) would have provided the principle
that alternating between payment channels does not reset the failed
payment transfer count. Specifically, it proposed that a failed payment
transfer meeting the conditions in proposed Sec. 1041.14(b)(2)(ii) is
the second consecutive failed transfer, regardless of whether the first
failed transfer was initiated through a different payment channel.
Proposed comment 14(b)(2)(iii)-1 provided an illustrative example of
this concept.
Comments Received
Several industry representatives and lender commenters generally
opposed the Bureau's proposal. These commenters stated that new
industry guidelines issued by NACHA were sufficient to address the
harms identified by the Bureau. Specifically, those new rules set
return thresholds, including a 15 percent rate of total returns, a
three percent rate of administrative returns, and a 0.5 percent rate of
unauthorized transaction returns, and clarified the limits on payment
splitting and re-presentments, as noted above. Conversely, other
commenters argued against delaying or forgoing the proposed approach
because, as the Bureau noted in the proposal, NACHA's new guidelines do
not impact payment transfers initiated outside the ACH system.
Various stakeholders commented on the number of failed payment
transfers that the proposed rule allowed. Some noted that NACHA
operating rules and general industry standards allow three attempts to
collect a single payment. Others expressed concerns that the proposed
rule would in effect reduce the allowance to two attempts, which would
require NACHA to amend its operating rules, and depository institutions
and lenders to adjust their systems. Yet others argued that the Bureau
should not measure all presentments against the presentment cap, but
should instead measure presentments of the same payment, consistent
with NACHA's approach. A few commenters objected to counting payment
attempts towards the cap cross-payment method, and expressed concerns
about the compliance costs associated with tracking payments across
channels.
However, some industry participants agreed with the proposed two-
attempt limit proposed, which they claimed to already have adopted.
Other stakeholders argued that the rule should prohibit payment
transfer attempts after one failed attempt. One such commenter claimed
that gaining the ability to debit a borrower's account would reduce the
lender's incentive to determine whether the borrower would have the
ability to repay the loan and cover other obligations. It also argued
that even one overdraft or NSF fee could generate additional debt and
fees that would quickly snowball.
Some commenters argued that the Bureau should only declare the
initiation of repeated presentments as unfair or abusive. In other
words, this commenter believed that just finalizing this section, and
not any of the ability-
[[Page 54752]]
to-repay requirements, would suffice to address the identified harms
without imposing significant industry costs. One commenter also was
concerned that, as written, the proposal could be interpreted to
require depository institutions to: (1) Monitor lenders' use of the
payment system; (2) determine when a lender may be in violation of
proposed Sec. Sec. 1041.14 and 1041.15; and (3) act as an enforcer of
the regulation even where the consumer authorized the transaction. This
commenter asked the Bureau to clarify that the responsibility of
ensuring compliance with these provisions would be exclusively an
obligation of the lender, and not an obligation of the lender's or the
consumer's depository institution.
Other commenters stated that instead of prohibiting additional
payment transfers after a number of previous failed attempts, the
Bureau should require lenders to provide payment notices that include
reminders that consumers have the ability to stop payments or revoke
existing payment authorizations. These commenters shared the sentiment
of commenters, discussed in the section-by-section analysis of Sec.
1041.7 above, that borrowers should be able to avoid the harm by
initiating stop payments or revoking payment authorizations with
lenders, and argued that disclosure would help improve the efficacy of
those mechanisms to a point where the harms would largely be
eliminated.
One commenter asked the Bureau to additionally require
reauthorization from the consumer after three failed attempts in a 12-
month period, even when those attempts are not consecutive.
A number of comments from State Attorneys General and consumer
groups also touted the benefits of the approach described in the
proposed rule. These commenters noted that the limit on payment
transfer attempts was essential because it would reduce fees and
bolster the ability-to-repay determination.
Final Rule
The Bureau is finalizing the cap on payment presentments in Sec.
1041.8(b), consistent with the conclusions reached above in the
section-by-section analysis of Sec. 1041.7 of the final rule. The
Bureau is, however, making some changes to the proposed rule.
First, to clarify that the presentment cap will apply across all
loans with the lender, the Bureau is replacing, in two places in Sec.
1041.8(b)(1), the phrase ``in connection with a covered loan'' with
``in connection with any covered loan that the consumer has with the
lender.'' Similarly, the Bureau is adding ``or any other covered loan
that the consumer has with the lender'' at the end of Sec.
1014.8(b)(2)(i)(A). A lender will need to seek a new authorization, or
cease payment attempts, after two failed attempts on any loan the
borrower has with the lender. Accordingly, if a borrower has two
outstanding covered loans and a lender makes a failed payment attempt
for each such loan in succession, then the cap is met. The proposed
rule could have been interpreted to apply only to two failed attempts
on one loan, and then two failed attempts on a different loan, and so
forth. Yet the Bureau has adopted this change in order to ensure that
the rule fully prevents the scope of harms intended to be covered under
the rule in light of its understanding and description of the practice
that it has identified as unfair and abusive. Regardless of whether the
multiple presentments are for one loan, or spread across multiple
loans, the borrower harm and expected value would be the same.\1038\ To
the extent lenders are not currently tracking payments across multiple
loans, there may be some additional costs associated with this
adjustment. However, the Bureau does not expect, once systems are
updated, any additional compliance costs.
---------------------------------------------------------------------------
\1038\ The Bureau's Online Payday Loans Payments report on
online payday and payday installment lending did not distinguish
between multiple payments for individual loans and multiple payments
for multiple loans. CFPB Online Payday Loan Payments.
---------------------------------------------------------------------------
Comment 8(b)-1 is amended to incorporate this point, and a new
comment 8(b)-3 is added for further clarity and to add an example as
well. In addition, the comments related to Sec. 1014.8(b) have been
revised to clarify the prohibition's application to situations in which
a consumer has more than one covered loan with a lender. The Bureau is
also adding an example of a consumer with two covered loans who has a
second failed payment transfer, in comment 8(b)(2)(ii)-1.ii.
The second modification of this provision is intended to clarify,
in Sec. 1041.8(b)(1) and elsewhere in the final rule, that the
presentment cap applies on a per-consumer-account basis. That means if
a lender attempts to withdraw payments from multiple accounts, the
lender is limited to two consecutive failed attempts each. The Bureau
makes this clarification because the presumption that funds are
unlikely to be available for a third presentment does not follow when
the presentment is made from a different account. Two consecutive
failed attempts from one account tell the lender nothing about the
condition of another account. However, the prohibition applies to the
other account if the lender then initiates two consecutive failed
payment transfers from that account. The Bureau is adding a new comment
8(b)-2 to clarify this point.
Third, the Bureau is making technical edits to the description, in
Sec. 1041.8(b)(1), of what constitutes a failed payment transfer when
the lender is also the consumer's account-holding institution. That
description, both in the proposal and in the final rule, provides that
for such lenders, presentments resulting in non-sufficient funds,
partial payments, or full payments paid out of overdraft all count
toward the cap. The Bureau is making these edits for consistency with
the new conditional exclusion in Sec. 1041.8(a)(1). The Bureau also is
making similar conforming edits to comment 8(b)(1)-4.
Lastly, the Bureau has made some other technical edits to Sec.
1041.8(b)(2)(ii) for consistency with Sec. 1041.8(b)(2)(i).
In Market Concerns--Payments and the section-by-section analysis of
Sec. 1041.7, the Bureau has already addressed the comments about
whether this rule is necessary in light of NACHA's new guidelines. But
to summarize again briefly, the Bureau believes that NACHA guidelines
do not suffice to prevent all of the harms associated with the practice
identified in Sec. 1041.7. In particular, they would not prevent the
second presentment or the third payment attempt. Commenters noted this
difference and asserted that complying with the rule as proposed would
require companies to change their systems. As explained in the section-
by-section analysis of Sec. 1041.7, the Bureau finds that there is a
significant amount of injury in that third presentment: The Bureau's
study showed that approximately 80 percent of such presentments caused
an overdraft fee or failed (and likely caused an NSF fee and/or
returned-item fee). Importantly, not only do the NACHA Rules apply only
to payments made through the ACH network, but NACHA's own comment noted
that it had already seen vendors shift to using other payment methods,
likely in an effort to evade the NACHA Rules.
The Bureau has chosen to use a two-presentment cap to prevent
consumer harms from the practice that it has identified as unfair and
abusive. It did so not because the first re-presentment causes no
injury, but rather because the injury after each failed attempt is
cumulative and thus the injury becomes more significant over time. In
addition, the first re-presentment implicates certain additional
countervailing
[[Page 54753]]
benefits, as lenders may have simply tried the first presentment at the
wrong time, and consumers may find it more convenient not to have to
reauthorize after just one failed attempt. Additionally, if lenders
only have one try, it may cause them to be overly circumspect about
when to use it, which could undermine the benefits of ease and
convenience for consumers. The Bureau therefore is drawing the line at
two re-presentments in an abundance of caution, in an attempt to avoid
regulating potentially more legitimate justifications for re-
presentment. Nonetheless, the Bureau is aware of the harms that can
occur even from a single re-presentment, and that the manner in which a
lender engages in re-presentment activities more generally could be
unfair, deceptive, or abusive. The rule does not provide a safe harbor
against misconduct that it does not explicitly address, and the Bureau
could in appropriate circumstances address problems through its
supervisory and enforcement authority.\1039\
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\1039\ See, e.g., Press Release, Bureau of Consumer Fin. Prot.,
``CFPB Orders EZCORP to Pay $10 Million for Illegal Debt Collection
Tactics,'' (Dec. 16, 2015), available at http://www.consumerfinance.gov/newsroom/cfpb-orders-ezcorp-to-pay-10-million-for-illegal-debt-collection-tactics/; Press Release, Bureau
of Consumer Fin. Prot., ``CFPB Takes Action Against Online lender
for Deceiving Borrowers,'' (Nov. 18, 2015), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-online-lender-for-deceiving-borrowers/.
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For purposes of determining whether the cap has been met, the
Bureau has decided not to distinguish between re-presentments of the
same payment and new presentments to cover new loan installments, as
NACHA does. As the Bureau stated in the proposal, and now affirms, the
tailoring of individualized requirements for each discrete payment
practice would add considerable complexity to the rule and yet still
could leave consumers vulnerable to harms from aggressive and evasive
practices that may emerge in markets for covered loans in the future.
Accordingly, the Bureau is addressing a somewhat broader practice that
it has determined to be unfair and abusive by providing significant
consumer protections from a range of harms in a considerably less
complex fashion. Notably, the Bureau's study that showed very high
rates of rejection and overdraft fees for third presentments did not
distinguish between re-presentments of the same payment and new
presentments for new installments. And the Bureau believes that after
two failed attempts to the same account, even if two weeks or a month
has passed, there is reason to believe a third would fail, and that
obtaining a new authorization would be appropriate. The Bureau thus
concludes that considerable injury is likely occurring from such new
payment attempts and thus inclusion of those payments towards the cap
is warranted.
As noted above, one commenter suggested finalizing this portion of
the rule as a standalone, without the underwriting provisions requiring
lenders to make a reasonable, ability-to-repay determination. The
Bureau declines to follow this approach, as it continues to believe
that Sec. 1041.8 alone could not prevent all of the harms that flow
from the practice identified in Sec. 1041.7, including those stemming
from the practice identified in Sec. 1041.4. If lenders continue to
make covered loans without assessing borrowers' ability to repay,
consumers would still confront the harms associated with unaffordable
loans--default, delinquency, re-borrowing, or other collateral injuries
as described above in Market Concerns--Underwriting. The payment
provisions of this rule address one of the potential collateral
injuries from an unaffordable loan--which is itself an important source
of harm--but they do not address the whole scope of harm that the
Bureau seeks to address in part 1041. Therefore, the Bureau concludes
that it would be quite insufficient to finalize subpart C of this rule
by itself.
Furthermore, the Bureau concludes that disclosures alone would not
suffice to prevent all of the harms caused by the unfair and abusive
practice identified in Sec. 1041.7 of the final rule. As explained
above in Market Concerns--Payments and the section-by-section analysis
of Sec. 1041.7, the Bureau has observed significant difficulty when
borrowers seek to stop payments or revoke authorizations. Disclosures
may be effective in helping consumers know their rights, and understand
what is occurring, but they would not help consumers stop the multiple
attempts. Furthermore, while the Bureau believes its model disclosures
will be effective in informing some consumers, the Bureau knows there
are many others they will not reach or for whom they will not be as
effective. As discussed below, one commenter described that it had
tested the Bureau's ``notice of restrictions on future loans,'' which
does not pertain to this particular part of the rule. The Bureau
believes the methodology of that testing may have been flawed as noted
in the section-by-section analysis of Sec. 1041.6, but as we noted
above, it is a reminder of the fact that disclosures in complicated
areas, such as the payment attempt practices at issue here, are
unlikely to be as effective as a substantive intervention shaped to
respond more directly to the harms caused by the practice identified as
unfair and abusive. That conclusion here is also consistent with the
Bureau's conclusion about the effectiveness of disclosures as a
possible alternative to the ability-to-repay requirements laid out
above in Market Concerns--Underwriting and the section-by-section
analysis of Sec. 1041.4.
The principal obligation to comply with Sec. Sec. 1041.8 and
1041.9 rests on the lender. Of course, if the lender uses a service
provider to manage its payment withdrawals, that service provider may
also be liable for any violation of the rule, as provided in the Dodd-
Frank Act.\1040\ The Bureau does not intend for this rule to have the
effect of changing the obligations of non-lender depository
institutions.
---------------------------------------------------------------------------
\1040\ 12 U.S.C. 5531; 12 U.S.C. 5536(a).
---------------------------------------------------------------------------
The Bureau also has decided not to require reauthorization after
three failed attempts in a 12-month period. The effect of this change
would be to establish a one-attempt cap where the lender had previously
reached the two-attempt cap in the same 12-month period, or trigger the
cap where, for example, every other payment fails. The Bureau has set
the two-attempt cap to track the practice identified as unfair and
abusive, and to avoid being overly restrictive by allowing the lender
to make one more payment attempt after the first failed attempt
following an authorization. The Bureau concludes that adding this
requirement about the number of attempts in a 12-month period would add
further complexity to the rule and would increase the burdens
associated with tracking payment attempts.
8(c) Exception for Additional Payment Transfers Authorized by the
Consumer
Proposed Rule
Whereas proposed Sec. 1041.14(b) would have established the
prohibition on further payment withdrawals, proposed Sec. 1041.14(c)
and (d) would have established requirements for obtaining the
consumer's new and specific authorization to make further payment
withdrawals. Proposed Sec. 1041.14(c) was framed as an exception to
the prohibition, even though payment withdrawals made pursuant to its
requirements would not fall within the scope of the unfair and abusive
practice preliminarily identified in proposed Sec. 1041.13 (now Sec.
1041.7 of the final rule).
Under the proposal, a new authorization obtained pursuant to
[[Page 54754]]
proposed Sec. 1041.14(c) would reset to zero the failed payment
transfer count under proposed Sec. 1041.14(b), whereas an
authorization obtained pursuant to proposed Sec. 1041.14(d) would not.
Accordingly, a lender would be permitted under proposed Sec.
1041.14(c) to initiate one or more additional payment transfers that
are authorized by the consumer in accordance with certain requirements
and conditions, and subject to the general prohibition on initiating a
payment transfer after two consecutive failed attempts. The proposed
authorization requirements and conditions in proposed Sec. 1041.14(c)
were designed to assure that, before a lender initiated another payment
transfer (if any) after triggering the prohibition, the consumer did in
fact want the lender to resume making payment transfers and that the
consumer understands and had agreed to the specific date, amount, and
payment channel for those succeeding payment transfers. The Bureau
stated that requiring the key terms of each transfer to be clearly
communicated to the consumer before the consumer decides whether to
grant authorization would help assure that the consumer's decision is
an informed one and that the consumer understands the consequences that
may flow from granting a new authorization and help the consumer avoid
future failed payment transfers. The Bureau believed that, when this
assurance was provided, it no longer would be unfair or abusive for a
lender to initiate payment transfers that accord with the new
authorization, at least until such point that the lender initiated two
consecutive failed payment transfers pursuant to the new authorization.
The Bureau recognized that, in some cases, lenders and consumers
might want to use an authorization under this exception to resume
payment withdrawals according to the same terms and schedule that the
consumer had authorized prior to the two consecutive failed attempts.
In other cases, lenders and consumers might want to establish a new
authorization to accommodate a change in the payment schedule--as might
be the case, for example, when the consumer entered into a workout
agreement with the lender. Accordingly, the proposed exception was
designed to be sufficiently flexible to accommodate both circumstances.
In either circumstance, however, the lender would be permitted to
initiate only those transfers authorized by the consumer under proposed
Sec. 1041.14(c).
Proposed Sec. 1041.14(c)(1) would establish the general exception
to the prohibition on additional payment transfer attempts under Sec.
1041.14(b), while the remaining subparagraphs would specify particular
requirements and conditions. First, proposed Sec. 1041.14(c)(2) would
establish the general requirement that for the exception to apply to an
additional payment transfer, the transfer's specific date, amount, and
payment channel must be authorized by the consumer. In addition,
proposed Sec. 1041.14(c)(2) would address the application of the
specific date requirement to re-initiating a returned payment transfer
and also address authorization of transfers to collect a late fee or
returned item fee, if such fees are incurred in the future. Second,
proposed Sec. 1041.14(c)(3) would establish procedural and other
requirements and conditions for requesting and obtaining the consumer's
authorization. Lastly, proposed Sec. 1041.14(c)(4) would address
circumstances in which the new authorization becomes null and void.
Each of these sets of requirements and conditions is discussed in
detail below. Proposed comment 14(c)-1 summarized the exception's main
provisions, and noted the availability of the exception in proposed
Sec. 1041.14(d).
Proposed Sec. 1041.14(c)(1) provided that, notwithstanding the
prohibition in proposed Sec. 1041.14(b), a lender would be permitted
to initiate additional payment transfers from a consumer's account
after two consecutive transfers by the lender had failed if the
transfers had been authorized by the consumer as required by proposed
Sec. 1041.14(c), or if the lender had executed a single immediate
payment transfer at the consumer's request under proposed Sec.
1041.14(d). Proposed comment 14(c)(1)-1 explained that the consumer's
authorization required by proposed Sec. 1041.14(c) would be in
addition to, and not in lieu of, any underlying payment authorization
or instrument required to be obtained from the consumer under
applicable laws. The Bureau noted, for example, that an authorization
obtained pursuant to proposed Sec. 1041.14(c) would not take replace
an authorization that a lender would be required to obtain under
applicable laws to collect payments via RCCs, if the lender and
consumer wished to resume payment transfers using that method. However,
in cases where lenders and consumers wished to resume payment transfers
via preauthorized EFTs, as that term is defined in Regulation E, the
Bureau believed that--given the high degree of specificity required by
proposed Sec. 1041.14(c)--lenders could comply with the authorization
requirements in Regulation E, 12 CFR 1005.10(b) and the requirements in
proposed Sec. 1041.14(c) within a single authorization process.
Proposed Sec. 1041.14(c)(2)(i) would establish the general requirement
that for the exception in proposed Sec. 1041.14(c) to apply to an
additional payment transfer, the transfer's specific date, amount, and
payment channel must be authorized by the consumer. The Bureau believed
that requiring lenders to explain these key terms of each transfer to
consumers when seeking authorization would help ensure that consumers
could make an informed decision between granting authorization for
additional payment transfers, and other convenient repayment options--
e.g., payments by cash or money order, ``push'' bill payment services,
and single immediate payment transfers authorized pursuant to proposed
Sec. 1041.14(d)--which would help them avoid future failed payment
transfers.
With respect to lenders that wished to obtain permission to
initiate ongoing payment transfers from a consumer whose account has
already been subject to two consecutive failed attempts, the Bureau
believed it was important to require such lenders to obtain the
consumer's agreement to the specific terms of each future transfer from
the outset, rather than to provide for less specificity upfront and
rely instead on the fact that under proposed Sec. 1041.15(b), every
consumer with a covered loan will receive notice containing the terms
of each upcoming payment transfer. As discussed above, the Bureau
believed that, in general, the proposed required notice for all payment
transfers would help to reduce harms that may occur from payment
transfers by alerting the consumers to the upcoming attempt in
sufficient time for them to arrange to make a required payment when
they could afford it, and to make choices that might minimize the
attempt's impact on their accounts when the timing of a payment is not
aligned with their finances. However, the Bureau believed that
consumers whose accounts have already experienced two failed payment
withdrawal attempts in succession would have demonstrated a degree of
financial distress that would make it unlikely that a notice of another
payment attempt would enable them to avoid further harm.
Proposed comment 14(c)(2)(i)-1 explained the general requirement
that the terms of each additional payment transfer must be authorized
by the consumer in order to qualify for the exception. It further
clarified that for the
[[Page 54755]]
exception to apply to an additional payment transfer, these required
terms had to be included in the signed authorization that the lender
would be required to obtain from the consumer.
Proposed comment 14(c)(2)(i)-2 clarified that the requirement that
the specific date of each additional transfer be expressly authorized
would be satisfied if the consumer authorizes the month, day, and year
of the transfer.
Proposed comment 14(c)(2)(i)-3 clarified that the exception would
not apply if the lender initiated an additional payment transfer for an
amount larger than the amount authorized by the consumer, unless it
satisfied the requirements and conditions in proposed Sec.
1041.14(c)(2)(iii)(B) for adding the amount of a late fee or returned
item fee to an amount authorized by the consumer.
Proposed comment 14(c)(2)(i)-4 clarified that a payment transfer
initiated pursuant to Sec. 1041.14(c) would be initiated for the
specific amount authorized by the consumer if its amount was equal to
or smaller than the authorized amount. The Bureau recognized that in
certain circumstances it might be necessary for the lender to initiate
transfers for a smaller amount than specifically authorized including,
for example, when the lender needed to exclude from the transfer the
amount of a partial prepayment. In addition, the Bureau believed that
this provision would provide useful flexibility in instances where the
prohibition on further payment transfers is triggered at a time when
the consumer has not yet fully drawn down on a line of credit. In such
instances, lenders and consumers might want to structure the new
authorization to accommodate payments on future draws by the consumer.
With this provision for smaller amounts, the lender could seek
authorization for additional payment transfers for the payment amount
that would be due if the consumer had drawn the full amount of
remaining credit, and then would be permitted under the exception to
initiate the transfers for amounts smaller than the specific amount, if
necessary.
Proposed Sec. 1041.14(c)(2)(ii) would establish a narrow exception
to the general requirement that an additional payment transfer be
initiated on the date authorized by the consumer. Specifically, it
would provide that when a payment transfer authorized by the consumer
pursuant to the exception is returned for nonsufficient funds, the
lender would be permitted to re-present the transfer on or after the
date authorized by the consumer, provided that the returned transfer
had not triggered the prohibition on further payment transfers in
proposed Sec. 1041.14(b). The Bureau believed that this narrow
exception would accommodate practical considerations in payment
processing and noted that the prohibition in proposed Sec. 1041.14(b)
would protect the consumer if the re-initiation had failed.
Proposed Sec. 1041.14(c)(2)(iii) contained two separate provisions
that would permit a lender to obtain the consumer's authorization for,
and to initiate, additional payment transfers to collect a late fee or
returned-item fee. Both of these provisions were intended to permit
lenders to use a payment authorization obtained pursuant to proposed
Sec. 1041.14(c)(2)(iii) to collect a fee that was not anticipated when
the authorization was obtained, without having to go through a second
authorization process under proposed Sec. 1041.14(c).
First, proposed Sec. 1041.14(c)(2)(iii)(A) would permit a lender
to initiate an additional payment transfer solely to collect a late fee
or returned-item fee without obtaining a new consumer authorization for
the specific date and amount of the transfer only if the lender, in the
course of obtaining the consumer's authorization for additional payment
transfers, had informed the consumer of the fact that individual
payment transfers to collect a late fee or returned-item fee might be
initiated, and had obtained the consumer's general authorization for
such transfers in advance. Specifically, the lender could initiate such
transfers only if the consumer's authorization obtained pursuant to
proposed Sec. 1041.14(c) included a statement, in terms that were
clear and readily understandable to the consumer, that the lender might
initiate a payment transfer solely to collect a late fee or returned-
item fee. In addition, the lender would be required to specify in the
statement the highest amount for such fees that may be charged, as well
as the payment channel to be used. The Bureau believed this required
statement might be appropriate to help ensure that the consumer is
aware of key information about such transfers--particularly the highest
possible amount--when the consumer would be deciding whether to grant
an authorization.
Proposed comment 14(c)(2)(iii)(A)-1 clarified that the consumer's
authorization for an additional payment transfer solely to collect a
late fee or returned item fee needed not satisfy the general
requirement that the consumer must authorize the specific date and
amount of each additional payment transfer. Proposed comment
14(c)(2)(iii)(A)-2 provided, as an example, that the requirement to
specify the highest possible amount that might be charged for a fee
would be satisfied if the required statement specified the maximum
amount permissible under the loan agreement. Proposed comment
14(c)(2)(iii)(A)-3 provided that if a fee might vary due to remaining
loan balance or other factors, then the lender had to assume the
factors that would result in the highest possible amount in calculating
the specified amount.
The second provision, proposed Sec. 1041.14(c)(2)(iii)(B), would
have permitted a lender to add the amount of one late fee or one
returned-item fee to the specific amounts authorized by the consumer as
provided under proposed Sec. 1041.14(c)(2) only if the lender had
informed the consumer of the fact that such transfers for combined
amounts might be initiated, and had obtained the consumer's general
authorization for such transfers in advance. Specifically, under the
proposal, the lender could initiate transfers for such combined amounts
only if the consumer's authorization included a statement, in terms
that were clear and readily understandable to the consumer, that the
amount of one late fee or one returned-item fee might be added to any
payment transfer authorized by the consumer. In addition, the lender
would be required to specify in the statement the highest amount for
such fees that may be charged, as well as the payment channel to be
used. Proposed comment 14(c)(2)(iii)(B)-1 provided further
clarification on that provision.
Proposed Sec. 1041.14(c)(3) provided a three-step process for
obtaining a consumer's authorization for additional payment transfers.
First, proposed Sec. 1041.14(c)(3)(ii) would contain provisions for
requesting the consumer's authorization. The permissible methods for
requesting authorization would allow lenders considerable flexibility.
For example, lenders would be permitted to provide the transfer terms
to the consumer in writing or (subject to certain requirements and
conditions) electronically without regard to the consumer consent and
other provisions of the E-Sign Act. In addition, lenders would be
permitted to request authorization orally by telephone, subject to
certain requirements and conditions. In the second step, proposed Sec.
1041.14(c)(3)(iii) provided that, for an authorization to be valid
under the exception, the lender had to obtain an authorization that is
signed or otherwise agreed to by the consumer and that includes the
required terms for each additional payment transfer. The lender
[[Page 54756]]
would be permitted to obtain the consumer's signature in writing or
electronically, provided the E-Sign Act requirements for electronic
records and signatures were met. This was intended to facilitate
requesting and obtaining the consumer's signed authorization in the
same communication. In the third and final step, proposed Sec.
1041.14(c)(3)(iii) also would require the lender to provide to the
consumer memorialization of the authorization no later than the date on
which the first transfer authorized by the consumer is initiated. The
comments to proposed Sec. 1041.14(c)(3) specified and explained these
points in greater detail. Under the proposal, the lender would be
permitted to provide the memorialization in writing or electronically,
without regard to the consumer consent and other provisions of the E-
Sign Act, provided that it was in a retainable form.
In developing this three-step approach, the Bureau endeavored to
ensure that the precise terms of the additional transfers for which a
lender sought authorization were effectively communicated to the
consumer during each step of the process, and that the consumer had the
ability to decline authorizing any payment transfers with terms that
the consumer believed would likely cause challenges in managing her
account. In addition, the Bureau designed the approach to be compatible
with lenders' existing systems and procedures for obtaining other types
of payment authorizations, particularly authorizations for
preauthorized, or ``recurring,'' EFTs under Regulation E. Accordingly,
the proposed procedures generally were designed to mirror existing
requirements in Regulation E, 12 CFR 1005.10(b). Regulation E requires
that preauthorized EFTs from a consumer's account be authorized ``only
by a writing signed or similarly authenticated by the consumer.''
\1041\ Under EFTA and Regulation E, companies can obtain the required
consumer authorizations for preauthorized EFTs in several ways.
Consumer authorizations can be provided in paper form or
electronically. The commentary to Regulation E explains that the rule
``permits signed, written authorizations to be provided
electronically,'' and specifies that the ``writing and signature
requirements . . . are satisfied by complying with the [E-Sign Act]
which defines electronic records and electronic signatures.'' \1042\
Regulation E does not prohibit companies from obtaining signed, written
authorizations from consumers over the phone if the E-Sign Act
requirements for electronic records and signatures are met.\1043\ In
addition, Regulation E requires persons that obtain authorizations for
preauthorized EFTs to provide a copy of the terms of the authorization
to the consumer.\1044\ The copy of the terms of the authorization must
be provided in paper form or electronically.\1045\ The Bureau
understands that this requirement in Regulation E, 12 CFR 1005.10(b),
is not satisfied by providing the consumer with a recording of a
telephone call.
---------------------------------------------------------------------------
\1041\ See 12 CFR 1005.10(b).
\1042\ 12 CFR part 1005, Supp. I, comment 10(b)-5. The E-Sign
Act establishes that electronic signatures and electronic records
are valid and enforceable if they meet certain criteria. See 15
U.S.C. 7001(a)(1). An electronic signature is ``an electronic sound,
symbol, or process, attached to or logically associated with a
contract or other record and executed or adopted by a person with
the intent to sign the record.'' 15 U.S.C. 7006(5). An electronic
record is ``a contract or other record created, generated, sent,
communicated, received, or stored by electronic means.'' 15 U.S.C.
7006(4).
\1043\ In 2006, the Board explained that if certain types of
tape-recorded authorizations constituted a written and signed (or
similarly authenticated) authorization under the E-Sign Act, then
the authorization would satisfy Regulation E requirements as well.
71 FR 1638, 1650 (Jan. 10, 2006).
\1044\ See 12 CFR 1005.10(b).
\1045\ See 12 CFR part 1005, Supp. I, comment 10(b)-5.
---------------------------------------------------------------------------
During the SBREFA process, an SER recommended that the procedures
for obtaining consumers' re-authorization after lenders trigger the
proposed cap on failed presentments should be similar to existing
procedures for obtaining consumers' authorizations to collect payment
by preauthorized EFTs under Regulation E. The Bureau believed that
harmonizing the two procedures would reduce costs and burdens on
lenders by permitting them to incorporate the proposed procedures for
obtaining authorizations into existing systems. Accordingly, as
discussed above, the proposed approach was designed to achieve this
goal.
Lastly, proposed Sec. 1041.14(c)(4) would specify the
circumstances in which an authorization for additional payment
transfers obtained pursuant to proposed Sec. 1041.14(c) expires or
becomes inoperative. First, proposed Sec. 1041.14(c)(4)(i) provided
that a consumer's authorization would become null and void for purposes
of the exception if the lender obtained a subsequent new authorization
from the consumer pursuant to the exception. This provision was
intended to ensure that, when necessary, lenders could obtain a
consumer's new authorization to initiate transfers for different terms,
or to continue collecting payments on the loan, and that such new
authorization would supersede the prior authorization. Second, proposed
Sec. 1041.14(c)(4)(ii) provided that a consumer's authorization would
become null and void for purposes of the exception if two consecutive
payment transfers initiated pursuant to the consumer's authorization
had failed, as specified in proposed Sec. 1041.14(b). The Bureau
proposed this provision for clarification purposes.
Comments Received
A number of commenters objected to the proposal that companies
would have to obtain new authorizations after two failed attempts. More
specifically, many of the commenters focused on how the rule would
impact recurring debits or preauthorized EFTs. Under the proposal, if
two recurring debits or EFTs failed, then the lender would have to
receive a new authorization from the borrower under proposed Sec.
1041.8(c) or (d) to continue processing payment transfers. Commenters
argued that this could harm consumers because they might default or
become delinquent on the loan if they believed the recurring transfers
would continue, but the lender could not initiate further transfers
because two previous transfers had been rejected. Commenters stated
that a required notice informing borrowers of their right to revoke an
authorization under Regulation E would be more appropriate for
circumstances involving preauthorized EFTs.
Commenters also argued that the rule would deter lenders from using
recurring transfers, a convenience to borrowers, if it meant that the
loan would then be considered a covered longer-term loan subject to the
requirements of the rule.
As stated previously, the Bureau also received a number of comments
describing purported inconsistencies with the NACHA Rules. Specific to
the proposed exception in Sec. 1041.14(c), commenters noted that the
NACHA Rules currently do not allow companies to add fees to an
authorized amount, and instead only permit companies to initiate
separate transfers for fees if the company had obtained the consumer's
authorization for such transfers.
A consumer group asked the Bureau to clarify that the proposed
``failed payment clock'' would start again after reauthorization,
meaning that if a lender reached the payment transfer limit, and then
obtained reauthorization under proposed Sec. 1041.14(c), then the
borrower would need to get another new authorization if the lender
again reaches the payment transfer limit.
Finally, the Bureau received comments generally supportive of the
proposition that a lender should be
[[Page 54757]]
required to, and allowed to, obtain a new authorization after two
consecutive attempts have failed.
Final Rule
The Bureau is now finalizing Sec. 1041.8(c)--which is renumbered
from Sec. 1041.14(c) of the proposed rule--with a few revisions to the
content of the regulation and corresponding commentary. Most notably,
the Bureau is modifying proposed Sec. 1041.8(c)(2)(iii), which permits
lenders to collect late fees and returned-item fees pursuant to the
exception in Sec. 1041.8(c). Specifically, in light of comments noting
inconsistencies with NACHA Rules, the Bureau is deleting proposed
paragraph (c)(2)(iii)(B), which would have permitted lenders to add the
amount of such a fee to the amount of any payment transfer initiated
pursuant to the exception, provided that the consumer authorized the
addition of the fee amount. Accordingly, the Bureau is finalizing the
provisions in Sec. 1041.8(c)(2)(iii) to permit lenders to initiate a
payment transfer to collect a late fee or returned-time fee under the
exception in Sec. 1041.8(c) only as a stand-alone transfer for the
amount of the fee itself, and only if authorized by the consumer in
accordance with the rule's requirements. The Bureau notes that limiting
such transfers in this way is consistent with existing practices of
lenders that comply with NACHA Rules. Because the Bureau has deleted
paragraph (c)(2)(iii)(B), paragraph (c)(2)(iii)(A) has been renumbered
as paragraph (c)(2)(iii). The Bureau has also deleted the corresponding
comment, and renumbered the remaining comments to reflect the change.
The Bureau clarified the remaining paragraph (c)(2)(iii) as well.
As discussed immediately above, that paragraph allows lenders to
initiate payment transfers for the collection of fees when a consumer
has authorized such transfers. The Bureau replaced the word
``authorized'' with the phrase ``has authorized the lender to initiate
such payment transfers in advance of the withdrawal attempt'' to
indicate that the authorization cannot be obtained after-the-fact.
The Bureau is making no other substantive changes to paragraph (c)
or its corresponding comments, and finalizes the section as otherwise
proposed.
A number of the comment topics related to the prohibition on
repeated failed payment attempts were already addressed above in Market
Concerns--Payments or in the section-by-section analysis of Sec.
1041.7, which identified this unfair and abusive practice. The Bureau
recognizes that with recurring debits or preauthorized EFTs involving
installment loans, if two scheduled payments fail, the recurring
transfers would need to cease until after the lender has obtained a new
authorization. It also recognizes that this could be an inconvenience,
but nonetheless believes the interest of ceasing payment attempts when
the consumer's account has demonstrated that it lacks the funds to
cover ongoing payment attempts warrants the inclusion of preauthorized
EFTs. As stated in Sec. 1041.8(c), borrowers who wish to continue
making payments out of that account can simply reauthorize, including
by setting up a new authorization for preauthorized EFTs. They can also
request a single immediate payment transfer under Sec. 1041.8(d) at
any time.
Concerns that the rule might deter lenders from offering recurring
transfers on high-cost longer-term installment loans, because it would
bring the loan under the requirements of the rule as proposed, are
mitigated by the fact that the Bureau currently is not finalizing the
ability-to-repay underwriting criteria as to high-cost longer-term
installment loans. As a result, the only provisions of the rule that
could be triggered by a leveraged payment mechanism are the
requirements relating to payment attempts. It is, however, still
possible that a lender that is making high-cost longer-term installment
loans might choose not to take a leveraged payment mechanism, including
by not offering preauthorized EFTs. Borrowers in these circumstances
could set up recurring ``push'' payments with their account-holding
institution, instead of giving lenders authorization to initiate a
``pull,'' thereby still obtaining the convenience of recurring
automatic transfers. The Bureau notes that these borrowers would also
avoid all of the harms identified in Sec. 1041.7 because the lender
would not be authorized to initiate payment requests themselves.
The Bureau does not find it necessary, contrary to some received
comments, to clarify further that the ``failed payment clock'' under
Sec. 1041.8(b) restarts after a borrower provides a new authorization
under Sec. 1041.8(c). Section 1041.8(b)(2)(i)(C) makes clear that the
clock does restart after a borrower reauthorizes under Sec. 1041.8(c).
(d) Exception for Initiating a Single Immediate Payment Transfer at the
Consumer's Request
Proposed Rule
Proposed Sec. 1041.14(d) set forth a second exception to the
prohibition on initiating further payment transfers from a consumer's
account in proposed Sec. 1041.14(b). In contrast to the exception
available under proposed Sec. 1041.14(c), which would allow lenders to
initiate multiple recurring payment transfers authorized by the
consumer in a single authorization, this exception would permit lenders
to initiate a payment transfer only on a one-time basis immediately
upon receipt of the consumer's authorization, while leaving the overall
prohibition in place. This limited approach was designed to facilitate
the collection of payments that would be proffered by the consumer for
immediate processing, without requiring compliance with the multi-stage
process in proposed Sec. 1041.14(c), and to ensure that consumers
would have the option to continue making payments--one payment at a
time--after the prohibition in proposed Sec. 1041.14(b) had been
triggered, without having to provide lenders with broader ongoing
access to their accounts.
In particular, subject to certain timing requirements, proposed
Sec. 1041.14(d) would permit lenders to initiate a payment transfer
from a consumer's account after the prohibition had been triggered,
without obtaining the consumer's authorization for additional payment
transfers in accordance with proposed Sec. 1041.14(c), if the consumer
had authorized a one-time EFT or proffered a signature check for
immediate processing. Under proposed Sec. 1041.14(d)(1), a payment
transfer initiated by either of these two payment methods would be
required to meet the definition of a ``single immediate payment
transfer at the consumer's request'' in proposed Sec. 1041.14(a)(2).
Thus, for the exception to apply, the lender must initiate the EFT or
deposit the check within one business day after receipt.
Proposed Sec. 1041.14(d)(2) provided that, for the exception to
apply, the consumer had to authorize the underlying one-time EFT or
provide the underlying signature check to the lender, as applicable, no
earlier than the date on which the lender had provided to the consumer
the consumer rights notice required by proposed Sec. 1041.15(d) or on
the date that the consumer affirmatively had contacted the lender to
discuss repayment options, whichever date was earlier. The Bureau
believed that many consumers who
[[Page 54758]]
would elect to authorize only a single transfer under this exception
would do so in part because they had already received the notice, had
been informed of their rights, and had chosen to explore their options
with the lender. The Bureau also believed that in some cases, consumers
might contact the lender after discovering that the lender had made two
failed payment attempts (such as by reviewing their online bank
statements) before the lender had provided the notice. Moreover, by
definition, this exception would not require the consumer to decide
whether to provide the lender an authorization to resume initiating
payment transfer from their account on an ongoing basis. Accordingly,
the Bureau believed it was unnecessary to propose requirements similar
to those proposed for the broader exception in proposed Sec.
1041.14(c) to ensure that consumers had received the notice informing
them of their rights at the time of authorization.
Proposed comment 14(d)-1 cross-referenced proposed Sec.
1041.14(b)(a)(2) and accompanying commentary for guidance on payment
transfers that would meet the definition of a single immediate payment
transfer at the consumer's request. Proposed comment 14(d)-2 clarified
how the prohibition on further payment transfers in proposed Sec.
1041.14(b) continued to apply when a lender initiates a payment
transfer pursuant to the exception in proposed Sec. 1041.14(d).
Specifically, the proposed comment clarified that a lender would be
permitted under the exception to initiate the single payment transfer
requested by the consumer only once, and thus would be prohibited under
proposed Sec. 1041.14(b) from re-initiating the payment transfer if it
failed, unless the lender subsequently obtained the consumer's
authorization to re-initiate the payment transfer under proposed Sec.
1041.14(c) or (d). The proposed comment further clarified that a lender
would be permitted to initiate any number of payment transfers from a
consumer's account pursuant to the exception in proposed Sec.
1041.14(d), provided that the requirements and conditions were
satisfied for each such transfer. Accordingly, the exception would be
available as a payment option on a continuing basis after the
prohibition in proposed Sec. 1041.14(b) had been triggered, as long as
each payment transfer was authorized and initiated in accordance with
the proposed exception's timing and other requirements. In addition,
the proposed comment cross-referenced proposed comment 14(b)(2)(ii)-3
for further guidance on how the prohibition in proposed Sec.
1041.14(b) would apply to the exception in proposed Sec. 1041.14(d).
Proposed comment 14(d)-3 explained, by providing an example, that a
consumer affirmatively had contacted the lender when the consumer
called the lender after noticing on their bank statement that the
lender's last two payment withdrawal attempts had been returned for
nonsufficient funds.
The Bureau believed that the requirements and conditions in
proposed Sec. 1041.14(d) would prevent the harms that otherwise would
occur if the lender--absent obtaining the consumer's authorization for
additional payment transfers under proposed Sec. 1041.14(c)--were to
initiate further transfers after two consecutive failed attempts. The
Bureau believed that consumers who would authorize such transfers would
do so based on their first-hand knowledge of their account balance at
the time that the transfer, by definition, must be initiated. As a
result of these two factors, the Bureau believed there was a
significantly reduced risk that the transfer would fail.
Comments Received
Commenters argued that the proposed provisions in Sec. 1041.14(d)
that would not allow lenders to initiate single immediate payment
transfers at the consumer's request unless the borrower had received
the consumer rights notice or the borrower affirmatively contacted the
lender were detrimental to consumers. For borrowers who did not consent
to electronic communications, commenters argued that it would take days
to mail the notices, meaning borrowers might remain in delinquency for
longer than they otherwise would if a collector could simply call and
ask for a single immediate payment transfer. Commenters also argued
that the proposed rule would result in situations where a collector
would call the consumer, ask if they wanted to reauthorize payments,
and then ask the consumer to call back to ``affirmatively contact the
lender,'' which the Bureau agrees would be an unfortunate unintended
consequence.
One commenter argued that paragraph (d) would deter companies from
reaching out to the consumer after a payment was rejected the first
time to ask whether the consumer wanted to cover a required payment
with a single immediate payment. It provided an example of a consumer
authorizing a recurring ACH. If that recurring ACH was rejected, the
commenter's current practice was to call the borrower to ask if they
wanted to cover the payment over the phone using a different method
(under an independent authorization). The commenter stated that if the
consumer authorized a different payment that was then also rejected,
then the notice-and-consent requirements would be triggered. This
commenter argued that as it would be hard to track payments across all
non-cash methods, the proposed rule might deter companies from reaching
out to the consumer after the first ACH was rejected.
Final Rule
The Bureau is finalizing paragraph (d) as proposed, with only
technical edits to reflect the renumbering of this section to Sec.
1041.8.
The Bureau has decided not to eliminate the requirement that single
immediate payment transfers only be processed after the consumer rights
notice required under Sec. 1041.9(c) is provided unless a borrower
affirmatively reaches out to the lender to initiate the payment
transfer. Commenters correctly noted that when combining the
requirements in paragraphs (a), (b), (c), and (d), a lender will not be
able to initiate any payment transfers after two failed payment
transfers until after it they provide the notice under Sec. 1041.9(c),
unless the borrower affirmatively contact it to reauthorize. This means
that for borrowers who do not accept electronic communications, there
may be a period of several days before the notice under Sec. 1041.9(c)
is received, during which lenders cannot process payments unless the
borrower affirmatively reaches out to the lender. Loans may continue to
be delinquent during that period. And because lenders will be unable to
process payments during this period on an outgoing collection call,
they may be deterred from making collections calls during this brief
window.
For a number of reasons, the Bureau believes that this scenario
does not present significant concerns. First, the Bureau's study
observed that only about 20 percent of third re-presentments succeed
without an overdraft fee, suggesting that a minority of borrowers will
wish to re-initiate payments so quickly after the second failed payment
attempt. Second, while the time necessary to process a mail notice, and
delivery times, may add a few days of delinquency, often a few days of
delinquency will not be likely to cause a significant amount of harm if
the borrower is able to cure the delinquency soon after the notice is
received, and a collection call can be made. Third, borrowers retain
the option to affirmatively initiate payments through
[[Page 54759]]
the lender, or avail themselves of a variety of payment options
involving ``pushes'' from their account-holding institution, meaning
that borrowers can still initiate payments, just not after being
reminded to do so over an outgoing collection call. The Bureau does not
believe the small fraction of consumers who may be harmed by this
confluence of events is significant enough to outweigh the reasons for
the restriction. Consumers would fall into this category only if they:
(1) Have experienced a second payment attempt failure; (2) nonetheless
immediately have funds available for a third payment; (3) are unaware
that the second payment did not go through (and thus do not have the
information necessary to choose whether to make a payment through an
affirmative contact); (4) have not consented to electronic
notifications; and (5) are in the rare circumstances in which a few
additional days of delinquency would have a negative impact. In this
situation, these consumers will benefit from knowing their rights and
understanding what occurred with the prior failed payment attempts
before reinitiating payments. The Bureau similarly is not concerned
about payments made at the borrower's own affirmative initiation
because, as stated in the proposal, such payments are more likely to be
successful when the borrower knows what funds are available to process
the payments.
As for suggestions that the rule will result in lenders calling
consumers and telling them to return the call in order to initiate a
single immediate payment transfer after an affirmative consumer
contact, the Bureau believes that this scenario may violate the
prohibition against evasion set forth in paragraph (e), depending on
the underlying facts and circumstances.
The Bureau notes that if a lender reaches out after the first
attempt fails in order to process a second attempt using a different
payment method, then that second attempt would not be governed by
paragraph (d) because it does not follow a second consecutive failed
payment transfer. Instead, it simply would be an attempt to procure a
payment after a first failed payment transfer. In other words,
regardless of whether a lender reaches out to the borrower to arrange a
new payment method after the first failed payment transfer, or simply
re-presents under the original authorization, the cap and applicable
notices would only trigger after the second failure. The Bureau expects
that this may actually encourage lenders to reach out after the first
failed payment transfer because a lender may be able to avoid the
consequences of a second consecutive failed payment transfer by
speaking with the consumer about the timing and amount of the transfer
before initiating it.
Finally, the Bureau concludes that after an initial investment,
lenders should be able to track the number of failed payment attempts
on a borrower level (and not a loan or payment method level) with
relatively low burden. The Bureau thus is not persuaded that lenders
will be reluctant to call consumers to procure payment after the first
failed attempt because they are unaware of whether the cap has yet been
initiated.
8(e) Prohibition Against Evasion
The Bureau is finalizing Sec. 1041.8 with a new paragraph (e).
Paragraph (e) states that a lender must not take any action with the
intent of evading the requirements of this section (referring to Sec.
1041.8). Proposed Sec. 1041.14 did not include its own statement on
evasion. Rather, the proposal included a general statement on evasion
in proposed Sec. 1041.19, which provided that a lender must not take
any action with the intent of evading the requirements of part 1041. To
clarify and reinforce this point, the Bureau is adding anti-evasion
paragraphs to certain individual sections of the rule for ease of
reference, and to allow it to provide specific examples relating to
each section in the commentary. To that end, the Bureau is adding
comment 8(e)-1 to clarify that the standard in Sec. 1041.8(e) is same
as that in Sec. 1041.13. It also is finalizing an illustrative example
in comment 8(e)-2, which formerly was an example for proposed Sec.
1041.19, to clarify that, depending on the facts and circumstances,
lenders might violate the prohibition against evasion if they process
very small payments with the intent of evading the prohibition against
three consecutive failed payment attempts without obtaining a new
consumer authorization.
Some commenters noted that the better way to address this issue
would be to prohibit the initiation of additional transfers after any
failed attempt. The Bureau addresses the feedback regarding whether the
Bureau should impose a one re-presentment cap above. More general
comments on the Bureau's evasion authority also are found in the
section-by-section analysis of Sec. 1041.13.
Section 1041.9 Disclosure of Payment Transfer Attempts
Overview of the Proposed Rule
As discussed in the proposal, consumers who use online payday and
payday installment loans tend to be in economically precarious
positions. They have low to moderate incomes, live paycheck to
paycheck, and generally have no savings to fall back on. They are
particularly susceptible to having cash shortfalls when payments are
due and can ill afford additional fees on top of the high cost of these
loans. At the same time, as discussed above in Market Concerns--
Payments, many lenders in these markets may often obtain multiple
authorizations to withdraw account funds through different channels,
exercise those authorizations in ways that consumers do not expect, and
repeatedly re-present returned payments in ways that can substantially
increase costs to consumers and endanger their accounts.
In addition to proposing in Sec. 1041.14 (now Sec. 1041.8 of the
final rule) to prohibit lenders from attempting to withdraw payment
from a consumer's account after two consecutive payment attempts have
failed, unless the lender obtains the consumer's new and specific
authorization to make further withdrawals, the Bureau proposed in Sec.
1041.15 (which is now being finalized as Sec. 1041.9) to use its
authority under section 1032(a) of the Dodd-Frank Act to require two
new disclosures to help consumers better understand and mitigate the
costs and risks relating to payment attempt practices in connection
with covered loans. While the interventions in proposed Sec. 1041.14
were designed to protect consumers already experiencing severe
financial distress in connection with their loans and depository
accounts, the primary intervention in proposed Sec. 1041.15 was
designed to give all borrowers of covered loans who grant
authorizations for payment withdrawals the information they need to
prepare for upcoming payments and to take proactive steps to manage any
errors or disputes before funds are deducted from their accounts.
Specifically, proposed Sec. 1041.15(b) would have required lenders
to provide consumers with a payment notice before initiating each
payment transfer on a covered loan. This notice was designed to alert
consumers to the timing, amount, and channel of the forthcoming payment
transfer and to provide consumers with certain other basic information
about the payment transfer. The notice would specifically alert the
consumer if the payment transfer would be for a different amount, at a
different time, through a different payment channel than the consumer
might have expected based upon past practice, or for the purpose of re-
initiating a returned transfer. Where a lender had
[[Page 54760]]
obtained consumer consent to deliver the payment notice through
electronic means, proposed Sec. 1041.15(c) would provide content
requirements for an electronic short notice, which would be a truncated
version of the payment notice formatted for electronic delivery through
email, text message, or mobile application with a requirement to
include in the short notice a hyperlink that would enable the consumer
to access an electronic version of the full notice.
In addition, proposed Sec. 1041.15(d) would complement the
intervention in proposed Sec. 1041.14 by requiring lenders to provide
a consumer rights notice after a lender triggered the limitations in
that section. This consumer rights notice would inform consumers that a
lender has triggered the provisions in proposed Sec. 1041.14 and is no
longer permitted to initiate payment from the consumer's account unless
the consumer chooses to provide a new authorization. The Bureau
believed informing consumers of the past failed payments and the
lender's inability to initiate further withdrawals would help prevent
consumer confusion or misinformation, and help consumers make an
informed decision going forward on whether and how to grant a new
authorization to permit further withdrawal attempts. For lenders to
deliver the consumer rights notice required under proposed Sec.
1041.15(d) through an electronic delivery method, proposed Sec.
1041.15(e) would require the lenders to provide an electronic short
notice that contains a link to the full consumer rights notice.
Under the proposal, lenders would be able to provide these notices
by mail, in person or, with consumer consent, through electronic
delivery methods such as email, text message, or mobile application.
The Bureau sought to facilitate electronic delivery of the notices
wherever practicable because it believed that such methods would make
the disclosures timelier, more effective, and less expensive for all
parties. Given that electronic delivery may be the most timely and
convenient method of delivery for many consumers, the Bureau determined
that facilitating electronic delivery was consistent with its authority
under section 1032(a) of the Dodd-Frank Act to ensure that the features
of any consumer financial product are ``fully, accurately, and
effectively disclosed'' to consumers.\1046\
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\1046\ 12 U.S.C. 5532(a).
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The Bureau proposed model clauses and forms in proposed Sec.
1041.15(a)(7), which could be used at the option of covered persons for
the provision of the notices that would be required under proposed
Sec. 1041.15. The proposed model clauses and forms were located in
appendix A. Other than removing a line of APR information in one of the
forms, the Bureau is finalizing them as proposed. These proposed model
clauses and forms were validated through two rounds of consumer testing
in the fall of 2015. The consumer testing results are provided in the
FMG Report.\1047\
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\1047\ FMG Report, ``Qualitative Testing of Small Dollar Loan
Disclosures, Prepared for the Consumer Financial Protection
Bureau,'' (Apr. 2016) available at http://files.consumerfinance.gov/f/documents/Disclosure_Testing_Report.pdf.
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Legal Authority
The payment notice, consumer rights notice, and short electronic
notices in Sec. 1041.9 of the final rule were proposed and are
finalized under section 1032(a) of the Dodd-Frank Act, which authorizes
the Bureau to prescribe rules to ensure that the features of consumer
financial products and services ``both initially and over the term of
the product or service,'' are disclosed ``fully, accurately, and
effectively'' in a way that ``permits consumers to understand the
costs, benefits, and risks associated with the product or service, in
light of the facts and circumstances.'' \1048\ The authority granted to
the Bureau in section 1032(a) is broad, and empowers the Bureau to
prescribe rules regarding the disclosure of the ``features'' of
consumer financial products and services generally. Accordingly, the
Bureau may prescribe rules containing disclosure requirements even if
other Federal consumer financial laws do not specifically require
disclosure of such features.
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\1048\ 12 U.S.C. 5532(a).
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Dodd-Frank Act section 1032(c) provides that, in prescribing rules
pursuant to section 1032, the Bureau ``shall consider available
evidence about consumer awareness, understanding of, and responses to
disclosures or communications about the risks, costs, and benefits of
consumer financial products or services.'' \1049\ Accordingly, in
developing the rule under Dodd-Frank Act section 1032(a), the Bureau
considered consumer complaints, industry disclosure practices, and
other evidence about consumer awareness, understanding of, and
responses to disclosures or communications about the risks, costs, and
benefits of consumer financial products or services. This included the
evidence developed through the Bureau's own consumer testing as
discussed in the proposal, as well as in Market Concerns--Payments and
the FMG Report.
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\1049\ 12 U.S.C. 5532(c).
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Section 1032(b)(1) also provides that ``any final rule prescribed
by the Bureau under [section 1032] requiring disclosures may include a
model form that may be used at the option of the covered person for
provision of the required disclosures.'' Any model form issued pursuant
to this authority shall contain a clear and conspicuous disclosure
that, at a minimum, uses plain language that is comprehensible to
consumers; contains a clear format and design such as an easily
readable type font; and succinctly explains the information that must
be communicated to the consumer.\1050\ Section 1032(b)(2) provides that
any model form that the Bureau issues pursuant to section 1032(b) shall
be validated through consumer testing. The Bureau conducted two rounds
of qualitative consumer testing in September and October of 2015. The
testing results are provided in the FMG Report. Section 1032(d)
provides that ``any covered person that uses a model form included with
a rule issued under this [section 1032] shall be deemed to be in
compliance with the disclosure requirements of this section with
respect to such model form.''
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\1050\ Dodd-Frank Act section 1032(b)(2); 12 U.S.C. 5532(b)(2).
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The Bureau received a number of comments arguing that there was no
UDAAP basis for the notices in proposed Sec. 1041.15, or that the
remedy the Bureau proposed for the identified unfair and abusive
practice in proposed Sec. 1041.13 (finalized as Sec. 1041.7) was
overbroad by requiring disclosures in addition to a prohibition on the
identified practice. These commenters are correct in asserting that the
Bureau did not identify an unfair or abusive practice that would
warrant the notice requirements in proposed Sec. 1041.15, but only
because it did not attempt to do so. Instead, as described here, the
Bureau proposed the section on notice requirements pursuant to its
disclosure authority under section 1032 of the Dodd-Frank Act. Thus,
the remedy in final Sec. 1041.8 that is needed in order to prevent the
practice identified in final Sec. 1041.7 is not overbroad based on the
existence of final Sec. 1041.9, because Sec. 1041.9 is intended for
separate and additional reasons and finalized under separate authority.
9(a) General Form of Disclosures
Proposed Rule
Proposed Sec. 1041.15(a), finalized as Sec. 1041.9(a), set basic
rules regarding the format and delivery for all notices
[[Page 54761]]
required under proposed Sec. 1041.15 and set requirements for a two-
step process for the delivery of electronic disclosures as further
required under proposed Sec. 1041.15(c) and (e). The format
requirements generally paralleled the format requirements for other
disclosures related to certain covered short-term loans as provided in
proposed Sec. 1041.7 (now final Sec. 1041.6), but would also permit
certain electronic disclosures by text message or mobile application.
As proposed, a two-step electronic delivery process would involve
delivery of short-form disclosures to consumers by text message, mobile
application, or email that would contain a unique Web site address for
the consumer to access the full notices proposed under Sec. 1041.15
Because the disclosures in proposed Sec. 1041.15 involved the
initiation of one or more payment transfers in connection with existing
loans, the Bureau believed that electronic disclosures generally would
be more timely, more effective, and less expensive for consumers and
lenders than paper notices, as discussed below. At the same time, it
recognized that there were some technical and practical challenges with
regard to electronic channels. The two-stage process was designed to
balance such considerations, for instance by adapting the notices in
light of format and length limitations on text message and by
accommodating the preferences of consumers who are using mobile devices
in the course of daily activities and would rather wait to access the
full contents until a time and place of their choosing.
Proposed 15(a)(1) Clear and Conspicuous
Proposed Sec. 1041.15(a)(1) provided that the disclosures required
by proposed Sec. 1041.15 must be clear and conspicuous, and could use
commonly accepted or readily understandable abbreviations. Proposed
comment 15(a)(1)-1 clarified that disclosures would be clear and
conspicuous if they were readily understandable, and their location and
type size were readily noticeable to consumers. This clear and
conspicuous standard was based on the standard used in other Federal
consumer financial laws and their implementing regulations, including
Regulation E, subpart B, Sec. 1005.31(a)(1). The Bureau believed that
requiring the disclosures to be provided in a clear and conspicuous
manner would help consumers understand the information in the
disclosure about the costs, benefits, and risks of the transfer,
consistent with the Bureau's authority under section 1032(a) of the
Dodd-Frank Act.
Proposed 15(a)(2) In Writing or Electronic Delivery
Proposed Sec. 1041.15(a)(2) required disclosures mandated by
proposed Sec. 1041.15 to be provided in writing or through electronic
delivery. The disclosures could be provided through electronic delivery
as long as the requirements of proposed Sec. 1041.15(a)(4) were
satisfied. The disclosures would have to be provided in a form that can
be viewed on paper or a screen, as applicable. The requirement in
proposed Sec. 1041.15(a)(2) would not be satisfied orally or through a
recorded message. Proposed comment 15(a)(2) explained that the
disclosures that would be required by proposed Sec. 1041.15 may be
provided electronically as long as the requirements of proposed Sec.
1041.15(a)(4) were satisfied, without regard to the E-Sign Act.\1051\
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\1051\ 15 U.S.C. 7001 et seq.
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The Bureau proposed to allow electronic delivery because electronic
communications are more convenient than paper communications for some
lenders and consumers. Given that some requirements of the E-Sign Act
might not be necessary in this context, but other features like a
revocation regime might be useful given the ongoing nature of these
disclosures, the Bureau proposed a tailored regime that it believed
would encourage lenders and consumers to identify an appropriate method
of electronic delivery where consumers have electronic access.
The Bureau understood that some lenders already contact their
borrowers through electronic means such as text message and
email.\1052\ Lenders that currently provide electronic notices had
informed the Bureau that they provide both email and text message as
communication options to consumers. A major trade association for
online lenders reported that many of its members automatically enroll
consumers in an email notification system as part of the origination
process but allow consumers to opt-in to receive text message
notifications of upcoming payments. One member of this association
asserted that approximately 95 percent of consumers opt in to text
message notifications, so email effectively functions as a back-up
delivery method. Similarly, during the Bureau's SBREFA process, a SER
from an online-only lender reported that 80 percent of its customers
opt in to text message notifications. According to a major payday,
payday installment, and vehicle title lender that offers loans through
storefronts and the Internet, 95 percent of its customers have access
to the Internet and 70 percent have a home computer.\1053\ Lenders may
prefer contacting consumers through these methods given that they are
typically less costly than mailing a paper notice. Given the
convenience and timeliness of electronic notices, the Bureau believed
the disclosure information would provide the most utility to consumers
when it is provided through electronic methods.
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\1052\ During the SBREFA process, several SERs explained that
they currently provide consumers with text message reminders of
upcoming payments. Other public information indicates that lenders
contact consumers through many of these methods. See, e.g., ENOVA
Int'l, Inc., 2014 Annual Report (Form 10-K), at 9 (``Call center
employees contact customers following the first missed payment and
periodically thereafter. Our primary methods of contacting past due
customers are through phone calls, letters and emails.'').
\1053\ Community Choice Fin. Inc., 2014 Annual Report (Form 10-
K), at 4 (Mar. 30, 2015). At the time of the filing, most (about
half) of Community Choice's revenue was from short-term loans. Id.
at 6. Both short-term loans and long-term installment loans were
being offered online. Id. at 6-7.
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The Bureau believed that providing consumers with disclosures that
they can view and retain would allow them to more easily understand the
information, detect errors, and determine whether the payment is
consistent with their expectations. In light of the detailed nature of
the information provided in the disclosures required by proposed Sec.
1041.15, including payment amount, loan balance, failed payment
amounts, consumer rights, and various dates, the Bureau also believed
that oral disclosures would not provide consumers with a sufficient
opportunity to understand and use the disclosure information.
Proposed 15(a)(3) Retainable
Proposed Sec. 1041.15(a)(3) would require disclosures mandated by
proposed Sec. 1041.15 to be provided in a retainable form, except for
the electronic short notices delivered through mobile application or
text message. Electronic short notices provided by email would still be
subject to the retain-ability requirement. Proposed comment 15(a)(3)
explained that electronic notices would be considered retainable if
they were in a format that is capable of being printed, saved, or
emailed by the consumer. The Bureau believed that having the
disclosures in a retainable format would enable consumers to refer to
the disclosure at a later point in time, such as after a payment has
posted to their account or if they contact the lender with a question,
allowing the
[[Page 54762]]
disclosures to more effectively disclose the features of the product to
consumers. The Bureau did not propose to require that text messages and
messages within mobile applications be permanently retainable because
of concerns that technical limitations beyond the lender's control
might make retention difficult. However, the Bureau anticipated that
such messages would often be kept on a consumer's device for a
considerable period of time and could therefore be accessed again. In
addition, proposed Sec. 1041.15 would require that such messages
contain a link to a Web site containing a full notice that would be
subject to the general rule under proposed Sec. 1041.15(a)(3)
regarding retain-ability. A lender would also be required to maintain
policies, procedures, and records to ensure compliance with the notice
requirement under proposed Sec. 1041.18 (now final Sec. 1041.12).
Proposed 15(a)(4) Electronic Delivery
Proposed Sec. 1041.15(a)(4) laid out various requirements designed
to facilitate delivery of the notices required under proposed Sec.
1041.15 through electronic channels. The proposal would allow
disclosures to be provided through electronic delivery if the consumer
affirmatively consents in writing or electronically to the particular
electronic delivery method. Lenders would be able to obtain this
consent in writing or electronically. The proposed rule would require
that lenders provide email as an electronic delivery option if they
also offered options to deliver notices through text message or mobile
application. Proposed Sec. 1041.15(a)(4) would also set forth rules to
govern situations where the consumer revokes consent for delivery
through a particular electronic channel or is otherwise unable to
receive notices through that channel. The consumer consent requirements
for provision of the disclosures through electronic delivery were
specified in the proposal. Proposed Sec. 1041.15(a)(4)(i)(A) would
require lenders to obtain a consumer's affirmative consent to receive
the disclosures through a particular method of electronic delivery.
These methods might include email, text message, or mobile application.
The Bureau believed it was important for consumers to be able to choose
a method of delivery to which they had access and that would best
facilitate their use of the disclosures, and that viewable
documentation would facilitate both informed consumer choice and
supervision of lender compliance. The Bureau was concerned that
consumers could receive disclosures through a method that they would
not prefer or that would not be useful to them if they were
automatically defaulted into an electronic delivery method. Similarly,
the Bureau was concerned that a consumer might receive disclosures
through a method that they would not expect if they had been provided
with a broad electronic delivery option rather than an option
specifying the method of electronic delivery.
Proposed Sec. 1041.15(a)(4)(i)(B) stated that when obtaining
consumer consent to electronic delivery, a lender had to provide the
consumer with the option to select email as the method of electronic
delivery, separate and apart from any other electronic delivery methods
such as mobile application or text message. Proposed comment
15(a)(4)(i)(B) explained that the lender could choose to offer email as
the only method of electronic delivery.
The Bureau believed that such an approach would facilitate
consumers' choice of the electronic delivery channel that would be most
beneficial to them, in light of differences in access, use, and cost
structures between channels. For many consumers, delivery via text
message or mobile application might be the most convenient and timely
option. However, there would be some potential tradeoffs. For example,
consumers might incur costs when receiving text messages and could have
privacy concerns about finance-related text messages appearing on their
mobile phones. During consumer testing, some of the participants had a
negative reaction to receiving notices by text message, including
privacy concerns about someone being able to see that they were
receiving a notice related to a financial matter. The Bureau believed
that mobile application messages might create similar privacy concerns,
as such messages may generate alerts or banners on a consumer's mobile
device.
Nonetheless, the Bureau believed that receiving notices by text
message might be useful to some consumers. In general, most consumers
have access to a mobile phone. According to a recent Federal Reserve
study on mobile banking and financial services, approximately 90
percent of ``underbanked'' consumers--consumers who have bank accounts
but use non-bank products like payday loans--have access to a mobile
phone.\1054\ Fewer underbanked consumer have a phone with Internet
access, although the coverage is still significant at 73 percent. A few
participants in the Bureau's consumer testing indicated a preference
for receiving notices by text message. The Bureau believed that text
message delivery should be allowed as long as consumers had the option
to choose email delivery, which for some consumers might be a strongly
preferred method of disclosure delivery. The Bureau also maintained
that requiring an email option might help ensure that the disclosure
information is effectively disclosed to consumers, consistent with the
Bureau's authority under section 1032 of the Dodd-Frank Act.
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\1054\ Bd. of Governors of the Federal Reserve System,
``Consumers and Mobile Financial Services 2015,'' at 5 (Mar. 2015),
available at http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201503.pdf.
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Proposed Sec. 1041.15(a)(4)(ii) would have prohibited a lender
from providing the notices through a particular electronic delivery
method if there was a subsequent loss of consent as provided in
proposed Sec. 1041.15(a)(4)(ii), either because the consumer had
revoked consent pursuant to proposed Sec. 1041.15(a)(4)(ii)(A), or the
lender had received notification that the consumer was unable to
receive disclosures through a particular method, as described in
proposed Sec. 1041.15(a)(4)(ii)(B). Proposed comment 15(a)(4)(ii)(B)-1
explained that the prohibition applied to each particular electronic
delivery method. It further provided that a lender that had lost a
consumer's consent to receive disclosures via text message but, for
example, not the consent to receive disclosures via email, could
continue to provide disclosures via email so long as all of the
requirements in proposed Sec. 1041.15(a)(4) were satisfied. Proposed
comment 15(a)(4)(ii)(B)-2 clarified that the loss of consent would
apply to all notices required under proposed Sec. 1041.15. For
example, if a consumer revoked consent in response to the electronic
short notice text message delivered along with the payment notice under
proposed Sec. 1041.15(c), then that revocation also would apply to
text message delivery of the electronic short notice that would be
delivered with the consumer rights notice under proposed Sec.
1041.15(e), or to delivery of the notice under proposed Sec.
1041.15(d) if there were two consecutive failed withdrawal attempts
that would trigger the protections of Sec. 1041.14.
Proposed Sec. 1041.15(a)(4)(ii)(A) would prohibit a lender from
providing the notices through a particular electronic delivery method
if the consumer had revoked consent to receive electronic disclosures
through that method. Proposed comment 15(a)(4)(ii)(A)-1 clarified that
a consumer could revoke consent for any reason and by any reasonable
means of communication. The comment provided that examples of
[[Page 54763]]
a reasonable means of communication included calling the lender and
revoking consent orally, mailing a revocation to an address provided by
the lender on its consumer correspondence, sending an email response or
clicking on a revocation link provided in an email from the lender, and
responding to a text message sent by the lender.
The Bureau was aware that burdensome revocation requirements could
make it difficult for the consumer to revoke consent to receive
electronic disclosures through a particular electronic delivery method.
Accordingly, the Bureau believed it was appropriate to provide a simple
revocation regime and require that lenders cannot provide the notices
through a particular electronic delivery method if the consumer revokes
consent through that method. Proposed Sec. 1041.15(a)(4)(ii)(B) would
prohibit a lender from providing the notices through a particular
electronic delivery method if the lender had received notice that the
consumer was unable to receive disclosures through that method. Such
notice would be treated in the same manner as if the consumer had
affirmatively notified the lender that the consumer was revoking
authorization to provide notices through that means of delivery.
Proposed comment 15(a)(4)(ii)(B)-1 provided examples of notice,
including a returned email, returned text message, and statement from
the consumer.
The Bureau believed this was an important safeguard to ensure that
consumers have ongoing access to the notices required under proposed
Sec. 1041.15. It also believed this requirement to change delivery
methods after consent has been lost would ensure that the disclosure
information had been fully and effectively disclosed to consumers,
consistent with the Bureau's authority under section 1032.
Proposed 15(a)(5) Segregation Requirements for Notices
All required notices under proposed Sec. 1041.15 would have to be
segregated from all other written materials and contain only the
information required by the proposed rule, other than information
necessary for product identification, branding, and navigation. Under
the proposal, segregated additional content that was required by
proposed Sec. 1041.15 could not be displayed above, below, or around
the required content. Proposed comment 15(a)(5)-1 clarified that
additional, non-required content could be delivered through a separate
form, such as a separate piece of paper or Web page. To increase the
likelihood that consumers would notice and read the written and
electronic disclosures required by proposed Sec. 1041.15, the proposed
notices had to be provided in a stand-alone format that is segregated
from other lender communications. This requirement was intended to
ensure that the disclosure contents would be effectively disclosed to
consumers, consistent with the Bureau's authority under section 1032 of
the Dodd-Frank Act. Lenders would not be allowed to add additional
substantive content to the disclosure.
Proposed 15(a)(6) Machine Readable Text in Notices Provided Through
Electronic Delivery
Under the proposal, a payment notice and consumer rights notice
provided through electronic delivery also had to use machine readable
text that is accessible via both Web browsers and screen readers. As
the Bureau stated in the proposal, graphical representations of textual
content cannot be accessed by assistive technology used by the blind
and visually impaired. Providing the electronically-delivered
disclosures with machine readable text rather than as a graphic image
file, thus would allow consumers with a variety of electronic devices
and consumers that utilize screen readers, such as consumers with
disabilities, to access the disclosure information.
Proposed 15(a)(7) Model Forms
Proposed Sec. 1041.15(a)(7) required all notices in proposed Sec.
1041.15 to be substantially similar to the model forms and clauses
proposed by the Bureau. Specifically, proposed Sec. 1041.15(a)(7)(i)
required the content, order, and format of the payment notice to be
substantially similar to the Models Forms A-3 through A-5 in appendix
A. Proposed Sec. 1041.15(a)(7)(ii) required the consumer rights notice
to be substantially similar to Model Form A-5 in appendix A. And
similarly, proposed Sec. 1041.15(a)(7)(iii) mandated the electronic
short notices required under proposed Sec. 1041.15(c) and (e) to be
substantially similar to the Model Clauses A-6 through A-8 provided in
appendix A. To explain the safe harbor provided by these model forms,
proposed comment 15(a)(7)-1 provided that although the use of the
actual model forms and clauses was not required, lenders using such
model forms would be deemed to be in compliance with the disclosure
requirement.
As stated in the proposal, the model forms developed through
consumer testing might make the notice information comprehensible to
consumers while minimizing the burden on lenders who otherwise would
need to develop their own disclosures. Consistent with the Bureau's
authority under section 1032(b)(1), the Bureau believed that its
proposed model forms used plain language comprehensible to consumers,
contained a clear format and design, such as an easily readable type
font, and succinctly explained the information that must be
communicated to the consumer. As described in the FMG Report and as
discussed above, it further considered evidence developed through its
testing of model forms pursuant to section 1032(b)(3). It also believed
that providing these model forms would help ensure that the disclosures
were effectively provided to consumers, while also allowing lenders to
adapt the disclosures to their loan products and preferences.
Proposed 15(a)(8) Foreign Language Disclosures
The proposal also would allow lenders to provide the required
disclosures in a language other than English, provided that the
disclosures were made available in English upon the consumer's request.
Comments Received
Some industry commenters, many consumer groups, and many State
Attorneys General supported the notice intervention. Several commenters
raised concerns that consumers should have notice of upcoming transfers
in order to minimize unexpected bank fees. A number of lenders stated
that they already provide upcoming payment notices to their customers.
One explained that it does not anticipate much additional compliance
burden from the notices because it already provides payment reminders
and does not use the payment practices described in the proposal, like
re-presentments.
However, many industry commenters raised concerns about the burden
of the intervention. One supported the intervention overall but raised
burden concerns about the frequency and delivery of the notice. Some
disputed the need for the intervention, arguing that the proposed
notices were too burdensome and complex, that consumers knew when an
ACH will be pulled, that the practices the notices sought to prevent
violated existing laws that needed to be enforced, and that it would be
burdensome to create a payment notice for past due consumers because
lender wanted to debit when funds come in.
A number of stakeholders commented on the Bureau's consumer testing
[[Page 54764]]
process for the model forms. Some commenters believed that the Bureau's
28 consumer sample size was too small, noting that the Bureau and other
agencies had used larger sample sizes for the qualitative testing of
other disclosures (such as the TILA-RESPA integrated disclosure),\1055\
and supplemented with quantitative testing. These commenters asked the
Bureau to clarify that the notices do not need to conform to the model
forms, such that lenders could conduct their own testing. Commenters
claimed that the level of research rigor for the model disclosures was
weak as compared to what would be considered a best practice in the
industry. Another criticized both the sample size and the number of
geographies represented, and recommended that the Bureau remove the
model forms from the proposal. It also suggested that the Bureau's use
of just qualitative testing without quantitative testing meant that the
findings might not be projectable to the broader population. However,
others supported the Bureau's use of a model form.
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\1055\ See 78 FR 79730 (Dec. 31, 2013).
---------------------------------------------------------------------------
Stakeholders also commented on the consent requirements around
receiving notices electronically. Commenters argued that the consent
scheme imposed by the E-Sign Act should suffice, and that the Bureau
had not explained why the E-Sign Act requirements were not sufficient
in this context. In particular, one commenter argued that the
prohibition against providing electronic notices that would apply after
the lender receives notification that the consumer is unable to receive
notices through a given electronic medium would create uncertainty
around when a consumer will be deemed to have ``received
notification.'' It noted that this requirement was more onerous than
the E-Sign Act, which allows the lender to give electronic disclosures
to consumers who have affirmatively consented, and have not withdrawn
such consent. Others similarly suggested that allowing borrowers to
consent to electronic delivery over the phone, something E-Sign allows,
would be beneficial. These commenters said the Bureau should instead
follow the E-Sign Act's requirements relating to consent.
More generally, the Bureau heard from a variety of industry
participants about the compliance burden of the notice requirements.
Although each had somewhat different perspective on the compliance
costs, many considered them to be too high and argued that they could
lead to higher prices for loan products. One commenter argued that the
proposed notice requirements would pose a significant cost when
borrowers do not opt in to electronic notifications, because mailings
would pose significant costs. It provided the example of a borrower who
takes out a $1,000 loan payable over 12 months, in semi-monthly
installments. It estimated that the payment notices would cost about
$0.40 per notice at high scale, and $1 at low scale. In the commenter's
view, this meant that the notice requirement could cost more than two
percent of the principal balance. In light of this significant cost, it
asked that the Bureau allow borrowers to opt out of the notice
requirement, or that it allow lenders to provide the notices through
other methods, including pre-recorded phone calls. Other commenters
asked the Bureau to similarly allow oral notices. Alternatively, a
consumer group argued that lenders should be required to verify consent
with a digital or print signature.
Another industry participant argued that the allowance for
electronic notifications would not alleviate the costs associated with
mailed notices because the costs of tracking consent and withdrawals
across channel are too complex operationally and technologically, and
thus too costly. This commenter argued that the Bureau should abandon
the notice requirements because the costs would result in higher
pricing.
Another entity commented that the proposal would impose high costs
because a lender would have to invest in a system capable of
recognizing that the consumer's inability to receive notices through
certain methods or at a certain address.
Another commenter claimed that community banks would likely not
attempt electronic notices, and thus would be left with the cost of
providing paper notices.
However, a different industry participant stated that electronic
notices, for which consent is taken over the phone, are in their
experience 80 times cheaper than mail notices. The Bureau received
several comments about methods of consenting to electronic delivery of
the notices. One commenter argued that email notifications should only
be allowed if the consumer explicitly consented to such notices, and
that print text via mobile phone should be prohibited. Some commenters
urged the Bureau to allow consent to electronic delivery to be received
orally over the phone. One lender stated that 90 percent of customers
had consented to receive electronic disclosures via verbal consent that
would be either captured by a retail agent or by a call center agent on
a recorded line (they appeared to be obtaining the consent while also
closing the loan over the phone). A number of commenters also addressed
the foreign language disclosures in proposed Sec. 1041.15(a)(8).
Several argued that the final rule should not require foreign language
notices (which it did not propose but did seek comment on) because this
would impose substantial costs and could involve wide-ranging
consequences that deserve thoughtful consideration in a separate
rulemaking. Other commenters argued that lenders should offer the model
form in the language they use to communicate with consumers, in the
language of the consumer's preference, or in the language that the
lender uses to negotiate the transaction. One industry commenter
suggested that the Bureau convene a Federal interagency and industry
working group and address foreign language disclosures in a separate
proceeding.
Final Rule
The Bureau is finalizing proposed Sec. 1041.15(a) with no
substantive changes except to renumber it as Sec. 1041.9(a). It also
made cosmetic or technical changes to Sec. 1041.9(a)(2) and the
commentary pertinent to Sec. 1041.9(a) including, primarily, changes
to section numbers in light of the reorganization of the rest of the
regulatory text.
Based on its considerable experience with consumer testing, the
Bureau has made the judgment that the qualitative user testing process
for the model forms and notices is sufficient for purposes of this
rule, especially because unlike the TILA-RESPA model disclosures, the
model forms for this rule are relatively short and uncomplicated.
Lenders remain free to conduct their own user-testing, including
quantitative testing, and to improve upon the Bureau's model forms if
their user-testing suggests further improvements are possible (and
encourages lenders to share the results of that testing, and any
specific improvements to the forms, which the Bureau may incorporate
into the forms at a future date). The Bureau contracted with Fors March
Group (FMG) to conduct qualitative user testing of the forms. While the
sample size was indeed small--28 test subjects--each subject was given
a one-on-one interview with an FMG staff member for about an hour. The
interviews were conducted in two geographical locations, New Orleans
and Kansas City. In addition, CFPB staff used the feedback after the
round of testing in New Orleans to improve the model forms before the
second round of
[[Page 54765]]
testing in Kansas City. The Bureau did not conduct quantitative
testing, though the Bureau agrees that quantitative testing could be
advantageous. Regardless, it believes the testing it did suffices to
show that the disclosures use plain language that is comprehensible to
consumers, contains a clear format and design, and succinctly explains
the information that must be communicated to the consumer.
There are a few differences between the regime for obtaining
consent set forth in the proposal, and now the final rule, in
comparison to the regime set forth in the E-Sign Act. That statute does
not set forth the only electronic disclosure and consent requirements
that an agency can prescribe, but rather presents general rules of the
road where requirements are not otherwise specifically prescribed. It
was not designed for this specific disclosure requirement, but rather,
set forth default rules where others are not enacted specifically.
Under the E-Sign Act, companies can only obtain consent after providing
certain disclosures set forth in 15 U.S.C. 7001(c)(1)(B) and
(c)(1)(C)(i). This rule does not require those disclosures--which would
add marginal burden to the regime in this final rule--though companies
may provide them if they wish. These disclosures require consumers to
confirm through the particular electronic method that they can receive
notices through that particular electronic method. Given the steps and
potential delay that this requirement could impose on the origination
process, the Bureau believes that the consumer consent regime being
finalized will make it easier for consumers to provide (and lenders to
obtain) consent to electronic delivery at origination. The E-Sign Act
also requires certain actions when a company changes hardware or
software requirements, which are not found in the rule (companies may
provide these as well).\1056\ The rule requires that the lender, when
obtaining consent, must offer consumers the option to consent to the
specific electronic method used (and not just general consent to
electronic disclosures), and specifically requires that one method be
provided--email. As the Bureau stated in the proposal, and now finds,
consumers will benefit from being able to consent to specified
electronic delivery methods--for example, a borrower may wish to
consent to email but not mobile text messages (largely unavailable when
the E-Sign Act was enacted).\1057\ In certain circumstances, consent
can also be provided by phone under E-Sign, which this rule would not
allow. As stated in the proposal, the Bureau continues to believe that
consumers would benefit from being able to see the specific delivery
location--for example, the email address or phone number for text
messaging. Of course, none of this means the lender must provide
electronic notices; it is just an option.
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\1056\ 15 U.S.C. 7001(c)(1)(D).
\1057\ The Bureau notes that lenders communicating by electronic
means may be subject to additional requirements under the
Telecommunications Consumer Protection Act (47 U.S.C. 227) or other
authorities.
---------------------------------------------------------------------------
The rule requires that lenders cease using an electronic method
when a lender receives notification that the consumer is unable to
receive disclosures through that method. Here, the Bureau contemplated
a rejected email, text message, or other electronic communication, like
an automated notification that a disclosure email or text was
undeliverable. It does not agree with the commenters that this
provision adds any particular level of uncertainty--when a lender
receives any notice that the delivery method is no longer available,
the lender cannot continue using that method. To the extent it is more
burdensome than the E-Sign Act, it is for good reason--the Bureau does
not wish to permit a lender to continue sending disclosures to an
inactive email account or phone number, especially with regard to the
unusual withdrawal notice where the disclosure is intended to warn
consumers about an impending event.
The Bureau is not adding an option to allow oral consent to
electronic delivery. It maintains that it would be helpful for
consumers to see, and be able to retain, the type of delivery they are
consenting to and which email address or phone number they are
providing for this purpose. This requirement seems workable given
lender practices. In the storefront, lenders could incorporate consent
to electronic delivery into its in-person processes, and could have the
consumer consent on paper or a computer screen. Online lenders could
adjust their application process to have consumers consent to
electronic delivery as part of the application process, even if they
close the loan over the phone. They could even show the consent form
electronically during application process or email it separately.
The bulk of the comments the Bureau received on Sec. 1041.9(a) and
(b) pertained to the burdens associated with the notice requirements.
The Bureau has made changes to Sec. 1041.9(b) that will substantially
reduce the total aggregate burden of the disclosures, most notably that
the notices no longer have to be sent before every payment attempt.
Under the final rule, a payment notice must be sent before the first
payment withdrawal (and can be provided during the origination process)
and thereafter, notices only will have to be sent when there is an
unusual withdrawal (defined as a payment that varies from a regular
payment or minimum payment in the case of open-end credit, occurs on a
date other than the regularly scheduled payment date, is processed
through a different payment channel from the previous channel used, or
is a re-presentment) or the payment attempt cap is met. Thus, taking
the commenter's example of the borrower with a $1,000 loan payable over
12 months in semi-monthly installments, instead of providing 24
notices, the lender would only have to provide one (assuming there were
no unusual payments, and the borrower never hit the payment attempt
cap). Using the commenter's estimates, instead of costing more than two
percent of the principal balance, it would cost 0.05 to 0.10 percent of
principal. The lender would also able to provide that first and only
payment notice during origination, thereby saving on postage as well.
Given the changes discussed above, lenders may be able to avoid the
need to send such paper notices at all if they avoid unusual
withdrawals and hitting the cap, which should generally be rare events.
To the extent the costs of tracking consent to receive electronic
notifications or to detect whether electronic communications are being
rejected is too burdensome, lenders can always provide paper notices.
But in the Bureau's experience, the technology to track borrower
consent and detect rejected communications is readily available on the
market today, and could be developed for this specific market, such
that even small to mid-sized lenders would be able to procure that
functionality from a vendor.
The Bureau concludes that providing notices through a pre-recorded
call or a robo-call, or orally over the phone or in person, would not
suffice to meet the purposes of the rule. The Bureau has determined
that it is important for the notices to be retainable, such that a
borrower can refer back to it at a later time--for example, to check
that the right amount was debited. This is especially important now
that lenders will not be providing notices before every payment
withdrawal. Also, the burden of providing the notices is lower now that
they are not required before every payment and, after origination,
[[Page 54766]]
should only be necessary in rare circumstances.
The Bureau does not agree with consumer group commenters suggesting
that it should not allow print text via mobile phones. In light of the
constantly updating technology of the modern world--where some
consumers may move frequently and may be more reliably communicated
with through their phones--the Bureau believes this rule should allow
communications to be made through the common communications means of
the day. This means that for now, the Bureau will allow disclosures
through mobile application or text message (provided that there is a
link or PDF to the full disclosure); and that disclosures may be
transmittable through other electronic means as they become available.
As proposed, the Bureau is not requiring foreign language disclosures,
and is instead finalizing the rule as proposed, which merely allows
foreign language disclosures. Some of the Bureau's rules, like 12 CFR
1005.31(g), require disclosures in foreign languages in certain
circumstances. The Bureau continues to believe that disclosures in
languages other than English are a positive development in all markets
for consumer financial products or services, where the customer base
has become increasingly more diverse. It is not, however, prepared to
make foreign language disclosures mandatory at this time with respect
to these forms, largely because it recognizes that the current final
rule will require lenders to engage in a significant amount of
implementation work in order to begin complying with the rule,
including the work to design and implement disclosures in English. In
finalizing this rule, the Bureau is attempting to minimize compliance
burden to the extent possible while maintaining the core protections of
the rule. Although it has decided to allow but not mandate foreign
language notices at this time, it may consider supplemental rulemakings
or model forms in the future, when industry has fewer regulatory
adjustments to manage and has developed more experience with the
English-language forms.
9(b) Payment Notice
Proposed Rule
Proposed Sec. 1041.15(b) required lenders to provide to consumers
a payment notice before initiating a payment transfer from a consumer's
account with respect to a covered loan. The Bureau notes here that
under the final rule, this requirement has been scaled back to be
required only in more limited payment transfer circumstances. As
defined in proposed Sec. 1041.14(a), a payment transfer would be any
transfer of funds from a consumer's account that was initiated by a
lender for the purpose of collecting any amount due or purported to be
due in connection with a covered loan. The proposed notice contained
timing requirements that would vary depending on the method of
delivery, along with additional required information if the payment
transfer was unusual in that it involved changes in amount, timing, or
payment channel from what the consumer would otherwise be expecting. As
discussed in the proposal and above in Market Concerns--Payments, when
a lender initiates a payment transfer for which the consumer's account
lacks sufficient funds, the consumer can suffer a number of adverse
consequences. The consumer's bank will likely charge an overdraft or
NSF fee. If the payment is returned, the lender may also charge a
returned-item fee and/or a late fee. These fees can materially increase
the overall amount that the consumer is required to pay. Moreover, the
incidence of returned-item fees and other payments of these kinds
appear to increase the likelihood that the consumer's account will be
closed.
The Bureau believed that the payment notice could help consumers
mitigate these various harms by providing a timely reminder that a
payment transfer will occur, the amount and expected allocation of the
payment as between principal and other costs, and other information
that consumers may need to follow up with lenders or their depository
institutions if they anticipate a problem with the upcoming withdrawal
or in covering the payment transfer.
The Bureau believed that the notice could have value as a general
financial management tool, but would be particularly valuable to
consumers in situations in which lenders intend to initiate a
withdrawal in a way that deviates from the loan agreement or prior
course of conduct between the parties. As detailed above, the Bureau
was aware that some lenders making covered loans sometimes initiate
payments in an unpredictable manner, which may increase the likelihood
that consumers will experience adverse consequences. Consumers have
limited ability to control when or how lenders will initiate payment.
Although paper checks specify a date and amount for payment, UCC sec.
4-401(c) allows merchants to present checks for payment on a date
earlier than the date on the check. Lenders sometimes attempt to
collect payment on a different day from the one stated on a payment
schedule. The Bureau had received complaints from consumers who had
incurred bank account fees after online payday and payday installment
lenders attempted to collect payment on a different date from what was
scheduled. It was also aware that lenders sometimes split payments into
multiple pieces, make multiple attempts to collect in one day, add fees
and charges to the payment amount, and change the payment method used
to collect.
The Bureau was aware that these notices would impose some cost on
lenders, particularly the payment notice under proposed Sec.
1041.15(c), which would be sent before each payment transfer. It
considered requiring the payment notice only when a payment transfer
qualified as unusual, such as when there is a change in the amount,
date, or payment channel. However, at the time of the proposal the
Bureau believed that once lenders had built the infrastructure to send
the unusual payment notices, the marginal costs of sending notices for
all upcoming payments would likely to be relatively minimal. The Bureau
noted that a number of lenders already had a similar infrastructure for
sending payment reminders (e.g., monthly bills). Indeed, a trade
association representing online payday and payday installment lenders
had expressed support for upcoming payment reminders.\1058\ These
lenders currently may choose to send out payment reminders before all
payments initiated from a consumer's account. Others may be sending out
notices for preauthorized EFTs that vary in amount in accordance with
Regulation E Sec. 1005.10(d), which requires payees to send a notice
of date and amount ten days before a transfer that varies in amount
from the previous transfer under the same authorization or from the
preauthorized amount.
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\1058\ ``Bank account overdrafts are a lose-lose for online
lenders and their customers. It is in the customers best interests
as well as the lenders best interest for customers to not incur
overdrafts. This is why we support payment reminders so that
customers do not overdraft their accounts.'' Lisa McGreevy, ``OLA
Releases Statement in Response to CFPB Online Loan Payment Study,''
Online Lenders Alliance (Apr. 20, 2016), available at http://onlinelendersalliance.org/ola-releases-statement-in-response-to-cfpb-online-loan-payment-study/.
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The Bureau describes each subparagraph of proposed Sec. 1041.15(b)
and (c) below, discusses the comments received on Sec. 1041.15(b) and
(c) together thereafter, and discusses the changes made to final Sec.
1041.9(b).
[[Page 54767]]
Proposed 15(b)(1) General
The proposal would have specifically required lenders to send a
payment notice to a consumer prior to initiating a payment transfer
from the consumer's account, subject to limited exceptions as
specifically listed in proposed Sec. 1041.15(b)(2) and the comments
thereto.
Proposed 15(b)(2) Exceptions
Proposed Sec. 1041.15(b)(2)(i) would except covered loans made
pursuant to proposed Sec. 1041.11 or proposed Sec. 1041.12 from the
payment notice requirement. The Bureau had limited evidence that
lenders making payday alternative loans like those covered by proposed
Sec. 1041.11 take part in questionable payment practices. Given the
cost restrictions placed by the NCUA on payday alternative loans and on
the loans conditionally exempt under proposed Sec. 1041.12, the Bureau
believed it might have been particularly difficult to build the cost of
providing the payment disclosure into the cost of the loan. It was
concerned that lenders might be unable to continue offering payday
alternative loans or the loans encompassed by proposed Sec. 1041.12 if
the disclosure requirement is applied.
Proposed Sec. 1041.15(b) also provided a limited exception to the
notice requirement for the first transfer from a consumer's account
after the lender obtains the consumer's consent pursuant to proposed
Sec. 1041.14(c) (now final Sec. 1041.8(c)), regardless of whether any
of the conditions in proposed Sec. 1041.15(b) apply. As discussed
above, proposed Sec. 1041.14 would have generally required a lender to
obtain a consumer's consent before initiating another payment attempt
on the consumer's account after two consecutive attempts have failed.
Proposed Sec. 1041.15(b) would allow lenders to forgo the payment
notice for the first payment attempt made under the consumer's
affirmative consent as the consent itself will function like a payment
notice. Proposed comment 15(b)(2)(ii)-1 clarified that this exception
would apply even if the transfer otherwise triggered the additional
disclosure requirements for unusual attempts under proposed Sec.
1041.15(b)(5). Proposed comment 15(b)(2)(ii)-2 explained that this
exception would apply only to the first transfer when a consumer had
affirmatively consented to multiple transfers in advance.
Proposed Sec. 1041.15(b)(2) also provided an exception for an
immediate single payment transfer initiated at the consumer's request
as defined in proposed Sec. 1041.14(a)(5). This exception would carve
out situations where a lender is initiating a transfer within one
business day of receiving the consumer's authorization.
During the SBREFA process and other external outreach, lenders
raised concerns about how the Bureau's potential proposal would apply
to one-time, immediate electronic payments made at the consumer's
request. Industry commenters stated that, unless these payments were
excepted from the requirement, lenders could be prohibited from
deducting payments from consumers' accounts for several days in
situations in which consumers had specifically directed the lender to
deduct an extra payment or given approval to pay off their loans early.
Similarly, if an advance notice were required before a one-time
payment, consumers attempting to make a last-minute payment might incur
additional late fees due to the waiting period required after the
disclosure. The Bureau believed that these were valid policy concerns
and accordingly proposed to except an immediate single payment transfer
made at the consumer's request. It also believed that because this
category of payments involved situations in which the consumer's
affirmative request to initiate a transfer is processed within a
business day of receiving the request, the consumer was unlikely to be
surprised or unprepared for the subsequent withdrawal.
Proposed 15(b)(3) Timing
Proposed Sec. 1041.15(b)(3) set forth timing requirements
applicable to each of the three methods through which the payment
notice can be delivered, which were mail, electronic, and in-person
delivery. The minimum time to deliver the notice would range from six
to three business days before the transfer, depending on the channel,
as specified in the proposal. In proposing the timing requirements, the
Bureau was attempting to balance several competing considerations about
how timing may impact consumers and lenders. First, it believed that
the payment notice information is more likely to be useful, actionable,
and effective for consumers if it is provided shortly before the
payment will be initiated. Consumers could use this information to
assess whether there were sufficient funds in their account to cover
the payment and whether they need to make arrangements for another bill
or obligation that is due around the same time. However, consumers also
might need some time to arrange their finances, to discuss alternative
arrangements with the lender, or to resolve any errors. For example, if
the payment were not authorized and the consumer wanted to provide a
notice to stop payment to their account provider in a timely fashion
under Regulation E Sec. 1005.10(c)(1), the regulation would require
the consumer to take action three business days before the scheduled
date of the transfer.
The Bureau was also aware that the delay between sending and
receiving the notice complicates timing considerations. For example,
paper delivery via mail involves a lag time of a few days and is
difficult to estimate precisely. Finally, as discussed above, the
Bureau believed that electronic delivery might be the least costly and
most reliable method of delivery for many consumers and lenders.
However, some consumers would not have access to an electronic means of
receiving notices, in which case a paper option would be their only
option to receive the notices required under proposed Sec. 1041.15(b).
In light of these considerations, the Bureau believed that these timing
requirements, which incorporate the delays inherent in various methods
of delivery and the utility of the disclosure information for
consumers, would help ensure that the content of the payment notice is
effectively disclosed to consumers, consistent with the Bureau's
authority under section 1032 of the Dodd-Frank Act.
Specifically, proposed Sec. 1041.15(b)(3) would require the lender
to mail the notice no earlier than 10 business days and no later than
six business days prior to initiating the transfer. Proposed comment
15(b)(3)(i)-1 clarified that the six business days would begin when the
lender placed the notice in the mail, rather than when the consumer
received the notice. For a payment notice sent by mail, there might be
a gap of a few days between when the lender sent the notice and when
the consumer received it. The Bureau expected that in most cases this
would result in the consumer receiving the notice between three and
seven business days prior to the date on which the lender intended to
initiate the transfer. This expectation was consistent with certain
provisions of Regulation Z,\1059\ which consider consumers to have
received disclosures delivered by mail three business days after they
are placed in the mail.
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\1059\ 12 CFR part 1026.
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For a payment notice sent through electronic delivery along with
the electronic short notice in proposed Sec. 1041.15(c), consumers
would be able to receive a notice immediately after it
[[Page 54768]]
is sent and without the lag inherent in paper mail. Proposed Sec.
1041.15(b)(3)(ii)(A) would therefore adjust the time frames and require
the lender to send the notice no earlier than seven business days and
no later than three business days prior to initiating the transfer.
Proposed comment 15(b)(3)(ii)(A)-1 clarified that the three business
days would begin when the lender sends the notice, rather than when the
consumer received or was deemed to have received the notice.
Proposed Sec. 1041.15(b)(3) would require that if, after providing
the payment notice through electronic delivery pursuant to the timing
requirements in proposed Sec. 1041.15(b)(3), the lender lost a
consumer's consent to receive notices through a particular electronic
delivery method, then the lender would have to provide the notice for
any future payment attempt, if applicable, through alternate means.
Proposed comment 15(b)(3)(ii)(B)-1 clarified that in circumstances when
the lender received the consumer's loss of consent for a particular
electronic delivery method after the notice has already been provided,
the lender could initiate the payment transfer as scheduled. If the
lender was scheduled to make any payment attempts following the one
that was disclosed in the previously provided notice, then the lender
would have to provide notice for that future payday attempt through
alternate means, in accordance with the applicable timing requirements
in proposed Sec. 1041.15(b)(3). Proposed comment 15(b)(3)(ii)(B)-2
explained that alternate means could include a different electronic
delivery method that the consumer has consented to in person or by
mail. Proposed comment 15(b)(3)(ii)(B)-3 provided examples of actions
that would satisfy the requirements in proposed Sec. 1041.15(b)(3).
The Bureau was concerned that requiring lenders to delay the
payment transfer past its scheduled date could cause consumers to incur
late fees and finance charges. For example, if the lender attempts to
deliver a notice through text message three days before the transfer
date and the lender received a response indicating that the consumer's
phone number was out of service, then the lender would not have
sufficient time before the scheduled payment transfer date to deliver
to payment notice by mail according to the timing requirements in
proposed Sec. 1041.15(b)(3). Although it would be preferable that
consumers received the notice before any transfer in all circumstances,
on balance the Bureau believed that the potential harms of causing
payment delays outweighed the benefits of requiring delivery of the
notice through another method. It was concerned that even if lenders
were required to deliver the notice through another means, such as
mail, alternative means also might not successfully deliver the notice
to the consumer.
Under the proposal, if a lender provided the payment notice in
person, then there would be no lag between providing the notice and the
consumer's receipt. Similar to the timing provisions provided for the
electronic short notice, proposed Sec. 1041.15(b)(3) would provide
that if the lender provided the notice in person, then the lender would
have to provide the notice no earlier than seven business days and no
later than three business days prior to initiating the transfer.
Proposed 15(b)(4) Content Requirements
Proposed Sec. 1041.15(b)(4) specified the required contents of the
payment notice, including an identifying statement, date and amount of
the transfer, truncated information to identify the consumer account
from which the withdrawal will be taken, loan number, payment channel,
check number (if applicable), the annual percentage rate of the loan, a
breakdown of how the payment is applied to principal and fees, and
lender contact information. The proposed rule and comments thereto
added more detail about these items. When the payment transfer had
changed in a manner that makes the attempt unusual, the disclosure
title would have to reflect that the attempt is unusual. The Bureau
believed that this content would enable consumers to understand the
costs and risks associated with each loan payment, consistent with its
authority under section 1032 of the Dodd-Frank Act. The Bureau was
aware that providing too much or overly complicated information on the
notice may prevent consumers from reading and understanding it. To
maximize the likelihood that consumers would read the notice and retain
the most importance pieces of information about an upcoming payment, it
believed that the content requirements should be minimal.
In particular, the Bureau considered adding information about other
consumer rights, such as stop-payment rights for checks and EFTs, but
had concerns that this information may be complicated and distracting.
Consumer rights regarding payments are particularly complicated because
they vary across payment methods, loan contracts, and whether the
authorization is for a one-time or recurring payment. As discussed in
Market Concerns--Payments, these rights are often burdensome and costly
for consumers to utilize.
On the requirement to disclose APR, which is the one content
requirement the Bureau is not finalizing as discussed below, it
believed that providing information about the cost of the loan in the
disclosure would remind consumers of the cost of the product over its
term and assist consumers in their financial management, for instance
in choosing how to allocate available funds among multiple credit
obligations or in deciding whether to prepay an obligation. The Bureau
recognized that consumers generally do not have a clear understanding
of APR, as confirmed by the consumer testing of these model forms. It
also stated at the proposal stage that APR nonetheless may have some
value to consumers as a comparison tool across loan obligations even by
consumers who are not deeply familiar with the underlying calculation.
Proposed 15(b)(5) Additional Content Requirements for Unusual Attempts
Under the proposal, if a payment transfer was unusual according to
the circumstances described in the proposal, then the payment notice
would have to include both the content provided in proposed Sec.
1041.15(b)(4) (other than disclosure of the APR) and the content
required by Sec. 1041.15(b)(5), which would mandate the notice to
state if the amount or the date or the payment channel differs from the
amount of the regularly scheduled payment, and that the transfer would
be for a larger or smaller amount than the regularly scheduled payment,
as applicable. Proposed Sec. 1041.15(b)(5) would require the notice to
state, if the payment transfer date is not a date on which a regularly
scheduled payment is due under the loan agreement, that the transfer
will be initiated on a date other than the date of a regularly
scheduled payment. For payment attempts using a payment channel
different from the channel used for the previous transfer, proposed
Sec. 1041.15(b)(5) would require a statement to specify that the
transfer would be initiated through a different payment channel, as
well as the channel that the lender had used for the previous payment
attempt. If the transfer was for the purpose of re-initiating a
returned transfer, then proposed Sec. 1041.15(b)(5) would require the
notice to state that it was a re-initiation, along with a statement of
the date and amount of the returned transfer and a statement of the
reason for the return. Proposed comment 15(b)(5)-1 explained if the
payment transfer was
[[Page 54769]]
unusual according to the circumstances described in proposed Sec.
1041.15(b)(5), then the payment notice had to contain contents required
by proposed Sec. 1041.15(b)(4) (except for APR) and (b)(5). Proposed
comment 15(b)(5)(i)-1 explained that the content requirement for
varying amount applies when a transfer was for the purpose of
collecting a payment that was not specified by amount on the payment
schedule, or when the transfer was for the purpose of collecting a
regularly scheduled payment for an amount different from the regularly
scheduled payment amount according to the payment schedule. Proposed
comment 15(b)(5)(ii)-1 explained that the content requirement for the
date other than due date would apply when a transfer was for the
purpose of collecting a payment that was not specified by date on the
payment schedule, or when the transfer was for the purpose of
collecting a regularly scheduled payment on a date that differed from
regularly scheduled payment date according to the payment schedule.
The Bureau believed that all four of these circumstances--varying
amount, date, payment channel and re-initiating a returned transfer--
might be important to highlight for the consumer, so that the status of
their loan is fully disclosed to them pursuant to section 1032(a) of
the Dodd-Frank Act. If a lender initiated a payment that differed from
the regularly scheduled payment amount authorized by the consumer, the
payment was more likely to vary from consumer expectations and pose
greater risk of triggering overdraft or NSF fees. The Bureau thus
believed that these changes should be highlighted for consumers to
understand the risks, attempt to plan for changed payments, and
determine whether their authorization is being used appropriately. It
also believed that changes in the date and channel of the payment could
be important information for the consumer to prepare for the withdrawal
and take steps as necessary. To effectively and fully understand their
current loan status and alert consumers to a series of repeat attempts
over a short period, the Bureau further found it important for the
consumer to know if the past payment attempt failed and the lender is
attempting to re-initiate a returned transfer.
Proposed 15(c)(1) General
The Bureau is combining the content from Sec. 1041.15(c) into
final Sec. 1041.9(b) as well, and thus addresses these provisions
here. Proposed Sec. 1041.15(c) provided content requirements for an
electronic short notice, essentially a truncated version of the payment
notice formatted for electronic delivery through email, text message,
or mobile application. This notice would be provided when the lender
has obtained the consumer consent for an electronic delivery method and
is proceeding to provide notice through such a delivery method. As
described above, this electronic short notice would provide a web link
to the complete payment notice that would be required by the proposed
rule. The Bureau believed it was appropriate to tailor the notices in
light of format limitations for electronic delivery channels that may
be beyond the lender's control; as well as considerations about the
ways consumers may access email, text messages, and mobile
applications; privacy considerations; preferences for particular usage
settings; and other issues. For all of these reasons, it found it
appropriate for the electronic short notice to contain less information
than the full payment notice, given that it links to the full notice.
It was also persuaded that providing access to the full notice via the
Web site link would appropriately balance related concerns to ensure
that consumers could access the full set of notice information in a
more secure, usable, and retainable manner. However, the Bureau asked
for comment on this two-step structure in the proposal and, as
discussed below, is finalizing additional ways to deliver the notices
electronically, such as by providing the full text of the notice in the
email and providing a PDF attachment of the full notice rather than a
web link.
15(c)(2) Content
The proposed electronic short notice contained an abbreviated
version of the proposed payment notice content, and would be an initial
notice provided through a method of electronic delivery that the
consumer has consented to, such as a text message or email, that would
provide a link to a unique URL containing the full payment notice. It
would include an identifying statement that describes the purpose of
the notice and the sender of the notice; the date of the transfer,
amount of the transfer, and consumer account information; and a unique
Web site URL that the consumer may use to access the full payment
notice.
15(c)(3) Additional Content Requirements
Under the proposal, if the electronic short notice was being
provided under an unusual attempt scenario, then the notice would have
to state what makes the payment attempt unusual by providing
information about whether the amount, date, or payment channel has
changed.
Comments Received
The Bureau received a number of comments about the payment notice
requirements proposed in the rule. Some commenters noted that the
notices were beneficial because they would provide information to
consumers that might allow them to avoid unexpected bank fees. On the
other hand, a commenter argued that the timing requirements of the
payment notices could pose safety-and-soundness risks by creating a
``loophole'' for those seeking to avoid payment, and create barriers to
borrowers repaying their contractual obligations. It appears this
commenter suggested that because borrowers would be made aware of a
pending payment, they might choose to stop that payment, which
concerned the commenter because it would make it harder to collect.
Many industry commenters raised burden concerns about providing the
notice. Several raised concerns about providing the paper notices
through the mail. For example, one lender explained that compliance
costs for mailed notices are between $10 and $24 for a $1,000 12-month
loan and another stated that mailed written notices would be 80 times
more expensive than electronic notices.
Additionally, as noted above when discussing Sec. 1041.9(a) of the
final rule, several commenters asserted that the payment notice
requirements create compliance complexity. One commenter argued that
because these notice requirements may preempt some and overlay other
State law requirements, the requirement could cause both regulatory and
consumer confusion. For example, the commenter claimed that if
finalized, the rule could potentially require lenders to provide
multiple notices with the same information in different formats (one
required by this rule and the other required by State law). The
commenter also suggested that lenders would incur substantial costs to
try to navigate this dynamic.
Another commenter argued that a similar overlap dynamic could exist
with TILA and Regulation Z, which imposes disclosure requirements for
creditors at loan origination. The commenter claimed that companies
which are lenders under this rule and ``creditors'' under TILA and
Regulation Z would have potentially duplicative disclosure requirements
that would be burdensome and perhaps confusing to consumers, thus
recommending that the
[[Page 54770]]
Bureau issue a revised proposal to better align with the requirements
in TILA and Regulation Z.
Several stakeholders commented on the proposed content of the
payment notices, arguing that they merely would disclose information
pertaining to an agreement into which the borrower had already entered,
and thus would be unnecessary, or could frustrate or confuse consumers.
A number of commenters asked the Bureau to provide a means for
consumers to opt out of the notices, explaining that some consumers may
not want to receive a stream of notices for normal payment activity.
One commenter claimed that consumers might be disconcerted by receiving
a comprehensive disclosure, and that it would be atypical to receive a
disclosure that explains something to which a consumer already had
agreed. This commenter claimed that consumers might not want the
notices, or be frustrated by receiving them, and that their frustration
would likely be aimed at the lenders. Many of these commenters focused
their concerns on instances where a borrower agreed to regular
automatic payments to make payments on installments.
One consumer advocate suggested using the term ``balance'' instead
of ``principal.'' Others suggested providing all of the notice
information in the body of the email, given concerns that a link may be
at times difficult for consumers to access. The Bureau did not receive
any comments about privacy concerns from including the full notice in
the body of the email or from a web link notice.
Several commenters argued that instead of requiring lenders to
obtain new payment authorizations after two failed attempts, the Bureau
should include in these notices a disclosure requirement about
consumers' rights to revoke existing authorizations. Other commenters
had specific comments about the content of the notices. Some generally
agreed with the prohibition against providing the full account number,
agreeing with the Bureau that a full account number could leave
consumers vulnerable to fraud. One commenter argued that the Bureau
should require that the name of the Originating Depository Financial
Institution (ODFI) be included in the notices. Another argued that the
Bureau should not require inclusion of a check number, which they claim
may interfere with lenders' ability to use remotely created checks and
payment orders. A number of commenters expressed agreement with the
requirement to include APR in the notices, including a suggestion to
disclose an APR that includes credit insurance premiums. Others cited
the Bureau's findings in the mortgage context that borrowers find APR
confusing or unhelpful, arguing that it should not be included in the
payment notices.
One commenter argued that credit union lenders, unlike other
lenders, already provide most of the information in the proposed
disclosures in monthly billing statements. Credit union commenters
expressed concern that they would have to comply with the payment
provisions, including by providing payment notices, when making loans
under the NCUA's PAL program. These commenters argued that credit
unions that already provide the information via billing statement
should be exempted from having to provide this information again in a
separate disclosure.
Finally, one commenter argued that depository institutions acting
as service providers to lenders would have no way to know, under
current technological means, whether transactions were related to
covered loans, and would have no way to tell whether lenders had
complied with notice requirements. For this reason, the commenter asked
the Bureau to clarify under the final rule that the depository
institutions holding the lender's or borrower's deposit account would
not be held responsible for compliance with notice requirements.
Final Rule
The Bureau is now finalizing proposed Sec. 1041.15(b) and (c),
renumbered as Sec. 1041.9(b), with significant deviations from the
requirements proposed. In response to many comments about the burden of
the notice, along with other concerns such as how consumers may be
overwhelmed and desensitized by notices that are provided before every
payment withdrawal, the Bureau is finalizing a scaled back payment
notice requirement. Under the final rule, the notice will be required
before (i) the first time a lender initiates a withdrawal and (ii) any
unusual payment notices thereafter. There are also additional
exceptions for open-end credit products, which already have periodic
statement requirements under Regulation Z.
In particular, in deciding to modify the proposal in this manner,
the Bureau found compelling the comments it received about over-
disclosure and burdens associated with notices before every automatic
payment withdrawal on installment loans. The upcoming payment notices
may not be necessary for long term loans that are not experiencing
unusual payment activity. However, due to concerns about payment
transparency identified in the proposal, consumers would benefit from
obtaining an upcoming payment notice for the first payment.
This revision would incentivize lenders to stick to the payment
schedule and would only impose costs--which commenters pointed out may
be more significant for paper notices--if they deviate from the
consumer's authorization. This change would eliminate the need for a
consumer opt-out regime, because after the first payment consumers
would only receive notices if something unusual was happening. It also
may make the unusual payment notices more salient for consumers, who
otherwise could become desensitized to notices that are delivered
before every payment. Accordingly, the Bureau decided that if a
borrower is given a disclosure before the first withdrawal, and there
are future withdrawals that are not unusual--meaning they do not vary
in amount, are not on a date other than the date of regularly scheduled
payment, are not processed through a different payment channel, and are
not for purposes of re-initiating a previous failed transfer--then that
first payment notice should suffice to give borrowers notice of payment
characteristics. Also in response to burden concerns, the Bureau has
adjusted the timing requirements so that the first payment withdrawal
notice could be provided earlier, such as during origination. Of
course, under this new notice regime, the requirement that the initial
notice be retainable is even more important. To further limit burden
and allow flexibility as consumer preferences and technologies change,
the Bureau is finalizing additional ways to deliver the notices
electronically, including by providing the full text of the notice in
the email and providing a PDF attachment of the full notice rather than
a web link.
To implement these revisions, the Bureau has restructured the
regulatory text. At a high level, in the proposal the Bureau structured
paragraph (b) as the requirement to provide notices before all
withdrawals (including various requirements depending on whether the
payments were unusual), and paragraph (c) set forth the ability to
provide an electronic short notice instead. In the final rule,
paragraph (c) has been built into paragraph (b), at paragraph (b)(4).
Additionally, the Bureau has restructured paragraph (b) by splitting up
the requirements for first payment withdrawal notices and unusual
withdrawal notices--in paragraph (b)(2)
[[Page 54771]]
and (3) respectively--as separate paragraphs.
To clarify situations when the notices are required under this more
limited frequency, definitions were added for the terms first payment
withdrawal and unusual withdrawal under Sec. 1041.9(b)(1)(i) and (ii),
respectively. To ease readability, provisions are now repeated in
paragraphs (b)(2) and (3) such that the requirements for each type of
notice are self-contained in their respective paragraphs. The
commentary has been revised to incorporate these changes as well. In
finalized paragraph (b)(2)(i), the Bureau has changed how early a first
payment withdrawal notice can be provided by mail, electronically, or
in person. Specifically, lenders can now provide the notice as early as
when the lender obtains payment authorization. This change was intended
to further reduce burden to lenders, as now lenders, if they wish, may
provide the first payment withdrawal notice at origination, when they
are already interacting with the consumer and providing other loan
materials. Although the information would not be as timely for
consumers, consumers would receive the information in retainable form
and there are transparency benefits to incentivizing lenders to commit
to a particular payment date, channel, and amount at the time of
origination.
The Bureau did not finalize proposed paragraph (b)(2)(i), which
would have exempted payment transfers in connection with loans made
under proposed Sec. 1041.11 or Sec. 1041.12 because the Bureau is not
finalizing either of those sections here.
The Bureau is also not finalizing the requirement to disclose APR.
Although the Bureau received some comments supporting its inclusion, it
agrees with other commenters that APR disclosures may be duplicative of
the disclosures provided under Regulation Z, especially with regard to
the first payment withdrawal notice that might be provided at
origination, which the Bureau believes will now make up the majority of
the notices provided under this rule.
The Bureau is not changing the term ``principal'' to ``balance.''
Balance seems misleading in this context because the notice breaks out
principal from interest and fees, and ``balance'' might lead consumers
to believe that the interest and fees are not outstanding in addition
to the principal amount.
The Bureau is finalizing the requirement that lenders only include
a truncated account number in the notices. It is concerned that full
account number is sensitive information given that a lender or
fraudster could use it in conjunction with a bank routing number to
initiate an ACH or RCC transfer. Truncated account number (such as the
last four digits) would still allow consumers to identify the account.
The Bureau continues to believe that the account information is
important for consumers to track which account is being debited.
However, despite disclosure of this information on the notice, the
Bureau has concerns that lenders at times debit accounts that the
consumer did not provide authorization for. It will continue to monitor
these unauthorized transfer practices related to account switching, and
maintains that requiring a lender to commit to a specific account
number, via notice, may assist in that effort.
The Bureau is adding provisions to address overlap of the unusual
withdrawal notices with disclosures required under Regulation Z for
open-end credit plans. Under paragraph (b)(3)(i)(D), the unusual
withdrawal notices may be provided in conjunction with the periodic
statement required under Regulation Z, 12 CFR 1026.7(b). The Bureau
added this provision to reduce burden on open-end lenders, which
already must provide periodic statements under Regulation Z--which
provides its own timing requirements--and may prefer to provide the
notices at the same time; also, the Bureau believes that consumers of
open-end credit would benefit, for comparison purposes, from receiving
an unusual withdrawal notice in conjunction with or close in time to
the periodic statement. It is further aware that minimum payments due
for open-end credit plans may fluctuate depending on the outstanding
balance. Under paragraph (b)(3)(ii)(C)(1)(ii), that unusual withdrawal
notice need only include content about varying amount when the amount
deviates from the scheduled minimum payment due as disclosed in that
periodic statement required under Regulation Z.\1060\ The Bureau
believes consumers would benefit from receiving an unusual withdrawal
notice when an open-end credit lender deviates from the scheduled
payment amount due. As the first payment withdrawal notice contains
information that is not on the periodic statement (e.g., payment
channel) and that it is a one-time notice that can be provided at
origination, the Bureau believes that open-end credit consumers would
benefit from receiving the first payment withdrawal notice.
---------------------------------------------------------------------------
\1060\ 12 CFR 1026.7(b).
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The Bureau adjusted the electronic delivery provisions to allow for
options beyond the two-step short notice plus link process. Under
paragraph (b)(4)(i), there is an exception to the electronic short
notice requirement if a lender is using email delivery as provided in
paragraph (b)(4)(iii). Under paragraph (b)(4)(iii), when the consumer
has consented to receive disclosures through electronic delivery, and
the method of electronic delivery is email, the lender may either
deliver the full notice required by paragraph (b)(1) in the body of the
email or deliver the full notice as a linked URL Web page or PDF
attachment along with the electronic short notice as provided in
paragraph (b)(4)(ii). The revision is meant to address burden concerns
raised by lenders and access concerns raised by consumer advocates.
The Bureau has made corresponding changes in the commentary, and
added a number of comments providing additional clarification about the
meaning of first payment withdrawal. Comment 9(b)(1)(i)-1 explains that
the term encompasses the first payment initiated by the lender, so it
is not necessarily the first payment on a covered loan; for example, a
lender that obtains payment authorization after a few payments have
been made by the consumer in cash would deliver the notice later in the
loan term. Comment 9(b)(1)(i)-2 explains that when an open-end credit
plan is not a covered loan at origination, but becomes one later, the
first payment withdrawal after the loan becomes a covered loan would
qualify as the first payment withdrawal. Comment 9(b)(2)(i)-1 specifies
that the earliest point at which a lender may provide the first payment
withdrawal notice is when the lender obtains the payment authorization.
It also specifies that the notice can be provided simultaneously with
receiving payment authorization, which could be at origination. The
Bureau did not finalize comment (b)(3)(i)(B)-3 because it implicated
regular payment notices that are now not contemplated in the final
rule.
The Bureau added comments 9(b)(3)(ii)(C)-1 and -2 to provide
further guidance on unusual withdrawal notices, with the latter
providing an example of a payment that is unusual because the payment
channel has changed. The Bureau added a paragraph to comment
9(b)(3)(ii)-3 describing how circumstances that trigger an unusual
withdrawal for open-end credit plans are more limited according to
Sec. 1041.9(b)(3)(ii)(C)(1)(ii). It now says that since the
outstanding balance on open-end credit plans may change over time, the
minimum payment due on the scheduled payment date may also fluctuate.
However, the minimum
[[Page 54772]]
payment amount due for these open-end credit plans would be disclosed
to the consumer according to the periodic statement requirement in
Regulation Z. The payment transfer amount would not be considered
unusual with respect to an open-end credit plan unless the amount
deviates from the minimum payment due as disclosed in the periodic
statement. Furthermore, the requirement for a first payment withdrawal
notice under Sec. 1041.9(b)(2) and the other circumstances that could
trigger an unusual withdrawal notice under Sec. 1041.9(b)(3)(ii)(C)(2)
through (4), continue to apply.
Lastly, the Bureau added comment 9(b)(4)-1 to clarify that an
electronic short notice must be used for electronic delivery other than
email, but that the lender can choose whether to use the electronic
short notice or the full text when using email.
The Bureau has determined that many of the extensive changes it
made to the final rule largely incorporate and address the critical
feedback received from commenters. While it does not share the fear
that a borrower might choose not to pay if given a more informed
choice, commenters' concerns about the notices making collections more
difficult are largely addressed by the fact that consumers will no
longer receive notices before every payment. The Bureau also made
changes to address concerns about overlapping Regulation Z requirements
by adding caveats for open-end credit and taking APR off the notices.
And as stated above, the compliance burden associated with payment
notices should be reduced significantly now that lenders will only need
to provide notices on the first payment withdrawal, and before unusual
withdrawals.
The Bureau does not agree that it needs to enact an opt-out
provision for these notices. It has addressed concerns about consumers
becoming desensitized to multiple identical notices by eliminating the
need to send multiple identical notices. As lenders will only be
sending notices upon infrequent events (the first payment, an unusual
payment, or when the payment attempt cap is met), the risk of
overloaded consumers is minimized; additionally, the Bureau wants to
ensure that borrowers are aware of these rare events, and an opt-out
regime might undermine that goal--including by allowing lenders to use
the opt out feature to surreptitiously initiate payments that fall
outside of consumers' expectations.
Credit union lenders making loans under the PAL program will not
have to comply with any parts of this rule, including the payment
notices. To the extent commenters believed that the Bureau's exclusion
did not fully capture all PAL program loans, the Bureau has added a
clarification in Sec. 1041.3(e) to explicitly exclude all PAL program
loans.
The Bureau does not see a basis for requiring lenders to identify
the ODFI on the notices. Borrowers do not have a relationship with the
ODFI, and would not need that information to understand any of the
triggering events for which notices are required. Nor would borrowers
need that information to enact a stop payment or revoke an
authorization. The Bureau also knows from its experience in disclosures
and consumer testing about the value of keeping the content of the
notices limited so as not to crowd out or distract from the most
important content.
The Bureau maintains its view that a check number should be on the
first payment withdrawal notices. As described above in Market
Concerns--Payments, borrowers may need that information to enact a stop
payment. Contrary to one commenter's suggestion, the Bureau believes
that this information will be useful to consumers.
The Bureau is not aware of any State laws that would directly
conflict with the notice requirements set forth in the proposal or this
final rule. It believes it is important that all consumers in all
States receive these notices, and trusts that State officials will find
an appropriate way to ensure that improved disclosures required by
State laws are helpful to consumers in their State, in accordance with
their independent judgment.
9(c) Consumer Rights Notice
The Bureau has decided to finalize proposed Sec. 1041.15(d) and
(e) as combined into Sec. 1041.9(c) of the final rule. Other than
adding some additional options for electronic delivery--which were also
added to the notices in Sec. 1041.9(b)--the Bureau is finalizing the
consumer rights notice as proposed. Its reasons for doing so are set
out below.
Proposed Rule
Proposed 15(d)(1) General
Proposed Sec. 1041.15(d) required lenders to provide consumers
with a consumer rights notice after a lender has initiated two
consecutive or concurrent failed payment transfers and triggered the
protections provided by the proposed rule. It also would provide timing
and content requirements for this consumer rights notice, which would
be triggered when the lender received information that its second
consecutive payment attempt has failed. As described above, proposed
Sec. 1041.14 would have limited a lender's ability to initiate a
payment transfer after two consecutive attempts have failed, allowing
the lender to initiate another payment attempt from the consumer's
account only if the lender had received the consumer's consent under
proposed Sec. 1041.14(c) or authorization to initiate an immediate
one-time transfer at the consumer's request under proposed Sec.
1041.14.
15(d)(2) Timing
The proposed rule would require a lender to send the consumer
rights notice no later than three business days after the lender
received information that the second consecutive attempt had failed,
which proposed comment 15(d)(2) clarified would be triggered whenever
the lender or its agent, such as a payment processor, received
information that the second attempted payment transfer had failed. The
Bureau believed that when a lender had initiated two consecutive failed
payment transfers and triggered the protections provided by proposed
Sec. 1041.14(b), a consumer might not be aware that the lender was no
longer permitted to initiate payment from the consumer's account. In
the meantime, some loans might accrue interest or fees while the
balance would remain unpaid. For these reasons, the Bureau stated that
the consumer rights notice should be provided shortly after the second
attempt fails. However, the Bureau was aware that, depending on the
payment method, there may be a delay between the lender's initiation of
the payment transfer and information that the payment transfer has
failed. Accordingly, the Bureau proposed to require the lender to send
the consumer rights notice within three business days after the lender
received information that the payment transfer has failed.
15(d)(3) Content Requirements
The proposal would also specify the content requirements for the
consumer rights notice. The Bureau believed that a consumer should know
that a lender has triggered the provisions in proposed Sec. 1041.14
and was no longer permitted to initiate payment from the consumer's
account. It also considered it important to inform consumers that
Federal law prohibits the lender from initiating further payment
withdrawal attempts. Given that proposed Sec. 1041.14 would prohibit
the lender from initiating another payment attempt without a new
consumer authorization, the Bureau proposed it would also be useful for
the consumer to be aware that the lender may be contacting the consumer
to
[[Page 54773]]
discuss payment choices. Consistent with the Bureau's authority under
section 1032(a) of the Dodd-Frank Act, this content would inform
consumers of the payment status on their covered loans. It also might
help prevent consumer confusion or misinformation about why the lender
cannot initiate another payment, by helping to ensure that this
information about the situation is effectively, accurately, and fully
disclosed to the consumer. The proposed rule specified that this
content would include an identifying statement, a statement that the
lender's last two attempts to withdraw payment had failed, information
about the consumer account and loan identification information, a
statement on the Federal law prohibiting the lender from initiating
further transfers without the consumer's permission, a statement that
the lender could contact the consumer to discuss payment choices going
forward, the circumstances of why the lender could no longer withdraw
payments from the consumer's account, and information about the Bureau.
15(e) Electronic Short Notice
For lenders to deliver the required consumer rights notice through
an electronic delivery method, the proposed rule would require the
lenders to provide an electronic short notice that contains a link to
the full consumer rights notice; a truncated version of the content
specified in the proposal; an email subject line, if applicable; and a
unique Web site URL that links to the full consumer rights notice. For
many of the same reasons discussed above in connection with proposed
Sec. 1041.15(c), the Bureau believed that the electronic short notice
should contain limited content to maximize the utility of notices for
consumers and minimize the burden on lenders. Consistent with the
Bureau's authority under section 1032 of the Dodd-Frank Act, these
proposed requirements would help ensure that consumer rights under
proposed Sec. 1041.14 are effectively disclosed to consumers.
Proposed Sec. 1041.15(e)(2) specified that the electronic short
notice must contain an identifying statement, a statement that the last
two attempts were returned, consumer account identification
information, and a statement of the prohibition under Federal law,
using language substantially similar to the language set forth in the
proposed model form. These terms were described for the full consumer
rights notice in proposed Sec. 1041.15(d)(3)(i), (ii), (iii), and (v).
Proposed comment 15(e)(2)-1 clarified that when a lender provides the
electronic short notice by email, the email had to contain this
identifying statement in both the subject line and the body of the
email. In order to provide consumers access to the full consumer rights
notice, proposed Sec. 1041.15(e)(2)(v) would also require the
electronic short notice to contain the unique URL of a Web site that
the consumer may use to access the consumer rights notice.
The Bureau understood that the unique Web site URL contains limited
privacy risks because it would be unlikely that a third party will come
across a unique URL. Even if a third party did discover this URL, the
notice would not contain identifying information such as the consumer's
name or full account number.
Comments Received
Many of the comments relating to the notices were aimed more
generally at all of the notice requirements, and not specifically at
the consumer rights notice. For example, some commenters repeated the
concern that these provisions would create additional regulatory
requirements for loans made under the NCUA's PAL program, which is not
correct because those loans are not subject to the notice requirements.
Others raised general concerns about the total compliance burden, which
has been substantially lessened due to various changes in the final
rule, including a significant scaling back of the frequency of the
notices. Those comments are all addressed in the earlier discussions of
comments above. Lastly, the Bureau did not receive any comments about
the specific timing or content of the consumer rights notices.
Final Rule
The Bureau is now finalizing proposed Sec. 1041.15(d) and (e) as
Sec. 1041.9(c) of the final rule. It has concluded that consumers
should be informed when a lender has triggered the threshold of two
consecutive failed payment withdrawal attempts so that they are made
aware of the failed attempts and of the fact that, by operation of law,
further attempts will cease even though they remain obligated to make
continuing loan payments. The Bureau is also concerned that some
lenders may pressure consumers to provide affirmative consent and could
present the reasons behind the re-initiation limit in an incomplete
manner. It has made the judgment that requiring disclosure of
information about prior failed payments and consumer rights under Sec.
1041.8 of the final rule would help ensure that the costs, benefits,
and risks of the loan and associated payments are effectively disclosed
to consumers, consistent with its authority under section 1032 of the
Dodd-Frank Act. Due to these policy considerations, the Bureau has
determined that a lender should be required to provide a standardized
consumer rights notice after it has initiated two consecutive attempted
payment withdrawals have failed.
The Bureau has made a few technical changes to reconcile the
numbering changes, but otherwise is finalizing these paragraphs as
proposed with only one substantive change to the rule and a
corresponding change to the commentary. To ease burden and provide
lenders with additional options--which may be beneficial to consumers
giving changing preferences and privacy concerns in an evolving
technological world--the Bureau is explicitly stating that when making
electronic delivery of the consumer rights notices via email, lenders
can, if they choose and the consumer has provide required consent,
provide the full notice in the text of the email instead of the
electronic short notice, or provide the full notice in a PDF attachment
instead of through a linked URL Web page.
Lastly, the Bureau notes that the exclusions and exemptions listed
in Sec. 1041.3, including that for PAL loans, applies to all sections
of part 1041, including this section.
Subpart D--Information Furnishing, Recordkeeping, Anti-Evasion, and
Severability
Sections 1041.10 Information Furnishing Requirements and 1041.11
Registered Information Systems
Overview of the Proposal
As described earlier, the Bureau proposed that it is an unfair and
abusive practice to make a covered short-term loan without reasonably
determining that the consumer has the ability to repay the loan. The
Bureau proposed to prevent this abusive and unfair practice by, among
other things, including in the proposal requirements for how a lender
could reasonably determine that a consumer has the ability to repay a
loan.
The Bureau stated that, in order to achieve these consumer
protections, a lender must have access to reasonably comprehensive
information about a consumer's current and recent borrowing history,
including covered loans made to the consumer by other lenders, on a
real-time or close to real-time basis. As discussed above, online
borrowers appear especially likely to move from lender to lender. This
makes it particularly important for online
[[Page 54774]]
lenders to have access to information about covered loans made by other
lenders in order to assess properly a consumer's eligibility for a loan
under the proposal. The Bureau proposed Sec. 1041.16 to require
lenders to furnish certain information about most covered loans to each
information system registered with the Bureau pursuant to proposed
Sec. 1041.17.\1061\ This requirement was intended to be in addition to
any furnishing requirements existing under other Federal or State law.
The proposed registered information systems would be consumer reporting
agencies within the meaning of sec. 603(f) of the Fair Credit Reporting
Act (FCRA).\1062\ Accordingly, lenders furnishing information to these
systems under proposed Sec. 1041.16 would be required to comply with
the provisions of the FCRA and its implementing regulations applicable
to furnishers of information to consumer reporting agencies.\1063\ The
furnishing requirement under proposed Sec. 1041.16 would enable a
registered information system to generate a consumer report containing
relevant information about a consumer's borrowing history, regardless
of which lender had made a covered loan to the consumer previously. A
lender contemplating making most covered loans to a consumer would be
required to obtain a consumer report from a registered information
system and consider such a report in determining whether the loan could
be made to the consumer, in furtherance of the consumer protections of
proposed part 1041.\1064\
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\1061\ The proposal required entities seeking to become
registered information systems after the effective date of proposed
Sec. 1041.16 to first be provisionally registered for a period of
time.
\1062\ 15 U.S.C. 1681a(f).
\1063\ These provisions include a number of requirements
relating to the accuracy of information furnished, including the
requirement to investigate consumer disputes and to correct and
update information. See, e.g., 15 U.S.C. 1681s-2(a) through (b); 12
CFR 1022.42 through 1022.43. Compliance with the FCRA may require
that information in addition to that specified in the proposal is
furnished to information systems registered with the Bureau. The
proposed furnishing requirements aimed to ensure that lenders making
most loans covered under the proposal would have access to
information necessary to enable compliance with the provisions of
the proposal, but would not supersede any requirements imposed upon
furnishers by the FCRA.
\1064\ The proposal explained that such lenders would be subject
to the provisions of the FCRA and its implementing regulations
applicable to users, including the requirement to provide a consumer
a notice of taking an adverse action based in whole or in part on
information contained in a consumer report. See, e.g., 15 U.S.C.
1681m(a).
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In developing the proposal, the Bureau considered an alternative
approach to ensure that lenders could obtain reasonably comprehensive
information about a consumer's borrowing history across lenders. Under
this alternative approach, lenders would furnish information about
covered loans to only one of the entities registered with the Bureau,
but would be required to obtain a consumer report from each such
entity.\1065\ However, the Bureau preliminarily believed that this
approach would be costlier for lenders than the proposed approach
because lenders potentially would need to obtain several consumer
reports for every application for a covered short-term loan made under
proposed Sec. 1041.5 or Sec. 1041.7.\1066\ The Bureau recognized the
costs involved in furnishing to multiple entities but anticipated that
those costs could be substantially reduced with appropriate
coordination concerning data standards. The Bureau considered an
alternative under which lenders would be required to furnish
information to the Bureau or a contractor designated by the Bureau, and
to obtain a report from the Bureau or its contractor. The Bureau
believed that these functions would be better performed by the private
sector and that the proposed approach would permit faster
implementation of the rule. Further, it noted there may be legal or
practical obstacles to this alternative approach.
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\1065\ If lenders were required to furnish information to only
one consumer reporting agency, the Bureau identified a substantial
risk that, for many consumers, no consumer reporting agency would be
able to provide a reasonably comprehensive report of the consumer's
current and recent borrowing history with respect to covered loans
across lenders.
\1066\ Under the proposal, a lender would have had to review a
consumer report in connection with loans made pursuant to proposed
Sec. Sec. 1041.5, 1041.6, 1041.7 and 1041.9. For ease of reference,
this section-by-section analysis only refers to proposed Sec.
1041.5 and/or Sec. 1041.7 because the Bureau is adopting these
proposed sections in the final rule (as Sec. Sec. 1041.5 and
1041.6) and is not adopting proposed Sec. Sec. 1041.6 and 1041.9.
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The proposal would have required the Bureau to identify the
particular consumer reporting agencies to which lenders were required
to furnish information pursuant to proposed Sec. 1041.16, and from
which lenders would obtain consumer reports pursuant to proposed Sec.
1041.5 and Sec. 1041.7. Specifically, under proposed Sec. 1041.17,
the Bureau would have registered these consumer reporting agencies with
the Bureau as information systems. Lastly, proposed Sec. 1041.17 set
forth processes for registering information systems before and after
the effective dates of the furnishing obligations under proposed Sec.
1041.16, and established the conditions that an entity had to satisfy
to become a registered information system.
Legal Authority for Subpart D
A. Section 1031(b)
Section 1031(b) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules for the purpose of identifying unfair or abusive acts
or practices, which rules may include requirements for the purpose of
preventing such acts or practices.\1067\ As discussed above, the Bureau
determined that it is an unfair and abusive practice to make a covered
loan without determining that the consumer has the ability to repay the
loan. Accordingly, consistent with aspects of the proposed rule, this
final rule requires lenders to determine the consumer's ability to
repay a covered loan, including by reviewing the consumer's borrowing
history and any current difficulty with repaying an outstanding loan.
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\1067\ 12 U.S.C. 5531(b).
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The provisions of proposed Sec. Sec. 1041.16 and 1041.17 were
designed to ensure that lenders would have access to information to
achieve the consumer protections of proposed Sec. Sec. 1041.5 and
1041.7. The Bureau believed that to prevent the abusive or unfair
practices identified in the proposed rule, it would be necessary or
appropriate to require lenders to obtain and consider relevant
information about a borrower's current and recent borrowing history,
including covered loans made by all lenders. Requiring lenders to
furnish relevant information concerning most covered loans pursuant to
proposed Sec. 1041.16 would ensure that lenders have access to a
reliable and reasonably comprehensive record of a consumer's borrowing
history when considering extending the consumer a loan. In turn, this
would ensure that consumers receive the benefit of the protections
imposed by proposed Sec. Sec. 1041.5 and 1041.7.
B. Section 1024(b)
Section 1024(b)(7) of the Dodd-Frank Act provides that the Bureau
may: (A) ``prescribe rules to facilitate supervision of persons
described in subsection (a)(1) and assessment and detection of risks to
consumers;'' (B) ``require a person described in subsection (a)(1), to
generate, provide, or retain records for the purposes of facilitating
supervision of such persons and assessing and detecting risks to
consumers;'' and (C) ``prescribe rules regarding a person described in
subsection (a)(1), to ensure that such persons are legitimate entities
and are able to perform their obligations to consumers.'' \1068\ The
provisions in proposed Sec. 1041.17--including the
[[Page 54775]]
criteria governing when the Bureau may register or provisionally
register information systems, suspend or revoke such registration or
provisional registration, or deny applications for registration or
provisional registration--were proposed to facilitate supervision,
enable the assessment and detection of risks to consumers, and ensure
that registered information systems are legitimate entities able to
perform their obligations to consumers.
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\1068\ 12 U.S.C. 5514(b)(7)(A)-(C).
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Proposed Sec. 1041.17 permits the Bureau to provisionally register
or register an information system only if the Bureau determines, among
other things, that the information system acknowledges that it is, or
consents to being, subject to the Bureau's supervisory authority.
Section 1024 of the Dodd-Frank Act grants the Bureau supervisory and
enforcement authority over, among other non-bank persons, ``larger
participant[s] of a market for other consumer financial products or
services,'' as the Bureau defines by rule.\1069\ In 2012, the Bureau
promulgated a final rule defining larger participants of the market for
consumer reporting.\1070\ As noted in the proposal, the Bureau believes
that entities that are registered information systems would be non-
depository institutions that qualify as larger participants in the
market for consumer reporting, and their acknowledgment would reflect
that status. To the extent such an entity is not a larger participant,
or if there is any ambiguity concerning that status, the proposal would
require that an entity consent to the Bureau's supervisory authority to
be eligible for registration as an information system.\1071\
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\1069\ 12 U.S.C. 5514(a)(1)(B) and (a)(2).
\1070\ 77 FR 42873 (July 20, 2012).
\1071\ For example, 12 CFR 1091.110(a) provides that,
``[n]otwithstanding any other provision, pursuant to a consent
agreement agreed to by the Bureau, a person may voluntarily consent
to the Bureau's supervisory authority under 12 U.S.C. 5514, and such
voluntary consent agreement shall not be subject to any right of
judicial review.''
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C. Sections 1022(b), 1022(c), and 1021(c)(3)
Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules ``as may be necessary or appropriate to enable the
Bureau to administer and carry out the purposes and objectives of the
Federal consumer financial laws, and to prevent evasions thereof.''
\1072\ The criteria defined in proposed Sec. 1041.17 would ensure that
registered information systems provide information to the Bureau about
their activities and compliance systems or procedures. In addition to
helping to achieve the purposes and objectives of the proposed rule,
these provisions were proposed to ensure that ``consumers are protected
from unfair, deceptive, or abusive acts and practices,'' and that
``markets for consumer financial products and services operate
transparently and efficiently to facilitate access and innovation.''
\1073\ Section 1021(c)(3) of the Dodd-Frank Act provides that it is a
function of the Bureau to ``publish[ ] information relevant to the
functioning of markets for consumer financial products and services to
identify risks to consumers and the proper functioning of such
markets.'' \1074\ Section 1022(c)(7) further authorizes the Bureau to
``prescribe rules regarding registration requirements applicable to a
covered person, other than an insured depository institution, insured
credit union, or related person.'' \1075\
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\1072\ 12 U.S.C. 5512(b)(1).
\1073\ 12 U.S.C. 5511(b)(2) and (b)(5).
\1074\ 12 U.S.C. 5511(c)(3).
\1075\ 12 U.S.C. 5511(c)(7).
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Pursuant to the authorities described above, the Bureau is thus
finalizing subpart D.\1076\
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\1076\ See also 12 U.S.C. 5514(b)(1)(A) through (C)
(authorizing, with respect to persons described in section 1024, the
Bureau to ``require reports and conduct examinations . . . for
purposes of--(A) assessing compliance with the requirements of
Federal consumer financial law; (B) obtaining information about the
activities and compliance systems or procedures of such person; and
(C) detecting and assessing risks to consumers and to markets for
consumer financial products and services'').
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Effective and Compliance Dates
Although the effective and compliance dates of the various sections
of the rule are discussed in part VI, it is necessary to address them
here also, as the imposition of information furnishing requirements and
the registration of information systems involve operational issues
where timing is a significant factor.
Proposed Rule
As discussed in the proposal, the Bureau believed that building a
reasonably comprehensive record of recent and current borrowing would
take some time and raises a number of transition issues. For entities
that wanted to become registered information systems before the
furnishing requirements under proposed Sec. 1041.16 take effect, the
Bureau proposed a process that would generally work in the following
sequence: Proposed Sec. 1041.17 would take effect 60 days after
publication of the final rule in the Federal Register so that the
standards and process for registration would become operative.
Interested entities would submit to the Bureau an application for
preliminary approval for registration and, after receiving preliminary
approval and obtaining certain written assessments from third parties
concerning their compliance programs, a full application for
registration. After an entity became a registered information system,
the Bureau proposed to provide at least 120 days for lenders to onboard
to the information system and prepare for furnishing before proposed
Sec. 1041.16 began to require furnishing. As detailed in the section-
by-section analysis of proposed Sec. 1041.17, the Bureau proposed a
timeline for these steps that it believed would ensure that information
systems would be registered, and lenders ready to furnish, on the date
that the furnishing obligation in proposed Sec. 1041.16 becomes
effective.
Ultimately, the Bureau proposed allowing approximately 15 months
after publication of the final rule in the Federal Register for
information systems to complete the registration process described
above, and for lenders to onboard to registered information systems and
prepare to furnish. The Bureau also considered whether an additional
period was needed between the date that furnishing to registered
information systems would begin and the effective date of the
requirements to obtain a consumer report from a registered information
system under proposed Sec. Sec. 1041.5 and 1041.7.
Comments Received
A number of industry commenters and trade associations objected to
the Bureau's proposed timeline to implement Sec. Sec. 1041.16 and
1041.17 as being too short. In particular, commenters argued that,
given the proposal to require furnishing to each provisionally
registered and registered information system (``furnish-to-all''), the
sheer mechanics necessary to create furnishing relationships between
all of the lenders making covered loans and all of the provisionally
registered and registered information systems could not be accomplished
in the allotted time frame. One commenter noted that in addition to
common data standards, other standards would need to be established as
well, which could take additional time. Pointing to the complexities of
the proposal, one commenter urged the Bureau to delay the final rule's
effective date, including proposed Sec. 1041.17, which the Bureau
proposed to become effective 60 days after publication of the final
rule. The commenter recommended that the furnishing requirement in
proposed
[[Page 54776]]
Sec. 1041.16 become effective sometime between 18 and 24 months after
publication of the final rule. Two others suggested an implementation
period of 24 months or longer. As precedent, one commenter cited the
Bureau's TILA-RESPA Integrated Disclosure Rule, which became effective
almost 24 months after the final rule was published. One commenter said
delaying the effective date of the rule beyond the proposed 15 months
would have two advantages. First, it would allow the Bureau to develop
a contingency plan if no entity had applied or qualified for
registration before the effective date. Second, if the Bureau
experienced delays in registering information systems, the additional
time would provide that lenders still had sufficient time to onboard.
One industry commenter requested a 26-month implementation period and
asserted that, in developing its timeline for implementation, the
Bureau did not consider the time necessary for developing, testing, and
deploying the infrastructure needed to comply with the proposal's
onboarding and furnishing requirements.
Final Rule
The Bureau has considered the points made in the comments regarding
the time frames related to provisionally registered and registered
information systems in proposed Sec. Sec. 1041.16 and 1041.17 and
engaged in further analysis of the operational aspects of this process
in light of those comments. As a result, the Bureau has decided to
extend some of the proposed time frames in final Sec. Sec. 1041.10 and
1041.11 (proposed Sec. Sec. 1041.16 and 1041.17 as adopted and
renumbered), including the time frame for submitting an application for
preliminary approval for registration, the time frame for submitting an
application to become a registered information system, the time frame
for provisional registered information systems to automatically become
fully registered information systems, and the time frame within which
furnishing to a particular provisionally registered or registered
information system must begin (the onboarding period). The Bureau is
also extending the overall general implementation period for the final
rule.
Nonetheless, the Bureau is adopting the proposed effective date for
the registration provisions in Sec. 1041.11. As noted above, the
standards and processes for becoming registered information systems
will become effective and operative 60 days after the final rule's
publication. However, based on the comments it received, the Bureau is
persuaded that other time frames should be extended. In particular, the
Bureau concluded that potential registered information systems needed
more time than originally proposed to submit applications for
registration before August 19, 2019, the compliance date of the
furnishing obligation. Final Sec. 1041.11(c)(3)(i) extends the
proposed time frame for entities to submit applications for preliminary
approval for registration from 30 days to 90 days. In addition, final
Sec. 1041.11(c)(3)(ii) extends the proposed time frame from 90 days to
120 days for entities that have received preliminary approval to submit
applications to become registered information systems.
The Bureau is also extending from 180 to 240 days the proposed time
frame for entities provisionally registered on or after August 19, 2019
to automatically become registered information systems. Like the
proposal, the process for registration on or after August 19, 2019
involves two steps: An entity will be required to apply to become a
provisionally registered information system pursuant to Sec.
1041.11(d)(1) and then, after it is provisionally registered for a
period of time, it automatically will become a fully registered
information system. Under the final rule, once an information system is
provisionally registered for 180 days, lenders must furnish to it but
cannot rely on reports from it to satisfy their obligations under the
final rule until the system has become fully registered, 240 days after
the date it was provisionally registered, pursuant to Sec.
1041.11(d)(2). Like the proposal, the final rule provides 60 days for
lenders to furnish to a provisionally registered information system
before it becomes a fully registered information system.
The Bureau also extended the time frames associated with the
registered information systems to which information must be furnished.
The proposed rule would require lenders to furnish to each information
system that, as of the date of consummation of the loan, had been
registered with the Bureau pursuant to Sec. 1041.17(c)(2) for 120 days
or more, or had been provisionally registered with the Bureau pursuant
to Sec. 1041.17(d)(1) for 120 days or more, or subsequently had become
registered with the Bureau pursuant to Sec. 1041.17(d)(2). The Bureau
is extending these 120-day time frames to 180 days under final Sec.
1041.10(b)(1) in order to allow additional time for provisionally
registered and registered information systems to ``onboard'' lenders.
Similarly, as noted above, the Bureau is extending the
implementation period for Sec. Sec. 1041.2 through 1041.10, 1041.12,
and 1041.13 from 15 to 21 months. Therefore, compliance with the
obligation to furnish information to registered information systems
pursuant to Sec. 1041.10 is not required until 21 months after
publication in the Federal Register. This extension will allow for
additional time to register information systems and additional time for
lenders to onboard to registered information systems before the
compliance date. The Bureau is extending the deadline to submit an
application for preliminary approval for registration by 60 days in
response to comments raising concerns about time needed to prepare such
applications, but Sec. 1041.11 will become effective and operative 60
days after publication of the final rule in the Federal Register, as
proposed. The Bureau is not modifying the procedures for registration
on or after the compliance date of the furnishing obligation. If no
entity is registered as an information system under Sec. 1041.11
sufficiently in advance of the compliance date of Sec. 1041.10 so as
to allow furnishing to begin as of that date, lenders will not be able
to make a loan under Sec. 1041.6 until such furnishing begins, as
explained in comment 6(a)-2. Lenders will be able to make loans under
Sec. 1041.5 in the event that no entity is registered as an
information system under Sec. 1041.11 or registered sufficiently in
advance of the compliance date of Sec. 1041.10 so as to allow
furnishing to begin as of that date.
10(a) Loans Subject to Furnishing Requirement
Proposed Rule
In proposed Sec. 1041.16(a), the Bureau proposed to require
lenders making most types of covered loans to furnish to each
information system described in proposed Sec. 1041.16(b) the
information concerning the loans as described in proposed Sec.
1041.16(c). As described in the proposal, the purpose of the furnishing
requirement was to enable a registered information system to generate a
consumer report containing relevant information about the consumer's
borrowing history, regardless of which lender made a covered loan to
the consumer previously. The Bureau believed that requiring lenders to
furnish information about most covered loans would help achieve this
result and, accordingly, help fulfill the consumer protections of
proposed part 1041.
The Bureau also stated that the development of common data
standards across registered information systems would benefit lenders
and registered
[[Page 54777]]
information systems, and that the Bureau intended to foster the
development of such common data standards where possible to minimize
burdens on furnishers.
Comments Received
The Bureau received a wide range of comments about the furnishing
requirements proposed under Sec. 1041.16. Some comments supported the
proposal to subject covered short-term loans and covered longer-term
loans to the furnishing requirements. A consumer reporting agency
stated that the proposal would allow the registered information systems
to collect more comprehensive credit information on consumers who
sought covered loans. Likewise, various commenters--including a
consumer reporting agency, two consumer advocates, a credit union, and
another industry commenter--approved of the proposed registered
information systems and the requirement that lenders furnish
information concerning consumers' borrowing histories. Consumer groups
and others maintained that mandating the furnishing of information to
registered information systems was critical to enabling compliance with
the proposed regulation, including the restrictions on rollover
transactions, back-to-back loans, and re-borrowing within a short
period after paying off a prior loan. One industry commenter wrote that
the furnishing requirements could potentially have a positive impact on
consumers who make regular payments by helping them gain greater access
to other types of credit. Another agreed with the Bureau's proposed
furnishing requirements, but stated it would be difficult to implement
in a timely manner the requirements for the registered information
systems, which it considered burdensome.
Several commenters opposed either mandating the proposed furnishing
requirements altogether, or suggested that the rule should only require
certain kinds of lenders to furnish. Several commenters requested that
the rule not require credit unions and other lenders to furnish to
registered information systems at all, suggesting that their current
furnishing to consumer reporting agencies is sufficient. Other
commenters representing credit unions and auto lenders objected to the
furnishing requirements on the basis that they do not generally furnish
information to, or obtain information from, consumer reporting
agencies. One consumer reporting agency contended that mandatory
furnishing would stifle innovation among registered information
systems, including among some specialty consumer reporting agencies, by
diminishing their incentives to develop better risk-management products
and services, which in turn would likely reduce the quality of products
and services.
A trade association asserted that the furnishing provisions were
overly prescriptive and disproportionate to any consumer benefit. One
industry commenter asked the Bureau to consider restricting access to
any registered information system to properly licensed lenders, citing
State-licensed lenders as an example, to ensure that lenders were
properly licensed in the State in which a consumer resided. Another
group of commenters generally argued that the registered information
requirements, including the furnishing provisions, would impose costs
that would prevent lenders from providing small-dollar loans.
Commenters criticized the furnishing requirements for other
reasons. One anticipated that lenders would not comply with the
furnishing requirements, including what they understood to be the
obligation to furnish information in real time, and warned of the
compliance risk this would create for lenders. A trade association
noted that the furnishing requirements could have a negative effect on
Veritec's systems, which it thought are currently in use by most States
that track payday loans. This commenter asserted that the proposal was
silent on mechanisms to independently verify and secure the
confidentiality of the data in the registered information systems.
Other commenters expressed concerns about the monetary,
operational, and access-related burdens imposed by the furnishing
requirements. One State government entity anticipated that the costs of
creating the infrastructure related to the furnishing requirements
would be passed on to consumers in the form of higher costs for
obtaining small-dollar loans. A number of industry commenters stressed
the impact that the requirements would have on lenders such as online
lenders and other small-volume lenders, especially additional costs and
burdens. Another argued that larger lending entities would be at a
competitive advantage because the scale of their operations would allow
them to spread the costs of integration more easily.
At least two of the industry commenters argued that the provisions
related to the registered information systems would make it less
profitable for banks and most credit unions to make small-dollar loans.
One cited the high costs of investing in systems with furnishing
capabilities and obtaining reports from registered information systems.
Another claimed that obtaining consumer reports would increase the
expense of making small-dollar loans for community banks, and that
small-volume lenders would have to pay more for such reports than other
lenders. One industry commenter stated that for lenders, the costs of
hiring and training staff, along with the operational risks associated
with data security and data integrity, would be significant.
An industry commenter and a Tribal-entity commenter identified as
burdensome the requirement to report information at various stages in
the life of a covered loan. One commenter observed that many lending
entities with Tribal affiliation have limited access to consumer
reporting agencies, and could be unable to comply with the rule if
registered information systems refused to work with them, unless the
Bureau took action to address the problem. The Tribal-entity commenter
also asserted that satisfying the furnishing requirements would be more
challenging for Tribes.
Some commenters recommended changes that they thought would
facilitate the implementation of the furnishing requirements. One trade
association proposed that lenders only be required to furnish
information on a monthly basis. A trade association whose membership
includes vehicle title lenders commented that the Bureau should permit
such lenders to comply with a simplified alternative process in lieu of
the proposed furnishing requirements.
Some commenters expressed concern about the impact of the
furnishing requirements on the availability and cost of credit. One
conveyed the importance of enabling consumers to build credit while
they rely on covered short-term loans. This commenter suggested that
the final rule should prohibit the use of furnished information to harm
the score or profiles of less financially capable borrowers. One trade
association speculated that the proposed rule could greatly restrict
the availability of credit by discouraging community banks and other
depository lenders from developing small-dollar lending programs and
providing small-dollar loans as an accommodation to existing customers.
This commenter asserted that restricted credit availability could fuel
the growth of unlawful offshore lending from individuals and entities
that are difficult to identify or regulate. An industry commenter
stated that the registered
[[Page 54778]]
information system framework creates a unique category of non-prime
consumer reporting agencies, which the commenter cautioned could
prevent consumers from accruing the credit benefits that result when
lenders furnish repayment information to mainstream consumer reporting
agencies. One trade association stated that without an overhaul of the
existing credit reporting structure, the proposal would dramatically
increase the potential for errors and inaccuracies on consumer credit
reports, and thereby decrease access to credit for consumers with
negative or insufficient credit history.
Final Rule
As explained below, the Bureau is adopting Sec. 1041.10(a) (as
renumbered from proposed Sec. 1041.16(a) for the reasons discussed
earlier) with the following modifications. The proposal's coverage
regarding the furnishing requirements included each covered loan,
except covered loans made pursuant to proposed Sec. 1041.11 or Sec.
1041.12. Because proposed Sec. Sec. 1041.11 and 1041.12 are not
included in the final rule, as discussed above, the final rule no
longer references loans made pursuant to those proposed provisions and
thus, the Bureau has deleted the phrase ``other than a covered loan
that is made under Sec. 1041.11 or Sec. 1041.12.'' Further, the final
rule clarifies that a lender must furnish not for ``each covered loan''
as proposed but rather for ``each short-term and covered balloon-
payment loan'' under the final rule. Thus the scope of the furnishing
requirement is narrower than proposed and excludes a requirement that
lenders furnish information regarding covered longer-term loans. The
Bureau concluded that excluding such loans from the furnishing
requirements would lessen the burden on lenders, especially in terms of
the requirements to update loan information. Although this may create a
gap in the information in the registered information systems to the
extent an applicant has a prior or outstanding covered longer-term
loan, lenders will still need to consider other sources of information
concerning covered longer-term loans when performing the ability-to-
repay analysis required by Sec. 1041.5, as discussed in that section.
Proposed comment 16-1 is not adopted in the final rule because it
pertained to proposed Sec. Sec. 1041.11 and 1041.12 and the
conditional exceptions to longer-term loans, which the Bureau is not
adopting in the final rule. The Bureau is including in the final rule
two new comments to Sec. 1041.10(a). The first comment explains the
application of the furnishing requirements to rollover loans. Comment
10(a)-1 was added to align with the treatment of rollovers in comments
5(d)-2, 6(b)(1)-3, 6(b)(1)-4 and 6(c)(2)-1, and provide greater clarity
regarding their treatment in the context of the furnishing requirements
in Sec. 1041.10(a). In sum, it clarifies that if a State permits
lenders to rollover (or renew) covered short-term loans or longer-term
balloon payment loans, then the rollover or renewal loan must be
treated as a new loan for the purposes of the furnishing requirements
in Sec. 1041.16(a). It further offers an example that illustrates that
if a lender rolls over a covered short-term loan, as allowed by State
law, after determining that the consumer has the ability to repay the
loan, then the lender must report the original loan as no longer
outstanding and report the rollover as a new covered loan.
Final comment 10(a)-2 pertains to lenders' furnishing through third
parties. The Bureau added this comment in order to address concerns
raised by commenters about the potential that, under the proposed rule,
lenders may be required to furnish to multiple registered information
systems with different interfaces and data standards. The comment
clarifies that a lender may furnish information to a registered
information system directly or through a third party acting on its
behalf, including a registered information system. Accordingly, a
lender could enter into an arrangement with one registered information
system to allow that registered information system to furnish the
lender's information to the other registered information systems on its
behalf. Under such an arrangement, the lender would not have to furnish
to multiple registered information systems--it would furnish to just
one. The Bureau anticipates that some registered information systems
will provide such services to lenders. Accordingly, it included comment
10(a)-2 in the final rule to clarify that direct furnishing to
registered and provisionally registered information systems by lenders
is not necessary, and to encourage registered information systems and
service providers to provide services to reduce the potential
challenges of a variety of different interfaces and data standards. As
noted below, however, the Bureau anticipates that the market will
create incentives for registered information systems to develop common
data standards and interfaces.
The Bureau declines to eliminate the proposed mandatory furnishing
obligation, as some commenters suggested. As many other commenters
recognized, the proposed furnishing requirement is important to allow
the underwriting and other provisions in the rule to function properly.
The Bureau believes that lenders making covered loans will benefit
significantly from comprehensive information about the consumer's
recent borrowing history with respect to covered loans when making a
reasonable assessment of a consumer's ability-to-repay. Generally,
lenders either do not furnish information regarding loans that will be
covered under this rule at all or furnish information about such loans
to specialty consumer reporting agencies only. The registered
information system provisions of the final rule are designed to allow
lenders to access information regarding the consumer's borrowing
history concerning short-term and covered longer-term balloon loans,
beyond their own records and those of their affiliates. As described
above, Sec. 1041.5(d)(2) prohibits lenders from making the fourth loan
in a loan sequence of covered short-term loans, covered longer-term
balloon-payment loans, or a combination of those types of loans that
are made under Sec. 1041.5; and Sec. 1041.5(d)(3) prohibits lenders
from making a covered short-term or covered longer-term balloon loan
under Sec. 1041.5 concurrently or within a 30-day period following a
loan made pursuant to the Sec. 1041.6 conditional exception. To
determine whether either prohibition applies to a contemplated loan,
Sec. 1041.5(d)(1) of the final rule requires a lender to obtain and
review information about a consumer's borrowing history from its own
records, its affiliates' records, and from a consumer report obtained
from a registered information system, if available. These provisions
require a cooling-off period of 30 days between the third and fourth
loans in a Sec. 1041.5 sequence, and before a consumer borrows a Sec.
1041.5 loan following a Sec. 1041.6 loan. These cooling-off periods
are an integral component of the final rule's ability-to-repay
intervention that the registered information system fosters. Namely,
the existence of a registered information system allows the
underwriting provisions in the rule to function properly by enabling a
lender to see the borrower's previous and current use of covered short-
term loans and covered longer-term balloon loans to determine the
borrower's eligibility for a new covered short-term loan or covered
longer-term balloon-payment loan subject to Sec. 1041.5. Importantly,
the registered information system will ensure that lenders are aware
whether a potential borrower is subject to a
[[Page 54779]]
cooling-off period. That knowledge also may deter lenders from seeking
to enter into referral arrangements to evade the cooling-off period
requirements. Without a framework to ensure that information about a
potential borrower's previous and current use of covered short-term
loans and covered longer-term balloon loans is provided and collected
in an organized and accessible manner, it would be much less likely
that the goals of the lending limits, conditions, or restrictions
contained in the rule would be achieved. Accordingly, the Bureau
continues to believe that furnishing requirements play an important
role in ensuring that lenders have the information they need to comply
with the rule and achieve the consumer protections that are the goal of
this part.
As discussed at great length above in Market Concerns--
Underwriting, the market for covered short-term loans and covered
longer-term balloon-payment loans is one where consumers who take out
unaffordable loans confront considerable potential risks and harms.
These risks and harms stem from default, delinquency, repeat re-
borrowing, and the collateral consequences of having to make
unaffordable payments, including forgoing basic living expenses or
payments on major financial obligations. The underwriting requirement,
that a lender must first make a reasonable assessment of the borrower's
ability to repay the loan according to its terms, is being imposed in
this rule to prevent the identified unfair and abusive practice of
failing to engage in such underwriting for such loans. The furnishing
requirement is an important component of the approach taken in the
final rule to address these harms and protect consumers by preventing
the identified unfair and abusive practices, pursuant to the Bureau's
statutory authority to write such rules under section 1031(b) of the
Dodd-Frank Act.
The furnishing requirements also allow lenders to make loans under
final Sec. 1041.6, which provides an exemption from the ability-to-
repay determination requirements in final Sec. 1041.5. The information
furnished to a registered information system allows lenders to review a
consumer's borrowing history, reflected in a consumer report from the
registered information system, to determine the potential loan's
compliance with the requirements of final Sec. 1041.6 (b) and (c). If
no entity is registered as an information system or a registered
information system has not been registered for a period of at least 180
days on the compliance date of Sec. 1041.6, the exemption under Sec.
1041.6 will not be available. The Bureau anticipates that there will be
at least one registered information system by the compliance date of
Sec. 1041.6.
The Bureau is not persuaded that requiring furnishing to registered
information systems in this rule will exclude borrowers from nationwide
consumer reporting agencies, as some commenters asserted. As noted in
the proposal, for the most part, lenders currently making loans that
would be covered under Sec. 1041.10(a) do not currently furnish
information concerning such loans to consumer reporting agencies
consistently, if at all. Nothing in the final rule precludes lenders
from furnishing to entities other than registered information systems,
including nationwide consumer reporting agencies that do not seek to
register as registered information systems.
As noted elsewhere, databases, such as Veritec, contract with
various States that have statutory caps on short-term loans; these
States impose requirements that lenders provide loan information to the
databases and check the databases before approving borrowers for loans.
Such databases are useful tools in policing State requirements. If any
database, including Veritec, were to become a registered information
system, it would have to make adjustments to the services it provides
to facilitate lenders' compliance with part 1041's furnishing
requirements. As discussed in the Section 1022(b)(2) Analysis in part
VII below, lenders that already report information to databases to
comply with State laws will likely face lower costs to come into
compliance with the furnishing requirements in Sec. 1041.10.
The Bureau expects that provisionally registered and registered
information systems will find it in their competitive interests to
develop common data standards and interfaces to facilitate accurate and
timely reporting. Given the likelihood that standards for data will be
established in this market, the Bureau is not persuaded that having
more than one provisionally registered or registered information system
will negatively impact the accuracy or quality of the data furnished to
systems, as some commenters have suggested. As noted elsewhere, the
FCRA and Regulation V will impose obligations with respect to data
accuracy on lenders furnishing information to provisionally registered
and registered information systems and on the information systems
themselves.
One commenter expressed concern that a registered information
system may not ``work with'' Tribal lenders. However, this commenter
did not indicate what it believed the bases for such refusal might be.
To be eligible for provisional registration or registration, Sec.
1041.11(b)(3) requires that an entity must perform in a manner that
facilitates compliance with and furthers the purposes of part 1041.
This includes facilitating lender compliance with obligations to
furnish information to provisionally registered and registered
information systems and to obtain consumer reports from registered
information systems. The Bureau notes that, as explained in proposed
comment 17(b)(3)-1 (finalized as comment 11(b)(3)-1), this requirement
does not supersede consumer protection obligations imposed upon a
provisionally registered or registered information system by other
Federal law or regulation. For example, if receiving data furnished by
a particular lender pursuant to this rule, or providing a consumer
report to a particular lender pursuant to this rule, would cause a
provisionally registered or registered information system to violate a
Federal law or regulation, then Sec. 1041.11(b)(3) would not require
the provisionally registered or registered information system to do so.
However, absent such a circumstance, provisionally registered and
registered information systems will be required to receive furnished
data and provide consumer reports required under the rule, and to
generally perform in a manner that facilitates compliance with and
furthers the purposes of part 1041, in order to maintain their
eligibility for provisional registration or registration. The Bureau
notes that Sec. 1041.11(h) will permit the Bureau to suspend or revoke
the provisional registration or registration of an information system
that has not satisfied, or no longer satisfies, the eligibility
conditions set forth in Sec. 1041.11(b). The Bureau believes that,
together, these provisions will ensure that lenders are only denied
service by registered information systems for reasons authorized under
the rule.
The Bureau is not persuaded by the objection that commenters made
to applying proposed Sec. 1041.16 to vehicle title lenders. As
explained in the proposal and above in Market Concerns--Underwriting,
the Bureau has found a recurrence of high re-borrowing and high default
rates among consumers who obtain short-term vehicle loans, which can
result in severe harms to many consumers. Therefore, the Bureau remains
convinced that it is in the public interest to require lenders that
make such loans under Sec. 1041.5 to
[[Page 54780]]
furnish information to registered information systems pursuant to
Sec. Sec. 1041.10 and 1041.11 of the final rule.
With respect to concerns about burdens on lenders associated with
the furnishing requirements that some commenters have raised, the
Bureau recognized in the proposal and further acknowledges that that
the furnishing requirements will result in some added costs to lenders,
especially those related to setting up furnishing arrangements with the
registered information systems, but continues to believe that these
costs are justified by the important benefits of the furnishing
requirement. Commenters expressed concern about lenders having to
furnish to and set up arrangements with multiple registered information
systems. As discussed in greater detail in the Section 1022(b)(2)
Analysis, furnishing information to registered information systems will
require lenders to incur one-time and ongoing costs, including those
associated with establishing a relationship with each registered
information system, developing procedures for furnishing the loan data,
and developing procedures for compliance with applicable laws. The
Bureau also anticipates that lenders will face ongoing costs to furnish
the data, although the Bureau estimates that the time costs for lending
staff will be modest, particularly if one or more registered
information systems or service providers offer a service of providing
furnished information to some or all of the other registered
information systems on behalf of lenders. The Bureau recognizes,
however, that if multiple registered information systems exist and no
such service is made available, then lenders will have to incur these
costs multiple times. As noted in the proposal and in the Section
1022(b)(2) Analysis, the Bureau will encourage the development of
common data standards for registered information systems in order to
reduce the costs of providing data to multiple services where possible.
The Bureau recognizes that these additional costs may flow to
consumers, though in some cases, lenders may not be able to pass all,
or any, of the additional costs on by increasing product pricing, given
that many covered short-term loans are already priced at their maximum
allowable level under different State laws, as discussed above in part
II. For the reasons stated in the proposal, in Market Concerns--
Underwriting above, and described herein, the Bureau continues to
maintain that the furnishing requirement and related costs are
important components of the rule that will assist with effectively
addressing the identified unfair and abusive practice of making
unaffordable covered loans to consumers without reasonably assessing
their ability to repay these loans. Moreover, as stated above, the
Bureau expects that the registered information systems will find it in
their interests to develop common data standards and interfaces to
facilitate accurate and timely reporting. Specifically, if registered
information systems take such steps and furnishing becomes more
automated over time, it will make compliance with the rule easier and
cheaper. In addition, because the rule, as described in the above
discussion of comment 10(a)-2, allows a lender to rely on a third party
to furnish on behalf of the lender, the Bureau anticipates that
registered information systems and other providers will offer services
that include furnishing to registered information systems, and will
compete to offer such a service. The availability of such a service
will mean that lenders can minimize any challenges of furnishing to all
of the registered information systems and furnish to one who acts on
its behalf to furnish data to the others. The Bureau anticipates that
these arrangements will also result in cost-savings.
Nonetheless, the Bureau also notes that the final rule reflects two
modifications that are likely to alleviate some of the burden stemming
from complying with the furnishing requirement under Sec. 1041.10.
First, the Bureau has narrowed the scope of loans required to be
furnished under final Sec. 1041.10(a) to exclude covered longer-term
loans (other than covered longer-term balloon-payment loans). As a
result of this change, lenders will be required to furnish information
about fewer loans than would have been required under the proposed
rule. Second, as explained further below, the Bureau has also
eliminated some of the information that it proposed to require lenders
to furnish when a loan ceases to be an outstanding loan. Again, the
Bureau anticipates that this modification will reduce burdens for
lenders to satisfy their furnishing obligations under Sec. 1041.10 of
the final rule.
10(b) Information Systems to Which Information Must Be Furnished
10(b)(1)
Proposed Rule
Proposed Sec. 1041.16(b)(1) stated that a lender had to furnish
the information required in proposed Sec. 1041.16(a) and (c) to each
information system registered pursuant to proposed Sec. 1041.17(c)(2)
and (d)(2) or provisionally registered pursuant to proposed Sec.
1041.17(d)(1). Proposed comment 16(b)-2 clarified that lenders were
not, however, required to furnish information to entities that had
received preliminary approval for registration pursuant to Sec.
1041.17(c)(1) but were not registered pursuant to Sec. 1041.17(c)(2).
To allow lenders and provisionally registered and registered
information systems time to prepare for furnishing to begin, the
proposal delayed the furnishing obligation for newly registered and
provisionally registered systems by requiring that lenders furnish
information about a loan to such systems only if the system had been
provisionally registered or registered for 120 days or more as of the
date the loan was consummated. The Bureau believed that this 120-day
period would allow lenders sufficient time to prepare for compliance
with proposed Sec. 1041.16, while giving provisionally registered or
registered information systems sufficient time to onboard all of the
lenders required to furnish to the information system.
Comments Received
Various consumer reporting agencies and consumer advocates approved
of the proposal to require lenders to furnish information to each
registered information system. An academic commenter stated that a more
coordinated reporting of loans across lenders and States could matter
in protecting consumers, many of whom had been harmed when they
incurred large debts by borrowing from multiple lenders simultaneously.
One consumer reporting agency asserted that proposed Sec.
1041.16(b)(1) was a practical solution for the industry. Another
claimed that the proposal to have lenders report to each registered
information system would improve the industry's understanding of small-
dollar loan usage among consumers and, combined with the data proposed
to be furnished, this framework could lead to better and cheaper loan
products.
A group of consumer advocates urged the Bureau to adopt the
requirement that lenders must furnish to each of the registered
information systems because, they argued, giving lenders the discretion
to furnish to only one registered information system would incentivize
the systems to be more responsive to lender concerns than to consumer
concerns. These commenters also believed that permitting lenders to
furnish to only one registered information system would be more
cumbersome because it would be more difficult to guarantee access to a
comprehensive borrowing history; doing
[[Page 54781]]
so either would require lenders to obtain reports from all registered
information systems, or would necessitate all of the registered
information systems to complete data-sharing agreements with each
other. One industry commenter approved of the proposed rule generally,
but recommended that lenders should also be required to register with
the Bureau.
One consumer reporting agency believed that the proposed approach
requiring furnishing to all of the registered information systems was
realistic because in its view the industry norm for information
furnishing already has creditors furnishing information to multiple
nationwide consumer reporting agencies. It advocated for a single
platform or gateway to accomplish the ``furnish to all'' approach,
through which lenders would furnish information to each registered
information system while being able to obtain the required consumer
reports from this same single platform. At least two industry
commenters supported the single-platform approach, one of which
suggested that the single platform to which the lenders would furnish
could coordinate furnishing and dispute resolution with the registered
information systems.
One consumer reporting agency otherwise in support of the Bureau's
proposal opposed the single-platform approach. This commenter argued
that the mechanics of such an approach could not be accomplished on a
reasonable timeline, and that such an approach would increase the
infrastructure costs for registered information systems. It believed
the single-platform approach was likely to be inadequate for other
reasons also. This commenter argued that it would be difficult for the
Bureau to select the single-platform provider and ascertain reasonable
cost for the service. It further submitted that such an approach would
reduce competition to improve the performance of the registered
information systems, and any service interruption or disruption would
affect the entire industry. This commenter suggested that, even with a
single platform, lenders may still choose to obtain multiple reports to
obtain a comprehensive understanding of a consumer's borrowing history,
and establishing the contracting requirements for each registered
information system would be a complex undertaking.
At least two commenters opposed the requirement to furnish to
multiple registered information systems altogether. One trade
association stated that for lenders, the costs of hiring and training
staff, along with the operational risks associated with data security
and data integrity, would be significant. One industry commenter echoed
that the furnishing provisions were cumbersome, expensive, and
presented the risk that inaccurate data would be furnished and that
data would be disputed or handled improperly. Citing the potential high
costs of compliance, one industry commenter criticized the Bureau's
efforts for not sufficiently researching the impact of this approach on
small businesses.
Several commenters responded to the Bureau's request in the
proposal for ideas about alternatives to requiring lenders to furnish
to each information registered system. One was concerned about the
complexity of reporting to multiple systems with unique interfaces,
credentialing, and the increased risks of errors. Two credit union
commenters encouraged the Bureau to require lenders to furnish to the
nationwide consumer reporting agencies only. An industry commenter
recommended that, in lieu of the proposed registered information system
approach, the Bureau require nationwide consumer reporting agencies to
accept information furnished under the rule and share the information
with other nationwide consumer reporting agencies. Some nationwide
consumer reporting agencies advocated they are in the best position to
act as registered information systems.
A mix of commenters recommended that the Bureau amend the proposal
to allow lenders to furnish to one registered information system, and
obtain from the system a merged report that would contain all the data
furnished about the consumer. They noted that this ``furnish to one,
pull a merged report'' approach was akin to the consumer reporting
approach that typically is used in mortgage and certain other credit
markets. A consumer reporting agency suggested that in order to enable
the ``merge report'' concept to work, the Bureau would need to require
each registered information system to agree to provide to other
registered information systems, upon request, any furnished data
concerning a loan applicant.
One trade association and another industry commenter favored a
single, nationwide registered information system hosted by the Bureau
or its contractor. A commenter with the capability to develop such a
database asserted that this approach would create a unitary set of
standards for data capture and electronic communication, while
providing lenders with a single provider for assistance. This commenter
stated that other advantages of a singular system included minimized
costs and burdens for furnishing and maintaining information, increased
compliance from lenders, improved regulatory oversight of lenders and
the registered information system by the Bureau, more restricted access
to the database and corresponding privacy protections for consumers,
increased accuracy and consistency for both consumer and product data,
reduced costs on the basis of scale, faster implementation, and
improved ability to innovate and adapt to regulatory change.
A group of consumer advocates also supported a single registered
information system on the condition that the Bureau consider housing
the database either itself or with a contractor hired by the Bureau.
These commenters believed this approach would improve protections for
consumers while generating fewer data errors. One trade association
listed as precedents for this approach the sanctions list hosted by the
Department of Treasury's Office of Foreign Assets Control, and the list
of active-duty servicemembers that the Department of Defense has
developed to help implement the Servicemembers Civil Relief Act and the
Military Lending Act.
Other commenters noted the experience of the 14 States that have
State-mandated databases containing information about short-term,
small-dollar loans. Commenters said that most of those regulatory
regimes include a sole source contract with a single State-selected
contractor that collects and discloses limited information about
eligibility to lenders seeking to make loans. Some commenters noted
that these systems lack market incentives to increase value and service
while reducing costs and that the system as proposed by the Bureau will
lead to better, less expensive products for lenders. Some commenters
pointed to those State-mandated databases as success stories in terms
of efficiencies and noted the experiences of two States that started
out with multi-database reporting systems but, because of the
challenges associated with such an approach, ultimately developed a
single database reporting system.
One commenter noted that there were at least nine firms that would
have the technical capability to act as registered information systems.
Several noted that consistent data standards should be established,
with many recommending the Metro 2 format but with others requesting
that no standard be established.
[[Page 54782]]
As described above, the Bureau also received numerous comments
about the amount of time provided under the proposed rule for lenders
to onboard to registered information systems. Proposed Sec.
1041.16(b)(2) provided that a lender must furnish information as
required in paragraphs (a) and (c) to each information system that, as
of the date the loan is consummated: Had been registered with the
Bureau pursuant to Sec. 1041.11(c)(2) for 120 days or more; or had
been provisionally registered with the Bureau pursuant to Sec.
1041.11(d)(1) for 120 days or more or subsequently had become
registered with the Bureau pursuant to Sec. 1041.11(d)(2). This would
have provided lenders with 120 days to onboard to a provisionally
registered information system and an information system registered
before the effective date of Sec. 1041.10 and prepare to furnish. At
least two consumer reporting agencies suggested that they could onboard
all covered lenders within this proposed time frame. Referring to the
process of credentialing and onboarding potential furnishers, one
consumer reporting agency estimated that it could onboard the lenders
in a matter of months with the appropriate technical expertise and
support. Another consumer reporting agency estimated that in its
current capacity as a consumer reporting agency, credentialing and
onboarding a new lender could take the commenter around four weeks.
However, the commenter cautioned that if more extensive requirements
than were proposed were included in the final rule, including
additional or longer data fields, or a requirement to furnish using a
data standard other than Metro 2, it could take longer to implement.
Several commenters argued that the 120-day period would be
insufficient to permit onboarding of all lenders to all registered
information systems. One industry commenter cautioned that the proposed
timeline did not appear to contemplate the burdens lenders could face
while working with the unique onboarding requirements of each
registered information system. One commenter argued that the Bureau was
underestimating the effort and time required to enroll and onboard
lenders, and speculated that it would take years to implement the
proposed furnishing provisions. It noted that the onboarding process at
registered information systems could be unique because of variations in
technology platforms, interfaces, and reporting formats. Additionally,
this commenter explained that storefront lenders could face more
difficulties than online lenders in integrating with consumer reporting
agencies, which could delay such lenders' ability to onboard to a
registered information system.
Final Rule
The Bureau has reviewed and analyzed the comments, and now adopts
(renumbered) Sec. 1041.10(b)(1) to require that a lender furnish the
information as required in Sec. 1041.10(a) and (c) to each information
system registered pursuant to (renumbered) Sec. 1041.11(c)(2) and
(d)(2), and to provisionally registered information systems pursuant to
Sec. 1041.11(d)(1), as proposed. Of note, final Sec. Sec. 1041.5 and
1041.6 require lenders to obtain a report from only one registered
information system, also as proposed. The Bureau is responding to
commenters that suggested extending the 120-day time period registered
information systems need to be registered or provisionally registered
before the furnishing requirements are applicable (onboarding period)
by extending the onboarding period by 60 days. The final rule sets the
onboarding period at 180 days. Other changes to the rule text reflect
the renumbering from the proposal to the final rule. Likewise, comment
10(b)-1 is modified from the proposal to reflect the final rule's
renumbering and adoption of the 180 day time frame described above. The
illustrative example contained in the comment is also updated to
reflect that lenders are not required to furnish to an information
system that was provisionally registered 179 days before a loan was
consummated. Comment 10(b)-2 is likewise altered to reflect the final
rule's renumbering.
Commenters expressed concerns regarding the potential for
inconsistencies in the furnished data and potential burdens on lenders
they anticipated as a result of the proposal's requirement that lenders
furnish to multiple registered information systems. Some commenters
suggested that the Bureau register only one information system under
proposed Sec. 1041.17 while others suggested that the Bureau contract
with a single provider or house the system within the Bureau. The
Bureau recognizes that a single registered information system
approach--whether administered by the Bureau, its contractor, or
another entity--may provide benefits in terms of the uniformity and
consistency of data and the expenditure of fewer lender resources
initially, as lenders would not have to furnish to multiple systems.
However, there are also risks to a single registered information system
approach. With respect to the suggestion that the Bureau house
information concerning covered loans itself or through the use of a
contractor, it continues to believe that the private sector is better
equipped to implement the requirements for registered information
systems in a timely manner. The Bureau also continues to believe that
there may be legal or significant practical obstacles to the Bureau
contracting with or maintaining the single system. Further, the Bureau
is concerned that, if it registered only one information system where
more than one entity has applied to be a registered information system
and satisfies the eligibility requirements, the single registered
information system would likely lack the market incentives to increase
value and service while reducing costs on lenders. The Bureau is thus
convinced that registering a single information system where others are
available would stifle innovation and, as some commenters noted,
competition to improve the performance of the registered information
system. The Bureau is confident that the market will adequately respond
to challenges that may arise in connection with the final rule's
furnish to all approach, and has determined that this approach is
better than the single registered information system approach some
commenters have suggested.
Some commenters suggested that the Bureau establish common data
standards or require the use of an existing credit reporting standard.
The Bureau decided not to create or require a particular data standard.
As described above, the Bureau concluded that the market will provide
incentives for the development of appropriate data standards. The
Bureau is concerned that requiring the use of a specific data standard
would stifle innovation. The Bureau believes that registered
information systems will be incentivized to work together to develop
common data standards and create efficiencies, especially in light of
the ability of registered information systems or service providers,
clarified under the final rule, to furnish information on behalf of
lenders. As noted in the proposal, the Bureau intends to help foster
the development of such coordinated data standards.
Some commenters advocated for an alternative that would require
lenders only to furnish to one of the registered information systems
and to obtain a ``merged'' report from only one registered information
system. In order to facilitate that approach, commenters recommended
that the Bureau require each registered information system to agree to
provide information in its system concerning a specific loan
[[Page 54783]]
applicant to each other registered information system in response to a
request for such information and that each agree to charge no more than
a reasonable fee for doing so. The Bureau chose not to pursue that
alternative for a variety of reasons. The Bureau is particularly
concerned that if lenders only furnished to one of the registered
information systems, the unique data that rest at a particular
registered information system would be unavailable to other lenders if
the registered information system experienced a problem, such as
temporary system outage, or had its registration revoked. However, if
lenders are obligated to furnish to all registered information systems,
then an outage or revocation at one registered information system would
not impact the comprehensiveness of the consumer report provided to a
lender by any other registered information system pursuant to the rule.
In addition, an approach that relied on registered information systems
sharing unique information to produce a merged report could create
incentives for individual registered information systems to leverage
their (perhaps limited) data to extract a high price from other
registered information systems for access. Although the imposition of a
limitation on what a registered information system may charge another
registered information system for data could ameliorate that concern,
the Bureau ultimately concluded that it did not want to engage in the
policing of pricing practices of registered information systems related
to the sale of data and, overall, the furnish to all requirement
reflected in the final rule is the better approach.
Other commenters suggested another approach as an alternative that
would involve reporting to all systems, but would also entail a
centralized gateway or platform through which lenders could furnish.
Some noted that some specialty consumer reporting agencies currently
provide such a service. The Bureau believes that there is no need to
mandate the creation of such a platform or gateway. If there is a
demand for such a service, the Bureau believes the registered
information systems or other market actors will respond to the demand.
Commenters encouraged the Bureau to require lenders to furnish to
the nationwide consumer reporting agencies and to require such consumer
reporting agencies to accept the information furnished under the rule.
Based on its market outreach and experience, as well as the comments it
received, the Bureau believes that there are firms capable of taking on
the task of acting as a registered information system under the final
rule. Accordingly, the Bureau has concluded that it is more appropriate
to grant players in the market who satisfy the eligibility criteria set
forth in Sec. 1041.11 the choice of whether to become a registered
information system. Nothing precludes nationwide consumer reporting
agencies from seeking to become registered information systems, and the
Bureau would welcome their participation in this area.
Many commenters expressed concern about the length of time allotted
in the proposal for registered information systems to onboard lenders.
Under the proposal, lenders would be required to furnish to registered
information systems that had been registered with the Bureau pursuant
to Sec. 1041.17(c)(2) for 120 days or more, or had been provisionally
registered with the Bureau pursuant to Sec. 1041.17(d)(1) for 120 days
or more or subsequently had become registered with the Bureau pursuant
to Sec. 1041.17(d)(2). Commenters noted that the amount of time it
would take for registered information systems to onboard lenders could
be significant. One suggested that from its experience, it could even
take years to onboard all of the lenders that would be required to
furnish under the proposal. Others anticipated that the process would
only take several months. The Bureau attempted to balance these
concerns against the need for the systems to be operational as soon as
possible so as to permit timely implementation of the rule.
Accordingly, in the final rule, the Bureau is extending the onboarding
period by 60 days, such that a lender now has 180 days to onboard to a
provisionally registered information system and an information system
registered pursuant to Sec. 1041.11(c)(2). However, depending on how
far in advance of the compliance date of the furnishing obligations
information systems are registered, the onboarding period for
information systems registered pursuant to Sec. 1041.11(c)(2) could
exceed 180 days. For example, if an information system is registered
210 days before the compliance date, then lenders will have 210 days to
onboard to that registered information system before they are required
to furnish to it. No lender would be obligated to start furnishing
before the compliance date of Sec. 1041.10. The Bureau concludes that
the revised time frame provides sufficient time for lenders to onboard
and prepare to furnish, and for registered or provisionally registered
information system to prepare to receive, information pursuant to
Sec. Sec. 1041.10 and 1041.11 of the final rule.
10(b)(2)
Proposed Rule
Proposed Sec. 1041.16(b)(2) would require the Bureau to publish on
its Web site and in the Federal Register notice of the provisional
registration of an information system pursuant to proposed Sec.
1041.17(d)(1), registration of an information system pursuant to
proposed Sec. 1041.17(c)(2) or (d)(2), and suspension or revocation of
the provisional registration or registration of an information system
pursuant to proposed Sec. 1041.17(g). Proposed Sec. 1041.16(b)(2)
provided that, for purposes of proposed Sec. 1041.16(b)(1), an
information system was provisionally registered or registered, and its
provisional registration or registration suspended or revoked, on the
date that the Bureau published notice of such provisional registration,
registration, suspension, or revocation on its Web site. Proposed Sec.
1041.16(b)(2) further required the Bureau to maintain on its Web site a
current list of information systems provisionally registered pursuant
to Sec. 1041.17(d)(1) and registered pursuant to Sec. 1041.17(c)(2)
and (d)(2).
Under the proposal, the date that a particular information system
becomes provisionally registered pursuant to proposed Sec.
1041.17(d)(1) or registered pursuant to proposed Sec. 1041.17(c)(2) is
the date that would trigger the 120-day period at the end of which
lenders would be obligated to furnish information to that particular
registered information system pursuant to proposed Sec. 1041.16. The
general furnishing requirement would commence at the effective date of
proposed Sec. 1041.16, namely, 15 months from publication of the final
rule in the Federal Register. An information system's automatic change
from being provisionally registered pursuant to proposed Sec.
1041.17(d)(1) to being registered pursuant to proposed Sec.
1041.17(d)(2) would not have triggered an additional obligation on the
part of a lender; rather the significance of the full registration of a
provisionally registered system was that lenders could, once fully
registered, rely on a consumer report from the system to comply with
their obligations under proposed Sec. Sec. 1041.5 and 1041.7.\1077\
Under the proposal, suspension or
[[Page 54784]]
revocation of an entity's provisional registration or registration
pursuant to proposed Sec. 1041.16(g) would relieve lenders of their
obligation to furnish information to the information system pursuant to
proposed Sec. 1041.16 and lenders would no longer be permitted to rely
on a consumer report generated by the entity to comply with their
obligations under proposed Sec. Sec. 1041.5 and 1041.7.
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\1077\ The proposal required lenders to furnish to such a system
beginning 120 days from the date of the system's provisional
registration and to continue to do so after the system becomes
registered.
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The Bureau believed that publication of a notice on its Web site
would be the most effective way to ensure that lenders received notice
of an information system's provisional registration or registration, or
of a suspension or revocation of its provisional registration or
registration. Accordingly, for purposes of proposed Sec.
1041.16(b)(1),\1078\ the Bureau proposed to tie the dates of
provisional registration, registration, and suspension or revocation of
provisional registration or registration, as applicable, to publication
of a notice on its Web site. The proposal also would have required the
Bureau to maintain on its Web site a current list of information
systems that were registered pursuant to Sec. 1041.17(c)(2) and (d)(2)
and provisionally registered pursuant to Sec. 1041.17(d)(1).
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\1078\ For purposes of proposed Sec. Sec. 1041.5 and 1041.7,
which would require a lender to obtain a consumer report from a
registered information system, the Bureau proposed that a suspension
or revocation of registration would be effective five days after the
Bureau published notice of the suspension or revocation on its Web
site.
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Final Rule
The Bureau did not receive any comments addressing this provision.
The Bureau has added language to clarify that, if it suspends the
provisional registration or registration of an information system, it
will provide instructions to lenders concerning the scope and terms of
such suspension. For example, depending on the facts and circumstances
of a particular determination that suspension is appropriate, the
Bureau may suspend registration of a provisionally registered
information system or registered information system for purposes of
final Sec. Sec. 1041.5 and 1041.6 but still require lenders to furnish
to the suspended system pursuant to Sec. 1041.10. The Bureau may also
determine that suspension is only appropriate for a certain period of
time. Other than those clarifications, the Bureau is finalizing this
provision substantially as proposed except that it is renumbering it as
Sec. [thinsp]1041.10(b)(2).
10(c) Information To Be Furnished
Proposed Rule
Proposed Sec. 1041.16(c) would have identified the information a
lender had to furnish concerning each covered loan as required by
proposed Sec. 1041.16(a) and (b). This provision would require lenders
to furnish information when the loan was consummated and again when it
ceased to be an outstanding loan. If there was any update to
information previously furnished pursuant to proposed Sec. 1041.16
while the loan was outstanding, then proposed Sec. 1041.16(c)(2)
required lenders to furnish the update within a reasonable period of
the event that caused the information previously furnished to be out of
date. However, the proposal did not require a lender to furnish an
update to reflect that a payment was made unless the payment caused the
loan to cease to be outstanding. A lender was only required to furnish
an update if such payment caused information previously furnished to be
out of date. Proposed Sec. 1041.16(c)(1) and (3) required lenders to
furnish information no later than the date of consummation, or the date
the loan ceased to be outstanding, as applicable, or as close in time
as feasible to the applicable date. Proposed comment 16(c)-1 clarified
that under proposed Sec. 1041.16(c)(1) and (3), if it was feasible to
report on the applicable date, then the applicable date was the date by
which the information had to be furnished. Under the proposal, the
Bureau would have encouraged lenders to furnish information concerning
covered loans on a real-time basis, but permitted lenders to furnish
the required information on a daily basis or as close in time to
consummation as feasible.
Proposed Sec. 1041.16(c) also stated that a lender had to furnish
the required information in a format acceptable to each information
system to which it was required to furnish information. This
requirement was complemented by proposed Sec. 1041.17(b)(1), discussed
further below, which conditioned an entity's eligibility for
provisional registration or registration as an information system on
its capability to use reasonable data standards that would facilitate
the timely and accurate transmission and processing of information in a
manner that would not impose unreasonable costs or burdens on
lenders.\1079\
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\1079\ Among other things, these standards had to facilitate
lender and registered information system compliance with the
provisions of the FCRA and its implementing regulations concerning
the accuracy of information furnished.
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Final Rule
The introductory paragraph of Sec. 1041.10(c) of the final rule is
being finalized as proposed (aside from being renumbered), and comments
directed at the substance of this provision are addressed in the
analysis for Sec. 1041.10(c)(1) through (3) below. The introductory
paragraph summarizes the main thrust of Sec. 1041.10(c), which
addresses what information must be furnished with respect to covered
loans as required in Sec. 1041.10(a) and (b), and when it must be
furnished. It also specifies that a lender must furnish the information
in a format acceptable to each information system to which it must
furnish information.
10(c)(1) Information To Be Furnished at Loan Consummation
Proposed Rule
Proposed Sec. 1041.16(c)(1) would have required that at the time a
loan was made, or as close in time as feasible to that date, lenders
must furnish eight pieces of information about the loan to each
registered and provisionally registered information system. The
specified pieces of information would be as follows:
Proposed Sec. 1041.16(c)(1)(i) would have required information
that is necessary to uniquely identify the covered loan. This would
likely be the loan number assigned to the loan by the lender, but the
proposal deferred to lenders and provisionally registered and
registered information systems to determine what information is
necessary or appropriate for this purpose.
Proposed Sec. 1041.16(c)(1)(ii) would have required information
necessary to identify the specific consumer(s) responsible for the
loan. The proposal deferred to each provisionally registered and
registered information system the determination of the specific items
of identifying information necessary for this purpose.
Proposed Sec. 1041.16(c)(1)(iii) would have required information
stating whether the loan was a covered short-term loan, a covered
longer-term loan, or a covered longer-term balloon-payment loan, as
those terms were defined in proposed Sec. 1041.2. Proposed comment
16(c)(1)-1 would clarify that compliance with proposed Sec.
1041.16(c)(1)(iii) required a lender to identify the covered loan as
one of these types of loans, and provided an example.
Proposed Sec. 1041.16(c)(1)(iv) would have required information
concerning whether the loan was made under proposed Sec. 1041.5 or
Sec. 1041.7, as
[[Page 54785]]
applicable. Proposed comment 16(c)(1)-2 would clarify that compliance
with proposed Sec. 1041.16(c)(1)(iv) required a lender to identify the
covered loan as made under one of these sections, and provided an
example.
Proposed Sec. 1041.16(c)(1)(v) would require the furnishing of
information about the loan consummation date for a covered short-term
loan.
Proposed Sec. 1041.16(c)(1)(vi) would require the furnishing of
information about the principal amount borrowed for a loan made under
proposed Sec. 1041.7.
Proposed Sec. 1041.16(c)(1)(vii) would require the furnishing of
the following information about a loan that is closed-end credit: (a)
The fact that the loan is closed-end credit, (b) the date that each
payment on the loan is due, and (c) the amount due on each payment
date. This information was intended to reflect the amount and timing of
payments due under the terms of the loan as of the loan's consummation.
Proposed comment 16(c)(2)-1 explained that, for example, if a consumer
made a payment on a closed-end loan as agreed and the loan was not
modified to change the dates or amounts of future payments on the loan,
then the lender was not required to furnish an update to information
previously furnished. If, however, the lender extended the term of the
loan, then the lender would be required to furnish an update to the
date that each payment on the loan was due and the amount due on each
payment date, to reflect the updated payment dates and amounts.
Finally, proposed Sec. 1041.16(c)(1)(viii) would require the
furnishing of the following information for a loan that is open-end
credit: (a) The fact that the loan is open-end credit, (b) the credit
limit on the loan, (c) the date that each payment on the loan is due,
and (d) the minimum amount due on each payment date. As discussed
further below, lenders would be required to furnish an update to
information previously furnished within a reasonable period after the
event that caused the prior information to be out of date.
Comments Received
As noted above, the proposal required lenders to furnish the
information no later than the date on which the loan was consummated or
as close as feasible to the date the loan was consummated. Several
commenters opposed what they deemed the ``real-time'' furnishing
requirement of proposed Sec. 1041.16(c). Other commenters recognized
that the Bureau was not requiring real-time furnishing and advocated
that the Bureau adopt such a requirement as a reasonable means of
ensuring compliance. One trade association suggested that some lenders
would not comply with the furnishing requirements on a real-time basis,
if at all. Several commenters said this requirement would add costs and
operational complexity that would hinder lenders from providing small-
dollar credit.
One consumer reporting agency expressed concern that without a
system to facilitate the sharing of the updated account information
between the registered information systems, correcting a consumer
report across all registered information systems would involve
substantial burden and expense. A commenter also asserted that
potential lags in the timing of furnishing to a registered information
system could result in a ``window of invisibility'' with respect to a
consumer report produced by the registered information system. For
example, if a consumer secured a loan from a lender but the lender did
not furnish information about the loan to a registered information
system until later that day, then the loan would not be reflected in a
consumer report obtained from that registered information system by
another lender immediately after the loan was made, and therefore would
be invisible to the second lender unless the loan was made by an
affiliate of that lender. This commenter also appeared to suggest that
if a loan was furnished to registered information systems after the
disbursement of funds, then the potential window of invisibility would
be shorter for storefront lenders as these lenders disburse funds
immediately, and longer for online lenders as these lenders may have a
lag period between the loan's approval and the disbursement of funds.
The commenter expressed concern that a consumer could obtain multiple
loan approvals during this window of invisibility. Relatedly, several
commenters requested a safe harbor from liability to account for
circumstances in which a lender checks a registered information system
and finds no outstanding loan, but later discovers that a borrower did
have another covered loan outstanding. The Bureau has addressed these
concerns in comments 5(c)(2)(ii)(B)-3 and 6(a)-3, as discussed in more
detail below.
A set of consumer advocates generally supported the elements of
proposed Sec. 1041.16(c) but urged the Bureau also to require lenders
to report more information, such as the all-in APR at consummation and
a summary of collection efforts. They also suggested that whether a
loan is short-term or long-term should be supported by the underlying
information, such as the loan's date of consummation, due date, and
amount and timing of payment, rather than by merely checking a box.
Several commenters criticized the Bureau's inclusion in proposed Sec.
1041.16(c)(1) of the phrase ``as close in time as feasible to the date
the loan is consummated.'' Consumer advocates urged the Bureau to
remove the above phrase to ensure the timelier furnishing of data,
which would improve the determinations made by lenders considering
consumer reports from registered information systems when making a
covered loan. An industry commenter stated that this standard would
thwart the provisions of the proposed rule that were intended to
prevent repeat borrowing.
Focusing on proposed Sec. 1041.16(c)(1)(i), an industry commenter
suggested that the unique loan identifier should be consistent across
all lenders and registered information systems. This commenter
contended that the lack of a unique loan identifier would create
substantial issues related to preserving data integrity with respect to
data furnished under proposed Sec. 1041.16.
With respect to proposed Sec. 1041.16(c)(1)(ii), a group of
consumer advocates urged the Bureau to require lenders to furnish the
borrower's full name, address, phone number, date of birth, and all
nine digits of the borrower's Social Security number. They further
requested that the Bureau mandate a set of strict matching criteria to
be used to properly match borrowers to the correct file at a registered
information system. The commenters suggested this was essential to
protect consumers against the risk of ``mixed files'' (i.e., the
inclusion, in a consumer report concerning one consumer, of information
concerning another consumer). One industry commenter noted that
proposed Sec. 1041.16(c)(1)(ii) would create a Federal mandate for
State-licensed providers to furnish personally identifying information
that is otherwise protected under several State laws. It also stated
that the Bureau should combine proposed Sec. 1041.16(c)(1)(iii) and
(iv) together in the final rule.
Regarding proposed Sec. 1041.16(c)(1)(v), a group of consumer
advocates suggested that the Bureau require the loan consummation date
for all loans required to be furnished, not just for covered short-term
loans. They also urged the Bureau to modify proposed Sec.
1041.16(c)(1)(vi) to require that the principal amount borrowed for all
loans be furnished, not just for loans made
[[Page 54786]]
under proposed Sec. 1041.7. Similarly, an industry commenter suggested
that this requirement should be extended to all loans made under
proposed Sec. Sec. 1041.5 and 1041.7.
A group of consumer advocates supported proposed Sec.
1041.16(c)(1)(vii) and (viii), but urged the Bureau to require lenders
to report at the time these loans are consummated the loan consummation
date, the total number of payments required, and the loan due date.
They also noted that lenders should be required to report loans
outstanding on the effective date of the furnishing requirements. They
believed this addition was critical to limiting a borrower's days of
indebtedness in a 12-month period.
An industry commenter stated that lenders should be required to
furnish to registered information systems the following additional
information to enable compliance. First, the lender should provide
information to uniquely identify itself and the store location that
issued the loan. The commenter stated that the identifier should be
verified to ensure that the lender was actively licensed to conduct
business with the borrower in the borrower's State, but did not specify
whether the party responsible for conducting the verification should be
the furnisher or the registered information system, and what a
registered information system or lender using a consumer report
containing such information would do with the information. The same
commenter also suggested that lenders should report whether the loan
was provided at the physical location of the entity that issued the
loan or elsewhere, including electronically.
Three consumer reporting agencies commented on the format of the
data to be furnished pursuant to proposed Sec. 1041.16. One stated
that a robust set of registration requirements--including mandating a
standardized format for furnishing the data required under the rule--
would minimize variation and inconsistencies in the consumer reports
provided to lenders across different registered information systems.
This commenter acknowledged that in the short run, some entities could
face challenges in implementing any standardized data format, but
argued that this approach would reduce the burden on furnishers and be
more efficient in the long run. It argued that requiring use of the
Metro 2 format would standardize the small-dollar lending market and
ensure greater data integrity and consistency, which it said would
benefit both lenders and consumers. Another consumer reporting agency
likewise encouraged the Bureau to require uniformity across furnishing
formats in order to ensure that lenders are able to furnish accurate,
complete, and timely information.
Conversely, one consumer reporting agency urged the Bureau to give
registered information systems flexibility rather than mandating data
furnishing standards in the rule. However, this commenter agreed that a
single standard would support consistency. It also said that though
developing a uniform data standard would be costly for registered
information systems, software companies could help new furnishers
comply with Metro 2 standards, which would allow for faster onboarding.
It cited Metro 2 as an example of a best practice and stated that this
format was a good model for enabling entities to furnish to registered
information systems. This commenter said it did not believe lenders pay
dues to use Metro 2. Relatedly, this commenter asked the Bureau to
stress to lenders the importance of adequate staffing and of designing
their furnishing systems with the appropriate speed and quality. It
also asked the Bureau to clarify to lenders that registered information
systems would not be responsible for deficiencies in the lenders'
furnishing capabilities.
One consumer reporting agency stated that common standards to
ensure equal access to data were in the interest of every registered
information system, and emphasized the utility of a standardized
electronic data reporting format akin to Metro 2, which the commenter
believed would decrease operational burdens for lenders. This commenter
speculated that, to the extent the industry could leverage the existing
Metro 2 infrastructure to develop a standard appropriate for furnishing
data required under the rule, the onboarding process would be
relatively quick and simple, whereas a registered information system
based on a brand-new data furnishing standard would delay the
prospective timeline.
Final Rule
For the reasons set forth herein, the Bureau is finalizing Sec.
[thinsp]1041.10(c)(1) as proposed, with two revisions and as renumbered
in light of other structural changes made in the rule. First, the
Bureau has removed from Sec. [thinsp]1041.10(c)(1)(iii) the phrase ``a
covered longer-term loan,'' and from Sec. [thinsp]1041.10(c)(1)(iv)
the corresponding reference to proposed Sec. [thinsp]1041.9, to
reflect that the final rule does not require furnishing of information
about covered longer-term loans (other than covered longer-term
balloon-payment loans). Second, Sec. [thinsp]1041.10(c)(1)(v) of the
final rule now requires lenders to provide the loan consummation date
for covered longer-term balloon-payment loans in addition to covered
short-term loans. As discussed in the section-by-section analysis to
the proposal, this information will enable a registered information
system to generate a consumer report that will allow a lender to
determine whether a contemplated loan is part of a loan sequence and
the chronology of prior loans within a sequence, which will enable the
lender to meet its obligations under final Sec. Sec. 1041.5 and
1041.6. Because the definition of loan sequence in the final rule
includes covered longer-term balloon-payment loans, the Bureau is
requiring lenders to furnish loan consummation date for all covered
loans required to be furnished. Accordingly, the Bureau has deleted the
phrase ``For a covered short-term loan'' from proposed Sec.
[thinsp]1041.16(c)(1)(v). The Bureau is making adjustments to comments
10(c)(1)-1 and 10(c)(1)-2, in order to reflect that Sec.
[thinsp]1041.10(c)(1)(iii) and (iv) relate only to covered short-term
loans and covered longer-term balloon loans.
As finalized, Sec. 1041.10(c)(1) requires lenders to furnish the
specified information no later than the date on which the loan is
consummated or as close in time as feasible after that date. The Bureau
recognized in the proposal, and acknowledges here, that some
installment lenders currently furnish loan information to consumer
reporting agencies in batches on a periodic basis. However, the Bureau
is not persuaded that batch reporting less frequently than daily would
provide information sufficiently timely to serve the purposes of this
rule. On the contrary, the Bureau maintains that the proposed timing
requirement is needed to further the consumer protections envisioned
for part 1041. With respect to the concern some commenters stated--that
there would be no way to ensure that data furnished and updated by
lenders is consistent across all registered information systems because
of the possible delays in the availability of loan data from each
individual registered information system--the Bureau is aware of the
potential for gaps in information. It further agrees that there exists
the potential for a window of invisibility for some loans, as the rule
does not require true ``real-time'' furnishing. Instead, it requires
that information must be furnished no later than the date on which the
loan is consummated, or as close in time as feasible to the date the
loan is consummated. The Bureau has weighed
[[Page 54787]]
the risk of potential gaps in the available information against the
burden on lenders of imposing a real-time furnishing requirement.
Ultimately, the Bureau concluded that the incremental benefit of a
real-time furnishing requirement would not justify the burden that
would result from such a requirement. In the event that lenders exploit
timing delays with the intent to evade the requirements of the rule,
the Bureau may address the behavior by relying on its anti-evasion
authority, as outlined in final Sec. [thinsp]1041.13.
A commenter expressed concerns about consumer disputes not being
adequately conveyed to all registered information systems because of
concerns about the systems' ability to communicate with each other. The
Bureau notes that the FCRA and Regulation V impose obligations on
furnishers to convey corrections to data previously furnished
identified by a consumer dispute. The Bureau expects that lenders will
comply with their obligations under the FCRA and Regulation V with
respect to updating information at each registered information system
to which it previously furnished information about a loan.
The Bureau recognizes the concern that commenters have expressed
about a lender incurring liability for making a covered short-term loan
or covered longer-term balloon-payment loan based on an incomplete or
inaccurate consumer report obtained from a nationwide consumer
reporting agency or registered information system. The Bureau has added
commentary to both Sec. Sec. 1041.5 and 1041.6 to allay such
concerns.\1080\
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\1080\ See Comments 5(c)(2)(ii)(B)-3 and 6(a)-3.
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Relatedly, the Bureau expects that lenders will furnish the
specified information no later than the date on which the loan is
consummated. It includes the phrase ``or as close in time as feasible
to the date the loan is consummated'' not to undercut this expectation
or to create, as some commenters fear, a loophole. The Bureau includes
this phrase because it recognizes that there may be certain
circumstances under which it may not be feasible to furnish information
on the date the loan is consummated, such as the temporary
unavailability of a furnishing system. Final comment 10(c)-1, unchanged
from the proposal except for numbering changes, clarifies that ``if it
is feasible to report on a specified date (such as the consummation
date), the specified date is the date by which the information must be
furnished.'' The Bureau concludes that the expectation under the rule
regarding the timing of furnishing information regarding consummation
is reasonable and clear and thus it declines to remove from proposed
Sec. [thinsp]1041.16(c) the phrase ``as close in time as feasible to
the date the loan is consummated'' and thus adopts Sec.
[thinsp]1041.10(c)(1) as described above.
Final rule Sec. [thinsp]1041.10(c)(1)(i) through (vii) also sets
out the types of information that lenders must furnish at loan
consummation. After carefully evaluating the comments it received
regarding increasing the number of data points lenders should be
required to furnish, the Bureau has decided to adopt Sec.
[thinsp]1041.10(c)(1) as proposed.
Regarding proposed Sec. [thinsp]1041.16(c)(1)(ii), the Bureau
weighed the utility of requiring furnishing of more extensive
identifying information (e.g., identifying specific consumers
responsible for the loan), as suggested by a group of consumer
advocates, against the potential burdens on furnishers associated with
such a requirement and the potential privacy and data security concerns
associated with the collection and furnishing of more identifying
information than is necessary, and concluded that the proposed approach
strikes the right balance. Under this approach, rather than prescribing
specific identifying information that could, in practice, prove to be
under-inclusive, over-inclusive, or both, the Bureau instead concludes
that it is preferable for individual provisionally registered and
registered information systems to identify the identifying information
needed to avoid errors. This approach will also ensure that lenders and
provisionally registered and registered information systems collect no
more identifying information from applicants and borrowers than is
necessary, consistent with best data security practices. Thus, the
Bureau defers to each provisionally registered and registered
information system concerning the specific items of identifying
information they deem necessary to identify the particular consumer
responsible for the loan.
The Bureau also decided not to modify proposed Sec.
1041.16(c)(1)(vi) to require lenders to furnish the principal amount
borrowed for all loans required to be furnished. The proposal required
lenders to furnish the principal amount borrowed only for loans made
under proposed Sec. [thinsp]1041.7(b)(1). The express purpose of this
requirement was to allow lenders to determine whether a contemplated
loan satisfied the limitations on principal amount set in proposed
Sec. 1041.7(b)(1). Under the corresponding provision in the final rule
(now renumbered as Sec. 1041.6), the lender must first obtain and
consider a consumer report from a registered information system to make
covered loans under that framework. However, lenders are permitted to
make loans pursuant to proposed Sec. 1041.5 without first obtaining a
consumer report from a registered information system if such consumer
reports are not available because there are no registered information
systems, or none have been registered for the required length of time.
While a record of the principal amount is crucial to a lender's review
for a loan made under final Sec. 1041.6, it is not essential for
registered information systems to collect and provide this information
for loans made pursuant to Sec. 1041.5. After carefully considering
the potential burdens that the suggested approach would pose on lenders
that furnish to registered information systems, the Bureau declines to
adopt the additional data points that some commenters recommend
requiring from furnishers in Sec. 1041.10(c) of the final rule. The
Bureau finds instead that Sec. 1041.10(c) will provide sufficient
information for lenders to make ability-to-repay determinations that
can achieve the consumer protections intended in part 1041.
The Bureau is also finalizing Sec. [thinsp]1041.10(c)(1)(vii) and
(viii) as proposed, except for numbering adjustments for internal
consistency. These provisions outline the specific information required
to be furnished depending on whether the loan is closed or open credit.
The Bureau continues to believe these data points will assist with
ability-to-repay determinations under the final rule.
10(c)(2) Information To Be Furnished While Loan Is an Outstanding Loan
Proposed Rule
Proposed Sec. 1041.16(c)(2) would have required lenders to
furnish, while a loan is an outstanding loan, any update to information
previously furnished pursuant to proposed Sec. 1041.16 within a
reasonable period of the event that caused the information previously
furnished to be out of date. Proposed comment 16(c)(2)-1 provided
examples of scenarios under which proposed Sec. 1041.16(c)(2) required
a lender to furnish an update to information previously furnished.
Proposed comment 16(c)(2)-2 clarified that the update requirement
extended to information furnished pursuant to proposed Sec.
1041.16(c)(2).
[[Page 54788]]
The Bureau believed that each item of information that the proposal
required lenders to furnish under Sec. 1041.16(c)(1) strengthened the
consumer protections of proposed part 1041. Updates to these items of
information could affect a consumer's eligibility for covered loans
under the proposal and, thus, the achievement of those protections. The
Bureau concluded that such updates should be reflected in a timely
manner on a consumer report that a lender obtains from a registered
information system. However, the Bureau also believed that, to the
extent furnishing updates would impose burden on lenders, a more
flexible timing requirement was appropriate for furnishing an update.
The Bureau thus proposed that when a covered loan was outstanding,
lenders had to furnish updates pursuant to proposed Sec. 1041.16(c)(2)
within a reasonable period after the event that caused this type of
information previously furnished to be out of date.
Comments Received
One group of commenters supported the proposed requirement that a
lender be required to furnish updates regarding any changes to a loan's
due date, payments, and payment amount. However, they urged the Bureau
to require furnishing of more information about a loan while it was
outstanding, including information about the payments made, principal
and charges owed after each payment, the number of days that a borrower
was delinquent on a payment, and whether the loan was refinanced or
renewed. These commenters stated that if the loan was refinanced or
renewed, then the lender should have to report the amount of principal
paid down on the original loan at the time of renewal, the amount of
principal owed after renewal, and lastly, all the other requirements
for a loan at consummation. They believed the proposed additional
information would be important to a lender's ability-to-repay
calculation, and would improve compliance with the proposed provisions
addressing repeat re-borrowing of longer-term loans. Other commenters
recommended that furnishing updates include any changes to balance
amount, credit limit, high credit, minimum payment due, actual payment
made, past due amount, delinquency status, and all dates associated
with those updates.
One industry commenter submitted that the lack of a consistent
means for loan identification across lenders and registered information
systems could create disparities in the application of updates to
borrower loan records. Some commenters expressed concerns about the
required frequency of the furnishing updates and that lenders may need
to furnish updates more often than once a month because of the short
billing cycle for small-dollar loans. In addition, a group of consumer
advocates opposed a timing requirement that would be any more flexible
than that contained in proposed Sec. 1041.16(c)(1) and (3), and asked
the Bureau to require lenders to furnish updates to information
previously furnished no later than the date on which the changes to the
terms of the outstanding loan are made. Another industry commenter
likewise urged a real-time furnishing requirement.
Final Rule
The Bureau is adopting Sec. 1041.16(c)(2) as proposed, other than
renumbering it as Sec. 1041.10(c)(2). It declines to expand this
furnishing requirement as proposed by some commenters. Ultimately, the
Bureau has concluded that the information lenders must provide pursuant
to Sec. 1041.10(c)(2) strikes the right balance between permitting
lenders to conduct a precise assessment for purposes of the proposed
rule, and limiting the furnishing burdens that the rule imposes on
lenders. These requirements, and the resulting balance struck between
demanding either more or less information, are in service of the core
principle of the underwriting provisions, which require lenders that
contemplate making a covered short-term loan or a covered longer-term
balloon-payment loan to make a reasonable assessment of the borrower's
ability to repay the loan according to its terms. Thus, they generally
further the consumer protections advanced by part 1041.
The Bureau does not agree with the commenter that suggested that a
loan identifier that is unique across all lenders and registered
information systems would be needed to ensure that updates are properly
applied to the correct loan. Even if two lenders assigned the same loan
number to a loan that each furnished, since each lender will be
updating its own loan, a registered information system will be able to
distinguish the loans. Further, the Bureau does not believe that such a
requirement is feasible in the context of this rule, which would
require thousands of unaffiliated lenders to develop and use a system
to generate a unique number at the consummation of every covered short-
term and longer-term balloon payment loan for use when furnishing
information to each registered information system.
The Bureau disagrees that the proposed requirement to update
information previously furnished did not adequately describe the loans
for which updates would be required or the timing of the required
reporting. As described above, final Sec. 1041.10(c)(2) requires
lenders to furnish--for all outstanding covered short-term loans and
covered longer-term balloon-payment loans--updates within a reasonable
period after the event that causes the information that was previously
furnished to be out of date. For the reasons described in the proposal,
the Bureau also maintains that granting lenders a more flexible timing
requirement for furnishing updates is an appropriate component in
drawing the balance between the burdens and the benefits of this
provision.
The Bureau adopts the commentary related to Sec. 1041.10(c)(2) as
proposed, other than to make updates regarding numbering. Final comment
10(c)(2)-1 sets out an example of the types of updates lenders must
furnish while loans are outstanding.
10(c)(3) Information To Be Furnished When Loan Ceases To Be an
Outstanding Loan
Proposed Rule
Proposed Sec. 1041.16(c)(3) would have required lenders to furnish
specified information no later than the date the loan ceased to be an
outstanding loan, or as close in time as feasible to the date that the
loan ceased to be an outstanding loan. The Bureau believed that a real-
time or close-to-real-time furnishing requirement for when a loan
ceased to be an outstanding loan was appropriate to achieve the
consumer protections of proposed part 1041. The proposed requirement
sought to give lenders that use consumer reports from a registered
information system timely information about most covered loans made by
other lenders to a consumer. Although the Bureau would have encouraged
lenders to furnish information about covered loans on a real-time or
close-to-real-time basis, the proposal permitted lenders to furnish the
required information on a daily basis or as close in time to the date
the loan ceased to be outstanding as would be feasible.
Proposed Sec. 1041.16(c)(3)(i) would have required lenders to
furnish the date as of which the loan ceased to be an outstanding loan.
Proposed Sec. 1041.16(c)(3)(ii) would require lenders to furnish for a
covered short-term loan that had ceased to be an outstanding loan
whether all amounts owed in connection with the loan were paid in
[[Page 54789]]
full including the amount financed, charges included in the total cost
of credit, and charges excluded from the total cost of credit. If all
amounts owed in connection with the loan were paid in full, then this
provision would further require lenders to specify the amount paid on
the loan, including the amount financed and the charges comprised in
the total cost of credit, but excluding any charges excluded from the
total cost of credit.
Comments Received
Very few commenters specifically addressed the requirements listed
under proposed Sec. [thinsp]1041.16(c)(3). A group of consumer
advocates asserted that the Bureau's furnishing requirements when a
loan ceases to be outstanding were lacking, and made recommendations
intended to strengthen the requirements applicable to both covered
short-term loans and covered longer-term loans. They contended that the
Bureau should require lenders to furnish charges excluded from the
total cost of credit even if a loan was paid in full, and to furnish
the amount financed and charges included and excluded from the total
cost of credit separately from one another. They also urged the Bureau
to clarify that charges not included in the total cost of credit
include any fees associated with late payment on the loan, including
both late fees and returned item fees.
These commenters advised the Bureau to require lenders to furnish
any date on which the borrower became delinquent, or the lender
determined the loan to be in default, or the lender charged off the
loan. They also urged the Bureau to require furnishing of information
related to collection activity, including the date that the collection
activity began, and records of any failed payment transfer such as
transfers that trigger a prohibition on further payment transfer
attempts and the reauthorization requirement. They considered this
information to be relevant to a consumer's borrowing history and a
subsequent lender's ability-to repay determination, and stated that the
availability of such information in a consumer report provided by a
registered information system would help protect consumers against
unaffordable longer-term refinancings. An industry commenter urged that
the Bureau adopt a real-time furnishing requirement.
Final Rule
The Bureau is finalizing Sec. [thinsp]1041.10(c)(3) as proposed
and renumbered with two substantive modifications and a minor technical
edit.
First, final rule Sec. 1041.10(c)(3)(ii) now requires the
information described in proposed Sec. 1041.16(c)(3)(ii)(A) to be
furnished for all loans for which information is required to be
furnished under the rule, not only covered short-term loans. The
information that must be furnished under this section is whether the
borrower paid in full all amounts owed in connection with the loan,
including the amount financed, charges included in the cost of credit,
and charges excluded from the cost of credit. Under the proposal, this
information was necessary to establish whether an exception to the
presumption against a consumer's ability to repay in proposed Sec.
1041.6 applied. Because of the narrowing of the scope of the rule, this
information is no longer necessary for that purpose. However, the
Bureau believes that this information will be useful to lenders'
underwriting of subsequent loans. Although this change will slightly
increase furnishing burden, the Bureau believes the increased burdens
are outweighed by the insights this information would provide about
actual prior loan performance. The Bureau is not finalizing proposed
Sec. 1041.16(c)(3)(ii)(B), which would have required furnishers to
furnish the actual amounts paid in instances where borrower
successfully paid in full all amounts connected with loans. This also
was proposed to allow lenders to establish whether an exception to the
presumption against a consumer's ability to repay in proposed Sec.
1041.6 applied. Because the Bureau is not adopting proposed Sec.
1041.6, this information is no longer needed. Additionally, this
section now references ``cost of credit,'' rather than ``total cost of
credit,'' consistent with the Bureau's adoption of the former term.
Commenters had suggested the inclusion of several other data points
in the furnishing requirements applicable to loans that are no longer
outstanding, as they suggested that this information would be helpful
for lenders in evaluating the borrowers' ability to repay loans or
refinanced loans. Although the additional information indeed might be
helpful to lenders in their ability-to-repay evaluations, the Bureau
finds that this benefit is outweighed by the burden on lenders that
would result from requiring the additional information. Likewise, for
reasons described above, the Bureau chose not to require real-time
furnishing.
Section 1041.11 Registered Information Systems
As discussed in more detail in the overview of proposed Sec. Sec.
1041.16 and 1041.17, the Bureau sought to ensure that lenders making
most covered loans would have access to timely and reasonably
comprehensive information about a consumer's current and recent
borrowing history with other lenders. Proposed Sec. 1041.16 would
require lenders to furnish information about most covered loans to each
information system that was either provisionally registered or
registered with the Bureau pursuant to proposed Sec. 1041.17. This
requirement would allow a registered information system to generate a
consumer report containing relevant information about a consumer's
borrowing history, regardless of which lender or lenders had made a
covered loan to the consumer previously. A lender that was
contemplating making most covered loans would obtain a consumer report
from a registered information system and consider such a report in
determining whether the loan could be made, in furtherance of the
consumer protections of proposed part 1041.
The proposal also would have required the Bureau to identify the
particular consumer reporting agencies to which lenders had to furnish
information pursuant to proposed Sec. 1041.16, and from which lenders
could obtain the consumer reports needed to satisfy their obligations
under proposed Sec. Sec. 1041.5 and 1041.7. Proposed Sec. 1041.17
would require the Bureau to identify these consumer reporting agencies
by registering them with the Bureau as ``information systems.'' As
described in more detail below, proposed Sec. 1041.17 set forth
proposed processes for registering information systems before and after
the furnishing obligations under proposed Sec. 1041.16 take effect and
it stated the proposed conditions that an entity would have to satisfy
in order to become a registered information system.
11(a) Definitions
11(a)(1) Consumer Report
Proposed Rule
Proposed Sec. 1041.17(a)(1) would have defined consumer report by
reference to the definition of consumer report in the FCRA.\1081\ The
Bureau explained that this definition accurately reflected how the FCRA
would apply to provisionally registered and registered information
systems, to lenders that furnish information about covered loans to
[[Page 54790]]
provisionally registered and registered information systems pursuant to
proposed Sec. 1041.16, and to lenders that use consumer reports
obtained from registered information systems. The proposal would
require a lender that contemplated making most covered loans to obtain
a consumer report about the consumer from a registered information
system, which would enable the lender to determine the consumer's
eligibility for most covered loans. The proposal clarified that
registered information systems providing consumer reports to such
lenders would be consumer reporting agencies within the meaning of the
FCRA \1082\ and would be subject to its applicable provisions and
implementing regulations. Moreover, lenders that obtained consumer
reports from registered information systems and those required to
provide information to provisionally registered and registered
information systems under proposed Sec. 1041.16 also would be required
to comply with the provisions of the FCRA applicable to users of
consumer reports and to furnishers of information to consumer reporting
agencies.
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\1081\ 15 U.S.C. 1681a(d).
\1082\ See 15 U.S.C. 1681a(f).
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Comments Received
One consumer reporting agency expressed general support for the
proposed definition of consumer report and agreed that the FCRA is
applicable. A few commenters disagreed with the definition of consumer
report proposed in Sec. 1041.17(a)(1). One industry commenter stated
that the definition was not consistent with the purposes of a
registered information system and a consumer report issued under the
proposed rule. The commenter posited that information communicated is
only a consumer report within the definition in the FCRA if the
information is used by a lender to answer the question of whether a
lender should make a loan to a borrower. The commenter suggested that
consumer reports under the rule would not qualify as consumer reports
under the FCRA because the purpose of the reports under the rule would
be to determine if a lender could lend to a consumer in compliance with
the regulation, not whether they should lend to the consumer. The
commenter asserted that a consumer report obtained from a registered
information system is not sufficient, and not intended to determine
whether a lender should make a loan to the borrower. The commenter
indicated that consumer reports provided by nationwide consumer
reporting agencies were more appropriate to this purpose than consumer
reports provided by a registered information system. One consumer
reporting agency stated that the proposed registered information
systems would be in conflict with the FCRA's definitions and
requirements for consumer reporting agencies, but did not elaborate
further.
Final Rule
The Bureau is finalizing proposed Sec. 1041.17(a)(1), renumbered
as Sec. 1041.11(a)(1) of the final rule, without any modifications.
The Bureau remains persuaded that it is appropriate to define consumer
report by reference to the FCRA's definition of consumer report. The
FCRA defines consumer report to mean ``any written, oral, or other
communication of any information by a consumer reporting agency bearing
on a consumer's credit worthiness, credit standing, credit capacity,
character, general reputation, personal characteristics, or mode of
living which is used or expected to be used or collected in whole or in
part for the purpose of serving as a factor in establishing the
consumer's eligibility for,'' among other permissible purposes,
credit.\1083\ Under the final rule, information contained in a consumer
report obtained from a registered information system will bear on the
aspects listed in section 603(d)(1) of the FCRA, and will be used in
whole or in part to serve as a factor in establishing the consumer's
eligibility for a covered short-term or covered longer-term balloon
loan. The Bureau does not agree with the comment suggesting that,
because the information in a consumer report from a registered
information system will be used to determine whether a loan would
comply with this regulation, such information will not be used in whole
or in part as a factor in establishing the consumer's eligibility for
credit.
---------------------------------------------------------------------------
\1083\ Section 603(d) of the Fair Credit Reporting Act, 15
U.S.C. 1681(d).
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11(a)(2) Federal Consumer Financial Law
Proposed Rule
Proposed Sec. 1041.17(a)(2) would have defined Federal consumer
financial law by reference to the definition of Federal consumer
financial law in the Dodd-Frank Act, 12 U.S.C. 5481(14). This term is
defined in the Dodd-Frank Act to include several laws that would apply
to registered information systems, including the FCRA.
Comments Received
A set of comments generally addressed the applicability of the FCRA
or other Federal laws such as the FTC's Standards for Safeguarding
Customer Information,\1084\ 16 CFR part 314, to provisionally
registered and registered information systems and covered lenders and
the scope of the applicability of those laws. One consumer reporting
agency agreed that registered information systems and furnishers are
subject to the FCRA. A group of consumer advocates believed it was
important and only fair that the FCRA applies to information that is
furnished to registered information systems. The commenters said that
the FCRA requirements were basic, fundamental principles of fair
information use.
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\1084\ Generally known as the Safeguards Rule, part 314 sets
forth standards for developing, implementing, and maintaining
safeguards to protect the security, confidentiality, and integrity
of customer information. The Safeguards Rule was promulgated and is
enforced by the FTC pursuant to the Gramm-Leach-Bliley Act (GLBA),
15 U.S.C. 6801 through 6809. The data security provisions of the
GLBA direct the prudential regulators, the SEC, and the FTC to
establish and enforce appropriate standards for covered entities
relating to administrative, technical and physical safeguards
necessary to protect the privacy, security, and confidentiality of
customer information. Congress did not provide the Bureau with
rulemaking, enforcement, or supervisory authority with respect to
the GLBA's data security provisions. 15 U.S.C. 6801(b),
6804(a)(1)(A), and 6805(b). The portion of the GLBA concerning data
security is not a Federal consumer financial law under the Dodd-
Frank Act. However, data security practices that violate those GLBA
provisions and their implementing regulations may also constitute
unfair, deceptive, or abusive acts or practices under the Dodd-Frank
Act.
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Conversely, some commenters argued that registered information
systems would not fit well within the scope of the FCRA and the FACT
Act. One of them added that the rule's provisions would be subject to
misinterpretation, litigation, and unpredictable regulatory examination
and oversight. Another commenter stated that requiring credit unions to
comply with the FCRA, when such entities do not typically furnish loan
information to specialty consumer reporting agencies, would greatly
increase operational costs for such lenders.
Some commenters requested clarification about the scope of the
FCRA's applicability to the proposed rule. One asked the Bureau to
clarify whether lenders would be required to provide a notice of
adverse action. Another asked the Bureau to formalize certain best
practices with respect to consumer report disputes as requirements in
the final rule, saying that it was essential for the registered
information systems to have the capacity to coordinate with lenders in
real time in order to handle consumer disputes effectively while
complying
[[Page 54791]]
with FCRA requirements and deadlines. One commenter noted that the FCRA
imposes duties on furnishers to provide accurate information and
investigate disputes, and encouraged the Bureau to state in the final
rule whether the registered information systems would be expected to
monitor furnishers and take corrective action.
At least two commenters sought clarification about the extent to
which consumers would have access to the consumer protections available
to them under the FCRA. One stated that consumers should have the right
to review the information pertaining to them in a provisionally
registered or registered information system, and to dispute those
records. This commenter explained that the FCRA entitles consumers to
receive information about adverse credit determinations, and stated
that such a consumer right would be useful in instances where some
borrowers are denied credit. One commenter encouraged the Bureau to
evaluate and clearly state any requirement permitting a consumer to
freeze, block, or place a fraud alert on their registered information
system consumer report. It also asked the Bureau to clarify any
requirement that a registered information system place an address
discrepancy notation on a consumer's file with a registered information
system. Lastly, this commenter also noted that it was possible that
some registered information systems subject to the final rule would not
be nationwide consumer reporting agencies within the FCRA's definition.
Numerous commenters were concerned about the possibility of
provisionally registered and registered information systems using the
furnished data for purposes other than in furtherance of part 1041. One
industry commenter encouraged the Bureau to consider further
restricting access to furnished information in order to protect
borrower information in a manner that is consistent with applicable
State law. It argued that registered information systems that supplied
reports containing information furnished under the rule would not be
subject to the Bureau's supervisory authority. It further argued that
permitted uses of furnished information were more permissive under the
FCRA than under State requirements, and contended that the FCRA would
enable registered information systems to exploit the private
information of consumers in ways detrimental to borrowers, including
for the purposes of generating marketing leads and advertising.
Likewise, one consumer advocate opposed allowing provisionally
registered and registered information systems to generate lead lists
based on information furnished under the proposed rule. The commenter
believed that the history of the payday lending industry showed that
new supplies of debt competition would not reduce prices and pointed
out that it was a standard practice of the payday industry to set
interest rates at the maximum level allowed by law. It suggested that
consumers would be unlikely to benefit if lenders had the ability to
purchase prescreened lists from a provisionally registered or
registered information system and then make pre-screened offers of
credit, and submitted that the FCRA grants consumers the right to
control where and how their personal information is disseminated.
Consumer advocates urged the Bureau to limit the use of information
furnished pursuant to part 1041 to credit purposes. Specifically, they
requested that the Bureau prohibit use of the furnished information for
prescreening and non-credit permissible purposes like determinations
related to employment or insurance. One commenter stated that
permitting use of the data for other purposes would expose consumers to
negative consequences that could resulting from employers or other
creditors learning that they had applied for a payday loan.
One commenter stated that the FCRA and FTC Safeguards Rule would
protect the security, confidentiality, and integrity of the consumer
information, but cautioned that to better protect consumer privacy, the
Bureau should impose additional limitations on the information
collected, and should further restrict access to and use of consumer
information held by registered information systems.
Some consumer reporting agencies disagreed with recommendations to
restrict additional uses of information furnished to provisionally
registered and registered information systems pursuant to proposed
Sec. Sec. 1041.16 and 1041.17. One asserted that prescreening
consumers for firm offers of credit would help them transition into
traditional credit products by giving them targeted information on
credit alternatives for which they qualify, expanding their options. It
stated that consumer unawareness of these products could limit people's
access to lower cost loans.
One consumer reporting agency argued that in certain contexts--
including during the underwriting process--underbanked consumers,
unbanked consumers, and consumers with little to no traditional credit
history could benefit from the alternative use of their furnished data.
It said that registered information systems would be obligated to
comply with the FCRA, including the provisions that restrict access to
credit reports for permissible purposes. It also noted that the Bureau,
pursuant to its supervisory and enforcement authority over registered
information systems, could monitor compliance with the FCRA and bring
enforcement actions against registered information systems as
applicable.
Final Rule
The Bureau has carefully considered the comments on proposed Sec.
1041.17(a)(2). For the reasons discussed in the proposal and further
below, the Bureau is finalizing this section as proposed, except for
renumbering it as Sec. 1041.11(a)(2) of the final rule, along with
conforming internal references to other renumbered sections of the
final rule.
Registered information systems performing as required under the
rule will be consumer reporting agencies within the meaning of the
FCRA. Regarding the comments seeking clarification about applicability
of various sections of the FCRA, the Bureau concludes that it is beyond
the scope of this rulemaking to clarify the scope of other rules or
statutes. Specifically, it declines to provide in this rulemaking
guidance concerning how registered information systems and lenders
comply with the FCRA.
It should be noted that the Bureau included in Sec. 1041.11(b)(4)
and (5) eligibility requirements for becoming a registered or
provisionally registered information system that include specific
requirements for an applicant to have a Federal consumer financial law
compliance program and for it to provide the Bureau with an independent
assessment of its compliance program as part of its application for
provisional registration or registration. Accordingly, it is the
Bureau's expectation that registered information systems will determine
their rights and obligations under the applicable Federal consumer
financial laws.
The Bureau declines to impose restrictions on the use of
information furnished to registered information systems pursuant to
this rule beyond the restrictions contained in the FCRA. The Bureau
recognizes that a provisionally registered or registered information
system's provision of prescreened lists based on information furnished
pursuant to this rule may create a risk
[[Page 54792]]
that an unscrupulous provider of risky credit products could use such a
list to target potentially vulnerable consumers. At the same time,
however, the Bureau believes that prescreening could prove useful to
certain consumers to the extent they needed credit and received firm
offers of affordable credit.
Commenters also sought clarity regarding the applicability of the
Safeguards Rule; again, the Bureau concludes that it is beyond the
scope of this rulemaking to clarify the scope of other rules or
statutes. The Bureau also notes that, as explained above, it does not
have authorities with respect to the Safeguards Rule. The Bureau notes
it is including in Sec. 1041.11(b)(6) and (7) eligibility requirements
for becoming a registered or provisionally registered information
system that include specific requirements for an applicant to have
developed, implemented, and maintain a comprehensive information
security program that complies with the Safeguards Rule and for it to
provide the Bureau with an independent assessment of its information
security program as part of its application for provisional
registration or registration and on at least a biennial basis
thereafter.
11(b) Eligibility Criteria for Information Systems
Proposed Rule
The subparts of proposed Sec. 1041.17(b) set forth the conditions
the Bureau would consider in determining whether an entity is eligible
to become a registered or provisionally registered information system
pursuant to proposed Sec. 1041.17(c) or (d). As with other portions of
the proposed rule that are being renumbered in light of changes made to
their provisions, proposed Sec. 1041.17(b) is ultimately being
renumbered as Sec. 1041.11(b) of the final rule.
Proposed Sec. 1041.17(b)(1) would have required the Bureau to
determine that an entity possesses the technical capability to
immediately receive information furnished pursuant to proposed Sec.
1041.16, and that the entity uses reasonable data standards that
facilitate the timely and accurate transmission and processing of
information in a manner that does not impose unreasonable cost or
burden on lenders.\1085\ Proposed Sec. 1041.17(b)(2) would require the
Bureau to determine that the entity possessed the technical capability
to generate a consumer report containing, as applicable for each unique
consumer, all information described in proposed Sec. 1041.16
substantially simultaneous to receiving the information from a lender.
Proposed Sec. 1041.17(b)(3) would require the Bureau to determine that
the entity would perform in a manner that facilitates compliance with,
and furthers the purposes of, proposed part 1041.
---------------------------------------------------------------------------
\1085\ Among other things, these standards must facilitate
lender and registered information system compliance with the
provisions of the FCRA and its implementing regulations concerning
the accuracy of information furnished.
---------------------------------------------------------------------------
Proposed Sec. 1041.17(b)(4) would require the Bureau to determine
that the entity had developed, implemented, and maintains a program
reasonably designed to ensure compliance with all applicable Federal
consumer financial laws. This compliance program would have to include
written policies and procedures, comprehensive training, and monitoring
to detect and promptly correct compliance weaknesses, as described in
more detail in the proposed commentary. Proposed Sec. 1041.17(b)(5)
required the entity to provide to the Bureau in its application for
registration or provisional registration a written assessment of the
Federal consumer financial law compliance program just described. The
assessment would have to set forth a detailed summary of the Federal
consumer financial law compliance program that the entity had
implemented and maintained, and explain how that compliance program was
appropriate for the entity's size and complexity, the nature and scope
of its activities, and risks to consumers presented by such activities.
The assessment also would have to certify that, in the opinion of the
independent assessor, the Federal consumer financial law compliance
program was operating with sufficient effectiveness to provide
reasonable assurance that the entity was fulfilling its obligations
under all Federal consumer financial laws. In addition, the assessment
would have to certify that it had been conducted by a qualified,
objective, independent third-party individual or entity that used
procedures and standards generally accepted in the profession, adhered
to professional and business ethics, performed all duties objectively,
and was free from any conflicts of interest that might have compromised
the assessor's independent judgment in performing the assessment.
The written assessment of an entity's Federal consumer financial
law compliance program required under proposed Sec. 1041.17(b)(5)
would have to be included in the entity's application for registration
pursuant to proposed Sec. 1041.17(c)(2) or for provisional
registration pursuant to proposed Sec. 1041.17(d)(1). However, this
written assessment would not be required in an entity's application for
preliminary approval for registration pursuant to proposed Sec.
1041.17(c)(1), and would not have to be provided to the Bureau when a
provisionally registered information system became registered pursuant
to proposed Sec. 1041.17(d)(2). With respect to entities seeking to
become registered prior to the effective date of proposed Sec.
1041.16, the proposal would have provided an entity 90 days from the
date that preliminary approval was granted to prepare its application
for registration, including obtaining the written assessment required
under proposed Sec. 1041.17(b)(5).
Proposed Sec. 1041.17(b)(6) would have required the Bureau to
determine that an applicant had developed, implemented, and maintained
a comprehensive information security program that complied with the
Safeguards Rule. Proposed Sec. 1041.17(b)(7)(i) would require the
entity to provide to the Bureau in its application for provisional
registration or registration, and on at least a biennial basis
thereafter, a written assessment of the information security program
described in proposed Sec. 1041.17(b)(6). Each assessment had to set
forth the administrative, technical, and physical safeguards that the
entity had implemented and maintained; explain how such safeguards were
appropriate to the entity's size and complexity, the nature and scope
of its activities, and the sensitivity of the customer information at
issue; explain how the safeguards that were implemented met or exceeded
the protections required by the Safeguards Rule; and certify that, in
the opinion of the assessor, the information security program was
operating with sufficient effectiveness to provide reasonable assurance
that the entity was fulfilling its obligations under the Safeguards
Rule. The assessment also had to certify that it had been conducted by
a qualified, objective, independent third-party individual or entity
that used procedures and standards generally accepted in the
profession, adhered to professional and business ethics, performed all
duties objectively, and was free from any conflicts of interest that
might have compromised the assessor's independent judgment in
performing assessments. The proposed commentary clarified the timing of
the assessments, provided examples of individuals and entities
qualified to conduct the assessment, and addressed matters of format
and style.
With respect to entities seeking to become registered prior to the
effective date of proposed Sec. 1041.16, the Bureau proposed to allow
90 days from the date that a preliminary approval for
[[Page 54793]]
registration was granted for the entity to prepare its application for
registration, including obtaining the written assessment required
pursuant to proposed Sec. 1041.17(b)(7). Proposed Sec.
1041.17(b)(7)(ii) required each written assessment produced pursuant to
proposed Sec. 1041.17(b)(7)(i) to be completed and provided to the
Bureau within 60 days after the end of the period to which the
assessment applies. Proposed Sec. 1041.17(b)(8) required that to
become a registered information system, the entity had to have
acknowledged that it was, or consented to being, subject to the
Bureau's supervisory authority.
Comments Received
The Bureau received a broad range of comments about the adequacy of
the eligibility requirements applicable to entities seeking to become
registered information system pursuant to proposed Sec. 1041.17(b).
One set of commenters was generally apprehensive about the potential
lack of interest from eligible entities in serving as registered
information systems. One trade association questioned the Bureau's
support for establishing the measures, and stated that it doubted any
entities would register as information systems. This commenter
predicted that consumer access to the covered loan products would turn
more on registration compliance than lender compliance. Another
commenter speculated that there would be little interest from entities
to become registered information systems because it viewed the proposed
independent assessment of the information security program as exceeding
the scope of the Safeguards Rule. It criticized the Bureau for lacking
a contingency plan to ensure continuity in the market in the event that
no entities chose to become registered information systems.
Some comments addressed proposed Sec. 1041.17(b)(1), concerning
the requirement that a registered information system be able to use
reasonable data standards in a manner that does not impose unreasonable
costs or burdens on lenders. One Tribal entity urged the Bureau to
prevent registered information systems from engaging in price-gouging
practices, particularly when transacting with parties that wholly
depend on the ability to access the services to be provided by these
systems. A consumer reporting agency argued that the heterogeneity of
specialty consumer reporting agencies with respect to technology, data
collected, business model, and business practices, would make it
challenging for the Bureau to assess whether any costs meet the
reasonableness standard of proposed Sec. 1041.17(b)(1). Furthermore,
this commenter cautioned that some entities applying for registration
could be regulatory monopolists and could charge high costs for access
to their data. This commenter believed that registered information
systems should agree to data interchange standards in order to keep
prices down. In addition, it recommended that any fee charged to
lenders should be conditioned on the provision of actual data, such
that a result of no data would not incur a fee. The commenter believed
this approach would prevent a registered information system from being
compensated simply for inquiries that generate no hits. On the other
hand, one industry commenter stated that the Bureau should consider
several factors before restricting fees and charges in connection with
the proposed furnishing requirements. It argued that fees and charges
should permit a registered information system to maintain financially
sound business operations while enabling lenders to use these
compliance services at a reasonable business-friendly cost.
With respect to an entity's general capability to receive
information, one consumer reporting agency stated that a registered
information system would need access to data about outstanding loans as
of the effective date of the furnishing requirement, along with
historical data on loans originated and closed in the six months
leading up to the requirement to furnish data. Another commenter agreed
with this suggestion, stating that it was necessary for lenders to
upload historical loan data by the effective date of the furnishing
requirement. Other commenters encouraged requiring registered
information systems to be able to receive information furnished in the
Metro 2 format, explaining that, in their view, Metro 2 fully complies
with Federal requirements, is publicly available and time-tested, and
would ensure proper classification of loans and loan statuses. Others
agreed that standardizing how data is furnished is important but
requested that the Bureau not designate a specific standard.
Proposed Sec. 1041.17(b)(2) requires entities to have the
capability to generate a consumer report substantially simultaneous to
receiving information from a lender. One trade association doubted that
entities seeking to act as registered information systems would be able
to generate reports substantially simultaneous to their receipt of the
information. Commenters who urged requiring provisionally registered
and registered information systems to be able to receive information
furnished in the Metro 2 format also requested that registered
information systems have the capability to generate a consumer report
containing information furnished in the Metro 2 format. Others asked
the Bureau to clarify provisionally registered and registered
information systems' responsibility to perform quality assurance
assessments on furnished information received pursuant to proposed
Sec. Sec. 1041.16 and 1041.17. As an example of what such potential
responsibilities might entail, the commenter described the process that
it follows to analyze its portfolio of records for data quality and
consistency, and to monitor the frequency of updates to its records.
Some commenters raised concerns about the feasibility of developing
within the proposed time frames the standards necessary to meet the
requirement that registered information systems generate reports
``substantially simultaneous'' to receipt of the information from the
lender. Other commenters indicated that some consumer reporting
agencies have that capability now.
The Bureau received several comments on proposed Sec.
1041.17(b)(3), which requires an entity to be able perform its
obligations as a registered information system in furtherance of the
purposes of part 1041. A number of consumer groups noted their support
for proposed comment 17(b)(3)-1, which clarifies that part 1041 does
not supersede the consumer protection obligations imposed under other
Federal law or regulation and provides a specific example concerning an
obligation under the FCRA. One commenter regarded it as a fundamental
condition of eligibility for registered information systems.
One consumer reporting agency urged the Bureau to condition an
entity's eligibility to become a registered information system on
certain financial stability requirements, to subject the systems to
oversight, and to apply standards of ownership and management that
would exclude inexperience or criminal backgrounds. It also urged the
Bureau to require entities to demonstrate a proven record of core
competencies, compliant market-place behavior, and an effective
dispute-handling system. Another commenter agreed that an entity should
be required to show a proven history of successfully implementing and
maintaining a compliance management system. A trade association
suggested that the Bureau mandate the lender's submission of net worth
requirements, a bond for performance, background checks on the owners,
and anti-sale provisions of the company without notice or approval
[[Page 54794]]
elements. Another commenter recommended that the Bureau require
entities to provide evidence of their relationships with lenders that
would furnish data to the entities pursuant to proposed Sec. 1041.16.
It believed that the existence and nature of such relationships could
help maximize the effectiveness of efforts to preserve and produce
high-integrity data.
One industry commenter argued that, generally, consumer reporting
agencies were not well-suited to satisfy the proposed conditions to
become registered information systems because they were not designed
for real-time data capture and reporting, and in the past had not been
required to perform in the manner required by proposed Sec. 1041.17 to
meet requirements under the FCRA. This commenter asserted that consumer
reporting agencies had a poor track record in maintaining the accuracy
of furnished information, among other obligations.
Very few commenters disagreed with the substance of proposed Sec.
1041.17(b)(4). One industry commenter argued the proposal is vague, and
does not provide enough information to adequately determine the
applicability of the referenced Federal consumer financial laws. A
consumer reporting agency suggested that entities should have to
demonstrate their capability to reasonably reinvestigate a consumer
dispute, based on the circumstances. It urged the Bureau to retain
exclusive jurisdiction over the enforcement and oversight of the
registered information systems. It speculated that fear of private
litigation could constrain new registered information systems. It also
raised the possibility that State actions and plaintiff litigation
would risk the development of inconsistent or conflicting law, which
could restrain future rulemaking relating to registered information
systems.
The Bureau received several comments on the requirement in proposed
Sec. 1041.17(b)(6) that an entity would have to develop an information
security program that is compliant with the Safeguards Rule and submit
it to the Bureau. One commenter praised the Bureau for acknowledging
that registered information systems must comply with the Safeguards
Rule. Another stated that registered information systems should be
required to monitor data furnishing and generally take an active role
in working with lenders to reduce compliance burdens and streamline
reporting systems. Yet another commenter said that the required
independent assessment of the information security program exceeded the
scope of the Safeguards Rule, which would increase the costs of
obtaining reports and eventually shut down small businesses and hinder
innovation.
One commenter requested that the Bureau explicitly restrict the
access to information furnished to registered information systems to
authorized users exclusively and on an as-needed basis only.\1086\ A
trade association argued that the proposal did not address mechanisms
to independently verify the data in the registered information systems
and to secure the data's confidentiality. This commenter generally
asked the Bureau for more details about the registered information
systems. A consumer reporting agency asked the Bureau how consumer
disputes were to be accurately communicated to all registered
information systems to ensure that each had identical data.
---------------------------------------------------------------------------
\1086\ It should be noted that the FCRA limits access to
consumer reports to those with a permissible purpose.
---------------------------------------------------------------------------
With respect to the requirements under proposed Sec. 1041.17(b)(5)
and (7), a consumer reporting agency expressed concern that requiring
all registered information systems to conduct independent assessments
would substantially increase the costs of compliance, which would then
pass through to consumers in the form of higher-cost credit. It
suggested that a sufficiently independent internal audit process could
provide the appropriate balance and oversight. Lastly, the Bureau did
not receive any comments about proposed Sec. 1041.17(b)(8).
Final Rule
After carefully considering the comments received, the Bureau is
finalizing Sec. 1041.11(b) of the final rule--including paragraphs
(b)(1) through (8)--in substantially the same form as proposed Sec.
1041.17(b), aside from renumbering the paragraphs and conforming the
internal references from the proposal, and it is also adding to the
commentary relating to Sec. 1041.11(b)(3) as described below.
In general, the Bureau disagrees with the prediction that no entity
would be interested in registering as an information system under the
rule. During its market outreach, several firms have expressed interest
in serving as registered information systems pursuant to the rule.
Several commenters emphasized the importance of moderating any
costs to furnish information pursuant to Sec. 1041.10 of the final
rule. Section 1041.11(b)(1) requires that registered information
systems use reasonable standards with respect to furnishing that, among
other things, do not impose unreasonable costs or burdens on lenders.
The Bureau considered the comments regarding moderating costs
associated with furnishing and the related concern that registered
information systems are able to cover their costs (and earn a return)
in satisfying their obligations pursuant to Sec. 1041.11 of the final
rule. It agrees with commenters who suggest that fees and charges
should permit a registered information system to maintain financially
sound business operations while enabling lender to use these compliance
services at a reasonable business-friendly cost. However, in finalizing
final Sec. 1041.11(b)(1), the Bureau concludes that in connection with
furnishing, lenders must not impose unreasonable costs or burdens on
lenders.
Several commenters suggested that lenders should be able to access
historical data on loans made prior to the effective date of the rule
when contemplating making a covered loan under the rule. As described
elsewhere, the final rule does not require any furnishing until the
compliance date of Sec. 1041.10, which will be 21 months after
publication of the rule in the Federal Register. Because compliance
with Sec. Sec. 1041.5 and 1041.6 will be required at the same time as
Sec. 1041.10, there will be some period of time during which reports
obtained from information systems registered before the compliance date
will have little or no information. The Bureau weighed the risk of
having little or no information in these registered information systems
against the burdens related to requiring lenders to furnish information
about loans made prior to the compliance date of Sec. Sec. 1041.2
through 1041.10, 1041.12, and 1041.13. The Bureau has determined that
such a requirement would impose significant burden on lenders and that
such burden would not be justified by the benefits. For example, under
such a requirement, lenders would have to determine whether loans made
prior to the compliance date would qualify as ``covered short-term
loans'' or ``covered longer-term balloon payment loans'' if they had
been made after that date. Further, lenders would not be able to
furnish some of the required fields, reducing the utility of the data
to further the purposes of the rule. Finally, requiring the furnishing
of historical loan data would require additional time for onboarding
lenders to registered information systems, delaying the implementation
of the rule.
The Bureau also considered whether, in order to increase the amount
of data
[[Page 54795]]
held by registered information systems when lenders begin obtaining
consumer reports as required under the rule, it should stagger the
compliance dates of the furnishing obligation under Sec. 1041.10 and
the obligations to obtain a consumer report from a registered
information system under Sec. Sec. 1041.5 and 1041.6. Staggering
compliance dates may increase to some degree the utility of the
consumer reports that lenders would be required to obtain at first, but
may add complexity to implementation of the rule and would involve
other tradeoffs, as discussed in the proposal. The Bureau has
determined that not staggering the compliance dates of Sec. Sec.
1041.10, 1041.5 and 1041.6, and requiring furnishing on a going forward
basis, is the better approach.
The Bureau agrees with commenters who suggest that requiring
provisionally registered and registered information systems to agree to
use a common data standard would have the potential to keep costs
incurred by lenders in connection with furnishing down. However, it
declines to require that provisionally registered and registered
information systems agree to use a common data standard. The Bureau is
not convinced that requiring such agreement as a condition of
eligibility for registration is necessary. The Bureau has concluded
that it will be in the interest of the registered information systems
to use a common data standard.
The Bureau also declines to require that provisionally registered
and registered information systems use a particular data standard, such
as Metro 2, for purposes of receiving furnished information from
lenders. As explained elsewhere, the Bureau believes that the
development of common data standards across provisionally registered
and registered information systems would benefit lenders and the
information systems and intends to foster the development of such
common data standards where possible. However, the Bureau believes that
development of these standards by market participants would likely be
more efficient and offer greater flexibility and room for innovation
than if the Bureau prescribed particular standards in this rule. With
respect to Metro 2 in particular, the Bureau notes that it believes the
standard would need to be modified in order to allow furnishing as
required under this rule. Though Metro 2 may be useful as a starting
point for development of a common data standard, especially to the
extent that the entities that become provisionally registered or
registered information systems already use Metro 2 to receive data, the
Bureau declines to condition an entity's eligibility to become a
registered information system on its use of Metro 2.
With respect to the requirement that registered information systems
generate a consumer report substantially simultaneous to receiving the
information from a lender, the Bureau is finalizing proposed Sec.
1041.17(b)(2) as Sec. 1041.11(b)(2). Comment 11(b)(2)-1 clarifies that
technological limitations may cause some slight delay in the appearance
of a consumer report of information furnished pursuant to Sec.
1041.10, but that any delay must be reasonable. The Bureau concludes
that this expectation is reasonable.
Under final Sec. 1041.11(b)(3), as proposed, an entity seeking to
become a provisionally registered or registered information system must
be able to perform in a manner that facilitates compliance with and
furthers the purposes of this part. The Bureau disagrees with the
comment recommending that it seek to override other existing Federal
consumer financial laws that would, example, permit States to bring
enforcement actions pursuant to the Dodd-Frank Act, or private
individuals to bring an action pursuant to a private cause of action
created by the FCRA. The Bureau maintains the position that the
consumer protections conferred by part 1041 will best be furthered if
the final rule does not supersede the obligations imposed by other
Federal laws or regulations. Accordingly, it is finalizing comment
11(b)(3)-1, as proposed, which clarifies that the requirement that to
be eligible for provisional registration or registration as an
information system, an entity must perform in a manner that facilitates
compliance with the purposes of the final rule, does not supersede
consumer protection obligations imposed on the entity by other Federal
law or regulation.
Several commenters expressed concern that the Bureau would consider
registering entities with no demonstrated experience with compliance
management systems, FCRA compliance, or with the types of lenders that
will be furnishing data under the rule. In response, the Bureau has
added comment 11(b)(3)-2 to clarify that in evaluating whether an
applicant is reasonably likely to satisfy or does satisfy the
requirement set forth in Sec. 1041.11(b)(3) of the final rule, the
Bureau will consider any experience the applicant has in functioning as
a consumer reporting agency.
In addition, the Bureau declines to prescribe in this rule a
provisionally registered or registered information system's
responsibility to perform quality assurance assessments on furnished
information received pursuant to Sec. 1041.10 of the final rule. As
described in the proposal, the Bureau's general approach is to seek to
preserve more latitude for market participants that are interested in
becoming registered information systems, with the understanding that
other regulations and laws already apply or will apply to them, such as
the FCRA and the Safeguards Rule, providing additional consumer
protections. The final rule confers on provisionally registered and
registered information systems the discretion to develop and refine
their policies and procedures to satisfy the requirements of Sec. Sec.
1041.10 and 1041.11. The Bureau has concluded that it is more efficient
and effective to allow a market entity to determine its individual
approach to complying with Sec. 1041.11(b)(1), (4) and (6) and other
regulatory requirements, including potentially designing a quality
assessment process in a manner that accounts for features that may be
unique to that entity, such as its technology, infrastructure, or
business model. As noted in comment 11(b)(3)-1, the FCRA would obligate
any registered information system preparing a consumer report to
``follow reasonable procedures to assure maximum possible accuracy of
the information concerning the individual about whom the report
relates.'' \1087\
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\1087\ 15 U.S.C. 1681e(b).
---------------------------------------------------------------------------
The central point in Sec. 1041.11(b)(4) of the final rule is to
ensure that provisionally registered and registered information systems
have appropriate Federal consumer financial law compliance programs in
place, including written policies and procedures, comprehensive
training, and monitoring to detect and to promptly correct compliance
weaknesses. As described in the proposal and in the discussion below,
the commentary to this section provides examples of the policies and
procedures, training, and monitoring that are required here. The
proposal explained that these examples were modeled after the
Compliance Management Review examination procedures contained in the
Bureau's Supervision and Examination Manual. Moreover, the final rule
refers to the Dodd-Frank Act's definition of Federal consumer financial
law which includes several laws that the Bureau sees as applicable to
registered information systems, including the FCRA, as discussed in
greater detail in the proposal.
[[Page 54796]]
The required Federal consumer financial law compliance program in
Sec. 1041.11(b)(4) of the final rule is reinforced by the provision
requiring an independent assessment of that compliance program in Sec.
1041.11(b)(5) of the final rule. To summarize, as noted in the
proposal, an entity's application for registration pursuant to Sec.
1041.11(c)(2) or provisional registration pursuant to Sec.
1041.11(d)(1) is required to contain this written assessment, which
includes a detailed summary of the entity's compliance program, an
explanation of how the program is appropriate to the entity's size and
activities, certification by an assessor that the program is effective
in assuring that the entity is fulfilling its legal duties, and
certification of the assessor's qualifications, objectivity, and
independence. The Bureau received comments suggesting that Sec.
1041.11(b)(5) would add costs to the preparation of an application to
be a registered information system, which the Bureau agrees is likely.
However, with respect to entities seeking to become registered
information systems before August 19, 2019, the Bureau has purposefully
staggered the requirement for submitting such an assessment to the
Bureau until after the entity receives preliminary approval to become a
registered information system. The applicants will incur such costs
only after they receive preliminary approval. The costs of having an
actual compliance management program are ones that responsible
companies already budget for and are not imposed by this requirement.
It should also be noted that effective programs often tend to reduce
costs by minimizing legal, regulatory, and reputational risk for the
entity. The Bureau is including the requirement in Sec. 1041.11(b)(5)
so that the Bureau can be reasonably assured that the entity has
developed, implemented, and maintains a program reasonably designed to
ensure compliance with all applicable Federal consumer financial laws
until such time as the Bureau itself can evaluate the entity's
compliance program under its supervisory authority. Thus, the Bureau is
finalizing Sec. 1041.11(b)(4) and (5) as proposed and renumbered. The
Bureau is also finalizing the related commentary related to those
provisions, as proposed.
The Bureau also adopts Sec. 1041.11(b)(6) as proposed and
renumbered. The Bureau acknowledges that, as one commenter stated, the
rule does not prescribe how provisionally registered and registered
information systems comply with the Safeguards Rule. As mentioned
above, the Bureau declines to provide in this rulemaking guidance
concerning how provisionally registered and registered information
systems comply with other applicable laws. The Bureau concludes that it
is beyond the scope of this rulemaking to do so.
And for essentially the same reasons that were discussed above with
respect to Sec. 1041.11(b)(4) and (5), the Bureau adopts Sec.
1041.11(b)(7) as proposed. The information security program required
under Sec. 1041.11(b)(6) is reinforced by the provision requiring an
independent assessment of the program in Sec. 1041.11(b)(7) of the
final rule. Here too, commenters stated that the independent assessment
requirement would add cost to the preparation of an application to be a
registered information system, which the Bureau agrees is likely.
However, with respect to entities seeking to become registered
information systems before August 19, 2019, the Bureau has purposefully
staggered the requirement for submitting such an assessment to the
Bureau until after the entity receives preliminary approval to become a
registered information system. The Bureau is finalizing Sec.
1041.11(b)(7) and its related commentary, as proposed and renumbered.
Several commenters sought to condition the Bureau's approval of an
entity as a provisionally registered or registered information system
upon it meeting certain additional criteria, including, among other
things, financial stability criteria, background checks, net worth
thresholds, criminal background checks, and performance bonds. The
Bureau declines to add additional eligibility requirements. The Bureau
takes the view that its expertise and experience with this market,
together with its consumer protection obligations under the Dodd-Frank
Act, this final rule, and other applicable Federal consumer financial
laws and regulations, provide sufficient sources to guide it in
evaluating an applicant's eligibility to become a registered
information system. It should be noted that several of the additional
criteria suggested by commenters are already addressed by the
eligibility requirements in final Sec. 1041.11(b). For example, one
commenter suggested that the Bureau condition eligibility on a company
having an established compliance management system designed to ensure
adherence with Federal consumer financial laws. Final Sec.
1041.11(b)(4) requires that registered information systems have
developed, implemented, and maintain a program reasonably designed to
ensure compliance with all applicable Federal consumer financial law.
Such a program is a key component of an adequate compliance management
system; other components of such a system include Board and management
oversight, consumer complaint response monitoring, compliance audit,
and service provider oversight. The Bureau expects that all supervised
entities (which under Sec. 1041.11(b)(8) will include all
provisionally registered and registered information systems) will have
adequate compliance management systems.
Proposed Sec. 1041.16(b)(8) would have required that an entity
seeking to become a provisionally registered or registered information
system must acknowledge it is or consents to be subject to the Bureau's
supervisory authority. This provision received no comments and thus the
Bureau is finalizing Sec. 1041.11(b)(8) as proposed and renumbered.
11(c) Registration of Information Systems Prior to August 19, 2019
Proposed Rule
Proposed Sec. 1041.17(c) described the process that the Bureau
proposed for the registration of information systems before the
effective date of proposed Sec. 1041.16. Once proposed Sec. 1041.16
was in effect, lenders would have to furnish information to an
information system that was registered pursuant to proposed Sec.
1041.17(c)(2) for 120 days or more. The Bureau proposed a two-stage
process to become registered prior to the effective date of proposed
Sec. 1041.16. First, interested entities would submit to the Bureau an
initial application for preliminary approval for registration. Second,
the entities would submit a full application for registration after
receiving preliminary approval and obtaining certain written
assessments from third parties concerning their compliance programs.
11(c)(1) Preliminary Approval
Proposed Sec. 1041.17(c)(1) provided that, prior to the effective
date of proposed Sec. 1041.16, the Bureau could preliminarily approve
an entity for registration only if the entity submitted an application
for preliminary approval to the Bureau by the deadline set forth in
proposed Sec. 1041.17(c)(3)(i). The application had to contain
information sufficient for the Bureau to determine that the entity was
reasonably likely to satisfy the conditions set forth in proposed Sec.
1041.17(b) by the deadline set in proposed Sec. 1041.17(c)(3)(ii). The
proposed rule and comments outlined further details about the process,
including that the entity's application
[[Page 54797]]
would need to describe the steps the entity plans to take to satisfy
the conditions and the entity's timeline for such steps and that the
entity's plan would need to be reasonable.
11(c)(2) Registration
Proposed Sec. 1041.17(c)(2) allowed the Bureau to approve the
application of an entity seeking to become a registered information
system prior to the effective date of proposed Sec. 1041.16 only if
the entity had received preliminary approval pursuant to proposed Sec.
1041.17(c)(1), and applied to be a registered information system by the
deadline proposed in Sec. 1041.17(c)(3)(ii) by submitting information
sufficient for the Bureau to determine that the conditions set forth in
proposed Sec. 1041.17(b) were satisfied. Proposed Sec. 1041.17(c)(2)
further provided that the Bureau could require additional information
and documentation to facilitate this determination or otherwise to
assess whether registration of the entity would pose an unreasonable
risk to consumers. Its related commentary clarifies that the entity
seeking to become a registered information system would have to submit
the application by the deadlines, and that the application would need
to contain information and documentation adequate for the Bureau to
determine the required conditions are satisfied, and succinctly and
accurately convey the required information, including the required
written assessments.
11(c)(3) Deadlines
Proposed Sec. 1041.17(c)(3)(i) and (ii) provided that the deadline
to submit an application for preliminary approval for registration
pursuant to proposed Sec. 1041.17(c)(1) would be 30 days from the
effective date of proposed Sec. 1041.17, and the deadline to submit a
registration application pursuant to proposed Sec. 1041.17(c)(2) would
be 90 days from the date that preliminary approval for registration is
granted. Proposed Sec. 1041.17(c)(3)(iii) would permit the Bureau to
waive these deadlines.
Comments Received
Few commenters objected to the time frames that were proposed in
Sec. 1041.17(c). One commenter interested in registering as an
information system under proposed Sec. 1041.17 stated that its
existing infrastructure could allow it to implement the requirements
within four months to a year. The commenter stated that the factors
that could delay implementation toward the longer side of that range
were the historical data component, the complexity of products, the
number of products, and interfaces and rules as yet unknown. One
consumer reporting agency stated that if the Bureau did not announce
the eligibility criteria for registration until it published the final
rule, the proposed 30-day period after Sec. 1041.17's effective date
to apply for preliminary approval would be insufficient to allow
applicants to conduct a business analysis and the technical planning
necessary to prepare their applications for preliminary approval. This
commenter urged the Bureau to signal its views on configuration issues
far ahead of the formal application period for registration.
Alternatively, it proposed that the Bureau extend the period to prepare
an application for preliminary approval to at least six months. Another
industry commenter argued that the deadlines under proposed Sec.
1041.17(c)(3) did not allow adequate time for a preliminary approval
application, technical development, operational development,
incorporation of common data standards, and completion of written
assessments. That commenter asked the Bureau to reconsider the timeline
required to meet eligibility criteria and foster common data standards,
and for prospective applicants to integrate these standards with their
service offerings. It urged the Bureau to initiate the common data
standards process prior to publication of the rule, if possible, to
facilitate completion of the registered information system's
environment prior to the effective date of the final rule.
Final Rule
The Bureau is finalizing proposed Sec. 1041.17(c) as Sec.
1041.11(c) of the final rule in accordance with the renumbering of
sections within the rule described earlier. As described above, the
Bureau is doing so with one minor modification to the proposed rule,
along with substantive changes to the proposed deadlines and technical
revisions. The Bureau is finalizing Sec. 1041.11(c)(1) as proposed,
except that the provision now permits the Bureau to require additional
information and documentation to facilitate its determination of
whether to grant an applicant preliminary approval. The Bureau has
determined that this modification will facilitate its engagement with
entities seeking registration before August 19, 2019 at an earlier
stage in the registration process, while granting entities additional
opportunities to supplement their applications and ensuring the Bureau
has received all the information necessary to make a well-informed
determination.
The Bureau is also finalizing proposed Sec. 1041.17(c)(2) as Sec.
1041.11(c)(2). As described above, the section allows the Bureau to
approve the application of an entity seeking to become a registered
information system prior to August 19, 2019 only if the entity received
preliminary approval pursuant to Sec. 1041.11(c)(1), and applied to be
a registered information system by the deadline in Sec.
1041.11(c)(3)(ii) by submitting information sufficient for the Bureau
to determine that the conditions set forth in Sec. 1041.11(b) are
satisfied. Section 1041.11(c)(2) further provides that the Bureau can
require additional information and documentation to facilitate this
determination or otherwise to assess whether registration of the entity
would pose an unreasonable risk to consumers. In addition, the Bureau
is finalizing the commentary related to Sec. 1041.11(c)(1) and (2).
In response to concerns that commenters raised about the proposed
deadlines, the Bureau is finalizing Sec. 1041.11(c)(3)(i) as proposed,
except that it is extending the deadline to submit an application for
preliminary approval by 60 days--which now establishes a deadline of
April 16, 2018. The Bureau is adopting Sec. 1041.11(c)(3)(ii) as
proposed, except that it is extending the deadline to submit an
application for registration by 30 days--which now establishes a
deadline of 120 days from the date that preliminary approval for
registration is granted. The Bureau has concluded that the revised
deadlines will provide interested entities with adequate time to
prepare their applications, and will provide the Bureau with adequate
time to review applications, while still allowing entities to register
sufficiently in advance of the compliance date of Sec. 1041.10 so that
furnishing may begin upon that date. The proposed deadlines complement
the final rule, which extends the implementation period for Sec. Sec.
1041.2 through 1041.10, 1041.12, and 1041.13 by six more months--moving
it from 15 months to 21 months, as described above--and which provides
for a 180-day period (rather than the 120-day period that was proposed)
before lenders are obligated to begin furnishing to an information
system registered prior to August 19, 2019.
The Bureau is not requiring that registered information systems use
a common data standard for receiving information from lenders. The
Bureau will welcome suggestions regarding how it can foster the
development of such standards with applications for preliminary
approval as registered information systems.
[[Page 54798]]
11(d) Registration of Information Systems On or After August 19, 2019
Proposed Rule
Proposed Sec. 1041.17(d) set forth the process that the Bureau
proposed to be used for the registration of information systems on or
after the effective date of proposed Sec. 1041.16. The process
involved two steps: First, an entity had to apply to become a
provisionally registered information system; second, after it had been
provisionally registered for a period of time, the entity automatically
would become a fully registered information system. Under the proposal,
lenders had to furnish information to a system that had been
provisionally registered pursuant to proposed Sec. 1041.17(d)(1) for
120 days or more, or that subsequently had become registered pursuant
to proposed Sec. 1041.17(d)(2). However, lenders could not rely on
consumer reports from a provisionally registered system to satisfy
their obligations under proposed Sec. Sec. 1041.5 and 1041.7 until the
system was fully registered pursuant to proposed Sec. 1041.17(d)(2).
The proposed period between provisional registration and full
registration would be 180 days, to provide 120 days for onboarding and
60 days of furnishing before lenders could rely on consumer reports
from the registered information system for purposes of the rule.
11(d)(1) Provisional Registration
Proposed Sec. 1041.17(d)(1) would have provided that, on or after
the effective date of proposed Sec. 1041.16, the Bureau could only
approve an entity's application to be a provisionally registered
information system if the entity's application contained information
sufficient for the Bureau to determine that the entity satisfied the
conditions set forth in proposed Sec. 1041.17(b). Proposed Sec.
1041.17(d)(1) added that the Bureau could require more information and
documentation to facilitate this determination or otherwise assess
whether provisional registration of the entity would pose an
unreasonable risk to consumers.
11(d)(2) Registration
Proposed Sec. 1041.17(d)(2) stated that an information system
which is provisionally registered pursuant to proposed Sec.
1041.17(d)(1) would automatically become a registered information
system pursuant to proposed Sec. 1041.17(d)(2) upon the expiration of
the 180-day period commencing on the date the information system was
provisionally registered. Once a system was registered pursuant to
proposed Sec. 1041.17(d)(2), lenders were permitted to rely on a
consumer report generated by the system to satisfy their obligations
under proposed Sec. Sec. 1041.5 and 1041.7. Proposed Sec.
1041.17(d)(2) would provide that, for purposes of proposed Sec.
1041.17(d), an information system was provisionally registered on the
date that the Bureau published notice of such provisional registration
on the Bureau's Web site.
Final Rule
The Bureau did not receive comments on proposed Sec. 1041.17(d).
In the proposal, the Bureau explained that it anticipated that, in
order to permit lenders time to adjust to furnishing to information
systems that are registered before the effective date of the furnishing
obligation, proposed Sec. 1041.16, it would not provisionally register
any information systems during the first year that proposed Sec.
1041.16 would be in effect. One consumer reporting agency expressed
support for this proposed pause, which it believed would provide
entities registered as information systems before the effective date
with time to collaborate on data exchange standards. The Bureau now
confirms that it plans to not provisionally register any information
systems during the first year compliance with Sec. Sec. 1041.2 through
1041.10, 1041.12, and 1041.13 is required. The Bureau concludes that
such a pause in registrations of information systems will allow lenders
time to adjust to the furnishing to registered information systems that
are registered pursuant to Sec. 1041.11(c)(2). The Bureau adopts Sec.
1041.17(d) as proposed, which is now renumbered as Sec. 1041.11(d) of
the final rule, with one modification. Under final Sec. 1041.11(d)(2),
as explained above, a provisionally registered information system under
Sec. 1041.11(d)(1) automatically becomes a fully registered
information system upon the expiration of 240 days, not 180 days as
proposed. This change is to preserve the 60-day ``furnishing-only''
stage proposed for entities provisionally registered on or after August
19, 2019. Under the final rule, once an information system is
provisionally registered for 180 days, lenders must furnish to the
system under Sec. 1041.10. Lenders cannot rely on reports from the
system to satisfy its obligations under Sec. Sec. 1041.5 and 1041.6
until the system becomes a fully registered information system, which
will happen automatically 240 days after the system was provisionally
registered. Thus, these registered information systems will receive
furnished information for 60 days before lenders can rely on their
reports to satisfy their obligations under the rule. This will ensure
that at the point at which an information system becomes registered on
or after August 19, 2019 and lenders can rely on its reports, such
reports would include reasonably comprehensive information about
consumers' recent borrowing histories.
The Bureau adopts comment 11(d)(1)-1 as proposed, as well, which
clarifies that the entity seeking to become a provisionally registered
information system must submit an application to the Bureau containing
information and documentation adequate for the Bureau to assess that
Sec. 1041.11(b) are satisfied.
11(e) Applications
In Sec. 1041.11 of the final rule, the Bureau has added a new
provision, Sec. 1041.11(e), for the purpose of ensuring more
specifically that it receives from applicants the information necessary
to evaluate applications pursuant to Sec. 1041.11(c) and (d) of the
final rule. The provision requires entities to submit their
applications for preliminary registration, registration, and
provisional registration in the form required by the Bureau.
Applications must include the name of the entity, its business and
mailing address as applicable, and the name and contact information of
the person who is authorized to communicate with the Bureau on the
applicant's behalf concerning the application. The Bureau expects that
applicants will be able to provide this information in their
application to the Bureau without incurring unreasonable costs or
burdens.
11(f) Denial of Application
Proposed Rule
Proposed Sec. 1041.17(e) would have provided that the Bureau deny
the application of an entity seeking preliminary approval for
registration pursuant to proposed Sec. 1041.17(c)(1), registration
pursuant to proposed Sec. 1041.17(c)(2), or provisional registration
pursuant to proposed Sec. 1041.17(d)(1) if the Bureau made any of
three determinations. First, if the Bureau determines that the entity
did not satisfy the conditions set forth in proposed Sec. 1041.17(b),
or, in the case of an entity seeking preliminary approval for
registration, was not reasonably likely to satisfy the conditions as of
the deadline set forth in proposed Sec. 1041.17(c)(3)(ii). Second, if
the Bureau determines that the entity's application was untimely or
materially inaccurate or incomplete. Third, if the Bureau determines
that preliminary approval, provisional registration, or registration
[[Page 54799]]
would pose an unreasonable risk to consumers.
Final Rule
The Bureau did not receive comments on proposed Sec. 1041.17(e).
Therefore, the Bureau adopts Sec. 1041.17(e) as proposed except that,
as described above, the Bureau has renumbered this provision as Sec.
1041.11(f) of the final rule.
11(g) Notice of Material Change
Proposed Rule
Proposed Sec. 1041.17(f) would have required a provisionally
registered or registered information system to provide to the Bureau a
written description of any material change to information contained in
its application for registration submitted pursuant to proposed Sec.
1041.17(c)(2) or provisional registration submitted pursuant to
proposed Sec. 1041.17(d)(1), or to information previously provided to
the Bureau pursuant to proposed Sec. 1041.17(f), within 14 days of any
such change.
Final Rule
The Bureau did not receive comments on proposed Sec. 1041.17(f).
Therefore, the Bureau adopts Sec. 1041.17(f) as proposed except that,
as described above, the Bureau has renumbered this provision as Sec.
1041.11(g) of the final rule.
11(h) Revocation
Proposed Rule
Proposed Sec. 1041.17(g)(1) would have provided that the Bureau
would suspend or revoke an entity's preliminary approval for
registration, provisional registration, or registration, if it
determined either that the entity had not satisfied or no longer
satisfied the conditions described in proposed Sec. 1041.17(b); or
that it had not complied with the requirement described in proposed
Sec. 1041.17(f); or that preliminary approval for registration,
provisional registration, or registration of the entity posed an
unreasonable risk to consumers.
Proposed Sec. 1041.17(g)(2) would allow the Bureau to require
additional information and documentation from an entity if it had
reason to believe suspension or revocation under proposed Sec.
1041.17(g)(1) may be warranted. Proposed Sec. 1041.17(g)(3) stated
that, except in cases of willfulness or those in which the public
interest required otherwise, prior to suspension or revocation under
proposed Sec. 1041.17(g)(1), the Bureau would issue written notice of
the facts or conduct that could warrant the suspension or revocation
and grant an opportunity for the entity to demonstrate or achieve
compliance with proposed Sec. 1041.17 or otherwise address the
Bureau's concerns. Proposed Sec. 1041.17(g)(4) would allow the Bureau
to revoke an entity's preliminary approval for registration,
registration, or provisional registration if the entity submitted a
written request to the Bureau that its preliminary approval for
registration, registration, or provisional registration be revoked.
Proposed Sec. 1041.17(g)(5) provided that for the purposes of
Sec. Sec. 1041.5 and 1041.7--which would require a lender making most
covered loans to obtain and consider a consumer report from a
registered information system--suspension or revocation of an
information system's registration would become effective five days
after the date that the Bureau published notice of the suspension or
revocation on its Web site. It also provided that, for purposes of
proposed Sec. 1041.16(b)(1), suspension or revocation of an
information system's provisional registration or registration would be
effective on the date that the Bureau published notice of the
revocation on its Web site. Finally, proposed Sec. 1041.17(g)(5)
provided that the Bureau would also publish notice of a suspension or
revocation in the Federal Register.
Final Rule
The Bureau did not receive comments on proposed Sec. 1041.17(g).
However, the Bureau is finalizing it as Sec. 1041.11(h) with one
change. The Bureau has added Sec. 1041.11(h)(6) to clarify that, if it
suspends the provisional registration or registration of an information
system, it will provide instructions to lenders concerning the scope
and terms of such suspension. For example, depending on the facts and
circumstances of a particular determination that suspension is
appropriate, the Bureau may suspend registration of a provisionally
registered information system or registered information system for
purposes of Sec. Sec. 1041.5 and 1041.6 only; lenders may still be
required to furnish to the provisionally registered information system
or registered information system pursuant to Sec. 1041.10. The Bureau
may also determine that suspension is only appropriate for a certain
period of time.
11(i) Administrative Appeals
The Bureau added Sec. 1041.11(i), which provides a process for
entities to submit to the Bureau an administrative appeal in certain
circumstances. According to Sec. 1041.11(i) of the final rule, an
entity may appeal: A denial of its application for preliminary approval
for registration pursuant to Sec. 1041.11(c)(1), registration under
Sec. 1041.11(c)(2) or (d)(2), or provisional registration under Sec.
1041.11(d)(1); and a suspension or revocation of its preliminary
approval for registration pursuant to Sec. 1041.11(c)(1), registration
under Sec. 1041.11(c)(2) or (d)(2), or provisional registration under
Sec. 1041.11(d)(1).
The subparagraphs of Sec. 1041.11(i) of the final rule address
other matters pertinent to administrative appeals. Section
1041.11(i)(1) sets out the grounds for administrative appeal while
under Sec. 1041.11(i)(2), an entity has 30 business days to submit an
appeal from the date of the determination, although the Bureau may
extend this time for good cause. Section 1041.11(i)(3) sets forth the
form and content of the administrative appeal, which shall be submitted
by electronic means as set forth on the Bureau's Web site. Section
Sec. 1041.11(i)(4) establishes the appeals process and that the filing
and pendency of an appeal does not by itself suspend the determination
that is the subject of the appeal during the appeals process, but
grants the Bureau discretion to suspend the determination that is the
subject of the appeal during the appeals process. Lastly, Sec.
1041.11(i)(5) specifies that the Bureau has the power to decide whether
to affirm or reverse the determination in whole or in part, and
requires the Bureau to notify the appellant of this decision in
writing.
The Bureau concluded that modifying the proposal to add Sec.
1041.11(i) is consistent with the tenets of due process and
administrative law and affords entities under its supervisory
authority, including registered information systems, more clarity and
transparency about their rights in the event that they receive an
adverse determination from the Bureau pursuant to any of the provisions
of Sec. 1041.11.
Section 1041.12 Compliance Program and Record Retention
Overview of the Proposal
The Bureau proposed Sec. 1041.18 to require a lender that makes a
covered loan to develop and follow written policies and procedures that
are reasonably designed to ensure compliance with part 1041 and that
are appropriate to the size and complexity of the lender and its
affiliates and the nature and scope of their covered loan activities.
The Bureau also proposed to require a lender to retain evidence of
compliance with the requirements in part 1041 for 36 months after the
date a covered loan ceases to be an outstanding loan. Specifically, the
[[Page 54800]]
Bureau proposed to require a lender to retain several types of
documentation and loan-level records. It proposed both requirements
pursuant to its authority to prevent unfair or abusive acts or
practices under section 1031 of the Dodd-Frank Act and for the reasons
discussed below.
The Bureau stated that the proposed requirement to develop and
follow written policies and procedures would help foster compliance
with proposed part 1041,\1088\ which would have prescribed detailed
ability-to-repay and payment collection requirements that were
generally more comprehensive than the requirements in States that
permit lenders to make covered loans.\1089\ To make covered loans that
comply with part 1041 when they are originated and when they are
outstanding, proposed Sec. 1041.18 would have required lenders to
develop written policies and procedures to reasonably ensure that their
staff understands the proposed requirements and conducts covered loan
activities in accordance with the proposed requirements. In
facilitating lender compliance with these requirements, the proposed
compliance program requirements would have helped to prevent the
identified unfair and abusive practices addressed in part 1041.
---------------------------------------------------------------------------
\1088\ A written policies and procedures requirement is a
requirement in other Bureau rules. See, e.g., Regulation E, 12 CFR
1005.33(g)(1).
\1089\ See discussion of the current regulatory environment by
product type in part II above.
---------------------------------------------------------------------------
As discussed above in part III, the Bureau has extensive experience
to date in using its supervisory authority to examine the operations of
certain payday lenders and its enforcement authority to investigate the
acts or practices of payday lenders. Based on that experience, as well
as through its general market outreach, the Bureau believed that it may
be useful to provide greater specificity as to the record retention
requirement than is typical in many other Federal consumer financial
regulations, which are usually phrased in more general terms.\1090\ In
the Bureau's experience, current record retention practices vary widely
across the industry, depending on lender business practices, technology
systems, State regulatory requirements, and other factors, but often
have proved to be problematic.\1091\ Particularly given that ability-
to-repay determinations would likely involve different levels of
automation and analysis from lender to lender, the Bureau believed that
providing an itemized framework listing the nature and format of
records that must be retained would help reduce regulatory uncertainty
and facilitate supervision by the Bureau and other regulators. The
Bureau also noted that the level of detail in the proposed record
retention requirements was similar to the level of detail in the
recordkeeping obligations in the small-dollar lending statutes and
regulations of some States.\1092\
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\1090\ The Bureau believed that record retention was necessary
to prove compliance with a rule and was a common requirement across
many of the Bureau's rules. See, e.g., Regulation B, 12 CFR 1002.12;
Regulation Z, 12 CFR 1026.25. In this context, the Bureau noted that
it had found it necessary to levy a civil penalty of $5 million
against a large payday lending company for engaging in the
destruction of records around one of the Bureau's initial
supervisory examinations in this market, which had included
continuing to shred documents for weeks, even after Bureau examiners
told employees to halt such activities. See Consent Order, In re
Cash America Int'l, Inc., No. 2013-CFPB-0008 (Nov. 20, 2013).
\1091\ Bureau of Consumer Fin. Prot., ``Supervisory
Highlights,'' at 16 (Spring 2014), available at http://files.consumerfinance.gov/201405_cfpb_supervisory-highlights-spring-2014.pdf (``At multiple lenders, policies and procedures for record
retention either did not exist or were not followed, leading to
incomplete record destruction logs and improperly destroyed
records.'').
\1092\ See, e.g., Colo. Code Regs. sec. 902-1-10; Wash. Admin.
Code sec. 208-630-610.
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Given that part 1041 would have imposed requirements tied to, among
other things, checking the records of the lenders and its affiliates
regarding a consumer's borrowing history and verifying a consumer's
income and major financial obligations, the Bureau believed that the
record retention requirements proposed in Sec. 1041.18(b) would assist
a lender in complying with the requirements in part 1041. By providing
a non-exhaustive list of records that would need to be retained in
proposed Sec. 1041.18(b)(1) through (5), proposed Sec. 1041.18(b)
would help covered persons determine whether a contemplated covered
loan would comply with the requirements in part 1041 and aid covered
persons in complying with the record retention requirements.
Furthermore, the proposed record retention requirements would support
the external supervision of lenders for compliance with part 1041. In
facilitating lender compliance and helping the Bureau and other
regulators assess compliance with the requirements in part 1041, the
proposed record retention requirements would help prevent and deter the
identified unfair and abusive practices addressed in part 1041.
Comments Received
A number of industry commenters disagreed with the Bureau's general
approach in the proposal, describing the recordkeeping provisions as
overly stringent, unnecessarily prescriptive, and disproportionate to
any benefit for consumers. They also suggested that the Bureau should
pursue less burdensome alternatives than requiring borrower information
to be maintained electronically.
By contrast, consumer groups recommended expanded record retention
provisions, partly to ensure that lenders report to the Bureau
sufficient information about loans and borrowers. They suggested twenty
additional, non-exhaustive data points for the Bureau to analyze under
an expanded requirement to retain more records. They also suggested
that lenders should report aggregate data to the Bureau at least
annually, that the Bureau should create a searchable public database of
such information, and that the Bureau should publish an annual report--
based on both retained and aggregate data--to demonstrate whether the
rule is proving to be effective in achieving its purposes. Another
commenter requested that the Bureau create a review process of lender
practices for lender portfolios of covered loans that perform unusually
poorly over time. This commenter also supported making more of the
retained information available to the public for scrutiny.
Several commenters urged that classes of lenders, such as State-
regulated entities, should be exempted from compliance with the
proposed rule, including its compliance program and record retention
requirements. Trade associations, including those for credit unions,
advocated for more sweeping exemptions of entire categories of lenders
from coverage under the rule. A group of chief legal officers from
certain States also supported exempting those lenders that are already
covered by such State and local regulatory systems from coverage under
the proposal, citing Alabama and Idaho as particular examples of State
regulatory systems that they viewed as operating effectively.
Some industry commenters were critical of the Bureau for not
exempting small businesses and other small entities from coverage under
the proposed rule's compliance program and record retention
requirements. One commenter acknowledged, but disagreed with, the
Bureau's stated rationale that small lenders are not engaged in
meaningfully different practices from other lenders that offer the same
types of loans. Others noted that the costs and burdens of meeting any
new and additional requirements tended to fall disproportionately
heavily on small entities.
[[Page 54801]]
Commenters with experience in documenting loans in accordance with
existing laws asserted that the recordkeeping requirements were not
specific enough for lenders to determine accurately the associated
costs, and advanced that to make such determinations, more information
was needed about format, content, retention, among other factors. A few
commenters noted that some of the recordkeeping requirements contained
in the proposal could be satisfied if regulators could access the
consistent, real-time information that lenders would furnish to
registered information systems, which then could reduce costs and
burdens to both lenders and regulators while being more conducive to
review and analysis. They also noted that the proposal would cause the
regulatory authorities themselves to incur substantial costs to
compile, review, and analyze the records they receive from lenders,
especially if they are maintained in different formats or contain
different content.
Several industry commenters noted that the practical effect of
conditional exemptions from certain provisions of the rule was likely
to be limited if compliance and records retention requirements still
had to be met, as they believed would be the case. Some industry
commenters cautioned that the record retention requirements could
expose consumers and lenders to significant operational risks to the
security of their data.
Final Rule
In Sec. 1041.12 of the final rule, renumbered from proposed Sec.
1041.18, the Bureau has decided to maintain the same general approach
to the compliance and record retention requirements as was framed in
the proposal. In particular, the final rule requires lenders that make
covered loans to develop and follow written policies and procedures
that are reasonably designed to ensure compliance with the rule's
requirements. Such policies and procedures must be appropriate to the
size and complexity of the lender and its affiliates and the nature and
scope of its covered loan activities. The final rule requires lenders
to retain evidence of compliance and includes a non-exhaustive list of
the types of loan-level records and documentation that lenders are
required to retain. However, because the scope of coverage has changed
from the proposed rule to the final rule to omit the underwriting
requirements for covered longer-term loans other than covered longer-
term balloon-payment loans, the compliance program and record retention
requirements of the final rule are narrower as well. In addition, the
final rule exempts from the compliance program and record retention
requirements alternative loans pursuant to Sec. 1041.3(e), and
accommodation loans pursuant to Sec. 1041.3(f), regardless of the type
of lender. The Bureau notes, however, that lenders making alternative
loans must maintain and comply with policies and procedures documenting
proof of recurring income, as specified as a condition of the exemption
in the final rule. The commentary to the final rule contains changes
that conform to the modifications made in the final rule.
Several commenters raised issues about the potential burden on
lenders and the level of detail required by the proposal, yet the
Bureau has determined that the record retention and compliance program
requirements will foster compliance with the final rule and as such
will benefit consumers. Although the record retention requirements are
the same regardless of the size of the lender's operation, the
compliance program requirements are calibrated to the size and
complexity of the lender and its affiliates, and the nature and scope
of the covered lending activities of the lender and its affiliates.
Lenders' written policies and procedures must be reasonably designed to
ensure compliance with the final rule but the Bureau's regulatory
expectation is for lenders to develop compliance programs that are
commensurate with their size and complexity and the scope of their
offered products. Accordingly, although the compliance program and
record retention requirements may increase lenders' regulatory
responsibilities, the Bureau concludes that the requirements of the
final rule will not be overly burdensome for such lenders. In the final
rule, the Bureau has opted to continue to include detailed record
retention requirements in order to reduce regulatory uncertainty and
facilitate supervision by the Bureau and other regulators. It concludes
that this level of detail is necessary because part 1041 is
establishing a new regulatory regime, which includes flexible
underwriting requirements and limitations on payment attempts. It is
important that lenders are aware of what records they need to maintain
to demonstrate compliance. In addition, it is important that the Bureau
and other regulators are able to use those records to evaluate whether
lenders are complying with the rule's requirements.
Some commenters noted that the record retention requirements may
increase the costs incurred by regulatory authorities to compile,
review, and analyze any records they receive from lenders, especially
if the records are maintained in different formats or contain different
content. The Bureau finds that the format and content differences in
the materials retained by lenders will not impact the overall benefit
of the compliance program and record retention requirements. The Bureau
would prefer to bear the costs of reviewing such records in different
formats rather than pass those costs on to lenders by imposing more
specific format requirements.
Several commenters suggested that whole categories of lenders
should be exempted from compliance with the final rule's compliance or
record retention requirements because they are already subject to State
or Federal regulation, such as credit unions or banks, or because they
are small businesses. The Bureau's approach to the final rule remains
primarily focused on the kinds of loans lenders provide and how they
impact consumers, not on the type or size of lenders. As noted above,
the Bureau has concluded that it will exclude several categories of
loans from coverage of the rule, in part, because they do not present
the same kinds of consumer risks and harms as the covered loans
addressed by part 1041. Providers of those excluded loans who do not
also offer covered loans will not be subject to the compliance program
and reporting requirements in Sec. 1041.12 of the final rule. For
providers of covered loans, the compliance program and record retention
required by the final rule will assist them in complying with the
substantive requirements of the rule, benefit supervisory and
monitoring efforts, and thus help deter unfair and abusive practices.
The Bureau thus has concluded that based on these benefits, the record
retention and compliance program requirements in the final rule should
apply to all lenders of covered loans, and that it should not exempt
any particular class of lenders. The Bureau continues to observe that
most small lenders are not engaged in meaningfully different practices
from other lenders that offer the same types of loans. Accordingly, the
Bureau has decided not to carve out any exceptions for small businesses
from the compliance program and record retention requirements of the
final rule.
Several commenters recommended that the Bureau require lenders to
retain additional specific information and that lenders periodically
report to the Bureau about their loan data and lending practices. The
Bureau is not requiring additional reporting requirements in the final
rule at this
[[Page 54802]]
time, based in part on the comments it received raising concerns about
the perceived regulatory burden related to the existing components of
the proposed compliance program and record retention requirements. In
addition, the Bureau concludes that it is premature to establish a
blanket reporting requirement for all lenders, given that regulators
may want different information for different supervisory or monitoring
purposes. In the same vein, the Bureau is not adopting the
recommendation by some commenters to make the reported information
available to the public.
Likewise, the Bureau is not increasing lenders' requirements to
report to the registered information systems as a means of having real-
time data available for review for compliance and monitoring purposes,
as some commenters suggested. Although real-time access to such data
might serve the supervisory purposes of the Bureau and other
regulators, it would be contrary to the Bureau's decision to ease some
of the burdens of the reporting requirement to the registered
information systems in the final rule, as discussed earlier. Many
commenters discussed the increased costs associated with the proposed
compliance program and record retention requirements, and several
cautioned that the record retention requirements could expose consumers
and lenders to significant operational risks for the security of their
data. The Bureau has considered all of these concerns about the
increase in costs to lenders and the industry as a whole and has
concluded that the benefits to consumers and the marketplace outweigh
concerns about the costs to industry, but those costs should not be
exacerbated by adding further burdens at this time of initiating a new
Federal regulatory framework. Finally, the Bureau disagrees that the
compliance program and record retention requirements increase risks for
the security of the consumer data. Providers of covered loans are
already subject to legal obligations to secure the data of their
consumers under the Safeguards Rule\1093\ and the final rule does not
change those obligations. If lenders are meeting those obligations in
their everyday operations, then the additional information that the
rule requires them to retain should not affect the security of consumer
data.
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\1093\ Standards for Safeguarding Customer Information, 16 CFR
part 314. This regulation was promulgated and is enforced by the FTC
pursuant to its specific authority under the Gramm-Leach-Bliley Act,
15 U.S.C. 6801-6809. See earlier discussion regarding the
requirements of the Safeguards Rule in the discussion of final rule
section 11. In particular, Congress did not provide the Bureau with
rulemaking, enforcement, or supervisory authority with respect to
the GLBA's data security provisions. 15 U.S.C. 6801(b),
6804(a)(1)(A), and 6805(b). The portion of the GLBA concerning data
security is not a Federal consumer financial law under the Dodd-
Frank Act; the Bureau does not have authority with respect to the
GLBA data security provisions. However, data security practices that
violate those GLBA provisions and their implementing regulations may
also constitute unfair, deceptive, or abusive acts or practices
under the Dodd-Frank Act.
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12(a) Compliance Program
Proposed Rule
In proposed Sec. 1041.18(a), the Bureau would have required a
lender making a covered loan to develop and follow written policies and
procedures that are reasonably designed to ensure compliance with part
1041 and that are appropriate to the size and complexity of the lender
and its affiliates and the nature and scope of their covered loan
activities. Proposed comments 18(a)-1 and 18(a)-2 explained and
provided examples of the proposed requirements.
Comments Received
One trade association noted that the proposal would require lenders
to develop corresponding policies, which may then grow in complexity if
multiple vendors provide the underlying hardware and software
infrastructure for origination systems. A number of industry commenters
stated that the compliance requirements would substantially increase
the costs for providing covered loans, which will either restrict the
availability of such credit or make it more costly as these higher
compliance costs are passed on to consumers. Several commenters noted
that this is particularly a problem for small entities, where the costs
of compliance can feel especially heavy and disproportionate to their
business operations that lack much scale.
Final Rule
After considering the many comments made on the proposal, the
Bureau has decided to finalize Sec. 1041.12(a) as it was proposed (and
now renumbered from proposed Sec. 1041.18(a)). The provision states
that a lender making a covered loan must develop and follow written
policies and procedures that are reasonably designed to ensure
compliance with the final rule's requirements. The written policies and
procedures must be appropriate to the size and complexity of the lender
and its affiliates, and the nature and scope of the covered loan
activities.
The commentary to Sec. 1041.12(a) of the final rule differs from
the proposed commentary because of technical changes to update the
relevant references to the final rule, rather than to the proposed
rule. Moreover, throughout, it deletes references to provisions in the
proposed rule that would have covered the underwriting of all covered
longer-term loans but were omitted from the final rule. By modifying
the scope of the final rule from the proposed rule, the Bureau thereby
has altered the compliance program requirements in the final rule.
Comment 12(a)-2 of the final rule modifies the reference to ``covered
short-term loan'' by replacing it with ``covered loan'' to align it
more accurately with the terms of the final rule, which also applies
the ability-to-repay underwriting requirements to covered longer-term
balloon-payment loans. It also specifies that lenders who make such
loans under Sec. 1041.5 of the final rule have to develop and follow
written policies and procedures to ensure compliance with the ability-
to-repay requirements set out in modified form in Sec. 1041.5 of the
final rule. For instance, the example in the commentary no longer
includes a discussion of the need for lenders to develop and follow
policies and procedures regarding estimating housing expenses because
under final Sec. 1041.5(c)(2)(iii), lenders can rely on borrower's
statements of rental expenses, rather than follow the proposal's
requirement that the lender estimate those expenses. And, as discussed
above, the commentary to Sec. 1041.12(a) of the final rule has been
modified based on changes to the scope of the final rule declining to
apply the ability-to-repay underwriting criteria to all covered longer-
term loans.
Commenters raised concerns about the complexity of the required
policies and procedures, given the underlying complexity of the
proposed rule's requirements. They also expressed concern about the
cost of developing compliance systems, especially for smaller lenders,
and predicted that such costs are likely to be passed on to consumers.
These general concerns have already been considered and addressed in
the discussion above, yet they also militate in favor of maintaining a
certain amount of flexibility. In this regard, it bears emphasis that
this provision requires lenders to develop and follow policies and
procedures that are reasonably designed to ensure compliance with the
requirements of the final rule. The written policies and procedures
must be appropriate to the size and complexity of the lender and its
affiliates, and to the nature and scope of the covered loan activities.
In short,
[[Page 54803]]
the final rule is not a one-size-fits-all approach. And because of
changes made in the scope of coverage under the final rule, the
compliance costs highlighted by commenters that were reacting to the
proposed rule will be less than they anticipated. The Bureau thus has
determined at this time that the final rule appropriately takes into
account the size and complexity of lenders' operations and will not
create unreasonable compliance costs or burdens on lenders.
12(b) Record Retention
Proposed Rule
Proposed Sec. 1041.18(b) would have required a lender to retain
evidence of compliance with part 1041 for 36 months after the date a
covered loan ceases to be an outstanding loan. The Bureau believed, in
general, that the proposed period would be appropriate for purposes of
record retention, and it would give the Bureau and other Federal and
State enforcement agencies time to examine and conduct enforcement
investigations in the highly fragmented small-dollar lending market
that could help address and prevent the unfair and abusive practices
that the Bureau had identified as a preliminary matter. The Bureau
believed that the proposed requirement to retain records for 36 months
after a covered loan ceases to be an outstanding loan also would not
impose an undue burden on a lender. The Bureau believed that the
proposed record retention requirements would have promoted effective
and efficient supervision and enforcement of part 1041, thereby further
preventing and deterring the unfair and abusive acts the Bureau
proposed to identify.
The Bureau also proposed to specify requirements as to the format
in which certain records would have to be retained. In particular, the
proposed approach would have provided flexibility as to how lenders
could retain the loan agreement and documentation obtained in
connection with a covered loan from the consumer or third parties,
while requiring that the lender retain various other records that it
generates in the course of making and servicing loans in an electronic
tabular format such as a spreadsheet or database, so as to facilitate
analysis both by the lender and by its external supervisors.
Specifically, proposed Sec. 1041.18(b)(1) would have required a
lender of a covered loan either to retain the original version of the
loan agreement or to be able to reproduce an image of it and certain
documentation obtained from the consumer or third parties in connection
with a covered loan. That additional documentation would include, as
applicable, the following items: A consumer report obtained from a
registered information system; verification evidence; any written
statement obtained from the consumer; authorization of an additional
payment transfer; and an underlying one-time electronic transfer
authorization or underlying signature check. These matters were further
described and clarified in the proposed commentary.
Proposed Sec. 1041.18(b)(2) would have required a lender to retain
electronic records in tabular format of certain calculations and
determinations that it would have been required to make in the process
of making a covered loan. A lender would, at a minimum, have been
required to retain the records listed in proposed Sec. 1041.18(b)(2),
as explained further in the proposed commentary.
Proposed Sec. 1041.18(b)(3) would have required a lender to retain
electronic records in tabular format for a consumer who qualifies for
an exception to or overcomes a presumption of unaffordability for a
covered loan in proposed Sec. 1041.6, Sec. 1041.12(a), or Sec.
1041.10. A lender would, at a minimum, have been required to retain the
records listed in proposed Sec. 1041.18(b)(3), as explained further in
the proposed commentary.
Proposed Sec. 1041.18(b)(4) would have required a lender to retain
electronic records in tabular format on a covered loan's type and
terms. A lender would, at a minimum, have been required to retain the
records listed in proposed Sec. 1041.18(b)(4), and as explained
further in the proposed commentary.
Proposed Sec. 1041.18(b)(5) would have required a lender to retain
electronic records in tabular format on payment history and loan
performance for a covered loan. A lender would, at a minimum, have been
required to retain the records listed in proposed Sec. 1041.18(b)(5),
and as explained in the proposed commentary.
Comments Received
Industry commenters asserted that the length of the proposed record
retention period was excessive, unjustified, and not in line with
existing Federal law, and several advocated for a shorter period. Many
relied on the 25-month record retention requirements of the Equal
Credit Opportunity Act as the basis for recommending a shorter period.
Another commenter supported the proposed record retention period as an
appropriate length of time, joined by others that pointed to the
furnisher requirements under the FCRA to retain substantiation for 36
months. Some commenters contended that the 36-month period would not
impose an undue burden on lenders.
Consumer groups believed that an even longer retention period is
justified in light of the requirements already imposed on lenders who
typically must substantiate any information they report to consumer
reporting agencies for 36 months or more. If the period is not
lengthened, they urged the Bureau to specify that this rule does not
affect any record retention requirement imposed under any other Federal
or State law, including those for substantiating information furnished
to a consumer reporting agency and Federal standards for safeguarding
consumer information.
Industry commenters also viewed the proposed formatting
requirements and mandatory data points as too complex and onerous. They
said the electronic tabular format as framed in the proposal was too
specific and the data points were too detailed, and that compliance
with these requirements would force lenders to develop new systems at
substantial cost. Some of this discussion of cost was directed at
covered longer-term loans made by traditional installment lenders, but
much of it was directed at covered short-term loans. Many commenters
claimed that the record retention provisions, including the electronic
tabular format, would likely impose large operating costs that would
either cause lenders to exit the market or be passed on to consumers.
They suggested that the Bureau should pursue less burdensome
alternatives than requiring borrower information to be maintained
electronically. Commenters noted that that lenders maintain many of the
records required under the proposal, but they often do not have one
system of record and predicted that the required information would have
to be manually entered into an electronic tabular format.
Several industry commenters expressed concerns that the
recordkeeping burden was the same for lenders who offered loans under
the conditional exemption (proposed Sec. 1041.7) as for those who
offered loans subject to the underwriting requirements. Credit unions
noted that PAL loans would also be subject to the record retention
requirements and expressed concern about the attendant added costs.
Industry commenters, including credit unions and banks, contended
that they already follow certain recordkeeping requirements pursuant to
existing regulatory oversight by other Federal and State authorities.
They asserted that they can provide such information when requested and
thus the electronic tabular format described
[[Page 54804]]
in the proposal is unnecessary. They regarded the proposal's
requirements as more stringent than parallel rules applicable to
lenders of other types of credit.
One commenter supported the electronic tabular format as a
reasonable approach to the kind of recordkeeping needed to monitor
compliance with the proposed rule, and stated that lenders will save on
costs by accepting and storing records electronically.
Final Rule
The Bureau is finalizing the opening paragraph of Sec. 1041.12(b)
unchanged from proposed Sec. 1041.18(b), other than being renumbered
to reflect other modifications made in the rule as discussed earlier.
This provision requires a lender to retain evidence of compliance with
the final rule for 36 months after the date on which a covered loan
ceases to be an outstanding loan.
In particular, the Bureau has concluded that the 36-month record
retention period contained in the proposal is appropriate here for
several reasons. First, it would provide the Bureau and other Federal
and State enforcement agencies with an appropriate and practical amount
of time to examine and conduct enforcement investigations in order to
prevent and deter the unfair and abusive practices identified in the
final rule. Record retention provisions are common in Federal consumer
financial law to facilitate effective supervisory examinations, which
depend critically on having access to the information necessary to
assess operations, activities, practices, and legal compliance.\1094\
If the record retention period were reduced, it could be considerably
more difficult to ensure that the necessary information and records
would remain routinely available for proper oversight of the industry.
The Bureau is in a position to evaluate such issues from its experience
and perspective of exercising supervision and enforcement authority
over this industry, as it has done now for the past several years, as
described above in part III. That experience has led the Bureau to
perceive that there are some special challenges of oversight in this
industry, including around the topic of record retention.\1095\
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\1094\ As noted earlier, record retention is necessary to prove
compliance with a rule and is a common requirement across many of
the Bureau's rules. See, e.g., Regulation B, 12 CFR 1002.12;
Regulation Z, 12 CFR 1026.25.
\1095\ See, e.g., Bureau of Consumer Fin. Prot., Supervisory
Highlights, at 16 (Spring 2014) (``At multiple lenders, policies and
procedures for record retention either did not exist or were not
followed, leading to incomplete record destruction logs and
improperly destroyed records.''); Consent Order, In re Cash America
Int'l, Inc., File No. 2013-CFPB-0008 (Nov. 20, 2013) (levying civil
penalty for ongoing destruction of records that were needed to
conduct an examination), available at http://files.consumerfinance.gov/f/201311_cfpb_cashamerica_consent-order.pdf.
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Second, the 36-month time frame fits relatively comfortably within
the other recordkeeping requirements provided under other consumer
financial laws, paralleling the FCRA in particular. And though some
statutes and regulations provide for shorter periods, the highly
fragmented small-dollar lending market argues for a somewhat longer
record retention period in order to facilitate the Bureau and other
regulators in covering more of the industry while maintaining
reasonably spaced examination cycles.
Third, given that some record retention period is virtually
inevitable in this market for all the reasons stated, the 36-month
retention period would be unlikely to impose an undue burden on
lenders, as some commenters noted, when viewed in light of the marginal
difference in cost or burden between, say, a 24-month period or a 36-
month period. That is especially so given that it is increasingly
common even for smaller entities to maintain their lending records on
computers.
The commentary to Sec. 1041.12(b) of the final rule was modified
to consolidate references previously found in the proposed commentary
for the individual subparagraphs. New comment 12(b)-1 now clarifies
that items listed in final Sec. 1041.12(b)--documentation and
information in connection with the underwriting and performance of
covered short-term loans and covered longer-term balloon-payment loans,
as well as payment practices in connection with covered loans,
generally--are non-exhaustive as to the records that may need to be
retained as evidence of compliance with part 1041.
The Bureau has finalized Sec. 1041.12(b)(1) in a slightly
reorganized form. Other than its organizational structure, it is in
substantially the same form as proposed, except for changes that
clarify that the loan agreement and documentation that lenders must
retain relates to that which lenders obtained in connection with
originating a covered short-term or covered longer-term balloon payment
loan, not a ``covered loan'' as described in the proposal. Other
changes are technical in nature to make references to the final rule
accurate. In particular, the list of required documentation in final
Sec. 1041.12(b)(1)(i) through (iii) no longer references proposed
Sec. 1041.9(c)(3), which pertained to the ability-to-repay
requirements for the covered longer term loans that were included in
the proposal but have not been retained in the final rule. It continues
to require retention of consumer reports from registered information
systems (i), as well as verification evidence (ii) and written
statements (iii) under Sec. 1041.5. It clarifies that the consumer
reports must be from an information system that has been registered for
180 days or more pursuant to final Sec. 1041.11(c)(2) or is registered
with the Bureau pursuant to Sec. 1041.11(d)(2). However, the
requirements in proposed paragraphs (b)(1)(iv) and (v) that relate the
requirements relating to proposed Sec. 1041.14 (renumbered as final
Sec. 1041.8) are now found in a new Sec. 1041.12(b)(4) regarding
retention of certain records pertaining to payment practices for
covered loans.
To reflect the addition of comment 12(b)-1, the proposed comment
18(b)(1)-1 was deleted. New comment 12(b)(1)-1 is substantially the
same as 18(b)(1)-2 in the proposal. It reflects technical changes,
including those to clarify that the provision relates to covered short-
term or covered longer-term balloon-payment loans and describes the
methods of retaining loan agreement and documentation for short-term or
covered longer-term balloon payment loans, including in original form
or being able to reproduce an image of the loan agreement and
documentation. In addition, the commentary to proposed Sec.
1041.18(b)(1)(ii) was deleted, as it referred to estimates of housing
expenses.
In light of other substantive changes to the final rule, Sec.
1041.12(b)(2) is more streamlined than the proposed rule. As in the
proposal, it requires lenders of covered loans to retain electronic
records in tabular format that include specific underwriting
information for covered loans under Sec. 1041.5 of the final rule. The
final rule clarifies that lenders must retain electronic records in
tabular format regarding origination calculations and determinations
for covered short-term or covered longer-term balloon-payment loans
under Sec. 1041.5. The list of required information is reduced
somewhat from the proposal because it no longer includes references to
the timing of net income or of major financial obligations, and it no
longer requires the retention of information about the underwriting of
covered longer-term loans (other than covered longer-term balloon-
payment loans). These changes to the record retention provisions thus
mirror the corresponding changes made to the
[[Page 54805]]
substantive underwriting requirements in Sec. 1041.5 of the final
rule. The information that lenders must retain under Sec.
1041.12(b)(2)(i) through (iv) includes: the projection made by the
lender of the amount of a consumer's income; the projections made by
the lender of the amounts of the consumer's major financial
obligations; calculated residual income or debt-to-income ratio; and,
the estimated basic living expenses for the consumer. The Bureau also
added new Sec. 1041.12(b)(2)(v), which requires the retention of other
information considered in making the ability-to-repay determinations to
clarify that the enumerated list, as stated in the commentary, is non-
exhaustive. The commentary to this provision is substantially similar
to the proposal but reflects those other substantive and technical
changes that were made to the final rule. Proposed comment 18(b)(2)-1
was not finalized because its content is addressed in final comment
12(b)-1, as discussed above. The Bureau finalized former comment
18(b)(2)-2, as comment 12(b)(2)-1. It discusses the requirement that
lenders retain records in an electronic tabular format and clarifies,
as was proposed, that a lender would not have to retain records under
this section in a single, combined spreadsheet or database with the
other records required by the provisions of Sec. 1041.12(b). It notes,
however, that Sec. 1041.12(b)(2) requires a lender to be able to
associate the records for a particular covered short-term or covered
longer-term balloon-payment loan with a unique loan and consumer
identifiers in Sec. 1041.12(b)(3).
In Sec. 1041.12(b)(3) of the final rule, the Bureau did not
finalize the requirement to retain electronic records in a tabular
format for a consumer that qualifies for an exception to or overcomes a
presumption of unaffordability for a covered loan. It thus has
eliminated this provision and renumbered the subsequent subparagraphs.
The Bureau did not include this provision in the final rule because the
presumptions of unaffordability in proposed Sec. 1041.6 have been
eliminated from the rule. The commentary reflects these same changes.
The Bureau has finalized in Sec. 1041.12(b)(3) provisions proposed
in Sec. 1041.18(b)(4) with changes from the proposal that reflect some
reorganization of provisions formerly found in paragraph (b)(5) and
technical changes to address the modification of references from the
proposal to the final rule. In particular, this renumbered provision
requires lenders to retain electronic records in tabular format
regarding loan type, terms, and performance of covered short-term or
covered longer-term balloon-payment loans. The final rule now includes
the requirement that lenders of such loans retain: the applicable
information listed in Sec. 1041.10(c)(1) and (2) of the final rule;
whether the lender obtained vehicle security from the consumer; the
loan number in a sequence of covered short-term loan, covered longer-
term balloon-payment loans, or a combination thereof; information
regarding loans not paid in full by the due date; for a loan with
vehicle security, whether repossession of the vehicle was initiated;
the date of last or final payment received; and, the information listed
in Sec. 1041.10(c)(3). The Bureau also deleted language from the
proposal that would have covered matters that are now treated elsewhere
in the final rule.
The related commentary reflects similar changes, including the
reorganization of several subparagraphs. Proposed comment 18(b)(3)-1
was not finalized. Former comment 18(b)(3)-2, now renumbered as
12(b)(3)-1 explains the requirement for lenders to retain records
regarding loan type, terms, and performance of covered longer-term
balloon payment loans in an electronic tabular format and notes that
the records are not required to be in a single, combined spreadsheet or
database with the other records required by the provisions of Sec.
1041.12(b); however, it states that Sec. 1041.12(b)(3) requires that
the lender be able to associate a particular covered short-term or
covered longer-term balloon-payment loan with unique loan and consumer
identifiers in Sec. 1041.12(b)(3).
Of note, the requirements formerly outlined in proposed Sec.
1041.18(b)(5)(iii) regarding retaining information about past due loans
has been altered in final Sec. 1041.12(b)(3)(iv). The proposal
required that a lender retain information on the maximum number of
days, up to 180, any full payment, as defined, was past due in relation
to the payment schedule. The final rule Sec. 1041.12(b)(3)(iv) instead
requires that lenders retain information ``for any full payment on the
loan that was not received or transferred by the contractual due date,
the number of days such payment was past due, up to a maximum of 180
days.'' Final comment 12(b)(3)(iv)-1 explains that under Sec.
1041.12(b)(3)(iv), a lender that makes a covered loan must retain
information regarding the number of days any full payment is past due
beyond the payment schedule established in the loan agreement, up to
180 days. The comment defines ``full payment'' as principal, interest,
and any charges and explains that if a consumer makes a partial payment
on a contractual due date and the remainder of the payment 10 days
later, the lender must record the full payment as being 10 days past
due. If a consumer fails to make a full payment more than 180 days
after the due date, the lender must only record the full payment as
being 180 days past due.
With the adjustments to other paragraphs of Sec. 1041.12(b), the
Bureau is finalizing Sec. 1041.12(b)(4) to focus on the retention of
documents regarding payment practices generally, as they relate to all
covered loans. It contains many of the provisions originally in
proposed Sec. 1041.18(b)(4) with some adjustments. It requires lenders
to retain certain payment-related records for covered loans. Like final
Sec. 1041.12(b)(1), a lender must retain or be able to reproduce an
image of the required records. Lenders do not need to retain these
documents in an electronic tabular format, which for many of the
required documents reflects a change from the proposal. The records
include leverage payment mechanisms with respect to covered longer-term
loans, authorizations of additional payment transfers, and underlying
one-time electronic transfer authorizations. It reflects technical
changes in the references and content of the final rule. The final
commentary outlines methods of retaining documentation. In particular,
as an example, comment 12(b)(4)-1 clarifies that a lender must either
retain a paper copy of a leveraged payment mechanism obtained in
connection with a covered longer-term loan or be able to reproduce an
image of the mechanism.
The Bureau is finalizing Sec. 1041.12(b)(5) to require that
lenders retain certain other records relating to payment practices for
covered short-term or longer-term balloon-payment loans. However,
unlike the records retained under Sec. 1041.12(b)(4), these records
must be retained in an electronic tabular format. The list of documents
is the same as that proposed with one exception. Proposed Sec.
1041.18(b)(5)(iii) has been rephrased and renumbered as Sec.
1041.12(b)(3)(iv). The commentary related to the proposed section was
moved to reflect this reorganization and any renumbering of provisions
in the rule. The commentary explains that the lender does not have to
retain the records required under Sec. 1041.12(b)(3) in a single,
combined spreadsheet or database with other records required by the
provisions of Sec. 1041.12(b); however, it noted that Sec.
1041.12(b)(5) requires a lender to be able to associate the records for
a
[[Page 54806]]
particular covered-short-term, or covered longer-term balloon-payment
loan with a unique loan and consumer identifiers in Sec.
1041.12(b)(3).
With respect to Sec. 1041.12(b) as a general matter, many
commenters had objected to the scope of the information that lenders
must retain under the proposal as complex, onerous, stringent, and
burdensome. As noted above, the most major change in this regard is the
change in the scope of coverage of the rule, which eliminated
underwriting requirements for covered longer-term loans (other than
covered longer-term balloon loans). Yet in light of the comments
received, the Bureau has also lessened the record retention
requirements in other respects. For example, the Bureau changed the
method of retention required for some of the required records. In
particular, it no longer is requiring lenders to retain certain records
relating to payment practices in an electronic tabular format.
Some commenters had expressed concern that even if loans were
exempted from the ability-to-repay requirements, the lenders were still
subject to the compliance program and record retention requirements. To
address those concerns, the Bureau has exempted certain types of loans
from coverage entirely--namely, alternative loans (Sec. 1041.3(e)),
and accommodation loans (Sec. 1041.3(f))--including from the
compliance program and record retention requirements. As a result,
lenders that exclusively provide such loans will not be subject to the
compliance program or record retention requirements. For lenders of
covered loans, including loans that are conditionally exempted from
Sec. 1041.5 under Sec. 1041.6, the Bureau concluded that retention of
the documents and information enumerated in final Sec. 1041.12(b)(1)
through (4) will suffice to facilitate lender compliance with the rule
and the ability to examine for such compliance. As such, the retention
of such documents will help prevent unfair and abusive practices.
Some commenters objected to the application of the retention
requirements to loans made pursuant to Sec. 1041.6 of the final rule,
arguing that the record retention requirements may deter lenders from
making such loans. The Bureau believes that the record retention
requirements are necessary to ensure that lenders are complying with
the specific requirements of Sec. 1041.6 which are designed to protect
consumers in the absence of underwriting requirements. In addition, it
notes that lenders of loans under Sec. 1041.6 would not have to retain
all of the information that relates to origination decisions for loans
made under Sec. 1041.5.
The Bureau disagrees with the commenters that asserted records
retention provisions are unnecessary because they already retain
documents in accordance with other Federal consumer financial laws and
can produce them when requested. The obverse of this argument is that
it shows the supposed burdens of imposing these provisions are not
significant for these entities. As outlined in the proposal, the
Bureau's experience is that current record retention practices vary
widely across the industry, depending on lender business practices,
technology systems, State regulatory requirements, and other factors.
In addition, as mentioned above, the Bureau itself, in the context of
its supervision and enforcement activities, has encountered
difficulties at times with the industry's handling of records.
Accordingly, the Bureau has concluded that listing the specific nature
and format of records to be retained will help reduce regulatory
uncertainty and facilitate supervision by the Bureau and other
regulators. That some lenders can easily produce these types of
documents upon request does not undercut the Bureau's conclusion that,
based on its supervisory and enforcement experience, many lenders of
covered loans do not have robust compliance management systems and
would benefit from more guidance regarding compliance expectations.
Indeed, as noted above, what it actually shows is that records
retention is a functionality that can be managed successfully by these
entities, especially as it is computerized and automated.
The other principal objection that commenters made here concerned
the requirement that much of the specified information is to be
maintained in an electronic tabular format, which they claimed is
complex, onerous, burdensome, and unnecessary. Other commenters,
however, found this requirement to be a reasonable approach, and as
outlined in the proposal, the Bureau sought to strike a balance that
would allow lenders substantial flexibility to retain records in a way
that would reduce potential operational burdens while also facilitating
access and use by the lender itself and by the Bureau and other
regulators. The Bureau has carefully considered the comments that it
received and concludes that this requirement to retain records in an
electronic tabular format should be relatively simple for lenders to
carry out. That is especially so because lenders can create multiple
spreadsheets or databases to capture the related sets of information,
as long as they could cross-link materials through unique loan and
consumer identifiers. As at least one commenter noted, these are
documents that many lenders are already generating right now. That
fact, coupled with the 21-month implementation period leading up to the
compliance date of Sec. Sec. 1041.2 through 1041.10, 1041.12, and
1041.13, indicates that the industry is relatively well positioned to
comply with this component.
The other complaint raised by some commenters was that the proposed
compliance program and record retention requirements would increase
lender costs in providing such loans and may result in some lenders
leaving the small-dollar loan market. Other commenters noted that
lenders would actually save on costs by accepting and storing records
electronically, as is increasingly common with businesses of all kinds.
The Bureau has concluded that any increased costs associated with
developing a record retention system that is compliant with the final
rule are likely to be offset by benefits that will flow to lenders,
consumers, and the marketplace from lenders having systems in place
that enable them more easily to track and monitor their compliance with
the final rule. For example, lenders will be better able to review
their loan performance metrics and identify the root causes of systemic
problems while preventing violations of the final rule. The Bureau has
also concluded that the record retention requirements would promote
effective and efficient enforcement and supervision of the final rule,
thereby deterring and preventing unfair and abusive practices that
create risks and harms for consumers.
Section 1041.13 Prohibition Against Evasion
Proposed Rule
Proposed Sec. 1041.19 would have provided that a lender must not
take any action with the intent of evading the requirements of part
1041. It would have complemented the specific, substantive requirements
of the proposed rule by prohibiting any lender from undertaking actions
with the intent to evade those requirements. The Bureau proposed Sec.
1041.19 based on its express statutory authority under section
1022(b)(1) of the Dodd-Frank Act to prevent evasions of ``the purposes
and objectives of the Federal consumer financial laws.'' \1096\
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\1096\ 12 U.S.C. 5512(b)(1).
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[[Page 54807]]
The proposed commentary would clarify the meaning of this general
provision by indicating when a lender action is taken with the intent
of evading the requirements of the Federal consumer financial laws,
including this rule. Specifically, the commentary noted that the form,
characterization, label, structure, or written documentation in
connection with the lender's action shall not be dispositive, but
rather the actual substance of the lender's actions, as well as other
relevant facts and circumstances will determine whether the lender took
action with the intent of evading the requirements of part 1041. It
also clarified that if the lender's action is taken solely for
legitimate business purposes, then it is not taken with the intent of
evading the requirements of part 1041, and that, by contrast, if a
consideration of all relevant facts and circumstances reveals the
presence of a purpose that is not a legitimate business purpose, the
lender's action may have been taken with the intent of evading the
requirements of part 1041.\1097\ The commentary also clarified that
action taken by a lender with the intent of evading the requirements of
part 1041 may be knowing or reckless. Furthermore, it clarified that
fraud, deceit, or other unlawful or illegitimate activity may be one
fact or circumstance that is relevant to the determination of whether a
lender's action was taken with the intent of evading the requirements
of the proposed rule, but fraud, deceit, or other unlawful or
illegitimate activity is not a prerequisite to such a finding. The
proposed comments also provided some illustrative examples of lender
actions that, depending on the facts and circumstances, may have been
taken with the intent of evading the requirements of the proposed rule
and thus may be violations of the proposed rule, as well as one
counter-example.
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\1097\ The proposal noted that even if a lender's action can be
shown to have been taken solely for legitimate business purposes--
and thus was not taken with the intent of evading the requirements
of the proposed rule--the lender's action is not per se in
compliance with the proposed rule because, depending on the facts
and circumstances, the lender's action may have violated specific,
substantive requirements of the proposed rule.
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The Bureau proposed Sec. 1041.19 for two primary reasons. First,
the provision would address future lender conduct that is taken with
the intent of evading the requirements of the rule but which the Bureau
may not, or could not, have fully anticipated in developing the rule.
The proposed rule contained certain requirements that are specifically
targeted at potential lender evasion and which rely on the Bureau's
authority to prevent evasion under section 1022(b)(1) of the Dodd-Frank
Act.\1098\ However, the Bureau cannot anticipate every possible way in
which lenders could evade the requirements of the proposed rule.\1099\
The Bureau was also concerned about the further complexity that would
result from attempting to craft additional rule provisions designed to
prevent other conduct taken with the intent of evading the proposed
rule. Proposed Sec. 1041.19 would provide flexibility to address
future lender conduct that is taken with the intent of evading the
proposed rule. By limiting avenues for potential evasion, proposed
Sec. 1041.19 would enhance the effectiveness of the proposed rule's
specific, substantive requirements, and thereby preserve the consumer
protections of the proposed rule.
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\1098\ For example, proposed Sec. 1041.7(d) was designed to
prevent evasion of the requirements of proposed Sec. 1041.7 through
the making of a non-covered bridge loan when a section 7 loan is
outstanding and for 30 days thereafter.
\1099\ As the Commodity Futures Trading Commission (CFTC) noted
in a proposed rulemaking implementing an anti-evasion provision
under title VII of the Dodd-Frank Act, ``Structuring transactions
and entities to evade the requirements of the Dodd-Frank Act could
take any number of forms. As with the law of manipulation, the
`methods and techniques' of evasion are `limited only by the
ingenuity of man.''' 76 FR 29818, 29866 (May 23, 2011) (quoting
Cargill v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971)). The
Bureau's approach to the anti-evasion clause in proposed Sec.
1041.19 has been informed by this CFTC rulemaking, as discussed
below.
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Second, the Bureau believed that proposed Sec. 1041.19 was
appropriate to include in the proposed rule given the historical
background of the markets for covered loans. As discussed in the
proposal, over the past two decades many lenders making loans that
would be treated as covered loans under the proposed rule have taken
actions to avoid regulatory restrictions at both the State and Federal
levels. For example, as discussed above in part II, some lenders have
reacted to State restrictions on payday loans by obtaining State
mortgage lending licenses and continuing to make short-term, small-
dollar loans. In Delaware, a State court of chancery recently held that
a loan agreement was unconscionable because, among other factors, the
court found that the ``purpose and effect'' of the loan agreement was
to evade the State's payday lending law, which includes a cap on the
total number of payday loans in a 12-month period and an anti-evasion
provision.\1100\ States also have faced challenges in applying their
laws to certain online lenders, including lenders claiming Tribal
affiliation and offshore lenders. Furthermore, at the Federal level,
lenders have been making loans that were narrowly structured to
deliberately circumvent the scope of regulations to implement the
Military Lending Act (MLA), which Congress enacted in 2006. For
example, in response to the MLA's implementing regulations that
prohibited certain closed-end payday loans of 91 days or less in
duration and vehicle title loans of 181 days or less in duration,
lenders began offering payday loans greater than 91 days in duration
and vehicle title loans greater than 181 days in duration, along with
open-end products. The Department of Defense, which was responsible for
drafting the MLA regulations, as well as numerous members of Congress,
concluded that such practices were undermining the MLA's consumer
protections for service members and their families.\1101\ Given this
historical background of a decade of widespread evasion of the
protections supposedly conferred by the MLA, the Bureau determined that
the anti-evasion provision in Sec. 1041.19 was appropriate to include
in the proposed rule.
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\1100\ See James v. National Financial, LLC, 132 A.3d 799, 834
(Del. Ch. 2016). The lender structured a $200 loan as a 12-month
installment loan with interest-only payments followed by a final
balloon payment, with an APR of 838.45 percent. Id. at 803. The
court also found a violation of TILA with regard to the disclosure
of the APR in the loan contract. Id. at 838-39. This case and the
Delaware payday law at issue are also discussed above in part II.
\1101\ The Department of Defense amended the MLA regulations in
2015 and the compliance date for the amendments is later this year.
See 80 FR 43560 (Jul. 22, 2015) (final rule containing amendments).
The preamble to the amendments included discussion of comments to
the proposed rule from 40 U.S. Senators who wrote that the
amendments were ``essential to preventing future evasions'' of the
MLA regulations. Id. at 43561 (quoting letter from Jack Reed, et
al., Nov. 25, 2014).
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In proposing Sec. 1041.19 and its accompanying commentary, the
Bureau relied on anti-evasion authority under section 1022(b)(1) of the
Dodd-Frank Act, which provides that the Bureau's director may prescribe
rules ``as may be necessary or appropriate to enable the Bureau to
administer and carry out the purposes and objectives of the Federal
consumer financial laws, and to prevent evasions thereof.'' \1102\
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\1102\ The Bureau noted that Dodd-Frank Act section 1036(a)
separately provides that it shall be unlawful for ``any person to
knowingly or recklessly provide substantial assistance to a covered
person or service provider in violation of the provisions of section
1031, or any rule or order issued thereunder, and notwithstanding
any provision of this title, the provider of such substantial
assistance shall be deemed to be in violation of that section to the
same extent as the person to whom such assistance is provided.'' 12
U.S.C. 5536(a)(3). The Bureau did not rely on this authority for
proposed Sec. 1041.19, but noted that this statutory provision
could be used in an enforcement action to address evasive conduct if
a lender's actions were taken with the substantial assistance of a
non-covered person.
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[[Page 54808]]
Anti-evasion provisions are a feature of many Federal consumer
financial laws and regulations.\1103\ In addition, anti-evasion
provisions were included in a final rule issued in 2012 by the CFTC
under title VII of the Dodd-Frank Act (the CFTC Anti-Evasion
Rules).\1104\ One of the CFTC Anti-Evasion Rules provides that it is
``unlawful to conduct activities outside the United States, including
entering into agreements, contracts, and transactions and structuring
entities, to willfully evade or attempt to evade any provision of'' the
Dodd-Frank Act title VII provisions or implementing CFTC regulations
\1105\ and that the ``[f]orm, label, and written documentation of an
agreement, contract, or transaction, or an entity, shall not be
dispositive in determining whether the agreement, contract, or
transaction, or entity, has been entered into or structured to
willfully evade.'' \1106\ Moreover, in the preamble for the final CFTC
Anti-Evasion Rules, the CFTC provided interpretive guidance about the
circumstances that may constitute evasion of the requirements of title
VII of the Dodd-Frank Act. The CFTC differentiated between an action
taken by a party solely for legitimate business purposes, which the
CFTC stated would not constitute evasion, and an action taken by a
party that based on a ``consideration of all relevant facts and
circumstances reveals the presence of a purpose that is not a
legitimate business purpose,'' which the CFTC stated could constitute
evasion depending on the facts and circumstances.\1107\ The CFTC
adopted a principles based approach because it found that adopting an
alternative approach that provides a bright-line test of non-evasive
conduct may provide potential wrong-doers with a roadmap for
structuring evasive transactions. The Bureau believes that the CFTC
Anti-Evasion Rules are an informative source of regulatory text and
interpretative guidance on agency use of anti-evasion authority granted
under the Dodd-Frank Act.\1108\
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\1103\ See, e.g., Fair Credit Reporting Act, 15 U.S.C.
1681s(e)(1) (``The Bureau may prescribe regulations as may be
necessary or appropriate to administer and carry out the purposes
and objectives of this subchapter, and to prevent evasions thereof
or to facilitate compliance therewith.'').
\1104\ See 77 FR 48208, 48297-48303 (Dec. 13, 2012) (Final
Rule); 76 FR 29818, 29865-68 (May 23, 2011) (Proposed Rule). Section
721(c) of the Dodd-Frank Act required the CFTC to further define the
terms ``swap,'' ``swap dealer,'' ``major swap participant,'' and
``eligible contract participant'' in order ``[t]o include
transactions and entities that have been structured to evade''
subtitle A of title VII of the Dodd-Frank Act, and several other
provisions of Dodd-Frank Act title VII reference the promulgation of
anti-evasion rules. See 77 FR 48208, 48297 (Dec. 13, 2012). The CFTC
Anti-Evasion Rules were promulgated as part of a larger rulemaking
issued jointly by the CFTC and the Securities and Exchange
Commission (SEC) under title VII of the Dodd-Frank Act, which
established a comprehensive new regulatory framework for swaps and
security-based swaps. Although the larger rule was issued jointly by
the CFTC and the SEC, the anti-evasion provisions were adopted only
by the CFTC. Id. at 48297-48302. The SEC declined to adopt any anti-
evasion provisions under its Dodd-Frank Act discretionary anti-
evasion authority. Id. at 48303.
\1105\ 17 CFR 1.6(a).
\1106\ 17 CFR 1.6(b). A separate anti-evasion provision deemed
as a swap any agreement, contract, or transaction ``that is
willfully structured to evade any provision of'' subtitle A of title
VII. This provision contained similar language as 17 CFR 1.6(b)
regarding the ``form, label, and written documentation'' of the
transaction not being dispositive as to the determination of
evasion. See 17 CFR 1.3(xxx)(6)(i), (iv). The CFTC defined willful
conduct to include intentional acts or those taken with reckless
disregard.
\1107\ See 77 FR at 48301-02; 76 FR at 29867. Among other
sources for this distinction, the CFTC described Internal Revenue
Service (IRS) guidance on the line between permissible tax avoidance
and impermissible tax evasion. See 77 FR 48208, 48301-02; 76 FR
29818, 29867. The CFTC also addressed, in response to comments,
whether avoidance of regulatory burdens is a legitimate business
purpose. The CFTC wrote that the agency ``fully expects that a
person acting for legitimate business purposes within its respective
industry will naturally weigh a multitude of costs and benefits
associated with different types of financial transactions, entities,
or instruments, including the applicable regulatory obligations.''
77 FR 48208, 48301. The CFTC further clarified that ``a person's
specific consideration of regulatory burdens, including the
avoidance thereof, is not dispositive that the person is acting
without a legitimate business purpose in a particular case. The CFTC
will view legitimate business purpose considerations on a case-by-
case basis in conjunction with all other relevant facts and
circumstances.'' Id.
\1108\ The Bureau emphasized that although the anti-evasion
clause in proposed Sec. 1041.19 and the accompanying commentary has
been informed by the CFTC Anti-Evasion Rules, the Bureau was not
formally adopting as the Bureau's own position the interpretations
drawn by the CFTC in the CFTC Anti-Evasion Rules' preamble, nor did
the Bureau endorse the reasoning and citations provided by the CFTC
in the CFTC Anti-Evasion Rules' preamble.
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Comments Received
Several industry participants and trade associations raised
questions about the Bureau's reliance on the Dodd-Frank Act's grant of
authority to the CFPB's director to promulgate rules to ``prevent
evasions'' as the basis for its legal authority for the proposed rule's
anti-evasion provision. In particular, one commenter asserted that this
legal authority should be construed narrowly to authorize only
recordkeeping, reporting, and compliance requirements or to prohibit
products and services where no reasonable expectation exists that
consumers will use them in a lawful manner.
Some commenters objected that exercising this authority would allow
the Bureau to circumvent the constraints of the Administrative
Procedure Act and impose restrictions without sufficient notice or
specificity. Other industry commenters urged that the proposed anti-
evasion clause should not be utilized because its purported breadth and
ambiguity would lead to overreach that could adversely affect lenders
that are responsible and committed to regulatory compliance. They noted
that lenders are already obliged to comply with various State laws and
with the Military Lending Act, and they contended that the anti-evasion
clause is unnecessary in light of the Bureau's existing authority to
target and investigate unfair, deceptive, or abusive acts or practices.
Many industry commenters urged that the rule either be made more
specific--without an anti-evasion clause--or that it be replaced
instead with clear guidance to ensure compliance. They noted that the
substantive and definitional provisions of the rule could be amended
over time to address any loopholes that are found to harm consumers
without including open-ended authority that they contend may create a
trap for unwary lenders who believe, in good faith, that they are
complying with the provisions of the rule. A group of chief legal
officers echoed this advice by urging the Bureau to develop specific
criteria to determine whether to bring enforcement actions because it
would provide clear standards to lenders. Another industry commenter
urged the Bureau to let the courts determine violations of law based on
fact-specific circumstances and statutory interpretations rather than
applying a broad anti-evasion clause.
In contrast, consumer groups judged the anti-evasion clause to be
an essential means of addressing evasive practices that would breach
the intent of the rule while seeming to conform to its terms. They
mentioned specific loopholes that exist under various State laws and
described how those provisions are used to circumvent regulatory
oversight in ways that are prevalent across the lending industry. One
State Attorney General expressed support for a broad and flexible anti-
evasion clause as necessary to prevent lenders from evading coverage by
various means and to enable law enforcement to effectuate the purposes
of the rule. Another commenter supported the clause but suggested
supplementing it with additional bright-line rules to restrict certain
fees and the bundling of covered loans with the sale of other goods and
services.
[[Page 54809]]
Many industry commenters and trade associations objected to the
anti-evasion clause because of its alleged vagueness. They contended
that, as a result, unfair effects could flow to lenders, including
potential chilling effects on participation and innovation in the
marketplace. In particular, they asserted that the proposed anti-
evasion provision's knowing or reckless standard for intent is too
vague, open-ended, and indefinite and it exposes lenders to liability
for non-compliance based on the Bureau's own undefined notions of the
spirit of the law, even where the lender is in technical compliance
with the provisions of the rule. In addition, many industry commenters,
while supportive of including an intent standard, thought it should be
more specifically defined. They also objected to setting the threshold
for intent at a ``knowing or reckless'' level because they thought it
was too loose a standard for invoking such authority. They further
contended that ``intended evasions'' should fall outside the scope of
the rule, and an action should have to constitute an actual evasion to
trigger a violation under the statute.
A number of consumer and legal aid groups opposed the proposed
``intent'' provision, which they thought risked undermining the entire
provision, as it would be potentially difficult for the Bureau to prove
the lender's state of mind. Others agreed and thought that the clause
would set up time-consuming and costly legal battles that would
actually facilitate evasions of the rule. They countered that the anti-
evasion clause should be reworded simply to cover de facto evasions,
without any importing of an intent standard into the clause.
Several commenters further urged the Bureau not to prohibit acts or
practices without lenders knowing what acts or practices were being
proscribed. This objection was couched as a matter of elementary
fairness and the legal requirement to provide sufficient notice before
imposing liability. Commenters said that the anti-evasion clause is
broad enough to permit the Bureau to label as a violation any action it
perceives as politically distasteful, regardless of the specific
provisions in the final rule. Some commenters focused on the Bureau's
second rationale for the proposal--that lenders of covered loans have a
history of avoiding regulatory restrictions. They asserted that these
examples of avoidance are really just evidence of lenders' efforts to
comply with those laws and regulations. One commenter objected that the
anti-evasion clause would be likely to sow confusion in the complex
system of modern interstate banking.
Some industry commenters also were concerned that the breadth of
the proposed anti-evasion clause would create a ``chilling effect''
that would disincentivize lenders from making loans, and could
therefore cause some lenders to exit the market. By creating the
potential to over-deter desirable conduct and punish undeserving
actors, commenters warned that the clause was more likely to lead to
significant litigation than to bolster regulatory effectiveness. At the
same time, they contended that the open-ended nature of the clause
would chill innovation and prevent market entry by lenders that would
otherwise be willing to offer new products. The risks thus posed would
tend to scare off investors and creditors, thereby increasing the cost
of capital and discouraging more lending.
Industry commenters also took issue with use of the phrase ``solely
for legitimate business purposes'' in the commentary to the proposed
rule. Specifically, the commentary stated that if the lender's action
is taken solely for legitimate business purposes, the lender's action
is not taken with the intent of evading the requirements. The
commenters contended that the phrase was vague and not sufficiently
defined in the proposal. One commenter asserted that this wording would
allow the Bureau to reach as evasion any acts with a secondary purpose
and instead the Bureau should be limited to reaching only acts that
constitute a ``disguised primary purpose,'' as grounded in an
evidentiary showing as a factual matter. Another commenter suggested
exempting from the clause any change in practices that produces an
economic benefit to the consumer.
Consumer groups stated that an evasion should not be limited to a
change in a lender's practices, in order to capture new entrants to the
markets with practices that would evade the rule. They also argued that
the relevant time frame for gauging a pertinent shift in a lender's
practices should extend back to the issuance of the SBREFA framework of
proposals, rather than the issuance of the final rule, which they
deemed to be more consistent with an ``all facts and circumstances''
approach. One industry commenter asked the Bureau to clarify that
compliance with the rule is itself a legitimate business reason to
modify products and processes.
Industry participants and trade associations objected to the
Bureau's statement in the proposal that anti-evasion provisions are a
feature of many Federal consumer financial laws and regulations, which
they claim is unfounded. They sought to distinguish on a variety of
grounds the FCRA, the treatment in Regulation Z derived from the Home
Ownership Equity and Protection Act (HOEPA), and the anti-evasion
clause contained in the Dodd-Frank Act as administered by the CFTC. For
example, one commenter noted that the FCRA has a statutory anti-evasion
provision, while only Regulation Z contains limited anti-evasion
clauses in its high-cost mortgage provision, which was derived from
HOEPA. Other commenters distinguished the CFTC's anti-evasion clause
from the proposal's provision because it applies only to ``willful''
behavior; the parties to the regulated activity are generally more
sophisticated than the consumer borrowers at issue here; and a person's
consideration of the regulatory burdens, including avoidance thereof,
is not dispositive that the person is acting without a legitimate
purpose.
Several industry commenters concluded that the proposal's anti-
evasion provision was arbitrary and capricious, citing several of the
issues identified above, including, among other things: The perceived
lack of distinction in the proposal between proper and improper
behavior; the Bureau's reliance on the CFTC's anti-evasion rule; the
necessity of the provision in light of the Bureau's other authority;
and the perceived potential for a chilling of the markets.
Many commenters also provided input into different aspects of the
commentary set out in the proposal and how well it does or does not
succeed in bolstering the proposed rule. In particular, some commenters
criticized the commentary as exacerbating the concerns about vagueness
with its list of ``non-exhaustive'' examples. One industry commenter
noted that the limited examples do not guarantee that other regulators
will take the same view, or that what is currently viewed as
permissible under the proposed rule would remain so in the future, both
of which raise liability concerns. On the other side, consumer groups
also recommended revising and adding a number of examples to further
their goal of strengthening the anti-evasion clause. A number of
commenters also expressed differing views about the appropriate
relationship or intersection between covered and non-covered loans for
purposes of some of these provisions.
Among other conduct, the first example in the proposal would
pertain to a lender that routinely obtains a leveraged payment
mechanism but does so more than 72 hours after origination. One
attorney general observed that it
[[Page 54810]]
was illustrative of the need for an anti-evasion clause. Several
commenters noted, however, that this example should be strengthened to
protect borrowers by removing the time limit altogether or covering
loans any time a lender obtains a leveraged payment mechanism,
regardless of when that occurs. An industry commenter stated that this
example was too vague, because it did not specify how many borrowers
were needed to meet the ``routinely'' standard. Another commented that
an examiner at a later date should not be able to add further
restrictions beyond the 72-hour period. One Tribal lender expressed its
concern that the language used seemed like a warning that the Bureau
will regularly find that the Tribal operations do not constitute
legitimate business practices.
Among other conduct, the second proposed example would pertain to a
lender not conducting an ability-to-repay analysis and regularly
charging a recurring late fee to borrowers to be paid biweekly while
the loan is outstanding. Consumer groups offered suggestions about the
second example in the proposal. They contended that the assumption that
delinquency fees and re-borrowing fees are the same should be
eliminated, and suggested that the Bureau should emphasize that the
scenario could lack elements from the fact pattern and still constitute
evasion. They further commented that the example did not provide very
robust guidance about what constitutes evasion. They recommended
modifying the definition of a loan sequence or covered loan to address
the concerns underlying this example in a more effective manner.
Consumer groups contended that the third proposed example which
would involve, among other conduct, the lender charging a high penalty
interest rate, was overly broad and advocated the use of a lower
penalty rate to emphasize that not all of the elements in the example
had to be present to constitute evasion. They also suggested that the
rule should specify that the total cost of credit must include the
penalty rate if the lender reasonably expects that a significant number
of borrowers will trigger the penalty rate. Consumer groups also
suggested that the reference point in the example for lenders' past and
current practices should be the SBREFA date.
Regarding the fourth proposed example, which would include, among
other conduct, the lender changing its practice such that its second
presentment for a delinquent loan was for only $1, consumer groups
recommended prohibiting the initiation of additional payment transfers
after any failed attempt.
The fifth proposed example would pertain to, among other conduct, a
lender restructuring its loan product prior to the effective date of
the final rule such that it is a covered loan subject to one of the
conditional exceptions. The commentary suggests that the scenario
offered is not indicative of evidence of a violation of the anti-
evasion provision. An industry commenter stated that the fifth example
suggests it might be an evasion to structure the loan product to be
non-covered, but the example does not clarify how to avoid having such
a loan product trigger the anti-evasion clause.
Consumer groups also stated that the Bureau should adopt other
examples for greater clarity about what constitutes an evasion. They
suggested that if certain lenders unilaterally change the terms of an
account after 72 hours to add a wage assignment, automatic transfers,
or other leveraged payment mechanism, that should constitute an
evasion. They also suggested that another example of evasion would be
where the lender continues to use a leveraged payment mechanism without
complying with the requirements of the payment provisions of the rule.
Further, they suggested a list of more than a dozen ways lenders could
evade the rule or certain of its requirements, which should be
addressed to improve the proposal. One commenter, by contrast, asked
the Bureau to adopt more examples of actions undertaken without intent
to evade the rule, including the use of consumer notices, one-time ACH
authorizations, and other mechanisms. A credit union trade association
offered several ideas for how the anti-evasion clause could be
clarified further, and asked the Bureau to clarify that the clause
would not be used to create liability for credit unions that changed
their lending programs to fall outside the scope of the rule. One set
of academic commenters expressed concern that the definition of
``annual percentage rate'' could allow lenders to exclude late fees
from the modified total cost of credit and structure rolled-over short-
term loans to pass as long-term loans.
Some commenters raised other miscellaneous suggestions. A trade
association requested that if the Bureau keeps an anti-evasion clause,
then it should extend a safe harbor for at least the first year after
the effective date of the final rule. Another commenter urged that the
Bureau should regularly examine records for data omissions and this
provision should include specific language to address the consequences
of any such data omissions. That commenter also sought language barring
the practice of breaking up a payment request into smaller requests to
avoid the reauthorization requirement. Consumer groups urged the Bureau
to make clear that it will pay special attention to situations where
lenders indicate they will attempt to expand or migrate to other
industries and shift their unaffordable lending practices to those
products.
Finally, a trade association encouraged the Bureau to consult with
prudential regulators about whether exempting depository institutions
would incentivize certain entities in the payday lending market to
convert to a bank status, which the commenter found to be implausible.
And a set of chief legal officers urged the Bureau to consult with or
defer to the States and incorporate some of their suggestions in the
final rule, because the States have had more experience with these
kinds of consumer loans.
Final Rule
Proposed Sec. 1041.19 would have required that a lender must not
take any action with the intent of evading the requirements of this
part 1041. After considering the comments received, the Bureau
concludes that the general anti-evasion provision as proposed is
appropriate in the final rule to complement the specific, substantive
requirements of the final rule by prohibiting a lender from taking
action with the intent to evade those requirements. The only change
from the proposed Sec. 1041.19 to the final rule is technical in
nature; its reference in the final rule is Sec. 1041.13.
In finalizing this provision, the Bureau is relying on its anti-
evasion authority under section 1022(b)(1) of the Dodd-Frank Act, which
provides that the Bureau's director may prescribe rules ``as may be
necessary or appropriate to enable the Bureau to administer and carry
out the purposes and objectives of the Federal consumer financial laws,
and to prevent evasions thereof.'' The Bureau is finalizing Sec.
1041.13 for two primary reasons. First, the provision will address
future lender conduct that is taken with the intent of evading the
requirements of the rule but which the Bureau may not, or could not,
have fully anticipated in developing the rule. The rule contains
certain requirements that are specifically targeted at potential lender
evasion and which rely on the Bureau's authority to prevent evasion
under section 1022(b)(1) of the Dodd-Frank Act. However, the Bureau
cannot anticipate every possible way in which lenders
[[Page 54811]]
could evade the requirements of the proposed rule. The Bureau concludes
final Sec. 1041.13 will provide flexibility to address future lender
conduct that is taken with the intent of evading the proposed rule. By
limiting avenues for potential evasion, Sec. 1041.13 will enhance the
effectiveness of the final rule's specific, substantive requirements,
and thereby preserve the consumer protections of the final rule.
Second, the Bureau's judgment is informed, in particular, by the
history of evasive actions in this industry to circumvent restrictions
in State laws and the coverage of the Military Lending Act, outlined
above.
In the commentary to the final rule, the Bureau modified the
proposal's commentary regarding the anti-evasion provision by removing
the illustrative examples of lender actions that may have been taken
with the intent of evading requirements of the rule outlined in
proposed comment 19-2. Two illustrative examples can now be found in
the commentary sections related to Sec. Sec. 1041.5 and 1041.8 of the
final rule. Specifically, the second example from proposed comment 19-2
is now found in the commentary for Sec. 1041.5(e) of the final rule
and the fourth example from proposed comment 19-2 is now found in the
commentary for Sec. 1041.8 of the final rule. Any modifications to
those examples in the final rule are discussed above in the section-by-
section analysis of those provisions. In particular, the Bureau added
to the final rule specific anti-evasion provisions about the ability-
to-repay requirements and prohibited payment transfer attempts, and
moved the illustrative examples from proposed Sec. 1041.19 to those
sections in the final rule to provide additional context for a
violation of those specific anti-evasion provisions.
Because of coverage changes and other considerations, including the
comments it received, the Bureau deleted from the commentary for Sec.
1041.13 of the final rule the remaining illustrative examples that were
proposed in comment 19-2. In particular, the first example pertained
to, among other conduct, a lender obtaining a leveraged payment
mechanism 72 hours after the borrower received the loan proceeds. The
proposed rule limited coverage of the ability-to-repay requirements for
covered longer-term loans to loans for which the leveraged payment
mechanism was taken within 72 hours of origination. However, under the
final rule covered longer-term loans are subject only to the payment
provisions, but not to the ability-to-repay underwriting provisions.
Accordingly, in the final rule, the Bureau deleted the reference to the
first example in the proposed rule's commentary to avoid confusion. The
Bureau deleted the third illustrative example in proposed comment 19-2
because it addressed evading the ability to repay requirements for
longer-term loans, and in light of the changes to the coverage of the
rule, it is of limited relevance. Likewise, the Bureau deleted the
fifth illustrative example, in part, because of concerns raised about
whether the counter-example of evidence not constituting a violation
succeeded in providing adequate guidance.
The comments the Bureau received about the inclusion of the
illustrative examples were mixed, with some commenters seeking more
examples to address certain situations and others finding the examples
unhelpful and not sufficiently detailed. By relocating some of the
examples and deleting others, the Bureau has attempted to balance the
stated desire by commenters for clearer guidance about what conduct
constitutes evasion and their suggestions that the anti-evasion
provision should remain flexible. The Bureau has concluded that the
specific anti-evasion provisions in the final rule and the related
illustrative examples in the commentary will provide concrete guidance
on specific types of evasions, while the general anti-evasion provision
is necessary to allow the Bureau to prevent intentional evasions of the
specific, substantive requirements of the final rule that it cannot yet
anticipate at this time. In addition to deleting some of the proposal's
illustrative examples, the Bureau decided not to include any additional
illustrative examples of evasion in the final rule, although many
commenters suggested particular factual situations as possible examples
and counter-examples of evasion. The Bureau reached this decision
because of the comments it received highlighting concerns that undue
weight may be placed on the specifics in any particular examples
provided and hence they may be misconstrued as an exhaustive list of
possible means of evasion that would be viewed as narrowing the concept
that Congress explicitly incorporated into the Dodd-Frank Act. The
Bureau thus disagrees with commenters that suggested a general anti-
evasion provision is contrary to the statutory authority granted in
section 1022(b)(1), which itself is expressly a general anti-evasion
provision. Nothing in the Act suggests in any way that the Bureau's
authority to prevent evasions is limited, as some commenters have
suggested. Nor does the Bureau agree that the Administrative Procedure
Act is implicated if the Bureau exercises this direct statutory
authority. In sum, the Bureau has decided to finalize, as it was
proposed (and now renumbered), the general anti-evasion provision
contained in Sec. 1041.13 of the final rule.
Although some commenters had questioned the Bureau's references to
anti-evasion features in other Federal consumer financial laws and
regulations, the Bureau did not rely on those provisions in deciding
upon its own authority to act in accordance with the express terms of
the statute. Rather, the Bureau included references to other Federal
consumer financial laws in the proposal merely because it found them to
be informative. Because the CFTC's source of authority for its Anti-
Evasion Rules was the Dodd-Frank Act, the Bureau believed that
provision to be of special interest regarding agency use of anti-
evasion authority granted under the very same statute. The Bureau
continues to find the CFTC Anti-Evasion Rules and other Federal
consumer financial laws to be informative about the scope and nature of
the Bureau's anti-evasion provision, yet the Bureau does not formally
adopt the CFTC's interpretations as its own.
As for the claim that an anti-evasion provision is unnecessary
because of the Bureau's UDAAP authority and lenders' responsibilities
to comply with other State and Federal laws, the Bureau does not find
the claim persuasive. Instead, the Bureau concludes that an anti-
evasion provision is necessary to ensure compliance with the
substantive provisions of the final rule. Congress granted the Bureau
to authority to promulgate rules to prevent evasions and thus, it is
authorized to exercise its authority by finalizing a general anti-
evasion provision. If Congress had intended that every evasion of the
Bureau's rules must also be an independent UDAAP, it would set out
those requirements in the Dodd-Frank Act; however, it did not. In fact,
it is well-established that violations of public policy--such as rules
or other violations--do not in and of themselves constitute independent
UDAAPs, in particular in the context of unfair acts or practices.
Accordingly, the Bureau disagrees that its UDAAP authority negates the
need for the anti-evasion provision because the Bureau may not be able
to readily reach conduct that constitutes evasion using its existing
UDAAP authority. In particular, the evasive conduct may be actionable
without having to meet the stringent standards for UDAAP violations or
with less expenditure of resources.
[[Page 54812]]
Moreover, as described above, the historical background in this
market indicates that lenders of covered loans have taken actions to
circumvent and avoid compliance with various State and Federal
regulatory restrictions designed to protect consumers, including the
Military Lending Act. The Bureau places great weight on this recent
historical experience and perceives it as considerable justification
for being vigilant about similar conduct that may be engaged in to
circumvent the provisions of this rule.
The Bureau is not persuaded by the concerns raised about the
purported breadth, ambiguity, and vagueness of a general anti-evasion
provision. In particular, many commenters thought it would be important
to identify much more specific conduct that would constitute evasion.
Instead, the Bureau found compelling the arguments from commenters who
urged that the anti-evasion provision should be maintained as a broad
and flexible support for administering and enforcing the provisions of
the rule. Almost by definition, the anti-evasion clause must be kept on
a more general plane; if all the particulars could be specified in
advance, they would all be written into the substantive provisions of
the rule, even though that could prove cumbersome and add a good deal
of complexity. As the CFTC noted in its anti-evasion rulemaking,
providing bright-line tests of non-evasive conduct may provide
potential wrong-doers with a roadmap for structuring evasive
transactions. By contrast, however, the only real purpose to be served
by an anti-evasion clause is to provide authority to address other
situations that may arise but are not directly addressed by the
specific provisions of the rule. Thus, the Bureau concludes that the
anti-evasion clause is an important feature of this rule and that it
must remain sufficiently flexible to prevent lenders from engaging in
conduct designed to circumvent the rule in ways that could pose harms
for consumers.
Another point of contention is the intent requirement in the anti-
evasion provision. Some commenters argued that it poses too low a
standard and others argued that it is set too high. The Bureau has made
the judgment that the requirement that a lender either knowingly or
recklessly intends to evade the final rule is an important limitation
on the Bureau's exercise of its evasion authority. The intent
requirement prevents the very outcome that some commenters fear--
violations by unwary lenders acting in good faith. By its very terms,
the intent requirement eliminates that possibility. The Bureau is thus
finalizing Sec. 1041.13 as proposed (and now renumbered), including
its formulation of the intent standard as further explained in the
related commentary.
As the commentary, now finalized, sets out, a lender must act with
knowing or reckless intent to evade the final rule in order to be
liable under the anti-evasion provision. Intent is the state of mind
accompanying an act. Ordinarily, state of mind cannot be directly
proved but, instead must be inferred from the surrounding
circumstances, as explained in the final rule commentary. As noted in
the proposal, the intent standard in the final rule is consistent with
the scienter standard in section 1036(a) of the Dodd-Frank Act for
establishing that persons knowingly or recklessly provided substantial
assistance to a covered person or service provider in violation of
section 1031.\1109\ In the civil liability sphere, recklessness
includes actions entailing an unjustifiably high risk of harm that is
known or either so obvious it should be known.\1110\ Some commenters
expressed concern that the intent standard would be a challenging
threshold to meet. Yet the existence of such a standard is crucial to
establishing that the lender has in fact engaged in the type of conduct
that was intended to evade this rule, as opposed to being found liable
for unintentional conduct. Because standards grounded in the intentions
of the parties are well-established in the common law and are being
developed in CFPB cases,\1111\ the Bureau is not persuaded that lenders
would be confused or at a loss to know how to proceed or that the
Bureau's use of this authority would be unfettered and arbitrary.
Accordingly, the Bureau has adopted this provision without altering the
intent standard as originally proposed.
---------------------------------------------------------------------------
\1109\ The CFTC's Anti-Evasion Rule's scienter standard is
willfulness which the CFTC interprets as including intentional or
reckless acts. See Safeco Ins. Co. of America v. Burn, 551 US 47
(2007).
\1110\ See Safeco Ins. Co. of America v. Burn, 551 US 47 (2007).
\1111\ See CFPB v. Universal Debt and Payment Solutions, Civil
Action No. 1:115-CF-00859 (D. Ga. September 2015).
---------------------------------------------------------------------------
Comment 13-1 of the final rule, which illustrates lender action
taken with the intent of evading the requirements of the rule, is
adopted in a form that remains unchanged from the proposal. Although
several commenters raised concerns about this piece of the commentary,
they appear to have misinterpreted it. In particular, it provides that
``if the lender's action is taken solely for legitimate business
purposes, the lender's action is not taken with the intent of evading
the requirements.'' \1112\ It further provides that ``if a
consideration of all relevant facts and circumstances reveals the
presence of a purpose that is not a legitimate business purpose, the
lender's action may have been taken with the intent of evading the
requirements of'' the final rule.\1113\ Both sentences must be read in
conjunction. The existence of a non-legitimate business purpose does
not mean that the lender necessarily intended to evade the rule's
requirements; it simply means that it may have done so. And commenters'
interpretation of the first sentence regarding ``solely for legitimate
business purposes'' is misguided. As the commentary itself states,
``the actual substance of the lender's action as well as other relevant
facts and circumstances will determine whether the lender's action was
taken with the intent of evading the requirements'' of the rule. By its
express terms, lenders who act solely from legitimate business purposes
will not be subject to enforcement of this provision. Accordingly, a
lender that modifies its practices to comply with the requirements of
the final rule will not violate the anti-evasion provision unless it
meets the threshold of acting with knowing or reckless intent to evade
the requirements.
---------------------------------------------------------------------------
\1112\ Comment 13-1 (emphasis added).
\1113\ Id. (emphasis added).
---------------------------------------------------------------------------
Some commenters warned that this provision could create a
``chilling effect'' that would cause lenders not to make loans and to
leave the market. To be sure, some lenders will likely change their
practices in light of the final rule, including performing ability-to-
repay underwriting of covered loans for the first time. However, it
seems highly unlikely that the anti-evasion provision itself would be
the cause of lenders changing their practices or exiting the market. In
fact, the Bureau concludes that the intent requirement is a key element
that undercuts arguments that the anti-evasion provision is unfair to
lenders or will over-deter desirable conduct and punish undeserving
actors.
In terms of evaluating a lender's practices under the anti-evasion
provision, commenters made conflicting arguments that tend to
underscore the need to maintain flexibility if this provision is to
fulfill its intended purpose. Various limiting principles were
suggested--such as that any changes in lender practices that produce an
economic benefit for consumers should never be deemed to be evasions,
or that conduct during one defined period or another should be
established
[[Page 54813]]
as a firm baseline--but none of them appears to be consistent with the
general terms that Congress used to articulate and confer this
authority. Nor was any sound justification offered for the suggestion
that the Bureau should extend a safe harbor against its use of the
anti-evasion provision for at least the first year after the effective
date of the final rule. As stated in the commentary, the pertinent
analysis instead is and should be the ``actual substance of the
lender's action as well as other relevant facts and circumstances'' and
thus the Bureau made no changes to the commentary in this regard.
Finally, in light of this discussion, the Bureau concludes that the
final anti-evasion provision is not arbitrary and capricious. Lenders
are on notice about the substantive provisions of the final rule and
they are on notice that if they act with knowing or reckless intent to
evade those provisions, they may be subject to the anti-evasion
provision. Congress expressly authorized the Bureau to enact such a
provision pursuant to the Dodd-Frank Act, and through this rulemaking
process the Bureau has considered the relevant factors, including
numerous public comments and its own analysis, to adopt this anti-
evasion provision in Sec. 1041.13 of the final rule.
Section 1041.14 Severability
Proposal
Proposed Sec. 1041.20 would have made the provisions of this rule
separate and severable from one another.
Comments Received
Several commenters argued that the proposed rule should not include
a severance provision because the various provisions of the proposal
are interconnected and the proposal would create a whole new
comprehensive regulatory framework. As such, if one provision is deemed
invalid, they argued, the entire system should be deemed invalid.
Commenters noted their impression that the proposal repeatedly
emphasized that the provisions were designed to work in tandem, noting
specifically the relationship between proposed Sec. Sec. 1041.5 and
1041.7.
Final Rule
The Bureau is finalizing proposed Sec. 1041.20 as final Sec.
1041.14, such that it now reads: ``The provisions of this part are
separate and severable from one another. If any provision is stayed or
determined to be invalid, the remaining provisions shall continue in
effect.'' The final rule removes the phrase ``it is the Bureau's
intention that'' from the provision to clarify that the provision is
not dependent on the Bureau's intention.
This is a standard severability clause of the kind that is included
in most regulations and much legislation to clearly express agency
intent about the course that is preferred if such events were to occur.
The Bureau disagrees with commenters that the provisions are so
interconnected that if one provision should fail, the others should, as
well. The Bureau specifically designed the framework of the rule so
that the fundamental protections will continue regardless of whether
one or another provision is not effectuated. The rule anticipates
certain contingencies. For example, lenders can still enter into loans
made pursuant to final Sec. 1041.5, regardless of whether there is a
registered information system pursuant to Sec. 1041.11. Lenders may
not be able to do so under Sec. 1041.6. In the absence of such
protections, then under the terms of the rule itself, such lending is
not available, and that framework should thus continue.
Further, Sec. 1041.6 is an exemption from Sec. 1041.5, and thus,
Sec. 1041.5 alone should be more than sufficient to prevent the unfair
and abusive practice identified in Sec. 1041.4 if Sec. 1041.6 should
be overturned. Additionally, part B (Sec. Sec. 1041.4 through 1041.6)
and part C (Sec. Sec. 1041.7 through 1041.9) are entirely separate,
based on separate identified unfair and abusive practices, and thus, if
either should fall, the other should remain intact and continue to
operate.
These examples are merely illustrative, and do not constitute a
complete list of sections which are severable from each other, nor of
reasons that sections can operate independently from each other. The
Bureau designed each individual provision to operate independently and,
thus the Bureau is finalizing the severability clause, as proposed.
VI. Effective Date
Proposed Rule
The Bureau proposed that, in general, the final rule would take
effect 15 months after publication in the Federal Register. The Bureau
believed that 15 months struck the appropriate balance between
providing consumers with necessary protections while giving covered
persons adequate time to comply with all aspects of the final rule. In
particular, the Bureau gave thought to the time necessary to implement
the consumer reporting components of the proposal, in addition to the
time that lenders would need to adjust their underwriting practices and
prepare to provide new consumer disclosures. The Bureau proposed that
proposed Sec. 1041.17 (now final Sec. 1041.11) would take effect 60
days after publication in the Federal Register with regard to
registered information systems. The Bureau believed that this earlier
effective date for Sec. 1041.17 was appropriate to allow the standards
and process for registration to be in place, which would be necessary
for the information systems to be operational by the effective date of
the other provisions of the final rule.
Comments Received
The Bureau received several comments suggesting that it should
extend the effective date as to the general rule, with particular focus
on 24 months after publication in the Federal Register as a proposed
alternative. Commenters argued that 2 years would be necessary because
they believed the rule would substantially change the core structure of
the industry. One commenter cited the experience with the TILA-RESPA
Integrated Disclosure Rule as evidence that complicated regulations
require significant implementation time. That rule was initially
published in the Federal Register on December 31, 2013, with an
effective date of August 1, 2015,\1114\ but the effective date was
extended to October 3, 2015, roughly 21 months after the initial rule
was published.\1115\ Other commenters, more generally, suggested it
would take more than 15 months, or ``years,'' to revise underwriting
standards, develop new loan origination processes, train staff, upgrade
systems to meet the new underwriting, disclosure, and recordkeeping
requirements, and integrate their systems with the registered
information systems.
---------------------------------------------------------------------------
\1114\ 78 FR 79730 (Dec. 31, 2013).
\1115\ 80 FR 43911 (July 24, 2015).
---------------------------------------------------------------------------
Commenters also asked the Bureau more specifically to delay the
date after which lenders will need to obtain a consumer report from a
registered information system, citing concerns that lenders would be
unable to make loans under the exemption in Sec. 1041.6 if an
information system is not registered sufficiently in advance of that
data to allow lenders to rely on a consumer report from a registered
information system as required under Sec. 1041.6.
Final Rule
In light of comments received, and extended deadlines elsewhere in
the rule, the Bureau is extending by six
[[Page 54814]]
months the compliance date for Sec. Sec. 1041.2 through 141.10,
1041.12, and 1041.13. The final rule will have an effective date of
January 16, 2018, 60 days after publication in the Federal Register,
and a compliance date for Sec. Sec. 1041.2 through 1041.10, 1041.12,
and 1041.13 of August 19, 2019, 21 months after publication in the
Federal Register. The deadline to submit an application for preliminary
approval for registration pursuant to Sec. 1041.11(c)(1) is April 16,
2018, 150 days after publication in the Federal Register. Accordingly,
the standards and processes for registration as registered information
systems will become operative 60 days after the final rule's
publication. However, it was persuaded that other time frames, based on
the comments it received, should be extended. See the section-by-
section analysis for Sec. Sec. 1041.10 and 1041.11 for more details.
The Bureau has extended deadlines for applying to be a registered
information system found in Sec. 1041.11(c)(3). It has also extended
the amount of time an information system must be registered before a
lender must furnish to it under Sec. 1041.10(b). The combined amount
of time extended for registration and preparation to furnish is 5
months. It is the Bureau's intent to have information systems
registered at least 180 days prior to the compliance date of Sec. Sec.
1041.2 through 1041.10, 1041.12, and 1041.13 such that lenders can
furnish to and obtain reports from a registered information system, and
make loans under Sec. 1041.6, immediately upon that effective date. To
help ensure that occurs, the Bureau needed to extend the compliance
date of Sec. Sec. 1041.2 through 1041.10, 1041.12, and 1041.13, in
light of the extended deadlines in Sec. Sec. 1041.10 and 1041.11, by
at least 5 months.
The timeline for implementation of the rule is as follows. The rule
goes into effect 60 days after publication of the rule in the Federal
Register. The deadline to submit an application for preliminary
approval to become a registered information system before August 19,
2019 is 90 days from the effective date of Sec. 1041.11 (it was 30
days in the proposal). That means the deadline for applicants seeking
preliminary approval is 150 days after publication in the Federal
Register. Once the Bureau grants preliminary approval, the applicant
will have an additional 120 days to submit an application to become a
registered information system (it was 90 days in the proposal). Under
Sec. 1041.10(b), lenders will be required to furnish to a registered
information system that has been registered for 180 days or more (it
was 120 days or more in the proposal), or upon the compliance date of
Sec. 1041.10, whichever is later. This will allow a period of at least
180 days for lenders to onboard to the registered information system
and prepare to furnish. The Bureau believes a compliance date for
Sec. Sec. 1041.2 through 1041.10, 1041.12, and 1041.13 of 21 months
after publication of the final rule in the Federal Register will
accommodate these new periods and give the Bureau enough time to review
applications.
The Bureau also agrees that the industry may need additional time
to implement the requirements of this rule. The Bureau seeks to balance
giving enough time for an orderly implementation period against the
interest of enacting protections for consumers as soon as possible. The
Bureau believes that by providing an additional 6 months for compliance
with Sec. Sec. 1041.2 through 1041.10, 1041.12, and 1041.13, lenders
should be able to reasonably adjust their practices to come into
compliance with the rule. Of course, the Bureau will monitor the
implementation period and make adjustments as appropriate.
VII. Section 1022(b)(2) Analysis
A. Overview
In developing this final rule, the Bureau has considered the
potential benefits, costs, and impacts as required by section
1022(b)(2) of the Dodd-Frank Act. Specifically, section 1022(b)(2)
calls for the Bureau to consider the potential benefits and costs of a
regulation to consumers and covered persons, including the potential
reduction of access by consumers to consumer financial products or
services, the impact on depository institutions and credit unions with
$10 billion or less in total assets as described in section 1026 of the
Dodd-Frank Act, and the impact on consumers in rural areas.
In the proposal, the Bureau set forth a preliminary analysis of
these effects and requested comments that could inform the Bureau's
analysis of the benefits, costs, and impacts of the proposal. In
response, the Bureau received a number of comments on the topic. The
Bureau has consulted with the prudential regulators and the Federal
Trade Commission, including consultation regarding consistency with any
prudential, market, or systemic objectives administered by such
agencies.
The Bureau specifically invited comment on all aspects of the data
that it used to analyze the potential benefits, costs, and impacts of
the proposed provisions. While some commenters provided additional
empirical analyses and data, the Bureau notes that in some instances,
the requisite data are not available or are quite limited. As a result,
portions of this analysis rely, at least in part, on general economic
principles, the Bureau's experience and expertise in consumer financial
markets, and qualitative evidence provided by commenters, while other
portions rely on the data that the Bureau has collected and analyzed
about millions of these loans. Many of the benefits, costs, and impacts
of the final rule are presented in ranges, rather than as point
estimates.
The Bureau also discussed and requested comment on several
potential alternatives, which it listed in the proposal's Initial
Regulatory Flexibility Analysis (IRFA) and also referenced in its
Section 1022(b)(2) Analysis. A further detailed discussion of potential
alternatives considered is provided in part VII.J and the Final
Regulatory Flexibility Analysis (FRFA) in part VIII below.
B. Major Provisions and Coverage
In this analysis, the Bureau focuses on the benefits, costs, and
impacts of the four major elements of the final rule: (1) The
requirement to reasonably determine borrowers' ability to repay covered
short-term and longer-term balloon-payment loans according to their
terms (along with the exemption allowing for a principal step-down
approach to issuing a limited number of short-term loans); (2) certain
limitations on attempts to initiate payment for covered loans; (3) the
recordkeeping requirements associated with (1) and (2); and (4) the
rule's requirements concerning registered information systems.
The discussion of impacts that follows is organized into these four
main categories. Within each, the discussion is organized to facilitate
a clear and complete consideration of the benefits, costs, and impacts
of the major provisions of the rule. Impacts on depository institutions
with $10 billion or less in total assets and on rural consumers are
discussed separately below.
There are two major classes of short-term lenders the Bureau
expects to be affected by the ability-to-repay provisions of the rule:
Payday/unsecured short-term lenders, both storefront and online, and
short-term vehicle title lenders. The Bureau also believes there is at
least one bank that makes deposit advance product loans that are likely
to be covered by these
[[Page 54815]]
provisions. The Bureau recognizes that some community banks and credit
unions occasionally make short-term secured or unsecured loans, but the
Bureau believes that those loans will generally fall within the
exemption for alternative loans or the exemption for accommodation
loans under Sec. 1041.3(e) and (f). Similarly, the Bureau recognizes
that some firms in the financial technology (fin tech) space are
seeking to offer products designed to enable consumers to better cope
with liquidity shortfalls, but the Bureau believes that those products,
to a significant extent, will fall within the exclusion for wage
advance programs under Sec. 1041.3(d)(7) or the exclusion for no-cost
advances under Sec. 1041.3(d)(8).\1116\
---------------------------------------------------------------------------
\1116\ The Bureau also believes many of the current ``fintech''
offerings fall outside of at least the ability-to-repay requirements
of the rule, as they often focus on longer-term lending without
balloon payments.
---------------------------------------------------------------------------
In addition to short-term lenders, lenders making longer-term
balloon-payment loans (either vehicle title or unsecured) are also
covered by the ATR requirements and the rule's requirements concerning
registered information systems. The Bureau believes there are many
fewer such lenders, but notes that the following discussion applies to
these lenders as well.
The provisions relating to payment practices and related notices
apply to any lender making a covered loan, either covered short-term
loans, covered longer-term balloon-payment loans, or covered longer-
term loans. However, payment withdrawals by lenders who also hold the
consumer's deposit account are exempt if they meet certain conditions.
The payment provisions affect certain online lenders, who make loans
with an APR above 36 percent and normally receive payments via ACH or
other electronic means. In addition, storefront payday or payday
installment lenders that receive payment via ACH or post-dated check,
either for regular payments or when a borrower has failed to come to
the store and make a cash payment in person, will be affected, as will
some traditional finance companies if they make loans that meet the
criteria for a covered longer-term loan. Lenders making vehicle title
loans often do not obtain the same forms of account access, but those
that do will also be affected.
The provisions relating to recordkeeping requirements apply to any
lender making covered loans, with additional requirements for lenders
making covered short-term and longer-term balloon-payment loans. The
provisions relating to the application process for entities seeking to
become registered information systems govern any and all entities that
apply to become such information systems.\1117\ The provisions relating
to the requirements to operate as a provisionally registered or
registered information system apply to any entity that becomes a
provisionally registered or registered information system.
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\1117\ In this section the Bureau's references to registered
information systems will generally include both provisionally
registered information systems and registered information systems,
as lenders will be required to report to both types of systems, and
incur similar costs to do so.
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The Bureau received many comments that seemed to mistakenly
interpret the rule as a ban on payday and/or vehicle title loans. It
should be noted that none of the above provisions, either on their own
or in combination, constitutes a ban on covered lending. As such, the
rule does not explicitly ban payday, vehicle title, longer-term
balloon, or any other covered loans. While the Bureau estimates that
there will be a substantial reduction in the volume of covered short-
term payday loans made in response to the rule prior to any reforms
that may occur in the market, the Bureau believes such loans will
remain available to the vast majority of consumers facing a truly
short-term need for credit (where permitted by State law). In fact, as
described in greater detail below, the Bureau's simulations suggest
that the rule will only restrict roughly 6 percent of borrowers from
initiating a payday borrowing sequence they would have initiated absent
the rule. In the case of short-term vehicle title loans, the Bureau
acknowledges that a more substantial portion of lending will be
curtailed.\1118\
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\1118\ In this section the Bureau focuses most of its analysis
on payday and vehicle title loans, rather than the longer-term
balloon-payment loans that face similar coverage. The Bureau has
observed that longer-term balloon-payment loans are currently less
common, and have arisen mostly in response to regulatory regimes
restricting or banning payday loans. As such, the Bureau has
substantially less evidence about these loans. The Bureau does
possess data for a single lender that made longer-term vehicle title
loans with both balloon and amortizing payment schedules. These data
show that loans with balloon payments defaulted at a substantially
higher rate (see ``CFPB Report on Supplemental Findings,'' at 30),
but do not provide much insight into the broader market for these
loans. Still, the Bureau has concluded that they generally lead to
similar harms due to their payment structures, and will experience
similar effects from this rule.
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C. Baseline for Consideration of Benefits, Costs, and Impacts
In considering the potential benefits, costs, and impacts of the
rule, the Bureau takes as the baseline for the analysis the regulatory
regime that currently exists for the covered products and covered
persons.\1119\ Given that the Bureau takes the status quo as the
baseline, the analysis below focuses on providers that currently offer
short-term loans and longer-term loans with balloon features, the
potential entrants into the market for registered information systems
required under this rule (although their participation is voluntary),
and, to a lesser extent, providers of covered longer-term loans that
face limits on their activities only through the intervention affecting
payment practices.
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\1119\ The Bureau has discretion in each rulemaking to choose
the relevant provisions to discuss and to choose the most
appropriate baseline for that particular rulemaking.
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The baseline considers economic attributes of the relevant markets
and the existing legal and regulatory structures applicable to
providers. Most notably, the baseline recognizes the wide variation in
State-level restrictions that currently exist. As described in greater
detail in part II above, there are now 35 States that either have
created a carve-out from their general usury cap for payday loans or
have no usury caps on consumer loans.\1120\ The remaining 15 States and
the District of Columbia either ban payday loans or have fee or
interest rate caps that payday lenders apparently find too low to
sustain their business models. Further variation exists within States
that allow payday loans, as States vary in their payday loan size
limits and their rules related to rollovers (e.g., when rollovers are
permitted and whether they are subject to certain limitations such as a
numerical cap or requirements that the borrower must amortize the
rollover by repaying part of the original loan
[[Page 54816]]
amount with each payment made). Numerous cities and counties within
these States have also passed local ordinances restricting the
location, number, or product features of payday lenders.\1121\
Restrictions on vehicle title lending similarly vary across and within
States, in a manner that often (but not always) overlaps with payday
lending restrictions. Overall, these restrictions leave fewer than half
of States having vehicle title lenders.\1122\
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\1120\ See Pew Charitable Trusts, ``State Payday Loan Regulation
and Usage Rates,'' (Jan. 14, 2014), available at http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates (for a list of States). Other
reports reach slightly different totals of payday authorizing States
depending on their categorization methodology. See, e.g., Susanna
Montezemolo, ``The State of Lending in America & Its Impact on U.S.
Households: Payday Lending Abuses and Predatory Practices,'' at 32-
33 (Ctr. for Responsible Lending 2013), available at http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf; Consumer Fed'n of Am., ``Legal Status of Payday Loans by
State,'' available at http://www.paydayloaninfo.org/state-information (last visited Apr. 6, 2016) (lists 32 States as having
authorized or allowed payday lending). Since publication of these
reports, South Dakota enacted a 36 percent usury cap for consumer
loans. Press Release, S.D. Dep't of Labor and Reg., ``Initiated
Measure 21 Approved'' (Nov. 10, 2016), available at http://dlr.sd.gov/news/releases16/nr111016_initiated_measure_21.pdf.
Legislation in New Mexico prohibiting short-term payday and vehicle
title loans will go into effect on January 1, 2018. Regulatory
Alert, N.M. Reg. and Licensing Dep't, ``Small Loan Reforms,''
available at http://www.rld.state.nm.us/uploads/files/HB%20347%20Alert%20Final.pdf.
\1121\ For a sample list of local payday ordinances and
resolutions, see Consumer Fed'n of Am., ``Controlling the Growth of
Payday Lending Through Local Ordinances and Resolutions,'' (Oct.
2012), available at www.consumerfed.org/pdfs/Resources.PDL.LocalOrdinanceManual11.13.12.pdf.
\1122\ For a discussion of State vehicle title lending
restrictions, see Consumer Fed'n of Am., Car Title Loan Regulation
(Nov. 16, 2016), available at http://consumerfed.org/wp-content/uploads/2017/01/11-16-16-Car-Title-Loan-Regulation_Chart.pdf.
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Another notable feature of the baseline is the restriction in the
Military Lending Act (MLA) to address concerns that servicemembers and
their families were becoming over-indebted in high-cost forms of
credit.\1123\ The MLA, as implemented by the Department of Defense's
regulation, requires, among other provisions, that the creditor may not
impose a military annual percentage rate (MAPR) greater than 36 percent
in connection with an extension of consumer credit to a covered
borrower. In 2007, the Department of Defense issued its initial
regulation under the MLA, limiting the Act's application to closed-end
loans with a term of 91 days or less in which the amount financed did
not exceed $2,000; closed-end vehicle title loans with a term of 181
days or less; and closed-end tax refund anticipation loans.\1124\ This
covered most short-term and longer-term payday loans and vehicle title
loans as well.\1125\
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\1123\ The Military Lending Act, part of the John Warner
National Defense Authorization Act for Fiscal Year 2007, was signed
into law in October 2006. The interest rate cap took effect October
1, 2007. See 10 U.S.C. 987.
\1124\ 72 FR 50580 (Aug. 31, 2007).
\1125\ As noted earlier, effective October 2015 the Department
of Defense expanded its definition of covered credit to include
open-end credit and longer-term loans so that the MLA protections
generally apply to all credit subject to the requirements of
Regulation Z of the Truth in Lending Act, other than certain
products excluded by statute. See 80 FR 43560 (July 22, 2015)
(codified at 32 CFR part 232).
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In considering the benefits, costs and impacts of the rule, the
Bureau recognizes this baseline. More specifically, the Bureau notes
that the rule will not have impacts, with some limited exceptions, for
consumers in States that currently do not allow such lending. It is
possible that consumers in these States do access such loans online, by
crossing State lines, or through other means, and to the extent the
rule limits such lending, they may be impacted. Similarly, in States
with more binding limits on payday lending, the rule will have fewer
impacts on consumers and covered persons as the State laws may already
be restricting lending. The overall effects of these more restrictive
State laws were described earlier in part II. In the remaining States,
which are those that allow lending covered by the rule without any
binding limitations, the rule will have its most substantial impacts.
Notably, the quantitative simulations discussed below reflect these
variations in the baseline across States and across consumers with one
exception. The data used inherently capture the nature of shocks to
consumers' income and payments that drive demand for covered loans. To
the extent that these have not changed since the time periods covered
by the data, they are captured in the simulations. The analysis also
captures the statutory and regulatory environment at the time of the
data. The implication is that to the extent that the environment has
changed since 2011-2012, those changes are not reflected in the
simulations. More specifically, the simulations will overstate the
effect of the rule in those areas where regulatory changes since that
time have limited lending, and will underestimate the effect of the
rule in any areas where regulatory changes since that time have relaxed
restrictions on lending. In general, the Bureau believes that the
States have become more restrictive over the past five years so that
the simulations here are more likely to overstate the effects of the
rule. That said, the simulation results are generally consistent with
the additional estimates, using other data and time periods, provided
to the Bureau in comments.
D. Description of the Market Failure
The primary concern in this market, as described in Market
Concerns--Underwriting and the section-by-section analysis of Sec.
1041.4, is that many borrowers experience long and unanticipated
durations of indebtedness. That is, the failures in the market do not
necessarily impact the average borrower experience, but instead impact
those borrowers who experience longer sequences of loans. If the
likelihood of re-borrowing, and in particular re-borrowing that results
in longer sequences is underestimated by customers when they take their
initial loans, the existence of these sequences implies imperfect or
incomplete information. This lack of information constitutes a
potentially harmful market failure.\1126\
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\1126\ Note that the characterization of market failure here
does not hinge only on the outcome of long sequences, but the
unanticipated nature of that outcome. Also note that the typical
customer anticipating his or her sequence length, or customers as a
whole properly anticipating the average duration of indebtedness, is
not a credible counterargument to this market failure. If few (or
none) of the individuals who experience long sequences properly
anticipated the likelihood that a sequence of this length might
occur, that in and of itself would constitute a market failure. In
assessing the costs and benefits of the rule, this section remains
agnostic about the source of the information deficiency; however
Sec. 1041.4 describes the Bureau's view about the nature and source
of consumers' inaccurate expectations.
---------------------------------------------------------------------------
That the likelihood of these long sequences is underestimated or
unanticipated is supported by empirical findings in the academic
literature. The Bureau believes that Mann (2013) provides the most
relevant data describing borrowers' expected durations of indebtedness
with payday loan products.\1127\ Many comments received in response to
the proposal, including one from Professor Mann himself, suggest this
is a widely held view. However, the Bureau's consideration of the facts
provided in Mann (2013) differs from the main points highlighted in the
study, and reiterated in Professor Mann's comment letter. This was
discussed at length in Market Concerns--Underwriting and is addressed
more completely, along with a discussion of the broader literature on
the accuracy of borrowers' expectations, in part VII.F.2.
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\1127\ Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, at 132 (2013). Also
note that, while Mann's approach is the most relevant for this rule,
there are other studies that explore the accuracy of borrowers'
expectations about continued use of short-term loans. These studies
are discussed in part VII.F.2 below.
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In summary, Mann asserts that borrowers are generally accurate in
their predictions (citing the fact that 57 percent predict their time
in debt within a 14-day window),\1128\ that many anticipate re-
borrowing (40 percent anticipated they would ``continue their borrowing
after its original due date''),\1129\ and that borrowers were about as
likely to overestimate their times in debt as they were to
underestimate them. The Bureau did not contradict these findings in the
[[Page 54817]]
proposal, nor does it attempt to do so now.
---------------------------------------------------------------------------
\1128\ Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, at 123 (2013). Note
that the reported value of 57 percent is out of respondents who
answered the relevant question (approximately 80 percent of all
survey respondents), meaning that only 46 percent of all survey
respondents made predictions with this accuracy.
\1129\ See Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, at 120 (2013).
---------------------------------------------------------------------------
However, the Bureau believes these data also provide strong
evidence that those borrowers who experience long periods of
indebtedness did not anticipate those experiences. For example, of the
borrowers who remained in debt at least 140 days (10 biweekly loans),
it appears that all (100 percent) underestimated their times in debt,
with the average borrower in this group spending 119 more days in debt
than anticipated (equivalent to 8.5 unanticipated rollovers). Of those
borrowers who spent 90 or more days in debt (i.e., those most directly
affected by the rule's limits on re-borrowing under Sec. 1041.6), it
appears that more than 95 percent underestimated their time in debt,
spending an average of 92 more days in debt than anticipated
(equivalent to 6.5 unanticipated rollovers).\1130\
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\1130\ Theoretically, these findings can be reconciled with a
rational expectations model, but only under very specific
conditions. Specifically, one has to assume that borrowers have no
or very little information on which to base their predictions of
their length of indebtedness. In that case, the extreme outcomes are
simply very rare realizations from some distribution of outcomes. To
the extent that borrowers have information about their own financial
circumstances (e.g., repeat borrowers know their past experience
with payday loans), the above assumption cannot be plausibly
maintained. And in fact, past experience is predictive of the future
length of indebtedness: In a hazard model, the length of past loan
sequences has an economically and statistically significant negative
impact on the hazard of subsequent loan sequences ending, which
implies that individuals with long sequences tend to have longer
subsequent loan sequences.
---------------------------------------------------------------------------
There is also evidence that even short-term borrowers do not fully
expect the outcomes they realize. For example, only 40 percent of
borrowers anticipated re-borrowing, but it appears that more than 70
percent of the customers Mann surveyed did in fact re-borrow. As such,
even those borrowers who accurately predict their durations of
indebtedness within a 14-day window are likely to have experienced
unanticipated re-borrowing. Across all borrowers in the data, a line of
``best fit'' provided by Professor Mann describing the relationship
between a borrower's expected time in debt and the actual time in debt
experienced by that borrower shows effectively zero slope (indicating
no correlation between a borrower's expectations and outcomes).\1131\
This shows that, regardless of whether borrowers experienced short or
long durations of indebtedness, they did not systematically predict
their outcomes with any sort of accuracy or precision. While many
individuals appear to have anticipated short durations of use with
reasonable accuracy (highlighted by Mann's interpretation), borrowers'
individual predictions did not appear to be correlated with their
actual outcomes, and virtually none accurately predicted long durations
(which is the market failure described here).\1132\
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\1131\ Again, technically these findings can be reconciled with
a rational expectations model if one assumes that borrowers have no
information on which to base their predictions of their length of
indebtedness, but as argued in the preceding footnote, this
assumption cannot be plausibly maintained.
\1132\ It should be noted that Professor Mann did not provide
his data to the Bureau, either prior to the proposal, or in his
comment in response to the proposal. In place of these data, the
Bureau is relying on the charts and graphs he provided in his
correspondence with and presentation to the Bureau. Among other
things, these graphs depict the distribution of borrowers'
expectations and outcomes, but as they are scatterplots, counting
the number of observations in areas of heavy mass (e.g., expecting
no rollovers) is difficult. However, the scatterplot depicts only
sequences up to approximately 170 days in length, while subsequent
histograms of sequence length show a large portion of borrowers
experiencing sequences of 200 or more days (approximately 13
percent). It appears these borrowers are not depicted on the
scatterplots. As such, the analysis provided here may be somewhat
imprecise.
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E. Major Impacts of the Rule
The primary impact of this rule, prior to any reforms it may prompt
in market practices, will be a substantial reduction in the volume of
short-term payday and vehicle title loans (measured in both number and
total dollar value), and a corresponding decrease in the revenues that
lenders realize from these loans. Simulations based on the Bureau's
data indicate that payday loan volumes will decrease by 62 percent to
68 percent, with a corresponding decrease in revenue.\1133\ Simulations
of the impact on short-term vehicle title lending predict a decrease in
loan volumes of 89 percent to 93 percent, with an approximately
equivalent reduction in revenues. The specific details, assumptions,
and structure of these simulations are described in detail below.
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\1133\ The Bureau ran a number of simulations based on different
market structures that may result after the rule. The estimates
cited here come from the specifications where lenders make loans
under both the ATR and principal step-down approaches. See part
VII.F.1.c for descriptions of all the simulations conducted by the
Bureau, and their results.
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The Bureau expects these declines will result in a sizable decrease
in the number of storefronts, as was observed in States that
experienced similar declines after adopting regulations of loan volumes
(e.g., Washington). This decline may limit some physical access to
credit for consumers, and this limit may be felt more acutely by
consumers in rural areas. Additionally, the decrease in storefronts is
likely to impact small lenders and lenders in rural areas more than
larger lenders and those in areas of greater population density.
However, borrowers in rural areas are expected to retain much of their
access to these loans. In States with regulatory changes that led to
decreases in storefronts, over 90 percent of borrowers had to travel an
additional five miles or less in order to obtain such a loan.
Additionally, the Bureau expects that online options will be available
to the vast majority of current borrowers, including those in rural
areas.\1134\ Consumers may also substitute non-restricted borrowing
options (e.g., longer-term loans not covered by the originations
portion of the rule, credit cards, informal borrowing from family or
friends, or other alternatives).
---------------------------------------------------------------------------
\1134\ This geographic impact on borrowers is discussed in the
section on Reduced Geographic Availability of Covered Short-Term
Loans in part VII.F.2.b.v below.
---------------------------------------------------------------------------
As discussed further below, the welfare impacts of the decline in
lending are expected to be positive for consumers, and negative for
lenders. Decreased revenues (more precisely, decreased profits) in an
industry with low concentration are expected to lead to exit by many
current providers. Additionally, many of the restrictions imposed by
the rule could have been voluntarily adopted by lenders absent the
rule; that they were not implies the changes are likely to be at least
weakly welfare-decreasing for lenders. As for the welfare impact on
consumers, in an efficient market (one that is competitive, fully
informed, and in which agents are rational and possess perfect
foresight) a decrease in access to credit should decrease consumer
welfare (though consumers would save an amount equal to the revenue
lost by lenders). However, as discussed in Market Concerns--
Underwriting, the section-by-section analysis for Sec. 1041.4, and
throughout this analysis, the payday and vehicle title lending markets
exhibit characteristics consistent with a market failure. If some of
the demand for these loans results from departures from rational
expectations (or any other violation of neoclassical economic theory),
reducing access may improve consumer welfare. To weigh these possible
outcomes, the Bureau conducted a broad assessment of the literature
pertaining to the welfare effects of short-term payday and vehicle
title loans. A summary of this assessment is presented in part
VII.F.2.c.
The Bureau believes that the evidence on the impacts of the
availability of
[[Page 54818]]
payday loans on consumer welfare indeed varies. In general, the
evidence to date suggests that access to payday loans appears to
benefit consumers in circumstances where they use these loans for short
periods to address an unforeseen and discrete need, such as when they
experience a transitory and unexpected shock to their incomes or
expenses. However, in more general circumstances, access to and
intensive use of these loans appears to make consumers worse off. A
more succinct summary is: Access to payday loans may well be beneficial
for those borrowers with discrete, short-term needs, but only if they
are able to successfully avoid long sequences of loans.
Short-term vehicle title borrowers are more likely to find that
they are unable to obtain an initial loan because the principal step-
down approach does not provide for vehicle title loans. Many of these
consumers may choose to pursue a payday loan instead and seek to avail
themselves of the principal step-down approach. However, as noted
later, State restrictions and the financial condition of these
borrowers may limit these options.
As this rule will allow for continued access to the credit that
appears most beneficial--that which assists consumers with discrete,
short-term needs--the Bureau believes that much of the welfare benefit
estimated in the literature will be preserved, despite the substantial
reduction in availability of re-borrowing. Additionally, the rule
limits the harm that may be realized by borrowers who experience long
durations of indebtedness where the literature, albeit more limited,
and the Bureau's own analysis and study suggest the welfare impacts of
prolonged re-borrowing are negative. Given this, the Bureau has
concluded that the overall impacts of the decreased loan volumes
resulting from the rule for consumers will be positive.\1135\
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\1135\ Note that the Bureau has observed that longer-term
balloon-payment loans are uncommon in the current market. As such,
while the rule's relative impact on these loans is expected to be
similar to the impact on payday and vehicle title loans, the
absolute magnitude of the impact on these loans is expected to be
small. This is because the Bureau takes the current market as its
baseline, and longer-term balloon-payment loans represent a small
share of covered loans in this baseline.
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Relative to the considerations above, the remaining costs and
benefits of this rule are much smaller. Most of these impacts manifest
as administrative, compliance, or time costs; or as benefits from
reductions in fraud or increased transparency. The Bureau expects most
of these impacts to be fairly small on a per loan/customer/lender
basis. These impacts include, inter alia, those applicable to the
registered information systems envisioned by the rule's requirements;
those associated with furnishing requirements on lenders and consumers
(e.g., cost to establish connection with registered information
systems, benefit from reduced fraud); those associated with conducting
an ATR assessment for loans that require such an assessment (e.g., cost
to obtain a consumer report, benefit of decreased defaults); those
associated with the increased requirements for record retention; those
associated with disclosures regarding principal step-down loans; those
associated with the prescribed payment interventions (e.g., cost from
additional disclosures, benefits from reduced NSF or overdraft fees);
and the additional benefits associated with reduced loan volumes (e.g.,
changes in defaults or account closures). Each of these costs and
benefits, broken down by market participant (lender, registered
information system, consumer) is discussed in detail below.
In addition, the Bureau has conducted a Final Regulatory
Flexibility Analysis (FRFA), which describes the impact of the rule on
small entities, responds to the significant issues raised by the public
comments and the Chief Counsel for Advocacy of the Small Business
Administration regarding the proposal's Initial Regulatory Flexibility
Analysis, and describes changes made to the proposed rule in the final
rule in response to these comments. The FRFA also provides an estimate
of the number of small entities to which the final rule will apply;
descriptions of the projected reporting, recordkeeping, and other
compliance requirements of the rule; and a description of the steps the
Bureau has taken to minimize the significant economic impact on small
entities and a statement of the reasons for selecting the final rule
over the other significant alternatives considered.
The Bureau has also conducted a Paperwork Reduction Act (PRA)
analysis to estimate the cost in burden hours and the dollar costs of
the information collection requirements to the entities subject to the
rule. The PRA separates these cost estimates into one-time and annual
ongoing categories for total burden cost, labor burden hour cost, and
labor burden dollar cost. Cost estimates are included for the
requirements of the rule relating to disclosure, obtaining and
furnishing consumer information, obtaining a consumer report,
underwriting, registered information systems, prohibited payment
transfers, and obtaining authorization for both small and large
entities.
F. Benefits and Costs of the Rule to Covered Persons and Consumers--
Underwriting
This section discusses the impacts of the provisions of the loan
origination portions of the rule. Those provisions specifically relate
to covered short-term loans and covered longer-term balloon-payment
loans. The benefits and costs of these provisions may be affected by a
shift to products not covered by the origination portions of the rule.
For example, the potential for consumer substitution to longer-term
installment and other loans may have implications for the effects of
these provisions on those non-covered markets. The Bureau also
acknowledges that some new products may develop in response to this
rule, to cater to displaced demand for short-term liquidity. In fact,
many of the rule's exclusions and exemptions are intended to encourage
innovation in this market space. However, the potential evolution of
substitutes in the market that may arise in response to this rule is
beyond the scope of this analysis. Potential interactions with existing
products are discussed as appropriate.
The provisions discussed here include the requirements under Sec.
1041.5 that lenders determine that applicants for short-term loans and
longer-term balloon payment loans have the ability to repay the loan
while still meeting their major financial obligations and paying for
basic living expenses, as well as the alternative set of requirements
for originating short-term loans discussed in Sec. 1041.6. In this
analysis, the practice of making loans after determining that the
borrower has the ability to repay the loan will be referred to as the
``ATR approach,'' while the practice of making loans by complying with
the alternative requirements under Sec. 1041.6 will be referred to as
the ``principal step-down approach.''
The procedural requirements for originations, and the associated
restrictions on re-borrowing, are likely to have a substantial impact
on the markets for these products. In order to present a clear analysis
of the benefits and costs of the rule, this section first describes the
benefits and costs of the rule to covered persons and then discusses
the implications of the rule for the overall markets for these
products. The benefits and costs to consumers are then described.
1. Benefits and Costs to Covered Persons
The rule imposes a number of procedural requirements on lenders
making covered short-term and longer-
[[Page 54819]]
term balloon-payment loans, as well as imposing restrictions on the
number of these loans that can be made. This section first discusses
the benefits and costs of the procedural requirements for lenders using
the ATR approach with regard to originating loans and furnishing
certain related information to registered information systems over the
life of the loan. This is followed by a discussion of the benefits and
costs of the procedural requirements for lenders using the principal
step-down approach. The final section discusses the potential impacts
on loan volume and revenues of the underwriting and re-borrowing
restrictions under both the ATR and the principal step-down approach.
Most if not all of the provisions are activities that lenders could
choose to engage in absent the rule. The benefits to lenders of those
provisions are discussed here, but to the extent that lenders do not
voluntarily choose to engage in the activities, it is likely the case
that the benefits to lenders, in the lenders' view, do not currently
outweigh the costs to lenders.\1136\
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\1136\ It is possible that coordination problems limit the
development of market improvements. This would be the case if such
improvements are in the interest of each lender individually, but
only if such improvements are undertaken by all lenders in the
market.
---------------------------------------------------------------------------
The Bureau received many comments discussing the analysis of costs
and benefits provided in the proposal. These comments came from
industry, trade groups, consumer groups, customers, academic and other
researchers, and others. Many of these comments offered general
critiques of the assumptions made by the Bureau (e.g., with respect to
time to process applications or cost to implement compliance systems),
and others pointed out perceived deficiencies in the costs and benefits
considered (e.g., should bolster discussion of the benefits from
avoiding unaffordable payments, or should provide deeper consideration
of the cost of reduced access to credit). Relatively few comments
offered data, evidence, or specific values for the costs or benefits
likely to arise from the rule. Those comments that offered information
of direct relevance to the analysis of costs and benefits have been
considered--and where applicable, have been incorporated into--the
analysis that follows.
a. Procedural Requirements--ATR Approach
Lenders making loans using the ATR approach need to comply with
several procedural requirements when originating loans. Lenders need to
consult their own records and the records of their affiliates to
determine whether the borrower had taken out any prior short-term loans
or longer-term balloon-payment loans that were still outstanding or
were repaid within the prior 30 days. Lenders must obtain a consumer
report from a registered information system (if available) in order to
obtain information about the consumer's borrowing history across
lenders, and are required to furnish information regarding covered
loans they originate to all registered information systems.\1137\
Lenders are also required to obtain and verify information about the
amount of an applicant's income (unless not reasonably available) and
major financial obligations. Specifically, lenders must obtain a
statement from applicants of their income and payments on major
financial obligations, verification evidence where reasonably available
regarding income, and a consumer report from a nationwide consumer
reporting agency to verify major financial obligations. Lenders must
assess that information and apply an estimate of the borrower's basic
living expenses in order to determine whether a consumer has the
ability to repay the loan.
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\1137\ The Bureau received comments from a number of specialty
consumer reporting agencies that indicated they believed themselves
to be eligible to become registered information systems.
Additionally, at least three of these companies have publically
expressed interest in becoming registered information systems. As
such, the Bureau believes there will be at least one registered
information system when the market reaches steady-state.
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Each of the procedural requirements entails costs that are likely
to be incurred for loan applications, and not just for loans that are
originated. Lenders will likely avoid incurring the full set of costs
for each application by establishing procedures to reject applicants
who fail a screen based on a review of partial information. For
example, lenders are unlikely to collect any further information if
their records show that a borrower is ineligible for a loan given the
borrower's prior borrowing history. The Bureau expects that lenders
will organize their underwriting process so that the more costly steps
of the process are only taken for borrowers who satisfy other
requirements. Many lenders currently use other screens when making
loans, such as screens meant to identify potentially fraudulent
applications. If lenders employ these screens prior to collecting all
of the required information from borrowers, that will eliminate the
cost of collecting additional information on borrowers who fail those
screens. But in most cases lenders will incur some of these costs
evaluating loan applications that do not result in an originated loan,
and in some cases lenders will incur all of these costs in evaluating
loan applications that are eventually declined.
Finally, lenders are required to develop procedures to comply with
each of these requirements and train their staff in those procedures.
The Bureau believes that many lenders use automated systems when
originating loans and will modify those systems, or purchase upgrades
to those systems, to incorporate many of the procedural requirements of
the ATR approach. The costs of modifying or upgrading such a system and
training staff are discussed below, in the discussion of the costs of
developing procedures, upgrading systems, and training staff.
i. Consulting Lender's Own Records
In order to consult its own records and those of any affiliates, a
lender will need a system for recording loans that can be identified as
being made to a particular consumer and a method of reliably accessing
those records. The Bureau believes that lenders will most likely comply
with this requirement by using computerized recordkeeping. A lender
operating a single storefront will need a system of recording the loans
made from that storefront and accessing those loans by consumer. A
lender operating multiple storefronts or multiple affiliates will need
a centralized set of records or a way of accessing the records of all
of the storefronts or affiliates. A lender operating solely online will
presumably maintain a single set of records; if it maintains multiple
sets of records it will need a way to access each set of records.
The Bureau believes that lenders must track their loans in order to
service them. In addition, lenders need to track the borrowing and
repayment behavior of individual consumers to reduce their credit risk,
such as by avoiding lending to a consumer who has defaulted on a prior
loan. And most States that allow payday lending have requirements that
implicitly require lenders to have the ability to check their records
for prior loans to a loan applicant, including limitations on renewals
or rollovers, or cooling-off periods between loans. As such, existing
business needs for recordkeeping ensure that most lenders already have
the ability to comply with this provision, with the possible exception
of lenders with affiliates that are run as separate operations. Still,
there may be a small minority of lenders that currently do not have the
capacity to comply with this requirement.
[[Page 54820]]
Developing this capacity will enable these lenders to better
service the loans they originate and to better manage their lending
risk, such as by tracking the loan performance of their borrowers.
Lenders that do not already have a records system in place will need to
incur a one-time cost of developing such a system, which may require
investment in information technology hardware and/or software. The
Bureau estimates that purchasing necessary hardware and software will
cost approximately $2,000, plus $1,000 for each additional storefront.
The Bureau estimates that firms that already have standard personal
computer hardware, but no electronic recordkeeping system, will need to
incur a cost of approximately $500 per storefront. Lenders may instead
contract with a vendor to supply part or all of the systems and
training needs. For lenders that choose to access their records
manually, rather than through an automated loan origination system, the
Bureau estimates that doing so will take an average of nine minutes of
an employee's time.
The Bureau received no comments from industry or trade groups
asserting that a substantial number of lenders currently lack the
ability to check their records for prior loans, or that implementing
such a system would constitute an undue cost or burden. The Bureau
believes this supports the benefit-cost framework laid out here. The
Bureau did receive some comments noting that it had underestimated the
costs associated with developing a system capable of allowing lender
personnel to check the lender's records, including by not accounting
for training, maintenance, or furnishing costs. It was suggested by
some commenters that these costs would be especially burdensome for
small lenders. The Bureau addresses systems and training costs, and
explicitly discusses the impacts on smaller lenders, in part VIII. The
Bureau believes most lenders already have systems in place for which
training must occur, and acknowledges that training for any new systems
developed based on this rule would largely replace or be added to that
training.
ii. Obtaining a Consumer Report From a Registered Information System
The Bureau believes that many lenders already obtain from third
parties some of the information that will be included in the registered
information system data. For example, in many States a private third
party operates a database containing loan information on behalf of the
State regulator, and many lenders utilize similar third parties for
their own risk management purposes (e.g., fraud detection). However,
the Bureau recognizes that there also is a sizable segment of lenders
making short-term loans or longer-term balloon-payment loans that
operate only in States without a State-mandated loan database, and who
choose to make lending decisions without obtaining any data from a
specialty consumer reporting agency.
Lenders will receive benefits from being able to obtain timely
information about an applicant's borrowing history from a registered
information system. This information will include reasonably
comprehensive information about an applicant's current outstanding
covered loans, as well as his or her borrowing history with respect to
such loans. Lenders that do not currently obtain consumer reports from
specialty consumer reporting systems will benefit from reports from a
registered information system through reduced risks of fraud and
default. Additionally, the rule requires furnishing to registered
information systems of all covered short-term and longer-term balloon-
payment loans, meaning that even lenders that already receive reports
from specialty consumer reporting agencies will benefit by receiving
more comprehensive and complete information.
As noted above, the Bureau believes that many lenders use automated
loan origination systems and will modify those systems or purchase
upgrades to those systems such that they will automatically order a
report from a registered information system during the lending process.
For lenders that order reports manually, the Bureau estimates that it
will take approximately nine minutes on average for a lender to request
a report from a registered information system. For all lenders, the
Bureau expects that access to a registered information system will be
priced on a ``per-hit'' basis, where a hit is a report successfully
returned in response to a request for information about a particular
consumer at a particular point in time. The Bureau estimates that the
cost per hit will be $0.50, based on pricing in existing relevant
consumer reporting markets.
The Bureau received comments from trade groups and lenders
discussing the estimated ``per hit'' costs of the registered
information system reports. The comments were approximately evenly
split as to whether the estimated costs were substantially too low,
slightly too low, or approximately accurate. A trade group representing
mostly large depository institutions argued the cost is substantially
too low, and cited its members' average costs of $10.97 to purchase a
credit report. Given the drastic difference between this cost and those
stated by other commenters, the Bureau believes the credit reports
referred to (e.g., tri-bureau credit reports) are not the type that
would be purchased for this type of loan. This comparison did not seem
relevant to the cost to obtain a report from a registered information
system. A trade group representing small-dollar lenders also asserted
the estimated cost was too low, citing its members' average cost of $1
to obtain a credit report from a nationwide consumer reporting agency.
Finally, a large small-dollar lender asserted the $0.50 estimate
``appears to be right.'' Given that registered information systems are
likely to collect much less data than are collected by consumer
reporting agencies operating in the market today, it follows that the
cost of a report from a registered information system should be lower.
Given that the comments received directly from lenders regarding the
expected costs of a registered information system report argued the
estimate is generally accurate, the Bureau continues to believe the
cost per hit estimate of $0.50 is reasonable. Additionally, lenders
will only need to pull a report from one registered information system.
In the event that more than one registered information system enters
the market, the Bureau believes that competition is likely to put
downward pressure on the price of a report.\1138\
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\1138\ As noted previously in this part, at least three
specialty consumer reporting agencies have publicly expressed
interest in becoming registered information systems. As such, the
Bureau believes there will be at least one--and potentially
multiple--registered information systems.
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iii. Furnishing Information to Registered Information Systems
Lenders making covered short-term and longer-term balloon-payment
loans are required to furnish information about those loans to all
information systems that have been registered with the Bureau for 180
days or more, have been provisionally registered with the Bureau for
180 days or more, or have subsequently become registered after being
provisionally registered (generally referred to here as registered
information systems). At loan consummation, the information furnished
must include identifying information about the borrower, the type of
loan, the loan consummation date, the principal amount borrowed or
credit limit (for certain loans), and the payment due dates and
amounts. While a loan is outstanding, lenders must furnish information
about any update to
[[Page 54821]]
information previously furnished pursuant to the rule within a
reasonable period of time following the event prompting the update. And
when a loan ceases to be an outstanding loan, lenders must furnish the
date as of which the loan ceased to be outstanding and whether all
amounts owed in connection with the loan were paid in full, including
the amount financed, charges included in the cost of credit, and
charges excluded from the cost of credit.
Furnishing data to registered information systems will benefit all
lenders by improving the coverage and quality of information available
to lenders relative to the baseline. This will allow lenders to better
identify borrowers who pose relatively high default risk, and the
richer information and more complete market coverage will make fraud
detection more effective relative to the baseline.
Furnishing information to registered information systems also
requires lenders to incur one-time and ongoing costs. One-time costs
include those associated with establishing a relationship with each
registered information system, and developing policies and procedures
for furnishing the loan data and procedures for compliance with
applicable laws.\1139\ Lenders using automated loan origination systems
will likely modify those systems, or purchase upgrades to those
systems, to incorporate the ability to furnish the required information
to registered information systems.\1140\ The Bureau believes that large
lenders rely on proprietary loan origination systems, and estimates the
one-time programming cost for large respondents to update their systems
to carry out the various functions to be 1,000 hours per entity.\1141\
The Bureau believes small lenders that use automated loan origination
systems rely on licensed software. Depending on the nature of the
software license agreement, the Bureau estimates that the one-time cost
to upgrade this software will be $10,000 for lenders licensing the
software at the entity-level and $100 per ``seat'' (or user) for
lenders licensing the software using a seat-license contract. These
systems are for furnishing information to, and receiving information
from, registered information systems, obtaining consumer reports, and
assessing ability to repay. Given the price differential between the
entity-level licenses and the seat-license contracts, the Bureau
believes that only small lenders with a significant number of stores
will rely on the entity-level licenses.
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\1139\ In the event that multiple registered information systems
enter the market, the Bureau anticipates that some will choose to
furnish information to the other registered information systems on
behalf of the lender, as a way to compete for that lender's
business. Other third parties may also provide this service.
\1140\ Some software vendors that serve lenders that make payday
and other loans have developed enhancements to enable these lenders
to report loan information automatically to existing State reporting
systems.
\1141\ In the PRA analysis prepared by the Bureau, the burden
hours estimated to modify loan origination systems is 500. This is
because only some of the system modifications are for functions
related to information collections covered by the PRA. See Bureau of
Consumer Fin. Prot., Paperwork Reduction Act Information Collection
Request, Supporting Statement Part A, Payday, Vehicle Title and
Certain High-Cost Installment Loans (12 CFR part 1041) (posted Jul.
22), available at https://www.regulations.gov/document?D=CFPB-2016-0025-0002. The Bureau notes that these costs include the anticipated
costs to establish connections to furnish to, and pull from,
registered information systems. If more than one registered
information system exists (as noted previously, multiple companies
have publically expressed interest in becoming registered
information systems), the programming costs may increase. The Bureau
estimates this increase to be approximately 250 additional hours of
programming per registered information system.
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The ongoing costs will be the costs of accurately furnishing the
data.\1142\ Lenders with automated loan origination and servicing
systems with the capacity of furnishing the required data will have
very low ongoing costs.\1143\ Lenders that report information manually
will likely do so through a web-based form, which the Bureau estimates
will take three minutes to fill out for each loan at the time of
consummation, when information is updated (as applicable), and when the
loan ceases to be an outstanding loan. If multiple registered
information systems exist and they do not share data, it may be
necessary to incur this cost multiple times, unless there are services
that report to all registered information systems on behalf of a
lender.\1144\ The Bureau notes that in States where a private third-
party operates a database on behalf of a State regulator, some lenders
are already required to provide information similar to that required
under the rule, albeit to a single entity; such lenders thus have
experience complying with this type of requirement. Where possible, the
Bureau will also encourage the development of common data standards for
registered information systems in order to reduce the costs of
providing data to multiple information systems.
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\1142\ The Bureau also received comments noting that lenders
will have to incur additional costs associated with dispute
resolution. One commenter specifically noted that consumers would
dispute negative data contained on their reports which would require
investigation along with company responses. The commenter cited a
figure of $50,000 per year to handle these disputes and other costs
of furnishing. The Bureau acknowledges there may be ancillary costs
associated with such disputes, but believes that furnishing accurate
data and compliance with the records management requirements should
mitigate the costs associated with dispute resolutions (e.g.
confirming the existence of the loan and any payments made).
Additionally, many of the costs associated are expected to be borne
by registered information systems, as the FCRA allows consumers to
dispute information directly with the consumer reporting agency. As
such, the $50,000 figure cited by the commenter seems inflated.
Instead, the Bureau believes the costs associated with these
activities are included in the ongoing costs associated with
furnishing to registered information systems.
\1143\ The Bureau notes there could be modest per-loan
furnishing costs (e.g., comparable to the costs of pulling from a
registered information system). This will largely depend on the
business model(s) adopted by registered information systems, and
must be consistent with Sec. 1041.11(b)(1), which requires
registered information systems to facilitate the timely and accurate
transmission and processing of information in a manner that does not
impose unreasonable costs or burdens on lenders.
\1144\ Should there be multiple registered information systems,
the Bureau believes that one or more registered information systems
or other third parties will offer to furnish information to all
registered information systems on behalf of the lender.
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iv. Obtaining Information and Verification Evidence About Income and
Major Financial Obligations
Lenders making loans under the ATR approach are required to collect
information about the amount of income and major financial obligations
from the consumer, make certain efforts to verify that information, and
use that information to make an ability-to-repay determination. The
impact on lenders with respect to applicants who a lender does not
determine have the ability to repay, and are thus denied loans, is
discussed separately.
The Bureau believes that many lenders that make covered short-term
and longer-term balloon-payment loans, such as storefront lenders
making payday loans, already obtain some information on consumers'
income. Many of these lenders, however, only obtain income verification
evidence the first time they make a loan to a consumer, or for the
first loan following a substantial break in borrowing. Other lenders,
such as some vehicle title lenders or some lenders operating online,
may not currently obtain any income information, let alone income
verification evidence, before issuing loans. In addition, many
consumers likely have multiple income sources that are not all
currently documented in the ordinary course of short-term lending.
Under the rule, consumers and lenders might have incentives to provide
and gather more income information than they do currently in order to
establish the borrower's ability
[[Page 54822]]
to repay a given loan. The Bureau believes that most lenders that
originate short-term and longer-term balloon-payment loans do not
currently collect information on applicants' major financial
obligations, let alone attempt to verify such obligations, or determine
consumers' ability to repay a loan, as is required under the rule.
As noted above, many lenders already use automated systems when
originating loans. These lenders will likely modify those systems or
purchase upgrades to those systems to automate many of the tasks that
are required by the rule.
Lenders are required to obtain a consumer report from a nationwide
consumer reporting agency to verify applicants' required payments under
debt obligations unless, within the preceding 90 days, that lender has
obtained a report that the lender retained and the consumer has not
triggered a cooling-off period. See Sec. 1041.5(c)(2)(ii)(D). As such,
these consumer reports will usually be necessary to obtain only for the
first loan in a new sequence of borrowing that begins more than 90 days
since the last consumer report was obtained. This is in addition to the
cost of obtaining a report from a registered information system, though
the Bureau expects some registered information systems will provide
consolidated reports.\1145\ Verification evidence for housing costs may
be included on an applicant's nationwide consumer report, if the
applicant has a mortgage; otherwise the lender may reasonably rely on
the consumer's written statement as to housing expense. Based on
industry outreach, the Bureau believes these reports will cost
approximately $2.00 for small lenders and $0.55 for larger lenders. At
least one trade group suggested this to be an accurate estimate, by
noting its members pay around $1 per hit for such reports.\1146\ As
with the ordering of reports from registered information systems, the
Bureau believes that many lenders will modify or upgrade their loan
origination system to allow the system to automatically order a
national consumer report during the lending process at a stage in the
process where the information is relevant, or to purchase combined
reports from registered information systems that may offer them. For
lenders that order reports manually, the Bureau estimates that it will
take approximately nine minutes on average for a lender to request a
report and incorporate it into the ATR determination.
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\1145\ The Bureau notes that, as discussed in the section-by-
section analysis for Sec. 1041.5(c)(2), lenders may order their
information requests in a way that would minimize unnecessary
impacts on consumers' credit scores. Even with the consolidated
reports envisioned here, lenders and the providers for the
registered information systems could stagger the delivery of such
reports so as to minimize the negative scoring impacts on consumers.
\1146\ Others suggested it would cost as high as $12 per hit,
but the Bureau believes these estimates were unreasonably high.
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Lenders that do not currently collect income or verification
evidence for income will need to do so. The Bureau estimates it will
take roughly three to five minutes per application for lenders that use
a manual process to gather and review information, for consumers who
have straightforward documentation (e.g., pay stubs or bank
statements). Some industry commenters suggested this value was too low
in the proposal, often citing cases where consumers may not have
regular income from sources that provide documentation. The Bureau
notes that many lenders already require such information prior to
initiating loans. Additionally, the rule allows stated income to be
used in appropriate cases where verification evidence is not reasonably
available, reducing the average time cost associated with verification
efforts. However, lenders will need to obtain a brief statement from
consumers about their incomes and expenses prior to verification. As
such, the Bureau believes the time estimates provided here to be
reasonable.
Some consumers may visit a lender's storefront without the required
income documentation and may have income for which verification
evidence cannot be obtained. Lenders making loans online may face
particular challenges obtaining verification evidence, especially for
income. It may be feasible for online lenders to obtain scanned or
photographed documents as attachments to an electronic submission; the
Bureau understands that some online lenders are doing this today. And
services that use other sources of information, such as checking
account or payroll records, may mitigate the need for lenders to obtain
verification evidence directly from consumers. Such services may be
especially appealing to online lenders, to whom it might be more
difficult to provide copies of physical pay stubs, bank statements, or
other documentation of income. Additionally, for consumers with cash
income that is not deposited into a deposit account, lenders will be
allowed to rely on stated information, Sec. 1041.5(c)(2)(ii), lowering
the lenders' costs relative to the proposal and the chance that a
consumer is unable to complete an application.
v. Making the Ability-To-Repay Determination
Once information and verification evidence on income and major
financial obligations has been obtained, the lender must use that
information and evidence to make a reasonable determination that the
consumer will have the ability to repay the contemplated loan. In
addition to considering the information collected about income and
major financial obligations, lenders must reasonably estimate an amount
that the borrower needs for basic living expenses. They may do this in
a number of ways, including, for example, collecting information
directly from borrowers, using available estimates published by third
parties, or basing estimates on their experience with similarly
situated consumers. See comment 5(b)-2.i.C.
The initial costs of developing methods and procedures for
gathering information about major financial obligations and income, and
estimating basic living expenses, are discussed further below. As noted
above, the Bureau believes that many lenders use automated loan
origination systems, and will modify these systems or purchase upgrades
to these systems to make the ability-to-repay calculations.
vi. Total Procedural Costs of the ATR Approach
In total, the Bureau estimates that obtaining a statement from the
consumer, taking reasonable steps to verify income, obtaining a report
from a nationwide consumer reporting agency and a report from a
registered information system, projecting the consumer's residual
income or debt-to-income ratio, estimating the consumer's basic living
expenses, and arriving at a reasonable ATR determination will take
essentially no additional time for a fully automated electronic system
and between 15 and 45 minutes for a fully manual system.\1147\ Numerous
industry commenters suggested the estimate provided by the Bureau in
the proposal (15 to 20 minutes) was too low. In response to these
comments, the Bureau has increased its estimated time to manually
underwrite these loans, but also notes that all major financial
obligations should be obtainable either from a consumer report or
consumer statement (in the example of rental expense).
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\1147\ Note that times are increases above the baseline. That
is, they represent additional time beyond that which is already
taken to originate such loans, such as the time spent on income
verification for payday loans.
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[[Page 54823]]
Further, total costs will depend on the existing utilization rates
of, and wages paid to, staff that will spend time carrying out this
work. To the extent that existing staff has excess capacity (that is,
that a lender's employees have time that is not fully utilized), the
extra time to process applications for loans made via the ATR approach
should not result in higher wage bills for the lender. Further, as the
Bureau expects the majority of loans to be made via the principal step-
down approach, the expected increase in staff hours necessary to comply
with the new procedural requirements should be modest.\1148\ Still, to
the extent that lenders must increase staff and/or hours to comply with
the procedural requirements, they may experience increased costs from
hiring, training, wages, and benefits.
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\1148\ In the Bureau's simulations, the ratio of loans made via
the principal step-down approach to those made via the ATR approach
is approximately 14:1.
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Dollar costs will include a consumer report from a nationwide
consumer reporting agency costing between $0.55 and $2.00 and a report
from a registered information system costing $0.50. Lenders relying on
third-party services to gather verification information about income
may face an additional small cost.
vii. Developing Procedures, Upgrading Systems, and Training Staff
Lenders need to develop policies and procedures to comply with the
requirements of the ATR approach and train their staff in those
procedures. Many of these requirements do not appear qualitatively
different from many practices that most lenders already engage in, such
as gathering information and documents from borrowers and ordering
various types of consumer reports.
Developing procedures to make a reasonable determination that a
borrower has an ability to repay a loan without re-borrowing and while
paying for major financial obligations and basic living expenses is
likely to be a challenge for many lenders. The Bureau expects that
vendors, law firms, and trade associations are likely to offer both
products and guidance to lenders, potentially lowering the cost of
developing procedures as service providers can realize economies of
scale. Lenders must also develop a process for estimating borrowers'
basic living expenses if they choose not to make an individual
determination for each customer. Some lenders may rely on vendors that
provide services to determine ability to repay that include estimates
of basic living expenses. Some methods for conducting an analysis to
determine estimates of basic living expenses could be quite costly.
There are a number of government data sources and online services,
however, that lenders may be able to use to obtain living expense
estimates. Additionally, lenders may rely on their experiences with
similarly situated consumers in making this estimate, reducing the need
to rely on individual measures or third parties.
As noted above, the Bureau believes that many lenders use automated
systems when originating loans and will incorporate many of the
procedural requirements of the ATR approach into those systems. This
will likely include an automated system to make the ability-to-repay
determination; subtracting the component expense elements from income
itself, or comparing the component expenses to income to develop a
ratio, is quite straightforward and should not require substantial
development costs. The costs of these systems are discussed above.
One trade group commented that they believe the Bureau's estimated
systems costs to be too low, citing a survey of their members. However,
the trade group's members are not predominately involved in making
loans that will be covered under the rule, so it is unclear how their
estimates relate to the systems contemplated here. Additionally, the
vast majority of the comments from more directly-related trade groups
and lenders remained silent on these estimates, despite the invitation
to provide feedback. As such, the Bureau has not changed these values
from those put forth in the proposal.
The Bureau estimates that lender personnel engaging in making loans
will require approximately 5 hours per employee of initial training in
carrying out the tasks described in this section and 2.5 hours per
employee per year of periodic ongoing training.\1149\
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\1149\ These training costs represent the total costs to comply
with the rule, including training to conduct an underwriting
assessment, pull a credit report, assess borrower history, and
comply with disclosure requirements. The specific breakdown of these
times can be found in part VIII.
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b. Procedural Requirements--Principal Step-Down Approach
The procedural requirements of the principal step-down approach
will generally have less impact on lenders than the requirements of the
ATR approach. Specifically, the rule does not mandate that lenders
obtain information or verification evidence about income or major
financial obligations, estimate basic living expenses, or complete an
ability-to-repay determination prior to making loans that meet the
requirements of the principal step-down approach.\1150\
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\1150\ As discussed above, the Bureau believes that, in certain
circumstances, lenders may choose to strengthen their internal
screening processes in order to increase the probability that loans
would be paid in full over a sequence of three principal step-down
approach loans, since the rule would restrict further re-borrowing.
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Instead, lenders making loans under Sec. 1041.6 must consult their
internal records and those of affiliates, obtain reports from a
registered information system, furnish information to all registered
information systems, and make an assessment that certain loan
requirements (such as principal limitations and restrictions on certain
re-borrowing activity) are met. The requisite disclosures are discussed
below. The requirement to consult the lender's own records is slightly
different than under the ATR approach, as the lender must check the
records for the prior 12 months. This is unlikely to have different
impacts on lenders, however, as any system that allows the lender to
comply with the requirement to check its own records under the ATR
approach should be sufficient for the principal step-down approach, and
vice-versa. A lender will also have to develop procedures and train
staff.
i. Disclosure Requirement
Lenders making short-term loans under the principal step-down
approach are required to provide borrowers with disclosures, described
in the section-by-section analysis of Sec. 1041.6(e), with information
about their loans and about the restrictions on future loans taken out
using the principal step-down approach. One disclosure is required at
the time of origination of a first principal step-down approach loan,
where a borrower had not had a principal step-down approach loan within
the prior 30 days. The other disclosure is required when originating a
third principal step-down approach loan in a sequence, because the
borrower would therefore be unable to take out another principal step-
down approach loan within 30 days of repaying the loan being
originated. The disclosures will need to be customized to reflect the
specifics of the individual loan.
By informing borrowers that they are not permitted to take out
another covered loan for the full amount of their current loan within
30 days of repaying the current loan, the first disclosure may help
lenders reduce defaults by borrowers who are unable to repay the loan,
even in part, without re-
[[Page 54824]]
borrowing. Lenders may have incentives to inform borrowers of this
restriction to reduce their own risk, although it is unclear if they
would choose to do so absent the requirement, if they believed that the
restrictions on principal and re-borrowing were likely to discourage
many borrowers who could repay from taking out loans made under the
principal step-down approach.
The Bureau believes that most, if not all, lenders have some
disclosure system in place to comply with existing disclosure
requirements. Lenders may enter data directly into the disclosure
system, or the system may automatically collect data from the lenders'
loan origination system. For disclosures provided via mail, email, or
text message, some disclosure systems forward the information necessary
to prepare the disclosures to a vendor in electronic form, and the
vendor then prepares and delivers the disclosures. For disclosures
provided in person, disclosure systems produce a disclosure which the
lender then provides to the borrower. Respondents will incur a one-time
cost to upgrade their disclosure systems to comply with new disclosure
requirements.
The Bureau believes that large lenders rely on proprietary
disclosure systems, and estimates the one-time programming cost for
large respondents to update these systems to be 1,000 hours per lender.
The Bureau believes small depositories and non-depositories rely on
licensed disclosure system software. Depending on the nature of the
software license agreement, the Bureau estimates that the cost to
upgrade this software will be $10,000 for lenders licensing the
software at the entity-level and $100 per seat for lenders licensing
the software using a seat-license contract. Given the price
differential between the entity-level licenses and the seat-license
contracts, the Bureau believes that only small lenders with a
significant number of stores will rely on entity-level licenses.
In addition to the upgrades to the disclosure systems, the Bureau
estimates that small storefront lenders will pay $200 to a vendor for a
standard electronic origination disclosure form template.
The Bureau estimates that providing disclosures in stores will take
a store employee two minutes and cost $0.10.
c. Effect on Loan Volumes and Revenue From Underwriting Requirements
and Re-Borrowing Limits
The underwriting requirements under the ATR approach and the
restrictions on certain re-borrowing under both the ATR approach and
principal step-down approach will impact lenders' loan volume in a way
that the Bureau believes will likely be more substantial than the
increase in compliance costs from implementing the requirements
discussed above. The following section discusses these impacts by
lender type since storefront and online payday lenders will have the
option of using both the ATR approach and principal step-down approach,
while vehicle title lenders are required to use the ATR approach. Any
impacts on longer-term balloon-payment loans should be similar
although, as noted, such loans are currently less common and the Bureau
has substantially less data about these loans. The subsequent section
discusses overall combined impacts on these markets from the reduction
in lender revenue and the increased procedural costs.
In order to simulate the effects of the rule, it is necessary to
impose an analytic structure and make certain assumptions about the
impacts of the rule, and apply these to the data. The Bureau conducted
three simulations of the potential impacts of this rule on payday loan
volumes. The first assumes all loans are issued using the ATR approach,
and simulates the impacts from both the underwriting restriction (using
assumed parameters informed by both Bureau and outside research) and
the restrictions on re-borrowing. The second simulation assumes all
loans are issued using the principal step-down approach. This approach
simulates the impacts from the sequence limits and annual caps
associated with these loans, and implicitly assumes no borrowers pass
ATR after exhausting the loans made under the principal step-down
approach. The final simulation assumes loans are issued via both the
ATR and principal step-down approaches. For loans issued via the ATR
approach, the Bureau simulates the effects of both the underwriting
requirement and the restrictions on re-borrowing. Generally, this is
the Bureau's preferred simulation, as it most closely mirrors the
market structure the Bureau expects in response to the rule.\1151\
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\1151\ The Bureau also conducted a number of additional
simulations as robustness checks. While not described here, their
general results were consistent with those reported in this
analysis.
---------------------------------------------------------------------------
In addition, the Bureau performed a single vehicle title
simulation. As vehicle title loans are not eligible for the principal
step-down approach, the simulation measures the impacts of the ATR
approach. As with payday, the Bureau simulates the impacts from both
the underwriting restriction and the restrictions on re-borrowing.
The structure, assumptions, and data used by the Bureau are
described below.
i. Description of the Simulations of the Rule's Impacts on Loan Volumes
In general, the Bureau uses its data, described in part
VII.F.1.c.ii, as the basis for the simulations. The simulations filter
or constrain the observed data according to constraints imposed by the
rule. In simulations where principal step-down approach loans are
available, the Bureau always assumes principal step-down approach loans
will be made to each consumer prior to any ATR approach loans as the
Bureau believes that lenders will strictly favor issuing loans under
the principal step-down approach over the ATR approach. Loans made
under the principal step-down approach require substantially less
underwriting (in effect just verifying the customer is eligible to
borrow given his/her previous indebtedness). They are, therefore,
faster and less costly to originate.
Perhaps more importantly, the number and duration of ATR loans
restrict lenders' abilities to make subsequent loans to a consumer
under the principal step-down approach. But there are no explicit caps
on the number of loans or time in debt restricting the issuance of
loans made under the ATR approach, beyond the sequence-level re-
borrowing restriction. As such, lenders seeking to maximize loan
volume, and borrowers seeking to maintain future borrowing options,
would likely favor the principal step-down approach when available,
even when customers are able to demonstrate the ability to repay.\1152\
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\1152\ The Bureau does note that principal step-down approach
loans do have potentially binding restrictions that may make them
less desirable to a small subset of consumers (e.g., lower limits,
forced principal step-down), and potentially a small set of lenders
(those concerned with loan amount, rather than number of loans).
However, the Bureau believes the speed and cost advantage of the
principal step-down approach will largely outweigh these
considerations.
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For loans issued under the ATR approach, the Bureau assumes the
loan amount will be unchanged from the amount observed in the data.
This holds for both initial loans in a sequence and for all subsequent
loans in that sequence. For loans issued under the principal step-down
approach, the Bureau assumes that the amount borrowed in initial loans
in a sequence will be the minimum of the observed loan amount in the
data, or the maximum amount allowed by the rule (i.e., $500).
Subsequent loans in a sequence will be the minimum of the observed loan
amount in the data, or the maximum amount allowed by the rule for
subsequent loans (i.e., two-thirds of
[[Page 54825]]
the amount of the initial loan for a second loan and one-third of the
amount of an initial loan for a third loan).
With respect to the underwriting of loans, in those simulations
where loans made via the principal step-down approach are available in
the market, the Bureau assumes that all initial loans observed in the
data are originated.\1153\ In contrast, simulations for payday loans
under the ATR approach assume that only a fraction of consumers will
qualify. To assess the impact of this reduction on loans and loan
volumes, the fraction of borrowers assumed to qualify for ATR is
applied to weight observations in the data that show revealed demand
for ATR loans.\1154\ The Bureau's analysis in the proposal attempted to
calculate this fraction and comments received in response to the
proposal provided additional information. Many of these comments note
that modeling the ability to repay of borrowers is difficult without
detailed information, though some comments attempt to provide evidence
for the share of borrowers likely to pass an ATR determination. The
Bureau has reviewed these comments and, as appropriate, used their
content to inform its assumptions. However, the Bureau continues to
believe that determining the share of borrowers and particular loans
likely to be impacted by an ATR assessment is necessarily imprecise.
The details of the calculations are included below.
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\1153\ The Bureau notes that the re-borrowing restrictions
imposed by the rule may provide incentives for lenders to impose
additional screens on borrowers. Under certain conditions, the limit
to the revenue that can be realized via re-borrowing may drive
lenders to attempt to screen out borrowers who are no longer
profitable to lend to. The Bureau lacks evidence on if, how, and how
frequently lenders would do this, and therefore the simulations do
not attempt to model this possibility. But any such voluntary
underwriting would further reduce the provision of credit. This
implies that the simulation results may somewhat underestimate the
overall reductions in loans and revenue if the price of and demand
for these loans remains constant.
\1154\ As the specific loans that would pass ATR are unknown,
the Bureau weights all potential loans by the ATR filter rate. If
the loans that would pass an ATR assessment systematically vary in
amount, propensity to re-borrow, or other such factors from the
typical loans observed in the data, the simulations may overestimate
or underestimate the impact of the ATR restriction (e.g., if a loan
that would pass ATR is actually larger in amount, and rolled over
more often than the typical loan, the estimated decreases in revenue
by the simulations would be overstated).
---------------------------------------------------------------------------
The Bureau applies this underwriting filter to both payday and
vehicle title loans. While the Bureau believes that the data and
comments relating to the share of payday borrowers that could
reasonably pass ATR are more informative than those relating to vehicle
title borrowers, (e.g., no supporting evidence was provided to the
Bureau in response to comments), the Bureau believes it is important to
include an underwriting filter in its simulations of each market, and
that the value of this filter may be similar across the affected
products.
In its ATR simulations, the Bureau assumes that each subsequent ATR
loan would be subject to the same filter. That is, the probability of
originating each subsequent loan is weighted by the value of the
underwriting filter. It is true that any borrower who passes an ATR
assessment on his or her initial loan will likely have the same
residual income or DTI on each subsequent loan within a sequence (as
the lender is not required to pull a new national consumer report if,
within the preceding 90 days, that lender has obtained a report that
the lender retained and the consumer has not triggered a cooling-off
period, and a customer's assessed ability to repay would only change if
the information obtained about income or from a registered information
system changed). However, the Bureau expects that the instances of re-
borrowing should be less frequent for customers who pass an ATR
assessment compared to customers who fail to satisfy an ATR
determination. This is due to the fact that customers who are able to
repay their loans according to the terms at origination are less likely
to need to re-borrow compared to those customers who are expected to
struggle to repay, and require a subsequent loan to repay the previous
one. Additionally, lenders may reasonably interpret the borrower's
immediate return as an indicator that the borrower may lack the ability
to repay the loan according to its terms, and decide not to extend an
additional loan.
The Bureau cannot identify from its data those specific customers
who will demonstrate an ability to repay (and applies a weighting
filter to account for the attrition induced by underwriting), let alone
those near the margin of demonstrating an ability to repay (who are
most likely to be voluntarily cut off by lenders). As such, assuming
consistent attrition in subsequent loans is a way to account for the
combined effects of ATR borrowers' lower propensities to re-borrow,
coupled with lenders' likely reassessments of those borrowers'
abilities to repay. Therefore, the Bureau assumes a constant decay of
re-borrowing amongst those customers who originate an ATR loan. That
is, for each new would-be ATR loan present in the data, the simulation
accounts for the decline in loan volumes by weighting each loan by a
value that represents the combined likelihood that a customer applies
and is approved for that loan.
Finally, with respect to re-borrowing restrictions, as stated
previously, in simulations where loans made under the principal step-
down approach are available, the Bureau assumes that all initial loans
are taken out under the rule. Each subsequent loan observed in the data
within 30 days of a prior loan (i.e., within a sequence) is also taken
out, up to the limit imposed by the rule (e.g., three). For borrowers
with sequences in excess of the limit and who have not reached any of
the caps on loans under the principal step-down approach, the Bureau
adopts one of two assumptions in each of its simulations: Either the
borrower returns immediately after the triggered cooling-off period
(assumes need persists), or the borrower does not return after the
cooling-off period (assumes need is obviated).\1155\ To the extent that
long sequences reflect the difficulty that borrowers have paying off
large single-payment loans, rather than borrowers repeatedly
experiencing new income or expense shocks that lead to additional
borrowing, it is more likely that borrowers will tend not to return to
borrow once a loan sequence has ended and a 30-day period has expired.
Regardless, the initial loan in each new distinct sequence for a
borrower as observed in the data is always assumed to be initiated,
until that borrower has reached his or her limit under the rule.
---------------------------------------------------------------------------
\1155\ Note that monthly borrowers are unlikely to be able to
borrow loans via the principal step-down approach after the third
loan in a 12-month period, as they will likely have reached the 90-
day limit on indebtedness.
---------------------------------------------------------------------------
When a borrower shows revealed demand for an ATR loan in the
simulations (e.g., in simulations with only ATR loans or with both ATR
and principal step-down approach loans where the borrower has exhausted
his/her principal step-down approach loans), the Bureau applies an
underwriting filter to the chance that the borrower takes the loan, as
discussed above. As was the case under the principal step-down
approach, for ATR borrowers with sequences in excess of the limit (and
who pass the underwriting screen for each of the loans \1156\), the
Bureau adopts one of two
[[Page 54826]]
assumptions in each of its simulations: Either the borrower returns
immediately after the triggered cooling-off period (assumes need
persists), or the borrower does not return after the cooling-off period
(assumes need is obviated). As each new loan must pass the ATR screen,
there is a great deal of decay in the likelihood that a new sequence of
ATR loans is initiated.\1157\
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\1156\ Note again that the underwriting screens are taken to be
independent. While it is likely that a borrower who is able to
demonstrate ATR for an initial loan in a sequence will present with
similar data for subsequent loans, the Bureau believes borrowers
with a demonstrated ATR would be less likely to return to re-borrow.
Additionally, lenders may take a borrower's return as an indication
they initially lacked the ability to repay, and may not originate
subsequent loans barring a documented improvement in the borrower's
finances. As such, the underwriting filter can be viewed as a
``combined probability of successfully re-borrowing'' filter for
second and third loans in a sequence.
\1157\ In practice, this represents a small share of potential
loans. For an ATR borrower to take a fourth loan, he or she would
have had to pass four of the combined re-borrowing and ATR screens,
making the probability of being eligible for such a loan p\4\, where
p is the probability of passing the screen.
---------------------------------------------------------------------------
(a). Example: Payday Simulation
In the simulation the Bureau estimates as most closely resembling
anticipated market impacts, the Bureau assumes loans will be available
under both ATR and principal step-down approaches. Consistent with the
description above, the Bureau assumes all borrowers with revealed
demand for six or more loans in a 12-month period will successfully
take out loans under the principal step-down approach until the cap
imposed by the rule, or until they reach a forced cooling-off period
(after which, by assumption, they may or may not return). The Bureau
also imposed an underwriting filter on the demand for and availability
of all ATR loans (i.e., all loans in excess of the limit imposed by the
principal step-down approach). Consumers are allowed to continue
borrowing as permitted by the re-borrowing restriction and the
underwriting filter. In practical terms, the re-borrowing rate for
sequences of loans made via the ATR approach declines rapidly, as the
underwriting filter compounds for each subsequent loan. The Bureau
conducts this simulation under the assumption that borrowers with
interrupted sequences return to attempt to borrow immediately after
their cooling-off periods, and under the assumption that such borrowers
do not attempt to borrow again until their next distinct sequence
observed in the data. This provides upper and lower bounds for the
estimated impacts under this simulation, though the range between these
bounds is narrow, due to the low probability of both returning to re-
borrow and being approved for a subsequent loan.
(b). Example: Vehicle Title Simulation
Vehicle title loans are only available under the ATR approach
because principal step-down loans cannot include vehicle security under
Sec. 1041.6(b)(3), limiting the assumptions required for simulations
of this market. In the Bureau's simulation for vehicle title loans, the
Bureau imposes the same underwriting filter applied to payday loans.
This means every loan observed in the data must pass the underwriting
screen (and second loans must have passed the first screen, third loans
must have passed the first and second screens, and so on). Consumers
are allowed to continue borrowing as permitted by the re-borrowing
restriction and underwriting filter, and trigger a 30-day cooling-off
period if they reach a third loan. The Bureau conducts this simulation
under the two different assumptions about borrowers that experience
interrupted sequences: That borrowers with interrupted sequences return
to attempt to borrow immediately after their cooling-off periods, and
that such borrowers do not attempt to borrow again until their next
distinct sequence observed in the data. This provides upper and lower
bounds for the estimated impacts under this simulation.
ii. Storefront Payday Lending: Impacts on Loan Volumes, Revenues, and
Stores
The Bureau has simulated the impacts of the lending restrictions on
loan volumes assuming that lenders only make loans using the principal
step-down approach relative to lending volumes today. The simulations
measure the direct effect of the restrictions by starting with data on
actual lending and then eliminating those loans that would not have
been permitted if the regulation had been in effect. Possible responses
by lenders or borrowers are not considered in the simulations, aside
from the effect discussed above on borrowers who have loan sequences
interrupted by the re-borrowing restrictions. Depending on the extent
to which borrowers who have loan sequences cut off by the three-loan
limit will return to borrow again after the 30-day period following the
third loan, the estimated impact of the lending restrictions shows a
decrease in the number of loans of 55 to 62 percent, and the estimated
impact on total loan volume is a decrease of 71 to 76 percent. The
simulated impact on revenue is greater than the impact on loan volume
because of the loan-size restrictions of the principal step-down
approach, with the ``step down'' in the allowable loan amounts for the
second and third loans in a sequence having a greater impact than the
$500 limit on initial loan size.
The Bureau has also simulated the effects of imposing the ATR
approach only (i.e., a market with no principal step-down approach
loans). Under the ATR approach a new covered short-term loan cannot be
made during the term of and for 30 days following a prior covered
short-term loan made under the principal step-down approach.
Additionally, new ATR loans can only be originated within 30 days of a
previous ATR loan if such a loan would not constitute a fourth loan in
a sequence. Using data and analysis provided in the proposal, and
information received in comments responding to the proposal, the Bureau
has estimated the share of borrowers who would be able to satisfy this
requirement to be 33 percent of the would-be borrowers. The Bureau also
uses this same value, 33 percent, for subsequent ATR loans to capture
the dynamics explained above (i.e., the probability a borrower applies
for, and is approved for, a subsequent loan). The Bureau views this, in
the absence of specific evidence, as a very conservative assumption in
that it generates a larger reduction in loans than would similarly
justifiable assumptions (e.g., assuming a larger share of borrowers are
able to pass the new, more streamlined ATR assessment; applying a
single underwriting reduction at the sequence-level rather than the
loan-level; etc.). However, the Bureau notes that the results are not
particularly sensitive to using any similar fraction.
Using the simulation approach described above and allowing only the
ATR approach produces estimates of the reduction of loan volume and
lender revenue of approximately 92 to 93 percent, relative to lending
volume today. Again, these estimates vary depending on what is assumed
about the behavior of borrowers after the end of the 30-day period
following a loan, though these differences are small, as few borrowers
will pass four ATR assessments in the simulations.
The Bureau received some comments citing a study that criticizes
the Bureau's simulations, arguing they underestimate the reduction in
loan volumes.\1158\ The study in question estimates that, under the
principal step-
[[Page 54827]]
down approach only, payday loan volumes would decrease by 79.6 percent,
and under the ATR approach only payday loan volumes would decrease by
90.5 to 92.7 percent. The Bureau notes these differences are fairly
small (less than four percentage points for the principal step-down
approach only, and within two percentage points for the ATR approach
only), and considers them broadly consistent with the Bureau's
findings. Further, the Bureau believes these differences are largely
attributable to methodological differences in the identification of the
loan sequences likely to be affected by the rule.\1159\
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\1158\ For more details see nonPrime101 ``Report 9--Evaluating
CFPB Simulations of the Impact of Proposed Rules on Storefront
Payday Lending,'' available at https://www.nonprime101.com/report-9-evaluating-cfpb-simulations-of-the-impact-of-proposed-rules-on-storefront-payday-lending/; ``Update to Report 9--`Being Precise
About the Impact of `Principal Reduction','' available at https://www.nonprime101.com/update-report-9/.
\1159\ Specifically, the nonPrime101 reports do not appear to
account for the left-censoring of their data. Under the rule, these
individuals would likely not be observed at this stage in their
borrowing. The Bureau's approach can be interpreted as the reduction
in ``steady-state'' loan volumes (i.e., the level of reduced loans
and revenues once the market has adjusted to the rule). The Bureau
has previously described its approach to dealing with the left-
censoring (see, e.g., CFPB Data Point: Payday Lending, at 10), and
does so again below.
---------------------------------------------------------------------------
The Bureau received comments citing two additional and similar
studies, which estimated the effects of the principal step-down
approach (with no ATR approach loans) using data covering loans made by
small lenders and loans made by large lenders. These studies estimate
total revenue reductions of 82% and 83% respectively.\1160\ The Bureau
again notes that these findings are broadly consistent with the
Bureau's findings, and that there are subtle but important
methodological differences which may largely account for the
differences in effect sizes.\1161\
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\1160\ Arthur Baines et al., ``Economic Impact on Small Lenders
of the Payday Lending Rules Under Consideration by the CFPB,''
Charles River Associates, (2015), available at http://www.crai.com/publication/economic-impact-small-lenders-payday-lending-rules-under-consideration-cfpb; Arthur Baines et al., ``Economic Impact on
Storefront Lenders of the Payday Lending Rules Proposed by the
CFPB,'' Charles River Associates (2016), available at http://www.crai.com/publication/economic-impact-storefront-lenders-payday-lending-rules-proposed-cfpb.
\1161\ In particular, a number of loans in their evaluation
period are excluded for exceeding loan caps based on the number of
loans taken in a pre-policy assessment period. However, the rule's
restrictions on allowed number of loans in a 12-month period will
not encompass loans made in any period prior to the compliance date
of Sec. Sec. 1041.2 through 1041.10, 1041.12, and 1041.13.
---------------------------------------------------------------------------
The Bureau feels the methodology used in its simulations should
generate the most accurate estimates of the steady-state effect on
loans volumes in these markets. In the simulation the Bureau believes
most closely mirrors the market likely to evolve in response to this
rule, borrowers are assumed to be able to take out loans under the
principal step-down approach, then continue re-borrowing subject to
passing an ATR determination should they still have demand for such
loans (again with a 33 percent chance of applying for and passing an
ATR assessment for each new ATR sequence). This is the third simulation
described above. This simulation produces estimates of the reduction of
loan volume and lender revenue of approximately 51 to 52 percent,
relative to lending volume in the data, with corresponding revenue
decreases of 67 to 68 percent. Of note in this simulation is that
approximately 40 percent of the reduction in revenue is the result of
limits on loan sizes (i.e., $500 max for principal step-down approach,
and forced step-downs), with the remaining reduction attributable to
re-borrowing restrictions.
Estimating the share of payday loan borrowers for whom a lender
could reasonably determine ability to repay the loan requires data on
borrowers' income, details about the prospective loans (especially the
payments), and data on borrowers' major financial obligations and
estimated basic living expenses. In addition, lenders may satisfy the
ATR requirements in a variety of ways (e.g., verification of income via
pay stubs or bank statements vs. relying on stated income, or a
residual income determination vs. a DTI assessment). It is also
challenging to estimate the frequency with which borrowers will seek to
initiate new loans sequences after a 30-day cooling-off period. All
this necessarily complicates the estimation of the effects of the
requirement. As already discussed, the Bureau has assumed 33 percent of
would-be ATR borrowers will pass an initial ATR determination and that
for each subsequent loan 33 percent of those borrowers would apply for
and pass another ATR test. To the extent more applicants will apply for
a loan and pass an ATR assessment, the ATR simulation estimates above
will overstate the actual decline in lending; to the extent fewer
applicants will apply for a loan and pass an ATR assessment, this
simulation will understate the actual decline in lending.
Given the importance of the assumption, the Bureau repeats here the
analysis and discussion from the proposal of the share of borrowers who
would be able to demonstrate an ability to repay a payday loan.
Additional analyses using proprietary data were submitted to the Bureau
in comments and these analyses are discussed immediately
following.\1162\ The Bureau notes that the estimates provided by these
analyses are all broadly consistent with one another.
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\1162\ The Bureau notes that the intent of these studies was to
argue that an ability-to-repay assessment is not an effective means
by which to reduce default. This Section 1022(b)(2) Analysis does
not evaluate these claims or the analyses on which they are based,
instead, it acknowledges the usefulness of their underlying data,
and uses these data to inform assumptions about the share of
borrowers who are likely to pass an ATR assessment. A discussion of
the main conclusions of these studies is offered in the section-by-
section for Sec. 1041.5.
---------------------------------------------------------------------------
The data the Bureau uses include information on the income and loan
amounts of payday borrowers. Data on major financial obligations and
basic living expenses are only available at the household level, and
only for certain obligations and expenses. In addition, only some of
the obligation and expense data are available specifically for payday
borrowers, and in no case is the obligation or expense data tied to
specific loans. Given the limited information on major financial
obligations and basic living expenses it is likely the case that
estimates made using the available data will overstate the share of
borrowers who would demonstrate an ability to repay a payday loan. In
addition, lenders may adopt approaches to estimating basic living
expenses that lead to fewer borrowers satisfying the lenders' ATR
evaluations. Also note that the data and discussion to follow focus on
an assessment of residual income for determining ability to repay.
While a debt to income (DTI) assessment is also permitted under Sec.
1041.5(b), it is the Bureau's expectation that the DTI approach will
not lead to substantial differences compared to the residual income
approach when assessing customers' abilities to repay. Rather, the
Bureau's inclusion of DTI is intended to give lenders more flexibility
in determining how to assess ATR.
Data on payday loans and their associated individual borrower
incomes were obtained under the Bureau's supervisory authority.\1163\
These data cover a large number of payday loans originated by several
lenders in over 30 States.\1164\ To ensure the sequences observed in
the Bureau's data are not
[[Page 54828]]
impacted by left-censoring, the Bureau looks at borrowers who take
their first loans in the second month of a lender's data. The Bureau
restricts the analysis to these sequences so that it can ensure it is
able to observe the first loan in a sequence and thus accurately
measure sequence duration.\1165\ In effect, this allows the Bureau to
estimate the impact on lending volumes in the steady-state, as many of
the loans observed in the first month's data are deep into a sequence,
and would not have been observed under the rule.
---------------------------------------------------------------------------
\1163\ These data have been used in prior Bureau publications
including: CFPB Payday Loans and Deposit Advance Products White
Paper; CFPB Data Point: Payday Lending; and CFPB Report on
Supplemental Findings, and are discussed in more detail in those
publications.
\1164\ Note that the Bureau's data were collected from large
payday lenders, and thus may not be representative of small lenders.
However, the two Charles River Associates studies cited by
commenters and discussed above estimated declines in loan volumes by
lender size and found similar revenue impacts on small and large
entities. See the Final Regulatory Flexibility Analysis for further
discussion of these studies and the anticipated impacts on small
lenders.
\1165\ See CFPB Data Point: Payday Lending, at 10 (for more
details).
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Data on household expenditures comes from the 2010 BLS Consumer
Expenditure Survey (CEX). These data contain information on some of the
expenditures that make up major financial obligations, including
housing obligations (rent or mortgage payments) and vehicle loan
payments. The CEX also contains information on various categories of
basic living expenses, including utilities, food, and transportation.
These expense categories would need to be considered by lenders
estimating basic living expenses. An important limitation of the data
is that they do not contain information for all major financial
obligations; in particular the data exclude such obligations as credit
card payments, student loan payments, and payments on other small-
dollar loans.
As noted above, the CEX collects expenditure data at the household,
rather than individual, level. Lenders are required to make the ATR
determination for an individual borrower, which may include reasonable
considerations of income from other persons to which the borrower can
show access, contributions of other persons to major financial
obligations and in certain cases to basic living expenses, see comments
5(a)(5)-3, 5(c)(1)-2, 5(b)-2.i.C.2. Given the lack of available
information on individual expenditures, household level income and
expenditures information is presented here, though the Bureau notes
these may not be directly applicable to individual-level determinations
of ATR. Because the data on payday loans collected under the Bureau's
supervisory authority contain information on borrowers' individual
incomes, the Bureau used a third source of data to map individual
incomes to household incomes, with particular attention on this
population.
Data on both individual and household incomes come from the four
waves of the FDIC National Survey of Unbanked and Underbanked
Households that have been conducted as a special supplement to the
Current Population Survey (CPS). This provides information on the
distribution of household income for individuals with individual income
in a certain range. The share of the population that takes one of these
types of loans is fairly small, so income data on both payday and
vehicle title borrowers is used to provide more robust information on
the relationship between individual and household income for this
population. The CPS collects information from 60,000 nationally
representative respondents in each wave, of whom roughly two percent
reported having taken out a payday and over one percent reported having
taken out a vehicle title loan in the past 12 months in the most recent
wave of the survey.\1166\ These data are the most extensive source of
information on both individual and household income of such borrowers
that the Bureau has been able to identify.
---------------------------------------------------------------------------
\1166\ Fed. Deposit Ins. Corp., ``2015 FDIC National Survey of
Unbanked and Underbanked Households,'' at 34 (Oct. 20, 2016),
available at https://www.fdic.gov/householdsurvey/2015/2015report.pdf (Calculations made using custom data tool.). The
percentage of households reporting using payday loans varied from
3.5 percent to 1.7 percent over the four waves. The percentage of
households reporting using auto-title loans ranged from 0.9 to 1.3
percent in the two waves where those data were collected. Fed.
Deposit Ins. Corp., ``2015 FDIC National Survey of Unbanked and
Underbanked Households, Appendix Tables'' (Oct. 20, 2016), available
at https://www.fdic.gov/householdsurvey/2015/2015appendix.pdf.
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Relative to the proposal, the Bureau has continued using data on
household spending and income from the 2010 CEX, while including the
latest wave of the 2015 FDIC Survey data. Compared to more recent CEX
data, the data should better correspond to the borrower characteristics
considered by lenders in the baseline loan origination data which are
from 2011 and 2012. As noted below, the Bureau also continues to use
the 2010 Survey of Consumer Finances for the same reason. Incorporating
the additional wave of the FDIC survey data increases the small sample
of observed payday and vehicle title borrowers, improving the estimated
relationship between individual and household incomes. The differences
in time periods should not introduce any bias as the four waves are
centered roughly over the time periods of the loan and expense data,
and the Bureau is only using the CPS data for the crosswalk between
individual and household income.
Table 1 shows the distribution of payday loan borrowers by their
reported individual monthly income based on the loan data discussed
above. As the table shows, roughly half of payday loans in the data
were taken out by borrowers with monthly individual incomes below
$2,000.
[[Page 54829]]
[GRAPHIC] [TIFF OMITTED] TR17NO17.000
Table 2 provides the distribution of household monthly income among
payday and vehicle title borrowers by their individual level of monthly
income.\1167\ For instance, referring back to Table 1, 14 percent of
payday loans in the loan data analyzed went to borrowers with
individual incomes between $2,000 to $2,499 dollars per month (or
$24,000 to $29,999 per year). As Table 2 shows, the median household
income for a payday or vehicle title borrower with an individual
monthly income in this range is $2,417 per month, with the mean
household income slightly higher at $2,811 per month.
---------------------------------------------------------------------------
\1167\ Sarah Flood et al., ``Integrated Public Use Microdata
Series, Current Population Survey: Version 5.0'' (dataset) (IPUMS
CPS, Univ. of Minn., 2017).
[GRAPHIC] [TIFF OMITTED] TR17NO17.001
Table 3 shows the distribution of certain household expenditures by
household monthly incomes. For instance, households with an income
between $2,000 and $2,499 per month spend on average $756 on
obligations which would fall within the category of major financial
obligations, including rent or mortgage payments and vehicle loan
payments. The same households spend an average of $763 on food,
utilities, and transportation, which all are basic living expenses. As
shown in the table, that leaves $689 to cover any other financial
obligations, including payments on other forms of debt, other basic
living expenses and payments on a new loan.
[[Page 54830]]
[GRAPHIC] [TIFF OMITTED] TR17NO17.002
Based on these data, it appears that payday borrowers need at least
$1,500 in monthly household income to possibly have enough residual
income to be able to repay a typical payday loan of $300-$400. However,
this requires that the household have no other major financial
obligations beyond housing and an auto loan, and does not factor into
account all of the categories for basic living expenses defined in the
rule.
Table 4 provides more information about other typical major
financial obligations of households that use payday loans. It shows the
amount of outstanding debts and monthly payments for several categories
of credit for households that used payday loans over a period of twelve
months, as well as the share of those households that had each category
of debt. This information comes from the 2010 Survey of Consumer
Finances (SCF),\1168\ which has details on respondents' assets, debts,
and income, but the number of payday borrowers in the data is not large
enough to allow estimating debts for borrowers in different income
ranges.\1169\
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\1168\ Relative to the proposal, the Bureau has continued to use
the 2010 SCF data, as these better reflect contemporaneous debt
obligations for borrowers observed in the baseline loan origination
data.
\1169\ These estimates show a substantially lower share of
borrowers with credit cards than was found in a study that matched
payday loan data with credit report information. That study found
that 59 percent of payday borrowers had an outstanding balance on at
least one credit card, with an average outstanding balance of
$2,900.
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[[Page 54831]]
[GRAPHIC] [TIFF OMITTED] TR17NO17.003
Table 4 shows that 34 percent of households with payday loans have
outstanding credit card debt, with an average balance of nearly $3,300.
An average credit card balance of approximately $3,300 requires a
minimum monthly payment of around $100.\1170\ The table also shows that
one-third of payday households have additional debts not associated
with housing or vehicles, with average monthly payments of $263. Given
these other major financial obligations, and the need to account for
other basic living expenses, it seems likely that a household will need
monthly income substantially higher than $1,500 to be able to
demonstrate an ability to repay a typical payday loan. For example,
households with at least $3,000 in monthly income seem to demonstrate
an ability to repay a typical payday loan. Individuals in such
households typically have roughly $2,500 in monthly income. And in the
data the Bureau has analyzed, roughly one-third of payday borrowers
have individual income above $2,500 per month.
---------------------------------------------------------------------------
\1170\ This assumes a 24 percent annual interest rate on the
balance, with a minimum monthly payment calculated as all interest
due plus one percent of the principal.
---------------------------------------------------------------------------
There is an additional caveat to this analysis: The CEX expenditure
data are for all households in a given income range, not households of
payday borrowers. If payday borrowers have unusually high expenses
relative to their incomes, they will be less likely than the data
suggest to be able to demonstrate an ability to repay a payday loan.
Conversely, if payday borrowers have unusually low expenses relative to
their incomes, they will be more likely to be able to borrower under
the ATR approach. Given these borrowers' needs for liquidity, it seems
more likely that they have greater expenses relative to their income
compared with households generally. This may be particularly true
around the time that borrowers take out a payday loan, as this may be a
time of unusually high expenses or low income.
As noted earlier, comments received in response to the proposal
provided the Bureau with additional data that speak to payday
borrowers' residual incomes and the likely outcomes of an ability to
repay assessment. The first of these data, shown in Table 5, were
provided in a comment letter to the Bureau by an alternative credit
bureau. Table 5 presents the percentages of current payday loans by the
residual income level of the borrower. The residual incomes were
calculated for a randomly sampled 1.65 million loan applicants in 2014.
The calculation subtracted the following elements from a consumers'
stated monthly income: ``Covered Loan'' monthly debt obligation,
traditional monthly debt obligation sourced from a national credit
bureau, any applicable child or family support sourced from a national
credit bureau, requested loan payment amount, monthly geo-aggregated
estimate of housing costs (from Census data), and monthly estimate of
utility and phone payments (from BLS data).\1171\ At least the basic
living expenses comprised by this estimate of residual income are, as
the commenter noted, incomplete, and thus the residual incomes in Table
5 are potentially higher than those that would result from an ability-
to-repay assessment consistent with Sec. 1041.5.
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\1171\ See FactorTrust Inc. Comment Letter to the CFPB, dated
October 6, 2016. The commenter did not provide more detail on the
nature of the sample, which may include loans that are not covered
under the rule (but were covered under the proposal). Also, the
subtractions listed include ``Covered Loan monthly debt obligation''
and ``requested loan payment amount.'' The Bureau believes these
refer to the same item.
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[[Page 54832]]
[GRAPHIC] [TIFF OMITTED] TR17NO17.004
As shown in Table 5, these data indicate that fewer than 50 percent
of current payday loans are made to individuals with positive residual
incomes, with slightly fewer first-time applicants having positive
residual incomes (46.2 percent vs. 44.8 percent).\1172\ Setting aside
the fact that as previously noted at least the subtractions for basic
living expenses are incomplete, this still implies that the majority of
payday loans would not pass an ability to repay determination. This
finding is consistent with other studies that show that fewer than four
in ten payday loan bookings passed a residual-income test.\1173\
---------------------------------------------------------------------------
\1172\ In this analysis, residual income refers to money left
over after subtracting loan payments, financial obligations and some
living expenses. Residual income in the rule is slightly different
and refers to income minus major financial obligations and loan
payments. Thus, whereas $0 residual income could indicate a borrower
has ability to repay using the factor trust calculation, it would
not under the rule's calculation because funds would be needed to
cover basic living expenses.
\1173\ FactorTrust ``Underwriting Benchmarks: How Does Your
Performance Stack Up?,'' presentation to the 2017 CFSA Conference &
Expo, at slide 20.
---------------------------------------------------------------------------
Another report, submitted by the research arm of an alternative
credit bureau, provided similar data.\1174\ Table 6 shows the
percentage of storefront payday loan borrowers who would have had
positive residual incomes after making a loan payment, and the
percentage of all loans made to such borrowers. These percentages come
from a sample of 90,000 storefront payday loans made in 2013, matched
to debt obligations and two income measures (one each for the median
observed income, and the most recently observed income). The residual-
income measure subtracted from the borrower's income debt service
obligations and basic living expenses including shelter, food,
transportation, communication, medical care, and dependent childcare
(using BLS data to proxy where necessary).
---------------------------------------------------------------------------
\1174\ nonPrime101, ``Report 10: Is Consumer `Ability to Repay'
Predictive of Actual Repayment of Storefront Payday Loans?,''
(2017), available at https://www.nonprime101.com/report-10-ability-to-pay/.
[GRAPHIC] [TIFF OMITTED] TR17NO17.005
[[Page 54833]]
The results in Table 6 show that between 28.5 and 33 percent of
borrowers would have passed a residual-income test in these data. This
appears somewhat lower than reported in Table 5, where 34 percent of
borrowers had at least $500 in positive residual income (more than
enough to cover the debt service on a payday loan). This difference
could be due to the study's sampling methodology, which may overstate
loans in long sequences. Such loans may be suggestive of an inability
to repay (see discussion of censoring above). As such, the Bureau
considers these figures to be ``conservative'' (in that they may
underestimate the share of borrowers who would pass an ATR
assessment).\1175\
---------------------------------------------------------------------------
\1175\ The differences also may reflect differences in the
categories of expenses included as basic living expenses in the two
analyses. The Bureau also received comments referencing other
studies or analyses that provided less data, analytic rigor, or
transparency; the Bureau placed less weight on the findings from
such studies. For example, some commenters cited an analysis in an
undated presentation by four industry representatives, including one
of the specialty credit bureaus whose more detailed comment is noted
above. This analysis claims that individuals earning less than
$40,000 per year are ``unlikely to qualify'' for a $500 payday loan.
However, this analysis is flawed. First, the presentation ignores
the option for loans made under the principal step-down approach,
which the Bureau expects to remain widely available. Second, the
study's sources for assumptions about the typical expenses faced by
these households are not cited, and appear inflated relative to the
levels shown in the available data (i.e., they assume $2,495 in
``typical'' monthly expenses, while Table 2 shows the median expense
for individuals with this level of income is only $1,667). Third,
this study applies a five percent ``ATR buffer'' that reduces the
individual's available income. This buffer was not part of the
proposal (though it is similar to the considerations proposed by
some consumer groups), and without this buffer, the individual in
the presentation's example actually would qualify for a $500 payday
loan according to their calculations. In general, the Bureau
considered carefully those analyses that provided or carefully cited
reliable data, and discounted those that were less empirically
grounded or had flaws similar to those noted here.
---------------------------------------------------------------------------
It is not known whether the applications that would fail to pass an
ATR determination are more likely to be for one of a customer's first
six loans (which would not be subject to an ATR assessment if issued
under the principal step-down approach). While first-time applicants do
appear slightly more likely to have negative residual incomes, the
residual income levels of applicants for a seventh (or greater) loan in
a 12-month period may be higher or lower on average compared to the
overall population of applications. As such, there is no strong
evidence that customers seeking their first loan under the ATR approach
(which, as discussed previously, is likely to be their seventh loan in
a 12-month period) would be more or less likely to pass an ATR
assessment. As such, the evidence suggests that relatively few
applicants would pass an ATR determination in order to continue
borrowing beyond the limits imposed by the principal step-down
approach.
Based on these findings, the Bureau assumes for the purposes of its
simulation that 33 percent of would-be borrowers can pass ATR. This
number is near the lower end of the ranges identified by the Bureau's
analysis and in the first of the two comments described above and
within the range of the second comment that independently attempted to
measure the share of borrowers likely to pass an ATR assessment. While
the 33 percent figure used here is a restrictive assumption (i.e., will
result in a larger estimated decline in lending), the actual share of
borrowers who will pass the ATR assessment in practice may differ from
the value used here. To the extent that the value used in the Bureau's
simulations is too high (i.e., fewer borrowers would pass an ATR
determination), the real decreases in loan volumes and revenues would
be greater. To the extent that the value used in the Bureau's
simulations is, as suggested above, too low (i.e., more borrowers would
pass an ATR determination), the real decreases in loan volumes and
revenues would be smaller. However, given the magnitude of the decline
in the ATR-only simulations, it appears that there is unlikely to be a
substantial change to the estimates based on any reasonable assumption
about the share of borrowers qualifying for ATR loans.
The simulations of the re-borrowing restrictions and the ATR
analysis presented thus far relate only to storefront loans. Online
payday loans and vehicle title loans are considered next.
iii. Online Payday Lending: Impacts
The impact of the rule on the online payday market is more
difficult to predict. There is no indication that online payday lenders
will be more successful under the ATR approach than storefront lenders;
in fact, it may be somewhat more difficult for them to satisfy the
procedural requirements of that approach. The available information
does not allow for reliably tracking sequences of online payday loans,
as borrowers appear to change lenders much more often online and there
is no comprehensive source of data on all online lenders. If very long
sequences of loans are less common for online loans, however, the re-
borrowing restrictions of both the ATR and principal step-down
approaches will have a smaller impact on online lenders.
There are additional relevant considerations for the impacts of the
rule on online lenders relative to storefront lending. Unfortunately
the direction and magnitudes of the impacts are not entirely clear. The
decrease in online lending may be less relative to storefronts if the
geographical contraction of storefronts leads more borrowers to seek
loans from online lenders. Additionally, online lenders may have lower
overhead costs and be able to better amortize one-time and per-location
costs over broader potential borrowing populations. However, there
could be negative selection into online lending (e.g., borrowers who
are less likely to pass ATR assessments or are more likely to default)
if storefront closings happen to displace less qualified customers. As
such, the effects on online lenders are likely to be similar to those
on storefront lenders, though the Bureau notes this actual impact on
online lenders is much more difficult to predict.
iv. Vehicle Title Lending: Impacts
Vehicle title loans are not eligible for the principal step-down
approach, and therefore lenders making only vehicle title loans will
only be able to make such loans to borrowers who the lender is able to
determine have the ability to repay the loan. Table 7 shows the
distribution of individual incomes of single-payment vehicle title
borrowers.
[[Page 54834]]
[GRAPHIC] [TIFF OMITTED] TR17NO17.006
Table 7 shows that the incomes of vehicle title loan borrowers are
slightly lower than those of payday loan borrowers. Vehicle title
loans, however, are substantially larger than payday loans, with a
median loan amount of nearly $700, twice that of payday loans.\1176\
Based on Tables 3 and 4, it appears that very few households with
monthly income below $3,000 will be able to demonstrate an ability to
repay a loan with a payment of $700, and even $3,000 will likely be
insufficient. Based on the imputation of household numbers to
individual borrowers, it appears that some individuals with monthly
income between $1,500 and $2,000 will live in households with
sufficient residual income to make a $700 payment, but that it is more
likely that monthly individual income of $2,500 or more will be needed
to have sufficient residual income to make such a payment. Table 7
shows that less than one third of vehicle title borrowers have monthly
individual income above $2,500.
---------------------------------------------------------------------------
\1176\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 15; CFPB Vehicle Title Report, at 6.
---------------------------------------------------------------------------
Putting aside the difficulty of developing precise estimates of the
share of borrowers who will be able to demonstrate an ability to repay
a loan, it is likely that the share will be smaller for vehicle title
borrowers than payday borrowers simply because vehicle title borrowers
have slightly lower average incomes, and the average single-payment
vehicle title loan is substantially larger than the average payday
loan. However, the Bureau applied the same assumption as with payday
loans about the share of borrowers who will pass an ATR assessment in
the vehicle title simulations. Specifically, 33 percent of borrowers
are assumed to pass the ATR screen. While it is likely that relatively
fewer borrowers will pass an ATR determination for title loans, the 33
percent number was near the low end of the predicted ranges for
borrowers passing ATR for payday. Additionally, the Bureau did not
receive any comments with detailed analysis of the share of borrowers
likely to pass ATR for title loans. As such, while the Bureau has
determined the 33 percent figure to be a reasonable assumption for the
share of borrowers passing ATR assessments for both payday and title
loans, it acknowledges that the figure is less precise for title loans.
Vehicle title lenders also face the limitations of the ATR approach
on making loans to borrowers during the term of, and for 30 days
following, a prior covered short-term loan.
The Bureau has run simulations of the share of single-payment
vehicle title loans that are currently made that could still be made
under the rule.\1177\ The simulations apply the same 33 percent ATR
filter as was described for payday, and likewise assume that borrowers
cannot take out a loan within 30 days of repaying a prior loan.
Depending on whether borrowers who currently take out long sequences of
loans will return to borrow again after a 30-day period following
repayment of a loan, the Bureau estimates that the restrictions on
short-term vehicle title lending will prevent between 89 and 93 percent
of short-term vehicle title loans that are currently made, with an
equivalent reduction in loan volume and revenue.
---------------------------------------------------------------------------
\1177\ These are similar to the simulations described in CFPB
Report on Supplemental Findings, at Chapter 6, though the results of
the simulations presented there take account only of the re-
borrowing restriction, while the results presented here add the
underwriting filter.
---------------------------------------------------------------------------
Depending on the extent to which the underwriting restrictions on
these lenders eliminate more loans (i.e., fewer than 33 percent of
borrowers demonstrate ATR), the overall reduction in loans and revenue
could be even greater. However, if more than 33 percent of borrowers
can demonstrate ATR for each loan, the reduction in loans may be
reduced.
v. Overall Impacts on These Markets
For the reasons discussed above, the Bureau believes that the rule
will have a substantial impact on the markets for payday loans and
single-payment vehicle title loans. The costs of the procedural
requirements may have some impact on these markets, but the larger
effects will come from the limitations on lending.
Most of the costs associated with the procedural requirements of
the rule are per-loan (or per-application) costs, what economists refer
to as ``marginal costs.'' Standard economic theory predicts that
marginal costs will be passed through to consumers, at least in part,
in the form of higher prices. As discussed above in part II, however,
many covered loans are being made at prices equal to caps that are set
by State law or State regulation; lenders operating in States with
binding price caps will not be able to recoup
[[Page 54835]]
those costs through higher prices. The new procedural costs to lenders
making loans using the principal step-down approach, however, will be
quite small, primarily the costs of obtaining data from a registered
information system and providing data to registered information
systems. Lenders making vehicle title loans, which cannot be made under
the principal step-down approach, will be required to incur the costs
of using the ATR approach. If lenders make smaller loans to comply with
the ATR requirements, however, the relative importance of procedural
costs could increase.
As described above, the limitations on lending included in the rule
will have a substantial impact on the loan revenue of storefront payday
and vehicle title lenders; the impact on online payday lenders is less
clear, but is likely to be substantial as well. However, it is
important to emphasize that these revenue projections do not account
for lenders making changes to the terms of their loans to better fit
the regulatory structure or offering other products, for instance by
offering a longer-term vehicle title loan with a series of smaller
periodic payments instead of offering a short-term vehicle title loan.
The Bureau is not able to model these effects.
A pattern of contractions in storefronts has played out in States
that have imposed new laws or regulations that have had a similar
impact on lending revenue, where revenue-per-store has generally
remained fairly constant and the number of stores has declined in
proportion to the decline in revenue.\1178\ To the extent that lenders
cannot replace reductions in revenue by adapting their products and
practices, Bureau research suggests that the ultimate net reduction in
revenue will likely lead to contractions of storefronts of a similar
magnitude, at least for stores that do not have substantial revenue
from other lines of business, such as check cashing and selling money
orders.
---------------------------------------------------------------------------
\1178\ CFPB Report on Supplemental Findings, at chapter 3; Wash.
State Dep't. of Fin. Insts., ``2015 Payday Lending Report,'', at 5
(2015), available at http://www.dfi.wa.gov/sites/default/files/reports/2015-payday-lending-report.pdf; Adm'r of the Colo. Consumer
Credit Unit, ``Colorado Payday Lending--July Demographic and
Statistical Information: July 2000 through December 2012,''; Adm'r
of the Colo. Consumer Credit Unit, ``Colorado Uniform Consumer
Credit Code: Annual Report Composites,'' available at https://coag.gov/uccc/info/ar.
---------------------------------------------------------------------------
With regard to evolution in product offerings, it is quite likely
that lenders may respond to the requirements and restrictions in the
rule by adjusting the costs and features of particular loans. They may
also change the range of products that they offer. If lenders are able
to make these changes, it will mitigate their revenue losses. On
individual loans, a loan applicant may not demonstrate an ability to
repay a loan of a certain size with a certain payment schedule. The
lender may choose to offer the borrower a smaller loan or, if allowed
in the State where the lender operates, a payment schedule with a
comparable APR but a longer repayment period yielding smaller payments.
Lenders may also make broader changes to the range of products that
they offer, shifting to longer-term, lower-payment installment loans,
where these loans can be originated profitably within the limits
permitted by State law.\1179\
---------------------------------------------------------------------------
\1179\ An analysis by researchers affiliated with a specialty
consumer reporting agency estimated that roughly half of storefront
payday borrowers could demonstrate ability to repay a longer-term
loan with similar size and APR to their payday loan, but noted that
these loans would not be permitted in a number of States because of
State lending laws and usury caps. nonPrime 101, ``Report 8, Can
Storefront Payday Borrowers Become Installment Loan Borrowers? Can
Storefront Payday Lenders Become Installment Lenders?,'' at 3 (Dec.
2, 2015) available at https://www.nonprime101.com/wp-content/uploads/2015/12/Report-8-Can-Storefront-Payday-Borrowers-Become-Installment-Loan-Borrowers-Web-61.pdf.
---------------------------------------------------------------------------
Making changes to individual loans and to overall product offerings
will impose costs on lenders even as it may serve to replace at least
some lost revenues. Smaller individual loans generate less revenue for
lenders. Shifting product offerings will likely have very little direct
cost for lenders that already offer those products. These lenders will
likely suffer some reduced profits, however, assuming that they found
the previous mix of products to generate the greatest profits. Lenders
who do not currently offer longer-term products but decide to expand
their product range will incur a number of costs. These might include
learning about or developing those products; developing the policies,
procedures, and systems required to originate and to service the loans;
training staff about the new products; and communicating the new
product offerings to existing payday and single-payment vehicle title
borrowers.
2. Benefits and Costs to Consumers
a. Benefits to Consumers
The rule will benefit consumers by reducing the harm they suffer
from the costs of extended sequences of payday loans and single-payment
auto-title loans, from the costs of delinquency and default on these
loans, from the costs of defaulting on other major financial
obligations, and/or from being unable to cover basic living expenses in
order to pay off covered short-term and longer-term balloon-payment
loans.\1180\ Borrowers will also benefit from lenders adjusting their
loan terms or their product mix, so that future loans are more
predictable and ultimate repayment is more likely.
---------------------------------------------------------------------------
\1180\ As mentioned previously, the effects associated with
longer-term balloon-payment loans are likely to be small relative to
the effects associated with payday and vehicle title loans. This is
because longer-term balloon-payment loans are uncommon in the
baseline against which benefits are measured.
---------------------------------------------------------------------------
i. Eliminating Extended Loan Sequences
As discussed in detail above in Market Concerns--Underwriting,
there is strong evidence that borrowers who take out storefront payday
loans and single-payment vehicle title loans often end up taking out
many loans in a row. This evidence comes from the Bureau's own work, as
well as analysis by independent researchers and analysts commissioned
by industry. Each subsequent single-payment loan carries the same cost
as the initial loan that the borrower took out, and there is evidence
that many borrowers do not anticipate these long sequences of loans.
Borrowers who do not intend or expect to have to roll over or re-borrow
their loans, or expect only a short period of re-borrowing, incur
borrowing costs that are several times higher than what they expected
to pay. The limitations on making loans to borrowers who have recently
had relevant covered loans will eliminate these long sequences of
loans.
The Bureau received many comments from industry, trade
associations, and others arguing about consumers' abilities to
anticipate their borrowing patterns. The Bureau has addressed these
comments previously in Market Concerns--Underwriting, the section-by-
section analysis for Sec. 1041.4 and part VII.D, and does so again
here.
There are several key findings that are raised by multiple sources,
including analyses by the Bureau; by academic, industry, and other
researchers; by State government agencies; in a report submitted by
several of the SERs as part of the SBREFA process; and raised in
comments. First, only a minority of new payday and single-payment
vehicle title loans are repaid without re-borrowing. With slight
variation depending on the particular analysis, from approximately one-
in-three to one-in-four payday loans and approximately one-in-eight
single-payment vehicle title loans is repaid without re-borrowing. In
contrast, about half of loans lead to sequences at least four loans
long, for both types of
[[Page 54836]]
loans.\1181\ A significant percentage of borrowers have even longer
sequences; about a third of either type of loan leads to sequences
seven loans long, and about a quarter lead to sequences 10 loans long
or longer. And, a small number of borrowers have extremely long
sequences that go on for years. An analysis by an industry research
group found that 30 percent of payday borrowers who took out a loan in
a particular month also took out a loan in the same month four years
later. For this group, the median time in debt over that period was
over two years, and nine percent of the group had a loan in every pay
period across the four years.\1182\
---------------------------------------------------------------------------
\1181\ See CFPB Data Point: Payday Lending, at 10-11; CFPB
Vehicle Title Report, at 10-11; CFPB Report on Supplemental
Findings, at Chapter 5; Arthur Baines et al., ``Economic Impact on
Small Lenders of the Payday Lending Rules Under Consideration by the
CFPB,'' Charles River Associates, (2015), available at http://www.crai.com/publication/economic-impact-small-lenders-payday-lending-rules-under-consideration-cfpb; Letter from Greg Gonzales,
Comm'r, Tennessee Dep't of Fin. Insts., to Hon. Bill Haslam,
Governor and Hon. Members of the 109th General Assembly, at 8 (Apr.
12, 2016) (Report on the Title Pledge Industry), available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf.
\1182\ nonPrime 101, ``Report 7-C, A Balanced View of Storefront
Payday Borrowing Patterns: Results from a Longitudinal Random Sample
over 4.5 Years,'' at tbl. A-7 (2016), available at https://www.nonprime101.com/data-findings/.
---------------------------------------------------------------------------
The Bureau believes the available empirical evidence demonstrates
that borrowers who take out long sequences of payday loans and vehicle
title loans do not anticipate those long sequences.\1183\ Aside from
the Mann (2013) study, which is discussed further below, two academic
studies have asked payday and vehicle title borrowers about their
expectations regarding how long it takes to repay payday loans, and not
re-borrow shortly thereafter, and compared their responses with actual
repayment behavior of the overall borrower population.\1184\ These
studies did not compare borrowers' predictions with their own borrowing
experiences, but did show that borrowers appear, on average, somewhat
optimistic about re-borrowing. Still, the average borrower experience
may not be directly relevant to the impacts of this rule. Rather, as
described in part VII.D, the more pertinent question in assessing the
impacts of this rule's restrictions is whether those borrowers who
experience long sequences of re-borrowing properly anticipated these
experiences.
---------------------------------------------------------------------------
\1183\ The evidence described in this section is also discussed
in Market Concerns--Underwriting.
\1184\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013 (2014); Marianne Bertrand and Adair Morse,
``Information Disclosure, Cognitive Biases and Payday Borrowing,''
66 Journal of Fin. 1865 (2011).
---------------------------------------------------------------------------
Two nearly identical surveys of payday borrowers commissioned by an
industry trade group were conducted in 2013 and 2016, and asked
borrowers who had recently repaid a loan and not re-borrowed if it had
taken as long as the borrower had initially expected to repay the
loan.\1185\ They found that the overwhelming majority of borrowers
stated that it had not taken longer than they expected. This approach,
however, may suffer from numerous problems, including recall bias (as
borrowers were asked about what they expected in the past and whether
their expectations were accurate) and ``reverse'' survivor bias (as
only borrowers who successfully closed a sequence of loans are
surveyed, and these borrowers are much less likely to have been in long
borrowing sequences). It is also not clear from the wording of the
survey if borrowers are likely to have understood the question to refer
to the actual loan they had recently repaid, or to the original loan
they had taken out that led to the loan sequence.
---------------------------------------------------------------------------
\1185\ Tarrance Group et al., ``Borrower and Voter Views of
Payday Loans,'' Cmty. Fin. Servs. Ass'n of America (2016), available
at http://www.tarrance.com/docs/CFSA-BorrowerandVoterSurvey-AnalysisF03.03.16.pdf; Harris Interactive, ``Payday Loans and the
Borrower Experience,'' Cmty. Fin. Servs. Ass'n of America (2013),
available at http://cfsaa.com/Portals/0/Harris_Interactive/CFSA_HarrisPoll_SurveyResults.pdf.
---------------------------------------------------------------------------
As discussed in the overview, Mann (2013) did ask borrowers about
their expectations for re-borrowing and compared those with their
actual borrowing experience, yielding insights more directly relevant
for this rule.\1186\ As described in the proposal, the study found that
borrowers who wound up with very long sequences of loans had rarely
expected those long sequences; that only 40 percent of respondents
expected to re-borrow at all (while more than 70 percent actually did
re-borrow); and, that borrowers did not appear to become better at
predicting their own borrowing, as those who had borrowed most heavily
in the past were most likely to underestimate their future re-
borrowing.
---------------------------------------------------------------------------
\1186\ Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105 (2013), and
correspondence between Prof. Mann and Bureau staff described in
Market Concerns--Underwriting.
---------------------------------------------------------------------------
This study was one of the most heavily cited by commenters, and the
author himself provided a comment as well. Industry commenters and the
author offered criticisms of the Bureau's characterization of the
study's findings. However, the Bureau continues to believe the evidence
suggests many borrowers did not anticipate their outcomes. Given the
prevalence and intensity with which commenters cite this study, the
Bureau offers a more detailed response here.
Mann (2013) presents evidence that 51 percent of borrowers predict
their outcomes within 7 days, 57 percent within 14 days, and 63 percent
within 21 days,\1187\ and that borrower's errors were fairly symmetric
around zero \1188\ (i.e., there was not evidence of systematic optimism
or pessimism).\1189\ The Bureau appreciates Mann's evidence and places
significant weight on his findings, but does dispute his interpretation
of those findings.
---------------------------------------------------------------------------
\1187\ Note that in performing these calculations, the paper
ignores the 20 percent of respondents who did not respond to the
questions (potentially because they were unable to offer a
prediction of their time in debt). In terms of the share of all
surveyed borrowers successfully predicting within a given window,
these percentages in the paper translate to 41 percent within seven
days, 46 percent within 14 days, and 51 percent within 21 days.
\1188\ Note that the paper does not offer the mean error,
stating only that it is ``close to zero.'' It does divulge that the
median error is three days, which is 10 percent of the predicted
loan duration and over 20 percent of the initial loan term. This
implies that even ``average'' borrowers may not be as precise in
their predictions as the author implies.
\1189\ The Bureau notes this second point, but further notes
that consumers who underestimate their ability to repay do not
achieve additional benefit from the payday loan borrowing
experience, though they do achieve better-than-expected outcomes.
Consumers who overestimate their ability to repay may suffer
considerably over a long period of subsequent indebtedness. This
asymmetry is what is addressed by the proposed rule, not the
asymmetry in expected durations.
---------------------------------------------------------------------------
The pertinent question for this rule, which limits long durations
(but not discrete and short-term access), is: Do the specific borrowers
who will experience very long sequences anticipate these outcomes at
the time they borrow? The answer to this question appears to be no.
Mann did not include his data with his comment, which makes deeper
exploration of his findings difficult.\1190\ However, using the paper
and documents provided by the author to the Bureau, some useful
findings can be discerned.\1191\ These
[[Page 54837]]
include, inter alia: Among borrowers taking 150+ days to clear a
sequence, none (0 percent) predicted they would be in debt for even
100, and the average borrower spent 121 unanticipated days in debt
(equivalent to more than 8.5 rollovers); among borrowers taking 90 or
more days to clear their loans at least 95 percent believed they would
be in debt for shorter durations than they actually experienced, with
the average borrower spending 92 unanticipated days in debt (equivalent
to more than 6.5 rollovers); and among those borrowers taking 42 or
more days to clear their loans (equivalent to the three loan sequence
permitted under the rule) more than 90 percent underestimated their
time in debt, with the average borrower experiencing 48 unanticipated
days in debt (equivalent to more than three rollovers).\1192\
---------------------------------------------------------------------------
\1190\ As stated above in part VII.D, it should be noted that
Professor Mann did not provide his data to the Bureau, either prior
to the proposal, nor in his comment in response to the proposal. In
place of these data, the Bureau is relying on the charts and graphs
he provided in his correspondence with and presentation to the
Bureau. As such the analysis provided here may be somewhat
imprecise.
\1191\ Many of these findings were derived by analyzing the
scatterplots depicting borrowers' re-borrowing expectations and
outcomes, provided in Attachment to Email from Ronald Mann,
Professor, Columbia Law School, to Jialan Wang & Jesse Leary, Bureau
of Consumer Fin. Prot. (Sept. 24, 2013, 1:32 EDT). The Bureau
measured the distances of each discernable point on the plot to
assess its coordinates. Because of the presence of line of best fit
on the figure, some points near 28 days of expected indebtedness are
obscured. This should not substantially impact the findings
presented here, and would only serve to bias the results away from
finding that borrowers with long sequences underestimate their
durations of indebtedness. As previously noted, borrowers with
exceptionally long sequences (including those displayed in
subsequent slides of the author's presentation) appear to be missing
from this scatterplot.
\1192\ Attachment to Email from Ronald Mann, Professor, Columbia
Law School, to Jialan Wang & Jesse Leary, Bureau of Consumer Fin.
Prot. (Sept. 24, 2013, 1:32 EDT).
---------------------------------------------------------------------------
Additionally, a graph depicting the relationship between predicted
and actual days in debt shows a regression line with no discernable
slope. The Bureau believes this to be the clearest statistical evidence
that there is no significant relationship between predicted and actual
days in debt. If borrowers could have predicted precisely what would
happen to them, the slope of the line would be equal to one. If
borrowers' predictions were generally (and positively) correlated with
their actual outcomes, the slope of the line would be positive and non-
trivial. If borrowers' predictions were completely uncorrelated with
their outcomes, the slope of the line would be zero. In the
correspondence provided by the author, the slope of the line appears to
be almost completely flat, and statistically indistinguishable from
zero.\1193\ In other words: Borrowers predictions had no discernable
correlation with their outcomes, regardless of whether they experienced
long periods of indebtedness.
---------------------------------------------------------------------------
\1193\ The Bureau estimates the actual slope of the line to be
approximately 0.011, based on the Stata-generated graph provided to
the Bureau by the author. See Attachment to Email from Ronald Mann,
Professor, Columbia Law School, to Jialan Wang & Jesse Leary, Bureau
of Consumer Fin. Prot. (Sept. 24, 2013, 1:32 EDT). And, again, the
relationship is statistically insignificant.
---------------------------------------------------------------------------
This finding of no discernable correlation between predictions and
outcomes may seem inconsistent with the finding that many borrowers did
accurately predict their durations within a 14-day window. Since so
many borrowers expect short durations, and many borrowers experience
these durations, it appears that they accurately predict their outcomes
when, in fact, they are just as likely to have experienced longer
durations. For example, in the Bureau's data on payday loans, if all
consumers predicted they would have no renewals, their actual sequence
length would be within 14 days of the prediction 44 percent of the
time. This is very similar to the 46 percent of borrowers in Mann's
data that are accurate in their predictions to within a 14-day window
(once those borrowers not reporting a prediction are included).
Lastly, the paper itself presents direct evidence that a
substantial minority of borrowers are unable to even offer a prediction
of their outcomes. For example, approximately 20 percent of borrowers
were unable to answer the question ``. . . How long do you think it
will be before you have saved enough money to go an entire pay period
without borrowing from this lender? If you aren't sure, please give
your best estimate.'' \1194\ In response to other questions in the
survey, amongst borrowers who indicated they expected to roll the loan
over, more than one-third did not (or could not) offer a prediction of
how long they would continue borrowing.\1195\ Accounting for these non-
responses means that the 57 percent of borrowers who Mann asserts
predict their durations within a 14-day window actually represent less
than half (46 percent) of all surveyed borrowers. Put another way, the
paper's findings are potentially instructive only for those borrowers
who have enough confidence to make a prediction, and say little about
the substantial fraction of borrowers who implicitly suggest or
explicitly state they cannot predict their expected duration of
indebtedness.
---------------------------------------------------------------------------
\1194\ Ronald Mann ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, 121 (2013).
\1195\ Ronald Mann ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, 121 (2013).
---------------------------------------------------------------------------
In summary, the Bureau believes there are multiple implications of
Mann's findings. Specifically, it may be true that many borrowers
accurately anticipate their debt durations, as Mann asserts in both his
paper and comment. However, it is certainly true that most of those
borrowers with long duration sequences did not accurately anticipate
this outcome. Additionally, a large share of borrowers who anticipated
no re-borrowing remain in debt for multiple loans, and many are unable
to even offer a guess as to the duration of their indebtedness, let
alone a precise prediction. Finally, there appears to be no discernable
relationship between borrowers' individual expectations, and their
ultimate outcomes.
Given the tenor of the comments received by the Bureau, the Bureau
feels compelled to note that this rule does not ban payday or vehicle
title lending. In fact, the Bureau expects the vast majority of
borrowers to be permitted three-loan sequences under the principal
step-down approach. It warrants mentioning that Mann (2013) shows that
borrowers expect to be in debt an average of 36 days, and that more
than 80 percent of borrowers expect clearance in 50 days or less, both
of which fall within the approximate amount of time of indebtedness
permitted under each sequence of loans under the rule.\1196\ As such,
the evidence from Mann (2013) implies that the rule would not place a
binding limit on the anticipated re-borrowing for the vast majority of
his sample.
---------------------------------------------------------------------------
\1196\ See Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Supreme Court Econ. Rev. 105, at at tbl. 3ii (2013).
Note that a sequence of three biweekly loans covers approximately 42
days, which appears to be assigned to the same category as 50 days
in the paper's histogram.
---------------------------------------------------------------------------
As mentioned, the Bureau received many comments suggesting that the
cumulative available evidence shows borrowers anticipate their payday
borrowing experiences. The Bureau believes the more thorough treatment
of this literature offered here provides much in the way of support for
the premise that those payday loan borrowers who experience long
durations of debt failed to anticipate that this would occur. As such,
the Bureau continues to believe the evidence strongly suggests there is
a significant minority of borrowers who experience long durations of
indebtedness that did not anticipate these outcomes, let alone the
costly impacts thereof.
It is less clear how large the benefits from the limitations on
repeat borrowing will be for borrowers who take out online payday
loans. As described above, available information does not allow for
reliably tracking sequences of online payday loans, as borrowers appear
to change lenders much more often online and there is no comprehensive
source of data on all
[[Page 54838]]
online lenders. If very long sequences of loans are less common for
online loans, the costs of those sequences will be less and the
benefits to consumers of preventing long sequences will be smaller.
ii. Reduced Defaults and Delinquencies
The Bureau estimates that borrowers taking out covered short-term
and longer-term balloon-payment loans will experience substantially
fewer defaults under the rule. As discussed in Market Concerns--
Underwriting, the Bureau believes the consequences of defaults are
harmful to consumers, and therefore reducing defaults provides a
benefit to consumers. Consumers who default can become subject to
harmful debt collection efforts. While delinquent, they may also seek
to avoid default in ways that lead to a loss of control over budgeting
for their other needs and expenses. In addition, 20 percent of single-
payment vehicle title loan sequences end with borrowers losing their
cars or trucks to repossession. Even borrowers who have not yet
defaulted may incur penalty fees, late fees, or overdraft fees along
the way and may find themselves struggling to pay other bills or meet
their basic living expenses.
There are at least three reasons generally to expect fewer defaults
under the rule. First, borrowers who take out loans from lenders that
use the ATR approach will go through a meaningful evaluation of their
ability to make the payment or payments on the loan. The borrowers whom
lenders determine have sufficient residual income or a low enough DTI
ratio to cover each loan payment, make payments for major financial
obligations, and meet basic living expenses over the term of the loan,
and 30 days thereafter, will likely be better able to pay off their
loans relative to the population of borrowers who currently take out
these loans.
Second, the reducing balances on loans made pursuant to the
principal step-down approach should limit payment shocks to consumers.
This step-down approach should lower the risk to lenders and borrowers
of borrowers defaulting when a lender is unable to continue to lend to
them (though some borrowers who would have re-borrowed the full amount
of the initial loan may now default, if they are unable to successfully
make the step-down payment).
Third, lenders' ability to make long sequences of loans to
borrowers will be greatly curtailed, whether lenders use the ATR or
principal step-down approach. Currently, borrowers who have difficulty
repaying a loan in full usually have the option of paying just the
finance charge and rolling the loan over, or repaying the loan and then
quickly re-borrowing. The option to re-borrow may make borrowers
willing to make a finance charge payment on a loan they know they
cannot afford while still meeting their other obligations or
expenditure needs. The option for continued re-borrowing allows
borrowers to put off defaulting in the hopes they may ultimately be
able to successfully repay the loan. If continued re-borrowing does not
allow them to ultimately repay the loan, the lender will still have
received multiple finance charges before the borrower defaults. To this
point, Bureau research shows that nearly half of the consumers who
experienced a default or a 30-day delinquency had fees over $60 in the
month before their first default or 30-day delinquency.\1197\
---------------------------------------------------------------------------
\1197\ Calculations using the Bureau's payday loan dataset
described above.
---------------------------------------------------------------------------
Borrowers who are more likely to default are also more likely to
have late payments; thus, reducing the rate of defaults will likely
reduce the rate of late payments and the harm associated with those
late payments. Late payments on payday loans, defined as a payment that
is sufficiently late that the lender deposits the borrower's check or
attempts to collect using the ACH authorization, appear to range from
seven \1198\ to over 10 percent.\1199\ At the borrower level, two
different sources show that 39 to 50 percent of borrowers have a check
deposited that bounces in their first year of payday borrowing.\1200\
These late payments are costly for borrowers. If a lender deposits a
check or submits a payment request and it is returned for insufficient
funds, the borrower's bank or credit union will likely charge the
borrower an NSF fee of approximately $35, and the lender may charge a
returned-item fee. In addition, analysis the Bureau has conducted of
payment requests from online lenders shows that a substantial number of
payments that are made are overdrafts.\1201\ Fees for overdrafts are
generally equal to NSF fees at the same institution. Consumers will
also benefit from mitigation of the harm from NSF and overdraft
transactions by the limitations on payment practices and related
notices described in the section-by-section analysis of Sec. Sec.
1041.8 and 1041.9, and discussed later in this section.
---------------------------------------------------------------------------
\1198\ ``For the years ended December 31, 2011 and 2010, we
deposited customer checks or presented an Automated Clearing House
(``ACH'') authorization for approximately 6.7 percent and 6.5
percent, respectively, of all the customer checks and ACHs we
received and we were unable to collect approximately 63 percent and
64 percent, respectively, of these deposited customer checks or
presented ACHs. Total charge-offs, net of recoveries, for the years
ended December 31, 2011 and 2010 were approximately $106.8 million
and $108 million, respectively.'' Advance America, 2011 Annual
Report (Form 10-K).
\1199\ Paige Marta Skiba and Jeremy Tobacman, ``Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default,'' (Vand. L. and Econ., Research Paper No.
08-33, 2008).
\1200\ Paige Marta Skiba and Jeremy Tobacman, ``Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default,'' (Vand. L. and Econ., Research Paper No.
08-33, 2008); Susanna Montezernollo and Sarah Wollf, ``Payday
Mayday: Visible and Invisible Payday Lending Defaults,'' at 5 (Ctr
for Responsible Lending 2015).
\1201\ The Bureau's analysis shows that 6 percent of payment
requests that were not preceded by a payment request that was
returned for insufficient funds are returned for insufficient funds
and 6 percent are paid as overdrafts. CFPB Online Payday Loan
Payments.
---------------------------------------------------------------------------
Default rates on individual payday loans are fairly low, 2 percent
in the data the Bureau has analyzed.\1202\ But, as noted above, a
substantial majority of borrowers takes out more than one loan in
sequence before repaying the debt or defaulting. A more meaningful
measure of default is therefore the share of loan sequences that end in
default. The Bureau's data show that, using a 30-day sequence
definition, 20 percent of loan sequences end in default. Other
researchers have found similar high levels of default at the borrower
level. A study of payday borrowers in Texas found that 4.7 percent of
loans were charged off but 30 percent of borrowers had a loan charged
off in their first year of borrowing.\1203\
---------------------------------------------------------------------------
\1202\ Default here is defined as a loan not being repaid as of
the end of the period covered by the data or 30 days after the
maturity date of the loan, whichever was later.
\1203\ Paige Marta Skiba and Jeremy Tobacman, ``Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default,'' at tbl. 2 (Vand. L. and Econ., Research
Paper No. 08-33, 2008).
---------------------------------------------------------------------------
Less information is available on the delinquency and default rates
for online payday loans. The available information is discussed in part
II above, where the Bureau notes that one lender reports online single-
payment loans have a charge-off rate substantially higher than that for
storefront payday loans. In a 2014 analysis of its consumer account
data, a major depository institution found that small-dollar lenders,
which include lenders making a range of products including payday
loans, had an overall return rate of 25 percent for ACH payments. The
Bureau's report on online payday loan payments practices presents rates
of failed payments for online lenders exclusively.\1204\ It shows a
lower rate of payment failure; six
[[Page 54839]]
percent of payment attempts that were not preceded by a failed payment
attempt themselves failed.\1205\ Default rates are more difficult to
determine, but 42 percent of checking accounts with failed online loan
payments are subsequently closed.\1206\ This provides a rough measure
of default on these loans.
---------------------------------------------------------------------------
\1204\ CFPB Online Payday Loan Payments.
\1205\ CFPB Online Payday Loan Payments, at 13 tbl. 1. This
analysis includes both online and storefront lenders. Storefront
lenders normally collect payment in cash and only deposit checks or
submit ACH requests for payment when a borrower has failed to pay in
person. These check presentments and ACH payment requests, where the
borrower has already failed to make the agreed-upon payment, have a
higher rate of insufficient funds.
\1206\ CFPB Online Payday Loan Payments, at 24 tbl. 5.
---------------------------------------------------------------------------
Default rates on single-payment vehicle title loans are higher than
those on payday loans. In the data analyzed by the Bureau, the default
rate on all loans is nine percent, and the sequence-level default rate
is 31 percent.\1207\ In the data the Bureau has analyzed, five percent
of all single-payment vehicle title loans lead to repossession, and 18
percent of sequences of loans end with repossession. So, at the loan
level and at the sequence level, slightly more than half of all
defaults lead to repossession of the borrower's vehicle.
---------------------------------------------------------------------------
\1207\ There is also evidence that the default rates on longer-
term balloon-payment title loans are high. The Bureau has data for a
single lender that made longer-term vehicle title loans with both
balloon and amortizing payment schedules. Those loans with balloon
payments defaulted at a substantially higher rate. See CFPB Report
on Supplemental Findings, at 30.
---------------------------------------------------------------------------
The range of potential impacts on a borrower of losing a vehicle to
repossession depends on the transportation needs of the borrower's
household and the available transportation alternatives. According to
two surveys of vehicle title loan borrowers, 15 percent of all
borrowers report that they would have no way to get to work or school
if they lost their vehicle to repossession.\1208\ Fully 35 percent of
borrowers pledge the title to the only working vehicle in the
household.\1209\ Even those with a second vehicle or the ability to get
rides from friends or take public transportation would presumably
experience significant inconvenience or even hardship from the loss of
a vehicle.
---------------------------------------------------------------------------
\1208\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013 (2014); Pew Charitable Trusts, ``Auto Title Loans,
Market Practices and Borrower Experiences,'' at 1038 (2015),
available at http://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf.
\1209\ Kathryn Fritzdixon et al., ``Dude, Where's My Car Title?:
The Law Behavior and Economics of Title Lending Markets,'' 2014 U.
IL L. Rev. 1013 (2014); Pew Charitable Trusts, ``Auto Title Loans,
Market Practices and Borrower Experiences,'' at 1038 (2015),
available at http://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf.
---------------------------------------------------------------------------
iii. Avoiding Harms From Making Unaffordable Payments
Consumers will also benefit from a reduction in the other financial
hardships that may arise because borrowers, having taken out a loan
with unaffordable payments, feel compelled to take painful measures to
avoid defaulting on the covered short-term and longer-term balloon-
payment loans. If a lender has taken a security interest in the
borrower's vehicle, the borrower may decide not to pay other bills or
forgo crucial expenditures because of the leverage that the threat of
repossession gives to the lender. The repayment mechanisms for some
covered short-term loans and longer-term loans with balloon payments
can also cause borrowers to lose control over their own finances. If a
lender has the ability to withdraw payment directly from a borrower's
checking account, especially when the lender is able to time the
withdrawal to the borrower's payday, the borrower may lose control over
the order in which payments are made and may be unable to choose to
make essential expenditures before repaying the loan.
iv. Changes to Loan Structure
Consumers may benefit if lenders respond to the rule by modifying
the terms of individual loans or if lenders adjust the range of
products they offer. Borrowers offered smaller loans may benefit if
this enables them to repay the loan, when they would otherwise be
unable to repay. This will mitigate a borrower's exposure to the costs
associated with re-borrowing, default, or the costs of being unable to
pay for other financial obligations or living expenses. If lenders
shift from payday loans or single-payment vehicle title loans to
longer-term loans, consumers may benefit from lower payments that make
it more feasible for the borrowers to repay. Given the high rate of
unanticipated re-borrowing of short-term loans, the financing costs of
longer-term loans, provided they disclose their terms clearly and do
not utilize balloon or leveraged payments, may be easier for borrowers
to predict, and therefore borrowers may be less likely to end up in a
loan that is substantially more expensive than they anticipated.
b. Costs to Consumers and Access to Credit
The procedural requirements of the rule will make the process of
obtaining a loan more time consuming and complex for some borrowers.
The restrictions on lending included in the rule will reduce the
availability of storefront payday loans, online payday loans, single-
payment vehicle title loans, longer-term balloon-payment loans, and
other loans covered by the rule. Borrowers may experience reduced
access to new loans (i.e., loans that are not part of an existing loan
sequence). Some borrowers will also be prevented from rolling loans
over or re-borrowing shortly after repaying a prior loan. And, some
borrowers may still be able to borrow, but for smaller amounts or with
different loan structures, and find this less preferable than the terms
they would have received absent the rule.
The Bureau received many comments suggesting that the consideration
of costs to consumers was incomplete. Notably, comments suggested that
the speed of obtaining funds would be reduced, leading to consumer
harm; that the welfare implications of reducing the access to covered
loans needed to be more adequately considered; that the Bureau should
more explicitly consider the costs of moving to ``inferior''
alternatives due to the reduction in covered loans; and that the Bureau
declined to provide monetary estimates of harm. The Bureau attempts to
address each of these (as well as additional comments) in the
subsections below.
However, one general response is that the estimated restriction on
consumer access to credit is not as severe as implied by these
comments. The rule does not impose a ban on payday lending, and the
Bureau expects the vast majority of consumers will experience minimal,
if any, reduction in access to credit. The Bureau's simulations
(discussed above) show that the restrictions on re-borrowing and
underwriting imply that only 5.9 to 6.2 percent of borrowers will be
prohibited from initiating a sequence of loans they would have
initiated absent the rule.\1210\ That is, since most consumers take out
six or fewer loans each year, and are not engaged in long sequences of
borrowing, most will not find their preferred borrowing patterns
interrupted by the rule's requirements and prohibitions. As will be
discussed below, if borrowers derive greater benefits from their
initial loans compared to subsequent loans, the impacts of these
restrictions will have
[[Page 54840]]
limited (and potentially positive) impacts on consumer welfare.
---------------------------------------------------------------------------
\1210\ As previously mentioned, the Bureau does not attempt to
predict the impact of any voluntary underwriting activities that
would be undertaken by lenders providing loans under the principal
step-down approach (e.g., to screen out likely defaulters who would
have been profitable under a regime with unlimited rollovers). Any
reduction in lending that might result from such a strategic
response to this rule would further reduce the provision of credit
compared to the estimates provided here.
---------------------------------------------------------------------------
i. Impacts of Procedural Requirements
The procedural requirements for lenders will make the process of
obtaining a loan more time consuming for some borrowers. This will
depend on whether lenders use the ATR approach or the principal step-
down approach, and the extent to which lenders automate their lending
processes. In particular, borrowers taking out payday loans originated
under the principal step-down approach from lenders that automate the
process of checking their records and obtaining a report from a
registered information system will see little, if any, increase in the
time to obtain a loan. Notably, this should not substantially reduce
the speed at which customers can take out a first loan (or a first loan
after 30 or more days without a covered short-term loan or longer-term
loan with a balloon payment). As such, those consumers who experience
discrete, unanticipated, and infrequent shocks are unlikely to be
negatively impacted by the rule's procedural requirements.\1211\
---------------------------------------------------------------------------
\1211\ Some commenters suggested that the procedural
requirements would reduce both speed and access to short-term
credit, leading to consumer harm for those consumers who experience
unanticipated shocks to their finances (e.g., car repair or hospital
bill). As the principal step-down approach is likely to be the
primary means through which customers get infrequent loans to deal
with shocks of this nature, the procedural requirements are unlikely
to bind on customers dealing with these events.
---------------------------------------------------------------------------
Borrowers taking out loans from lenders using the ATR approach are
more likely to experience additional complexity. Online payday
borrowers and vehicle title borrowers are required to provide
documentation of the amount of their income, which currently is often
not required. Both storefront and online borrowers will be asked to
fill out a form listing the amount of their income and payments on
major financial obligations. Even when additional documentation is not
required and a customer statement of income or expenses is sufficient,
the process by which a lender may obtain these values is likely to take
additional time, and lead to additional scrutiny, than was the case
prior to the rule. As such, customers seeking loans under the ATR
approach will likely experience reductions in the speed they receive
funds and/or access to credit.
While the Bureau expects many lenders to automate much of the ATR
determination, there may still be lenders that rely, partially or
completely, on manual underwriting processes.\1212\ Estimates of the
time required to manually process an application for a loan made via
the ATR approach vary substantially. In the proposal, the Bureau
assumed manual calculations of ATR would take less than 20 minutes. A
large lender noted in its comment that manually processing applications
in the U.K. takes one to four hours, and a trade group representing
mostly large depository institutions suggested that three hours was a
viable estimate. Comments received from a trade group representing
covered title lenders and based on information provided by Small Entity
Representatives shows that the increased time to process a manual ATR
determination is 15-45 minutes. The last of these seems to be based on
the most applicable information (e.g., covered lenders in the U.S.),
and thus informs the Bureau's estimates. Thus, if a lender orders
consumer reports manually and performs the calculations by hand
necessary to determine that the borrower has the ability to repay the
loan, the Bureau estimates this could add 15-45 minutes to the
borrowing process. And if a borrower is unaware that it is necessary to
provide certain documentation required by the lender, this may require
a second trip to the lender, increasing the costs borne by the
borrower. Finally, borrowers taking out loans online may need to upload
verification evidence, such as by taking a photograph of a pay stub, or
facilitate lender access to other information sources.
---------------------------------------------------------------------------
\1212\ It is likely that those stores able to determine ATR more
rapidly and at a lower cost (e.g., via an automated process) will
have a competitive advantage. Given the reduction in stores
anticipated in this section, in steady-state the Bureau has
concluded that relatively few lenders will employ a manual process,
and those that do will be the ones who are able to streamline their
assessments.
---------------------------------------------------------------------------
ii. Reduced Access to Initial Loans
Initial covered short-term loans--i.e., those taken out by
borrowers who have not recently had a covered short-term loan--are
presumably taken out because of a need for credit that is not the
result of prior borrowing of covered short-term loans. Borrowers may be
unable to take out new loans (those originated more than 30 days after
their last loan) for at least two reasons: they may only have access to
loans made under the ATR approach and be unable to demonstrate an
ability to repay the loan under the rule, or they may be unable to
satisfy any underwriting requirements adopted by lenders.
Payday borrowers are not likely to be required to satisfy the ATR
requirement unless and until they have exhausted the limits on loans
available to them under the principal step-down approach, or unless the
borrower is seeking a loan in excess of $500. However, to obtain loans
under the principal step-down approach, borrowers may be required to
satisfy more exacting underwriting requirements than are applied today.
Moreover, after exhausting the limits on principal step-down approach
loans, borrowers are required to satisfy the ATR requirement in order
to obtain a new loan.
The direct effects of the principal step-down approach on
borrowers' ability to take out loans will be quite limited, provided
the borrowers did not have an active loan within the past 30 days. The
Bureau estimates that only about five percent of initial payday loans
(those that are not part of an existing sequence) will be prevented by
the annual limits, and roughly six percent of borrowers will be
prohibited from initiating a new sequence of loans they would have
started absent the rule. That is, only about five percent of the loans
that are most likely to reflect a new need for credit will be affected
by these annual limits on borrowing. These affected borrowers will then
have to satisfy the ATR test in order to obtain a new loan.
Vehicle title borrowers are more likely to find that they are
unable to obtain an initial loan because the principal step-down
approach does not provide for vehicle title loans and thus these
borrowers must satisfy the ATR requirement. Many of these consumers
could choose to pursue a payday loan instead and seek to avail
themselves of the principal step-down approach. However, there are two
States that permit vehicle title loans but not payday loans, and 15
percent of vehicle title borrowers do not have a checking account, and
thus may not be eligible for a payday loan under the lender's own rules
(as borrowers without a checking account are allowed to obtain a loan
under this rule).\1213\ In addition, many States limit the size of
payday loans but not the size of vehicle title loans, so some borrowers
may prefer a vehicle title loan. For all of these borrowers, their
ability to obtain an initial loan will depend upon their ability to
demonstrate an ability to repay and satisfy any other underwriting
requirements the lender may impose.
---------------------------------------------------------------------------
\1213\ The 2015 FDIC National Survey of Unbanked and Underbanked
Households finds that 12.4 percent of consumers reporting having
used an auto title loan in the prior 12 months are unbanked.
---------------------------------------------------------------------------
Consumers who are unable to obtain a new loan because they cannot
satisfy
[[Page 54841]]
the ATR requirement and have exhausted or cannot qualify for a loan
under the principal step-down approach will bear some costs from
reduced access to credit. They may be forced to forgo certain
purchases,\1214\ incur high costs from delayed payment of existing
obligations, incur high costs and other negative impacts by simply
defaulting on bills, or they may choose to borrow from sources that are
more expensive or otherwise less desirable. Some borrowers may
overdraft their checking account; depending on the amount borrowed, an
overdraft on a checking account may be more expensive than taking out a
payday or single-payment vehicle title loan. Similarly, ``borrowing''
by paying a bill late may lead to late fees or other negative
consequences like the loss of utility service. Other consumers may turn
to friends or family when they would rather borrow from a lender. Still
others may seek other types of credit, like longer-term loans not
covered by the origination portions of this rule, credit cards, or
other alternatives. And, some consumers may take out online loans from
lenders that do not comply with this regulation.\1215\
---------------------------------------------------------------------------
\1214\ Specifically, consumers may react to reduced access to
short-term loans by decreasing their short-run consumption. However,
to the extent they avoid long sequences of loans, and the fees
associated with them, their longer-term consumption may increase.
One study of consumption responses to payday loan access shows that
overall consumption increases as payday loan use declines. See Brian
Baugh, ``What Happens When Payday Borrowers Are Cut Off from Payday
Lending? A Natural Experiment,'' Fisher College of Bus., Ohio State
U. 2015).
\1215\ It has been suggested that some borrowers might turn to
in-person illegal lenders, or ``loan sharks.'' The Bureau is unaware
of any data on the current prevalence of illegal lending in the
United States by individuals. Nor is the Bureau aware of any data
suggesting that such illegal lending is more prevalent in States in
which payday lending is not permitted than in States which permit
payday lending or of any evidence that the amount of such lending
has increased in States which adopted a prohibition on payday
lending.
---------------------------------------------------------------------------
Survey evidence provides some information about what borrowers are
likely to do if they do not have access to these loans. Using the data
from the CPS Unbanked/Underbanked supplement, researchers found that
the share of households using pawn loans increased in States that
banned payday loans, to a level that suggested a large share of
households that would otherwise have taken out payday loans took out
pawn loans, instead.\1216\ A 2012 survey of payday loan borrowers found
that a majority indicated that if payday loans were unavailable they
would reduce expenses, delay bill payment, borrow from family or
friends, and pawn personal items. Some did indicate, however, that they
would get a bank or credit union loan or use a credit card to cover
expenses.\1217\ Finally, data collected by the Bureau from banks that
ceased offering deposit advance products (``DAP loans''), showed that
there was no evidence that reduced access to these products led to
greater rates of overdraft or account closure.\1218\
---------------------------------------------------------------------------
\1216\ Neil Bhutta et al., ``Consumer Borrowing after Payday
Loan Bans.'' 59 J. of L. and Econ. 225 (2016).
\1217\ Pew Charitable Trusts, ``Payday Lending in America: Who
Borrows, Where They Borrow, and Why,'' at 16 (Report 1, 2012),
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/
pcs_assets/2012/pewpaydaylendingreportpdf.pdf (reporting $375 as the
average).
\1218\ CFPB Report on Supplemental Findings, at 35-39. The
Bureau notes, however, that if demand for short-term liquidity is
inelastic and outside options are limited, a decrease in access to
one option will necessarily increase the demand for its substitutes.
---------------------------------------------------------------------------
In many comments received by the Bureau it was suggested that more
consideration be given to the alternatives that displaced borrowers may
turn to absent available payday or title loans. Overdraft fees,
``illegal loan sharks,'' and pawn loans were specifically mentioned as
inferior forms of credit that borrowers denied a payday or title loan
may utilize. The Bureau agrees that these are indeed valid potential
costs, and considered them in the proposal. The Bureau notes that its
summary and analysis of the related literature and empirical evidence
suggests that intensive payday borrowers experienced increase welfare
from reduced use of these loans. This outcome reflects the net effects
of any substitution patterns or reductions in borrowing.
iii. Limits on Loan Size
Lenders making loans using the principal step-down approach could
not make loans larger than $500. This will limit the availability of
credit to borrowers who would otherwise seek a larger loan, and either
do not have access to loans under the ATR approach or cannot
demonstrate their ability to repay the larger loan. In the data
analyzed by the Bureau, however, the median payday loan is only $350,
and some States impose a $500 maximum loan size, so most existing
payday loans would fall at or below the $500 maximum.\1219\ Any
borrowers that would have preferred a vehicle title loan but instead
obtain a payday loan originated under the principal step-down approach
because of the rule may be more affected by the loan size limit, as the
median single-payment vehicle title loans is for nearly $700.\1220\
---------------------------------------------------------------------------
\1219\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 15.
\1220\ CFPB Vehicle Title Report, at 7 tbl. 1.
---------------------------------------------------------------------------
There are additional restrictions on loan sizes made via the
principal step-down approach that apply to the second and third loans
in a sequence. That is, each subsequent loan in a sequence made using
the principal step-down approach must decrease by at least one-third
the amount of the original loan. For example, a $450 initial loan would
mean borrowers are restricted to no more than $300 for a second loan,
and no more than $150 for a third loan.
In the Bureau's preferred simulation, described in part VII.F.1.c,
around 40 percent of the reduction in loan revenues were the result of
$500 cap on initial loans and the principal step-down, with the
remaining reduction attributable to re-borrowing restrictions. Put
another way, the reduction in revenues (which correspond to total
amounts borrowed) predicted by the Bureau's simulations are partially,
though not primarily, attributed to changes in maximum loans
amounts.\1221\
---------------------------------------------------------------------------
\1221\ Note that the Bureau's simulations do not consider the
possible strategic responses to the amortization features of loans
made via the principal step-down approach. For example, some lenders
may encourage borrowers to take out larger initial loans to ensure
increased access to credit on the second and third loans in a
sequence. To the extent this increases initial loan sizes, the
Bureau's estimates may overstate the expected decreases in lender
revenues and borrowers' access to credit.
---------------------------------------------------------------------------
iv. Limits on Re-Borrowing
For storefront payday borrowers, most of the reduction in the
availability of credit will likely be due to borrowers who have
recently taken out loans being unable to roll their loans over or
borrow again within a short period of time. As discussed above, the
Bureau believes that most storefront payday lenders will employ the
principal step-down approach to making loans. If lenders only make
loans under the principal step-down approach, each successive loan in a
sequence will have to reduce the amount borrowed by one-third of the
original principal amount, with a maximum of three loans per sequence,
and borrowers will only be able to take out six covered short-term
loans in a 12-month period or be in debt on such loans for at most 90
days over the course of any 12-month period.\1222\ This restriction
could limit borrowers paid monthly to as few as three loans per year,
depending on when they take out their loans relative to when they are
[[Page 54842]]
paid. If lenders make both ATR and principal step-down approach loans,
borrowers who can demonstrate an ability to repay a loan will be able
to take out ATR approach loans after they have reached the cap on loans
issued via the principal step-down approach.
---------------------------------------------------------------------------
\1222\ Prior loans made using the ATR approach would count
towards the maximum number of loans and maximum time-in-debt limits
of the principal step-down approach.
---------------------------------------------------------------------------
As described above, consumers will benefit from not having long
sequences of loans and the associated higher than anticipated borrowing
costs. Some borrowers, however, may experience costs from not being
able to continue to re-borrow. For example, consider a borrower who has
a loan due and is unable to repay one-third of the original principal
amount (plus finance charges and fees), but who anticipates an upcoming
influx of income. This borrower may experience additional costs if
unable to re-borrow the full amount due because of the restrictions
imposed by the rule. These costs could include the costs of being
delinquent on the loan and having a check deposited or ACH payment
request submitted, either of which may lead to an NSF fee. Borrowers in
this situation may reasonably expect to eventually repay the loan,
given the upcoming influx, but may simply default if they are not
permitted to re-borrow.
The Bureau does not believe, however, that the restrictions on
lending will necessarily lead to increases in borrowers defaulting on
payday loans, in part because the step-down provisions of the principal
step-down approach are designed to help consumers reduce their debt
over subsequent loans. This step-down approach should reduce the risk
of payment shock and lower the risk to lenders and borrowers of
borrowers defaulting when a lender is unable to continue to lend to
them (though some borrowers who would have re-borrowed the full amount
of the initial loan may now default, if they are unable to successfully
make the step-down payment). Additionally, the Bureau's simulations
indicate that the majority of reduced access to credit will result from
the re-borrowing restrictions, rather than initial loan size cap and
forced step-down features of loans made via the principal step-down
approach. It is also possible that some borrowers or lenders will
strategically respond to the step-down provisions by taking out larger
initial loans to ensure that subsequent loans in a sequence are
sufficient to cover anticipated expenses. Finally, borrowers
anticipating an influx of more than three pay periods in the future may
find it more appropriate to pursue a longer-term loan (where
permitted), meaning they should be less prevalent in the market for
short-term loans.
Borrowers taking out single-payment vehicle title loans will also
be much less likely to be able to roll their loans over or borrow again
within a short period than they are today. They will potentially suffer
the same costs as by payday borrowers taking out loans under the ATR
approach who would prefer to roll over or re-borrow rather than repay
their loan without re-borrowing.
v. Reduced Geographic Availability of Covered Short-Term Loans
Consumers will also have somewhat reduced physical access to payday
storefront locations. Bureau research on States that have enacted laws
or regulations that substantially impacted the revenue from storefront
lending indicates that the number of stores has declined roughly in
proportion to the decline in revenue.\1223\ Because of the way payday
stores locate, however, this has had much less impact on the geographic
availability of payday loans. Nationwide, the median distance between a
payday store and the next closest payday store is only 0.3 miles. When
a payday store closes in response to laws that reduce revenue, there is
usually a store nearby that remains open. For example, across several
States with regulatory changes, between 93 and 95 percent of payday
borrowers had to travel less than five additional miles to find a store
that remained open. This is roughly equivalent to the median travel
distance for payday borrowers nationwide. Using the loan volume impacts
previously calculated above for storefront lenders exclusively using
the principal step-down approach (which were about 71-76 percent
without accounting for additional ATR lending or for changes in product
terms or mixes \1224\) the Bureau forecasts that a large number of
storefronts will close under the rule, but that consumers' geographic
access to stores will not be substantially affected in most areas.
---------------------------------------------------------------------------
\1223\ CFPB Report on Supplemental Findings, at Chapter 3. This
is consistent with theoretical research showing that State price
caps should lead to fewer stores and more borrowers per store. See
Mark Flannery & Katherine Samolyk, ``Payday Lending: Do the Costs
Justify the Price?,'' (FDIC Ctr. for Fin. Res., Working Paper No.
2005-09, 2005), available at https://www.fdic.gov/bank/analytical/cfr/2005/wp2005/cfrwp_2005-09_flannery_samolyk.pdf; Mark Flannery &
Katherine Samolyk, ``Scale Economies at Payday Loan Stores,'' at
233-259 (Proceedings of the Federal Reserve Bank of Chicago's 43rd
Annual Conference on Bank Structure and Competition 2007). It is
also consistent with empirical analysis showing a correlation
between State price caps and the number of stores per State
resident. Pew Charitable Trusts, Fact Sheet, ``How State Rate Limits
Affect Payday Loan Prices'' (Apr. 2014), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs/content-
level_pages/fact_sheets/stateratelimitsfactsheet.pdf.
\1224\ It is important to note that the estimates for the
reduction in lending above may underestimate impacts in some ways
and overestimate them in others. For example, store closures may
cause total lending to fall further. A small share of potential
borrowers will lose easy access to stores. In addition, the reduced
physical presence and therefore visibility of stores, even in areas
where as store is fairly close by, may lead to some consumers not
taking out loans, or borrowing less, because they are not reminded
as frequently of the availability of payday loans. Some lenders,
however, may successfully adapt to the regulation by, for example,
broadening the range of products they offer. The ability to do this
will vary across States and across individual lenders.
---------------------------------------------------------------------------
c. Evidence on the Benefits and Costs to Consumers of Access to Payday
and Other Covered Loans
Most studies of the effects of payday loans on consumer welfare
have relied on State-level variation in laws governing payday
lending.\1225\ Most of these studies rely on an ``intent to treat''
identification strategy, where access to payday loans is used as a
proxy for actual use. While certainly instructive, the Bureau believes
findings from such studies are generally less compelling than those
based on individual-level data that are able to identify actual payday
borrowers and use. A third class of studies addressing questions around
payday focuses on experiments, either in the field or in laboratory
settings. Within this literature, most studies have examined storefront
payday loans; the literature studying online loans and vehicle title
lending is much smaller; and there is even less direct evidence on
longer-term balloon-payment loans.
---------------------------------------------------------------------------
\1225\ This section focuses on the benefits and costs to
consumers from payday lending. The literature on consumers'
understanding and expectations regarding payday lending, notably
Mann (2013), is discussed earlier in this section and above in
Market Concerns--Underwriting. Other strands of the literature
related to payday and small-dollar lending (e.g., those addressing
the populations of borrowers, endogenous market entry by lenders,
changes in behavior or outcomes not related to regulatory changes,
and academic studies of the business models or market structure)
were also reviewed by the Bureau, but are not discussed here.
---------------------------------------------------------------------------
The Bureau notes that all of the studies vary in their empirical
rigor and the connection of their causal inference to their documented
findings. As such, the Bureau, based on its experience and expertise,
finds some studies to be more compelling than others. The Bureau
discussed many of these studies in the proposal; additional studies are
discussed here in light of comments received on the proposal.
As noted above, the rule does not ban payday or other covered
short-term loans or longer-term balloon-payment loans. In fact, the
Bureau believes that covered short-terms loans will still be
[[Page 54843]]
available to consumers facing a truly short-term need for credit in
States that allow them. In contrast, most research has focused almost
exclusively on the question of what happens when all access to a given
form of credit is eliminated, as opposed to restricted. This is often
referred to as the extensive margin (access), rather than the intensive
margin (use, once accessed). As noted above, the available evidence
from States that have imposed strong restrictions on lending, but not
outright or de facto bans, suggests that, even after large contractions
in this industry, loans remain widely available, and access to physical
locations is not unduly limited.
To the extent that ability to repay and/or shorter loan sequences
are associated with beneficial borrowing, this should not unduly
restrict the positive welfare for consumers associated with borrowing
to cover discrete needs. That said, if the benefits from borrowing are
realized from later loans in a 12-month period, and are concentrated
predominately in the segment of borrowers who would not pass an ATR
assessment, the rule will more substantially reduce the benefits
realized by borrowers. As noted at the end of this section however, the
Bureau believes that the literature implies the greatest benefits
consumers receive from access to credit are realized early in a
borrowing sequence.
i. Intent-To-Treat Studies
As mentioned previously, intent-to-treat studies focus on the
availability of credit to larger populations of individuals, rather
than focusing on the actual usage of that credit. Many of these studies
focus on the changes resulting after States institute bans on payday
lending. For example, Morgan and Strain (2008) study a number of State
law changes over a ten-year period, and find that payday bans were
associated with higher rates of bounced checks.\1226\ They also found
that bans were associated with higher rates of complaints about debt
collectors to the FTC, but lower rates of Chapter 13 bankruptcy
filings. In an update to that paper, Morgan et al. (2012) expand the
time frame, analyze more State-level payday bans, and consider the
impacts of enabling payday lending as well.\1227\ They again find
evidence that bounced checks and complaints about debt collectors to
the FTC increase, and Chapter 13 bankruptcy filings decrease in
response to limits on payday lending. They also find that the service
fees received on deposit accounts by banks operating in a single State
tend to increase with limits on payday lending, and interpret this as
an indication that payday loans help to avoid overdraft fees.
---------------------------------------------------------------------------
\1226\ Donald P. Morgan and Michael R. Strain, ``Payday Holiday:
How Households Fare after Payday Credit Bans'' (Fed. Reserve of N.Y.
Staff Reports No. 309, 2008).
\1227\ Donald P. Morgan and Ihab Seblani, ``How Payday Credit
Access Affects Overdrafts and Other Outcomes,'' 44 J. of Money,
Credit, and Banking 519 (2012).
---------------------------------------------------------------------------
In contrast, Campbell, et al. (2008) found that Georgia's payday
ban appeared to improve consumer's outcomes, as consumers living in
counties further from bordering States that allowed payday lending had
lower rates of involuntary checking account closures.\1228\ Bhutta et
al. (2016), using data from the Current Population Survey, show some
evidence of increased use of alternative forms of high-interest credit
(e.g., pawn loans) when access to payday loans was restricted.\1229\
Additionally, they present weak evidence of an increase in involuntary
account closings after the imposition of State bans of payday loans,
but this effect did not persist. In data collected by the Bureau from
banks that ceased offering deposit advance products (``DAP loans''),
there was no evidence that reduced access to these products led to
greater rates of overdraft or account closure.\1230\
---------------------------------------------------------------------------
\1228\ Dennis, F. Campbell et al., ``Bouncing Out of the Banking
System: An Empirical Analysis of Involuntary Bank Account
Closures,'' 36 J. of Banking and Fin. 1224 (2012).
\1229\ Neil Bhutta et al., ``Consumer Borrowing after Payday
Loan Bans.'' 59 J. of L. and Econ. 225 (2016).
\1230\ CFPB Report on Supplemental Findings, at 39.
---------------------------------------------------------------------------
Melzer (2011) measured access to payday loans of people in States
that do not allow payday lending using distance to the border of States
that permit payday lending.\1231\ He measured the effects of access on
the payment of mortgages, rent and utilities, and found that greater
access causes greater difficulty in paying these basic expenses, as
well as delays in needed medical care. In a follow-up study, Melzer
(2016), found higher Supplemental Nutritional Assistance Program (food
stamp) usage and lower child-support payments with greater payday
availability.\1232\
---------------------------------------------------------------------------
\1231\ Brian T. Melzer, ``The Real Costs of Credit Access:
Evidence from the Payday Lending Market,'' 126 Quarterly J. of Econ.
517 (2011).
\1232\ Brian T. Melzer, ``Spillovers from Costly Credit.''
Review of Fin. Studies (forthcoming NW Univ., Kellogg Sch. of
Management, Dep't of Finance, 2013).
---------------------------------------------------------------------------
Two additional studies exploit State-level variation in access to
estimate the impacts of payday loans by looking at similarly situated
counties. Desai & Elliehausen (2017) compare counties in States that
ban payday lending (Georgia, North Carolina, and Oregon) with adjacent
States that allow such lending.\1233\ While the authors cannot observe
whether or to what extent payday borrowing is actually occurring in
these counties, it appears that legislation in the States curbing
payday lending had very small, mostly positive, effects on
delinquencies. Edminson (2011) uses a similar identification approach
(county-level analysis with varying payday restrictions), but does not
limit the analysis to counties in adjacent States.\1234\ This study
concludes that restrictive payday regimes are associated with lower
average credit scores, even when income is accounted for.
---------------------------------------------------------------------------
\1233\ Chintal A. Desai and Gregory Elliehausen, ``The Effect of
State Bans of Payday Lending on Consumer Credit Delinquencies,'' 64
Quarterly Review of Econ. and Fin. 94 (2017).
\1234\ Kelly D. Edminston, ``Could Restrictions on Payday
Lending Hurt Consumers?'' at 37-38 (Fed. Reserve Bank of K.C. Econ.
Review 31, 2011).
---------------------------------------------------------------------------
Zinman (2010) conducted a survey of payday loan users in Oregon and
Washington both before and after a new law took effect in Oregon that
limited the size of payday loans and reduced overall availability of
these loans.\1235\ He showed that the law appeared to increase consumer
hardship, measured by unemployment and qualitative self-assessments of
current and expected future financial conditions, over the subsequent
five months.
---------------------------------------------------------------------------
\1235\ Jonathan Zinman, ``Restricting Consumer Credit Access:
Household Survey Evidence on Effects Around the Oregon Rate Cap,''
34 J. of Banking and Fin. 546 (2010).
---------------------------------------------------------------------------
An alternative to the State-level variation in extensive access to
payday loans is to look at the intensive concentration of lenders in a
geographical area as a proxy for payday loan availability. For example,
Morse (2011) looked at zip code-level data to assess the impact of the
availability of payday loans in particular circumstances, natural
disasters.\1236\ Using information about the concentration of payday
lenders by zip code and linking it to data on natural disasters, she
found that greater access to payday lending in times of disaster--which
may generalize to unexpected personal emergencies--reduces home
foreclosures and small property crime. Dobridge (2014) found that, in
normal times, access to payday loans reduced consumer well-being, as
measured by purchases of consumer durable
[[Page 54844]]
goods.\1237\ But, similar to Morse (2011), Dobridge found that in times
of severe weather, access to payday loans allowed consumers to smooth
consumption and avoid declines in food spending or missed mortgage
payments. Carrell and Zinman (2014) also developed a measure of payday
loan access similar to that used by Morse (2011) and linked it to the
job performance of Air Force personnel, showing that greater access to
payday lending leads to worse job performance to such an extent that
fewer are eligible for reenlistment.\1238\
---------------------------------------------------------------------------
\1236\ Adair Morse, ``Payday Lenders: Heroes or Villains?,'' 102
J. of Fin. Econ. 28 (2011).
\1237\ Christine L. Dobridge, ``Heterogeneous Effects of
Household Credit: The Payday Lending Case'' (Wharton Sch., Univ. of
Penn., Working Paper, 2014). Note that this paper relies on a State-
level approach (similar to Melzer, 2011), as opposed to the more
intensive measures used by Morse (2011).
\1238\ Scott E. Carrell and Jonathan Zinman, ``In Harm's Way?
Payday Loan Access and Military Personnel Performance,'' 27 Rev. of
Fin. Studies 2805 (2014).
---------------------------------------------------------------------------
Carter and Skimmyhorn (2016) used an alternative identification
strategy, utilizing the differential access to payday loans associated
with the implementation of the Military Lending Act (MLA). The MLA
effectively banned payday loans to military personnel, allowing the
authors to measure the impact of payday loans on financial well-being
and labor market outcomes of soldiers in the Army.\1239\ Unlike Carrell
and Zinman who also focused on military personnel, Carter and
Skimmyhorn found no effects. They speculated that some of the
difference in the outcomes of the two preceding studies could reflect
the fact that re-enlisting in the Army was easier than re-enlisting in
the Air Force during the periods covered by the respective studies.
---------------------------------------------------------------------------
\1239\ Susan Payne Carter and William Skimmyhorn ``Much Ado
About Nothing? New Evidence on the Effects of Payday Lending on
Military Members,'' (forthcoming Rev. of Econ. and Stats, 2016).
---------------------------------------------------------------------------
Another study also used the implementation of the MLA to measure
the effects of payday loans on the ability of consumers to smooth their
consumption between paydays, and found that access to payday loans did
appear to make purchasing patterns less concentrated around paydays
(Zaki, 2013).\1240\ This study also found some evidence that access to
payday loans increased what the author referred to as ``temptation
purchases,'' specifically alcohol and consumer electronics.
---------------------------------------------------------------------------
\1240\ Mary Zaki, ``Access to Short-term Credit and Consumption
Smoothing within the Paycycle'' (FEEM. Working Paper No. 007.2016,
2016), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741001.
---------------------------------------------------------------------------
Among these intent-to-treat studies, industry comments most often
cited Morgan and Strain (2008), Zinman (2010), Morse (2011), and Morgan
et al. (2012), along with a related study that is no longer
available.\1241\ Many of these commenters argued that these studies
suggest strong, positive welfare impacts of access to payday lending.
However, Morgan and Strain (2008) relies on a methodology that severely
undermines their conclusions. Specifically, Morgan and Strain's (2008)
assertion that checks are returned more frequently from the non-
authorizing payday States of Georgia and North Carolina relies on data
that intermingles those States' data with that of numerous authorizing
States (e.g., Louisiana, Alabama, and Tennessee).\1242\ Additionally,
the complaints data they cite are limited by the fact that the FTC is
unlikely to receive complaints about payday lending (at the time, State
regulators were more likely to receive such complaints). As such, the
complaints measure the authors employ may not indicate the actual rate
of credit-related complaints, let alone overall consumer satisfaction.
---------------------------------------------------------------------------
\1241\ Donald P. Morgan, ``Defining and Detecting Predatory
Lending'' (Fed. Reserve Bank of N.Y. Staff Report No. 273, 2007).
FRBNY Web page indicates report was ``removed at the request of the
author.''
\1242\ Donald P. Morgan and Michael R. Strain, ``Payday Holiday:
How Households Fare after Payday Credit Bans,'' (Fed. Reserve of
N.Y. Staff Report No. 309, 2008), available at https://www.newyorkfed.org/research/staff_reports/sr309.html (similarly
mischaracterizes authorizing and non-authorizing States, e.g.,
asserting North Carolina to be a non-authorizing State despite
having 500+ payday lenders during the period analyzed.).
---------------------------------------------------------------------------
While Morgan et al. (2012) expands on the previous studies by
including more States (contributing to the policy variation needed for
identification), and additional outcome measures (e.g., bank fee
income), they fail to adequately address the shortcomings of their
previous studies. For example, this study once again employs the
measure of complaints received by the FTC. It also relies on data
sources that comingle returned checks from States with payday bans with
those from States that permit payday, which their difference-in-
difference identification approach may not adequately address. For
example, the Atlanta check processing center (CPC) is coded as
``banned'' even after States that allow payday (e.g., Alabama and
Louisiana) are absorbed; the Oregon payday ban is never coded into
their data since the CPC for Oregon is in Seattle (and Washington
allows payday); etc.\1243\ The biggest addition to the paper relative
to Morgan and Strain (2008) is that Morgan et al. (2012) analyze a new
outcome to support the notion that payday limits are associated with an
increase in overdrafts by looking at bank revenues realized through
fees. However, their proxy for overdraft fees includes all service fees
on deposit accounts at a time when the prevalence of overdraft was
changing, and they limit their sample of banks to only those operating
in a single State, limiting both the accuracy and generalizability of
their finding.
---------------------------------------------------------------------------
\1243\ These findings were obtained from a brief analysis of the
data used by Morgan et al. (2012), see Donald P. Morgan and Ihab
Seblani, ``How Payday Credit Access Affects Overdrafts and Other
Outcomes,'' 44 J. of Money, Credit, and Banking 519 (2012).
---------------------------------------------------------------------------
Finally, most of the findings in Morgan et al. (2012) are not
robust but rather highly sensitive to the choice of specification. For
example, the point estimates and significance levels change a great
deal in response to the inclusion or exclusion of State-specific time
trends; the service fee findings are dependent on using a log fees per
capita measure, rather than the more natural fees per capita or log
fees; and their findings for the impacts of State-level bans on
returned checks become insignificant when questionable demographic
variables are excluded from the regressions.\1244\
---------------------------------------------------------------------------
\1244\ The authors note their coefficients of interest ``were
insignificant in regressions using (unlogged) levels of fee income
and income per capita.'' Donald P. Morgan and Ihab Seblani, ``How
Payday Credit Access Affects Overdrafts and Other Outcomes,'' 44 J.
of Money, Credit, and Banking 519, at n.16 (2012). The findings
about the sensitivity of the returned checks estimates were achieved
by analyzing the Morgan et al. (2012) data available at id. It
should also be noted that the Bureau finds other weaknesses in the
analytic approach employed in this study. Specifically, the
difference-in-difference approach for returned checks relies on
observations at the check processing center (CPC) level, yet a
single CPC may process checks from many States, some of which ban
payday, some of which allow it, and some of which have no explicit
allowance or ban. The authors attempt to control for this using a
very large number of dummy variables to capture CPC mergers, but
this results in estimates that are highly sensitive to specification
assumptions. Additionally, the study appears to code in ``sharp''
policies where the policy is actually ``fuzzy,'' which would cause
identification problems (e.g., they code a payday ban for P.A. in
2007, when the last payday lender exited the market, even though
there had been a longer decline since 2006 when the legislation was
passed). There are additional econometric issues with this study's
approach, but the Bureau believes those cited here are sufficient to
cast doubt on the strength of the reported findings.
---------------------------------------------------------------------------
Zinman (2010) was also frequently cited by industry comments. Those
comments point to the qualitative findings that survey respondents
indicate greater levels of ``financial hardships'' after a payday ban.
However, the quantitative findings show indications that the welfare
effects of the ban may have been positive (e.g., lower rates of phone
disconnections, greater rates of on time bill
[[Page 54845]]
payment).\1245\ Additionally, the findings rely on a small survey
conducted across only two States where idiosyncratic effects may drive
many of the results. As such, the Bureau believes the actual welfare
implications from this study are hard to generalize.
---------------------------------------------------------------------------
\1245\ Phone disconnections were explored in greater detail in
the working paper version. See Jonathan Zinman, ``Restricting
Consumer Credit Access: Household Survey Evidence on Effects Around
the Oregon Rate Cap,'' (Dartmouth College, 2008), available at
http://www.dartmouth.edu/~jzinman/Papers/
Zinman_RestrictingAccess_oct08.pdf.
---------------------------------------------------------------------------
Priestly (2014), another paper frequently mentioned in industry
comments, is more clear on the welfare implications of payday, and
specifically re-borrowing. The author's results indicate, for example,
that each rollover in 2008-2009 was associated with a .109-point
increase in a customer's VantageScore (a credit score similar to FICO).
The Bureau believes these benefits are quite small, as Priestly's
findings suggest that the average consumer in her sample would need to
roll a payday loan over more than nine times (at a cost of
approximately $135 per $100 borrowed) in order to increase his or her
VantageScore by one point. For the average customer in Priestly's
sample, this would represent an increase from 587 to 588, deep enough
into the subprime range that such a change would be unlikely to have
any practical value.
The Morse (2011) study differs from the other intent-to-treat
studies most cited by commenters, as it focuses on a source of
variation more relevant to this rule (endogenous concentrations of
lenders, rather than restrictions on locations), and its welfare
implications are more nuanced. Specifically, Morse finds that borrowers
appear ``better off'' in the face of unexpected shocks (i.e., those
that lead to discrete needs) with access to payday loans. While the
outcome measures used in the study (e.g., home foreclosures) limit the
generalizability of the findings (as homeowners may not be
representative of the typical payday borrower), the Bureau believes
this study is methodologically sound and the findings are large and
significant enough to warrant deep consideration. However, the Bureau
has found little in this study to imply that a limit on continued use
of payday loans (rather than a limit on the availability of short-term
credit for discrete needs) would necessarily decrease borrowers'
welfare.
ii. Individual-Level Studies
Other studies, rather than using differences across States in the
availability of payday loans, have used data on the actual borrowers
who apply for loans and are either offered loans or are rejected. These
individual-level studies offer more direct insight into the effects of
payday loans, rather than the effect of access measured by the intent-
to-treat studies. Skiba and Tobacman (2009) used this approach to find
that taking out a payday loan increases the likelihood that the
borrower will file for Chapter 13 bankruptcy.\1246\ They found that
initial approval for a payday loan essentially doubled the bankruptcy
rate of borrowers. Bhutta, et al., (2015) used a similar approach to
measure the causal effects of storefront borrowing on borrowers' credit
scores.\1247\ They found that obtaining a loan had no impact on how the
consumers' credit scores evolved over the following months. The authors
noted, however, that applicants generally had very poor credit scores
both prior to and after borrowing (or being rejected for) a payday
loan. In each of these studies, the authors were unable to determine
whether borrowers that were rejected by the lender from which they had
data were able to take out a loan from another lender.
---------------------------------------------------------------------------
\1246\ Paige Marta Skiba and Jeremy Tobacman. ``Do Payday Loans
Cause Bankruptcy?,'' (Vand. U. Sch. of L., L. and Econ., Working
Paper No. 11-13, 2011), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1266215.
\1247\ Neil Bhutta et al., ``Payday Loan Choices and
Consequences,'' 47 J. of Money, Credit and Banking 223 (2015).
---------------------------------------------------------------------------
Two other studies have used data on payday borrowing and repayment
behavior to compare changes over time in credit scores for different
groups of borrowers. Priestley (2014), discussed above, measured
changes over time in credit scores for borrowers who re-borrowed
different numbers of times, and found that in some cases it appeared
that borrowers who re-borrowed more times had slightly more positive
changes in their credit scores.\1248\ These differences were not
economically meaningful, however, implying borrowers would need to
rollover a loan more than nine times (at an average total cost of $135
per $100 borrowed) to see a one-point increase in their
VantageScores.\1249\ Mann (2014) compared the changes in credit scores
of borrowers who defaulted on their loans with borrowers who did not,
and also found no difference.\1250\ Similar to the Bhutta, et al.
(2015) study, neither the Priestly nor Mann studies found a meaningful
effect of payday loan borrowing behavior on credit scores. Unlike
Bhutta, et al. (2015), however, if either had measured an effect it
would have simply been a finding of correlation, as neither had a way
of identifying an effect as causal.
---------------------------------------------------------------------------
\1248\ Jennifer Priestly, ``Payday Loan Rollovers and Consumer
Welfare'' (Kennesaw State U., Dep't of Stats. and Analytical
Sciences 2014).
\1249\ The Priestley study also compared changes over time in
credit scores of payday borrowers in different States, and
attributed those differences to differences in the States' payday
regulations. This ignores differences in who chooses to take out
payday loans in different States, and ignores the different changes
over time in the broader economic conditions in different States.
\1250\ Ronald Mann, ``Do Defaults on Payday Loans Matter?,''
(Colum. L. and Econ., Working Paper No. 509, 2015), available at
https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2560005.
---------------------------------------------------------------------------
Gathergood, et al. (2016),\1251\ used an approach similar to that
used by Skiba and Tobacman (2014) and Bhutta, et al., (2015) to study
the effects of taking out payday loans on United Kingdom borrowers'
future overdrafting, rates of delinquency on other loan products,
subjective well-being, and feelings of regret about borrowing. The
products studied are similar to payday loans in the United States,
primarily single-payment loans due in roughly 30 days. While the UK
market includes storefront lenders, it is dominated by online lenders.
The authors found that online payday loans led to higher rates of bank
overdraft and delinquencies on other loans. While it had no effect on
subjective measures of well-being, borrowers did report regretting the
decision to take out the payday loan.
---------------------------------------------------------------------------
\1251\ John Gathergood et al., ``Comments on: How do Payday
Loans Affect Consumers?'' (NBER Summer Institute-L. and Econ. 2015).
---------------------------------------------------------------------------
Baugh (2015) used the closure of dozens of online payday lenders,
which cut off borrowers' access to such loans and other high-cost
online credit, to measure the effects of these loans on consumers'
consumption, measured via expenditures on debit and credit cards, and
on overdrafts and insufficient funds transactions.\1252\ He found that
losing access to these loans, especially for consumers who had been
heavy users of these loans, led to increased consumption and fewer
overdrafts or NSF transactions.
---------------------------------------------------------------------------
\1252\ Brian Baugh, ``What Happens When Payday Borrowers Are Cut
Off From Payday Lending? A Natural Experiment,) (Ph.D. dissertation,
Ohio State Univ., 2015), available at http://fisher.osu.edu/supplements/10/16174/Baugh.pdf.
---------------------------------------------------------------------------
iii. Experimental Studies
There have also been at least three studies of the impacts of
payday loans that rely on experimental approaches. Bertrand and Morse
(2011) run an experiment providing three types of information
disclosures about the costs and re-borrowing rates of payday loans at
the time borrowers receive their loans
[[Page 54846]]
from a storefront payday lender.\1253\ The disclosures are found to
reduce the incidence of re-borrowing by 6-11 percent and the average
amount borrowed by 12-23 percent relative to the control group, with
stronger results for borrowers self-reporting higher degrees of self-
control.
---------------------------------------------------------------------------
\1253\ Marianne Bertrand, and Adair Morse, ``Information,
Disclosure, Cognitive Bias, and Payday Borrowing,'' 66 J. of Fin.
and Econ. 1865 (2011).
---------------------------------------------------------------------------
Fusaro and Cirillo (2011) conduct an experiment in which some
borrowers are given no-fee loans and their re-borrowing rates are
compared to borrowers who are given loans with normal fees.\1254\ They
find that re-borrowing rates are not different between the two groups.
This could lead to at least two possible and compatible conclusions:
That the cost does not drive a cycle of debt, and/or that the single-
payment structure is a key factor that drives unaffordability, not
merely the fee.
---------------------------------------------------------------------------
\1254\ Marc A. Fusaro & Patricia J. Cirillo, ``Do Payday Loans
Trap Consumers in a Cycle of Debt?,'' (2011), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776.
---------------------------------------------------------------------------
Commenters also referenced a third experimental study, Wilson et
al. (2010).\1255\ In this study the authors conducted a laboratory
experiment designed to test whether access to payday loans improves or
worsens the likelihood of ``financial survival'' or financial health in
the face of expense shocks. The authors found that the students engaged
in the game were more likely to successfully manage financial shocks if
they had access to payday loans. However, when they explore the
intensity of usage, they find that participants who utilize 10 or more
loans over the 30 experimental months find themselves at greater risk
than they would under a regime that bans payday loans.
---------------------------------------------------------------------------
\1255\ Bart J. Wilson et al., ``An Experimental Analysis of the
Demand for Payday Loans,'' 10 B.E. J. of Econ. Analysis & Policy
(2010).
---------------------------------------------------------------------------
iv. Discussion of Literature
The Bureau received numerous comments selectively citing the
studies listed above, and making reference to particular results of
interest to the commenters. Generally, industry and trade group
commenters favored studies that imply access improves consumer outcomes
(e.g., Priestly (2014), Zinman (2010)); consumer groups favored studies
that imply access harms consumers (e.g., Skiba and Tobacman (2015),
Baugh (2015)); and academic researchers referenced numerous studies
highlighting the ambiguity or uncertainty illustrated by the
literature. The Bureau has considered the comments carefully and gives
weight to the studies in proportion to their applicability to the rule,
generalizability, and methodological soundness.\1256\ Additionally, and
as much as possible, the Bureau has endeavored to rely on the
descriptive (positive) findings of the studies, and not the authors'
interpretations (often normative) of those findings.
---------------------------------------------------------------------------
\1256\ The Bureau received numerous comments calling into
question the objectivity of some studies funded by industry. These
issues have also been noted in the press. See, e.g., Ben Walsh and
Ryan Grim, ``Emails Show Pro-Payday Loan Study Was Edited by the
Payday Loan Industry,'' Huffington Post, Nov. 2, 2015, available at
http://www.huffingtonpost.com/entry/payday-loan-study_us_5633d933e4b00aa54a4e4273; Christopher Werth, ``Tracking the
Payday-Loan Industry's Ties to Academic Research,'' Freakonomics,
Apr. 6, 2014, available at http://freakonomics.com/podcast/industry_ties_to_academic_research/. At least one of these studies
appears to have given editorial and content control to an industry
lobbyist. Others failed to reference the financial and other support
received from the group in any of their acknowledgements, as is the
best practice in such research. Still others mention the support
received, but assert the group had no influence on the study or its
findings (a similar assertion was made in the study where influence
was documented). Such comments are to be expected in any contentious
policy debate. Overall, the Bureau attempted to judge each study on
its merits. As such, findings from these industry studies are
generally weighted by their methodological soundness (in terms of
data collection and analysis).
---------------------------------------------------------------------------
In reviewing the existing literature, the Bureau notes that the
evidence on the impacts of the availability of payday loans on consumer
welfare indeed varies. In general, the evidence to date suggests that
access to payday loans appears to benefit consumers in circumstances
where they use these loans for short periods to address an unforeseen
and discrete need, such as when they experience a transitory and
unexpected shock to their incomes or expenses. However, in more general
circumstances, access to and intensive use of these loans appears to
make consumers worse off. A more succinct summary is: Access to payday
loans may well be beneficial for those borrowers with discrete, short-
term needs, but only if they can succeed in avoiding long sequences of
loans.
There is also some limited evidence about the welfare effects of
``intensive'' users of payday. It should be noted, however, that there
are no studies the Bureau is aware of that directly evaluate the
welfare impacts of the seventh and later loans taken by a borrower in a
12-month span.\1257\ There are also no studies on the welfare effects
of payday loans made specifically to borrowers who would have failed an
ATR assessment. Since the rule's restrictions should only bind for
individuals who demand a seventh loan in a 12-month period and cannot
demonstrate an ability to repay, there are no studies that speak
directly to the likely impacts of the regulation.
---------------------------------------------------------------------------
\1257\ Bart J. Wilson et al., ``An experimental analysis of the
demand for payday loans,'' 10 B.E. J. of Econ. Analysis & Policy
(2010) (This analysis does show that once a participant takes 10 or
more loans in a 30-month span, the loans appear to be more harmful
than helpful to financial survival.)
---------------------------------------------------------------------------
As this rule will allow for continued access to the credit that
appears to benefit consumers with discrete needs, the Bureau believes
that the rule limits the potential harm other borrowers may experience
while maintaining much of the welfare gains consumers realize from
access to these loans.
G. Benefits and Costs of the Rule to Covered Persons and Consumers--
Payments and Notices
The rule limits how lenders initiate payments on a covered loan
from a borrower's account and imposes two notice requirements relating
to such payments. Specifically, if two consecutive prior attempts to
withdraw payment through any channel from a borrower's account have
failed due to insufficient funds, lenders are prohibited from
continuing to attempt to withdraw payment from a borrower's account,
unless the lender obtains a new and specific authorization to make
further withdrawals from the consumer's account. The rule also requires
lenders of covered loans to provide a notice to a borrower before the
initial withdrawal attempt and before initiating an unusual withdrawal
attempt. A special notice is also required to be sent to the borrower
if the lender can no longer continue to initiate payment directly from
a borrower's account because two consecutive prior attempts had failed
due to insufficient funds. The impacts of these proposals are discussed
here for all covered loans.
Note that the Bureau expects that unsuccessful payment withdrawal
attempts will be less frequent under the rule. This is because of the
notice of irregular withdrawals; and it is also true because the
ability-to-repay provisions or the requirements of the conditional
exemption loans will reduce the frequency with which borrowers receive
loans that they do not have the ability to repay. This should in turn
lessen the impacts of the limitation on payment withdrawal attempts and
the number of instances where a lender is required to notify consumers
that the lender is no longer permitted to attempt to withdraw payments
from a borrower's account.
Most if not all of the requirements in this portion of the rule are
activities that lenders could have chosen to engage in absent the rule.
As such, the Bureau
[[Page 54847]]
believes that, while there are potential benefits to lenders, the
restrictions are expected to impose some costs on these covered
persons.\1258\ That said, the Bureau is aware that many lenders have
practices of not continuing to attempt to withdraw payments from a
borrower's account after one or more failed attempts, and that some
depository institutions do not assess additional fees to customers when
continued attempts to withdraw from their accounts are made. In
addition, some lenders provide upcoming-payment notices to borrowers in
some form.
---------------------------------------------------------------------------
\1258\ This is simply a revealed preference argument that to the
extent that lenders did not voluntarily choose to engage in the
activities, it is likely the case that the benefits to lenders do
not outweigh the costs to lenders (at least in the lenders' views).
---------------------------------------------------------------------------
1. Limitation on Payment Withdrawal Attempts
The rule prevents lenders from attempting to withdraw payment from
a consumer's account if two consecutive prior payment attempts made
through any channel are returned for nonsufficient funds. The lender
can resume initiating payment if the lender obtains from the consumer a
new and specific authorization to collect payment from the consumer's
account.
a. Benefits and Costs to Covered Persons
The rule will impose costs on lenders by limiting their use of
payment methods that allow them to withdraw funds directly from
borrowers' accounts, and by imposing the cost of obtaining a renewed
authorization from the consumer or using some other method of
collecting payment. There may be some benefits to lenders of reduced
attempts to withdraw funds following repeated failures, as other
methods of collecting may be more successful.
The impact of this restriction depends on how often a lender
previously attempted to collect from a consumers' account after more
than two consecutive failed transactions, and how often the lender was
successful in doing so. Based on industry outreach, the Bureau
understands that some lenders had already established a practice of not
continuing to attempt to collect using these means after one or two
failed attempts. These lenders would not incur costs from the
restriction. Additionally, some depository institutions have disallowed
repeated attempts to collect using these means; lenders attempting to
collect from such depositories would also not incur costs from this
restriction.
The Bureau has analyzed the ACH payment request behavior of lenders
making payday or payday installment loans online. The Bureau found that
about half the time that an ACH payment request fails, the lender makes
at least two additional ACH payment requests.\1259\ The likelihood of a
successful payment request after a request that was returned for
insufficient funds is quite low. Only 30 percent of requests that
follow a failed request succeed, only 27 percent of third requests
succeed, and after that the success rate is below 20 percent.\1260\ The
Bureau found that only 7 to 10 percent of the payments attempted
through the ACH system came after two failed payments requests,
equivalent to $55 to $219 per borrower from whom a payment was
collected after the two failed attempts.\1261\ These payments would
have been prevented if the rule had been in place at the time. The
Bureau notes that under the restriction, lenders can still seek payment
from borrowers by engaging in other lawful collection practices. As
such, the preceding are high-end estimates of the impact this
restriction would have had on the collection efforts of these lenders.
These other forms of lawful collection practices, however, may be more
costly for lenders than attempting to collect directly from a
borrower's account.
---------------------------------------------------------------------------
\1259\ CFPB Online Payday Loan Payments, at 14 tbl. 2. Lenders
make at least one additional request after a failed payment request
74 percent of the time. Two-thirds of these are followed by a third
request, if the second also fails. These calculations exclude
multiple requests made on the same day, as those requests are
unlikely to be intentional re-presentments of failed attempts
because the lender is unlikely to know that a payment failed on the
same day it was submitted and be able to re-present the request on
the same day. The data used in the Bureau's analysis were for 18
months in 2011 and 2012. Changes to the rules governing the ACH
system in the fall of 2015 may have reduced the frequency with which
lenders continue to make payment requests after one or more payment
attempts have failed.
\1260\ CFPB Online Payday Loan Payments, at 13 tbl. 1.
\1261\ CFPB Report on Supplemental Findings, at 150. These
impacts may be lower now than they were at the time covered by the
data analyzed by the Bureau, due to changes in industry practices
and to changes in the rules governing the ACH system referred to in
note CFPB Online Payday Loan Payments, at 14 tbl. 2.
---------------------------------------------------------------------------
After the limitation is triggered by two consecutive failed
attempts, lenders are required to send a notice to consumers. To seek a
new and specific authorization to collect payment from a consumer's
account, the lender can send a request with the notice and may need to
initiate additional follow-up contact with the consumer. The Bureau
believes that this will most often be done in conjunction with general
collections efforts and will impose little additional cost on lenders,
other than the costs associated with the disclosures, discussed below.
To the extent that lenders assess returned item fees when an
attempt to collect a payment fails and are subsequently able to collect
on those fees, this rule may reduce lenders' revenues.
Lenders will also need the capability of identifying when two
consecutive payment requests have failed. The Bureau believes that the
systems lenders use to identify when a payment is due, when a payment
has succeeded or failed, and whether to request another payment will
have the capacity to identify when two consecutive payments have
failed, and therefore this requirement will not impose a significant
new cost.
b. Benefits and Costs to Consumers
Consumers will benefit from the restriction because it will reduce
the fees they are charged by the lender and the fees they are charged
by their depository institution. Many lenders charge a returned item
fee when a payment is returned for insufficient funds. Borrowers will
benefit if the reduced number of failed ACH payment requests also
results in reductions in the number of these fees, to the extent that
they are eventually paid. Borrowers may also benefit from a reduction
in the frequency of checking account closure, to be discussed below.
Each time an ACH transaction is returned for insufficient funds,
the borrower is likely to be charged an NSF fee by her financial
institution. In addition, each time a payment is paid by the borrower's
financial institution when the borrower does not have sufficient funds
in the account to cover the full amount of the payment, the borrower is
likely to be charged an overdraft fee. Overdraft and NSF fees each
average $34 per transaction.\1262\ As noted above, most re-
presentments\1263\ of failed payment requests themselves fail, leading
to additional NSF fees. In addition, about a third of all re-
presentments that succeed only succeed because the borrower's financial
institution paid it as an overdraft, likely leading to an overdraft
fee. The Bureau's analysis of online lender payment practices shows
that borrowers who have two payment withdrawal attempts fail are
charged additional fees on subsequent payment attempts of $64 to
[[Page 54848]]
$87. These costs would be prevented by the rule.\1264\
---------------------------------------------------------------------------
\1262\ CFPB Online Payday Loan Payments, at 2.
\1263\ For the purposes of its analysis, the Bureau referred to
any payment request following a failed payment request as a ``re-
presentment.'' The only exception was when multiple payment requests
were submitted on the same day; if two or more failed, only the
first failed payment request was considered a re-presentment.
\1264\ The Bureau notes that at least one depository institution
limits the fees charged to consumers from multiple attempts to drawn
on an account by payday lenders. To the extent that this type of
policy is being voluntarily adopted, the net benefits of this
limitation might decrease (due to an increase in the benefits
present in the baseline).
---------------------------------------------------------------------------
The restriction on repeated attempts to withdraw payments from a
borrower's checking account may also reduce the rate of account
closure, as account closures appear to be associated with failed
withdrawal attempts. This benefits borrowers by allowing them to
maintain their existing account so as to better manage their overall
finances. It also allows them to avoid the possibility of a negative
record in the specialty consumer reporting agencies that track
involuntary account closures, which can make it difficult to open a new
account and effectively cut the consumer off from access to the banking
system and its associated benefits. In the data studied by the Bureau,
account holders who took out online payday loans were more likely to
have their accounts closed by their financial institution than were
other account holders, and this difference was substantially higher for
borrowers who had NSF online loan transactions.\1265\ Borrowers with
two consecutive failures by the same lender are significantly more
likely to experience an involuntary account closure by the end of the
sample period than accountholders generally (43 percent versus 3
percent, respectively).\1266\ While there is the potential for a number
of confounding factors, transactions that were NSFs could contribute to
account closure in at least two ways. First, the fees from repeated
payment attempts add to the negative balance on the deposit account,
making it more difficult for a borrower to bring the account balance
positive and maintain a positive balance. And, if a lender is
repeatedly attempting to extract money from an account, the borrower
may feel that the only way to regain control of her finances is to
cease depositing money into the account and effectively abandon it.
---------------------------------------------------------------------------
\1265\ CFPB Online Payday Loan Payments, at 24.
\1266\ CFPB Report on Supplemental Findings, at 151 n. 177.
---------------------------------------------------------------------------
The reduced ability to collect by repeatedly attempting to withdraw
payments from a borrower's account may increase lenders' credit losses,
which may, in turn reduce the availability or raise the cost of credit.
As discussed in the consideration of the costs to lenders, this
reduction in collections is likely to be quite small. And, as noted
above in the discussion of the impacts of the ATR requirements, many
lenders already charge the maximum price allowed by State law.
2. Required Notice Prior To Attempt To Collect Directly From a
Borrower's Account
The rule also requires lenders to provide consumers with a notice
prior to the first lender-initiated attempt to withdraw payment from
consumers' accounts, including ACH entries, post-dated signature
checks, remotely created checks, remotely created payment orders, and
payments run through the debit networks. The notice is required to
include the date the lender will initiate the payment request; the
payment channel; the amount of the payment; the breakdown of that
amount to principal, interest, and fees; the loan balance remaining if
the payment succeeds; the check number if the payment request is a
signature check or RCC; and contact information for the consumer to
reach the lender. There are also separate notices required prior to
unusual payments.
a. Benefits and Costs to Covered Persons
These notices may reduce delinquencies and related collections
activities if consumers take steps to ensure that they have funds
available to cover loan payments, such as delaying or forgoing other
expenditures, making deposits into their accounts, or contacting the
lender to make alternative arrangements.
Costs to lenders of providing these notices will depend heavily on
when the lender provides the notice and, should they provide a notice
after origination, whether they are able to provide the notice via
email, text messages, or on paper at origination or have to send
notices through paper mail. In practice, the Bureau expects most
lenders to provide the notice of initial payment withdrawal at
origination, minimizing the transmission costs. This can either be done
via a written disclosure (at a storefront), or as a PDF attachment, or
Web page sent along with an electronic short notice sent via an email
or text (for either storefront or online lenders). The variation in
costs of notices provided after origination (either regular notices, or
notices in advance of unusual payments) is due in part to differences
in transmission costs between different channels. Most borrowers are
likely to have Internet access and/or a mobile phone capable of
receiving text messages, and during the SBREFA process multiple SERS
reported that most borrowers, when given the opportunity, opt in to
receiving notifications via text message. The Bureau has intentionally
structured the rule to encourage transmission by email or text message
because it believes those channels are the most effective for
consumers, as well as less burdensome for lenders. However, should the
lender choose to send paper notifications via regular mail, they would
incur higher costs of transmission, as well as administrative costs
associated with providing the notification early enough to ensure
sufficient time for it to be received by the consumer.
The Bureau believes that all lenders affected by the new disclosure
requirements have some system in place to comply with existing
disclosure requirements, such as those imposed under Regulation Z, 12
CFR part 1026, and Regulation E, 12 CFR part 1005. Lenders enter data
directly into the disclosure system, or the system automatically
collects data from the lenders' loan origination system. For
disclosures provided via mail, email, text message, or immediately at
the time of origination, the disclosure system often forwards the
information necessary to prepare the disclosures to a vendor in
electronic form, and the vendor then prepares and delivers the
disclosures. Lenders will incur a one-time burden to upgrade their
disclosure systems to comply with new disclosure requirements.
Lenders will need to update their disclosure systems to compile the
necessary loan information to send to the vendors that will produce and
deliver the disclosures relating to payments. The Bureau believes that
large lenders rely on proprietary disclosure systems, and estimates the
one-time programming cost for large respondents to update these systems
to be 1,000 labor hours per entity. The Bureau believes small lenders
rely on licensed disclosure system software. Depending on the nature of
the software license agreement, the Bureau estimates that the cost to
upgrade this software will be $10,000 for lenders licensing the
software at the entity-level and $100 per seat for lenders licensing
the software using a seat-license contract. For lenders using seat
license software, the Bureau estimates that each location for small
lenders has on average three seats licensed. Given the price
differential between the entity-level licenses and the seat-license
contracts, the Bureau believes that only small lenders with a
significant number of stores will rely on the entity-level licenses.
Lenders with disclosure systems that do not automatically pull
information from the lenders' loan origination or servicing system will
need to enter
[[Page 54849]]
payment information into the disclosure system manually, so that the
disclosure system can generate payment disclosures. The Bureau
estimates that this will require two minutes per loan in addition to
the two minutes to provide the disclosures. Lenders would need to
update this information if the scheduled payments were to change.
For disclosures delivered through the mail, the Bureau estimates
that vendors will charge two different rates, one for high volume
mailings and another for low volume mailings. For the high volume
mailings, the Bureau estimates vendors will charge $0.53 per
disclosure. However, the Bureau expects high volume mailings to be
infrequent, as follow-up disclosures are only necessary for unusual
payments and reauthorizations. For the low-volume mailings, the Bureau
estimates vendors will charge $1.00 per disclosure. For disclosures
delivered through email, the Bureau estimates vendors will charge $0.01
to create and deliver each email such that it complies with the
requirements of the rule. For disclosures delivered through text
message, the Bureau estimates vendors will charge $0.08 to create and
deliver each text message such that it complies with the requirements
of the rule. The vendor will also need to provide either a PDF
attachment of the full disclosure or a Web page where the full
disclosure linked to in the text message is provided. The cost of
providing this PDF attachment or web disclosure is included in the cost
estimate of providing the text message. Finally, for disclosures
delivered on paper at origination, the Bureau estimates costs will be
$0.10 per disclosures.
Again, the Bureau believes that virtually all notifications will be
provided at the time of origination (for regular notices), or
electronically via text or email (for notifications of unusual
payments). As such, the mailing costs discussed here are expected to be
almost completely avoided.
In addition to the costs associated with providing notices, this
requirement may impact the frequency with which lenders initiate
withdrawal attempts and lenders' revenue. On timing, lenders are likely
to disclose all regular payment schedules at origination, and must
provide notices on unusual payments in advance of their initiation.
This lag time could affect lenders' decisions as to the timing and
frequency of withdrawal attempts. With regard to revenue, the impacts
are uncertain: Payment revenue will be reduced if the notices lead to
consumers taking steps to avoid having payments debited from their
accounts, including placing stop-payment orders or paying other
expenses or obligations prior to the posting of the payment request.
Alternatively, if the notices help borrowers to ensure that funds are
available to cover the payment request, this will reduce lenders'
losses from non-payment, although it will also lower lenders' returned-
item fee revenue.
b. Benefits and Costs to Consumers
Receiving notices prior to an upcoming unusual payment will benefit
consumers by allowing them to take those payments into account when
managing the funds in their accounts. This will allow them to reduce
the likelihood that they will run short of funds to cover either the
upcoming payment or other obligations. The notice will also help
borrowers who have written a post-dated check or authorized an ACH
withdrawal, or remotely created check or remotely created payment
order, to avoid incurring NSF fees. These fees can impose a significant
cost on consumers. In data the Bureau has analyzed, for example,
borrowers who took out loans from certain online lenders paid an
average of $92 over an 18 month period in overdraft or NSF fees on the
payments to, or payment requests from, those lenders.\1267\
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\1267\ CFPB Online Payday Payments, at 3.
---------------------------------------------------------------------------
The information in the notices may also benefit borrowers who need
to address errors or unauthorized payments, by making it easier for the
borrower to resolve errors with the lender or obtain assistance through
their financial institution prior to the payment withdrawal being
initiated.
Some consumers may incur costs for notices sent by text. Consumers
can avoid these costs by choosing email; \1268\ the Bureau requires
that lenders must provide an email delivery option whenever they are
providing a text or other electronic delivery option.
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\1268\ It is possible that some consumers may only have access
to email via data-limited plans (e.g., smartphones), and thus
receiving emails could impose costs as well. However, there are
numerous ways to avoid the cost of accessing email (e.g., public
libraries or facilities that offer free WiFi). As such, the Bureau
considers the cost of receiving an email to be negligible.
---------------------------------------------------------------------------
As some commenters noted, costs associated with the disclosures
might be passed on the consumers. However, the Bureau believes the
costs associated with the disclosures will be limited, as noted above.
Specifically the costs will be much lower than under the proposed rule,
which would have required a disclosure before each payment withdrawal
attempt. Ultimately, the Bureau believes these costs to consumers will
be small in relation to the overall cost of the loan.
3. Required Notice When Lender Can No Longer Collect Directly From a
Borrower's Account
The rule requires a lender to provide a borrower with a notice of
consumer rights within three days of a second consecutive unsuccessful
attempt to collect payment from a borrower's account. This notice will
identify the loan, explain that the lender is no longer able to attempt
to collect payment directly from the borrower's account, and provide
the consumer a record of the two failed attempts to collect funds.
a. Benefits and Costs to Covered Persons
This provision may benefit lenders if it leads to consumers
contacting the lender to provide a new authorization to withdraw
payments from the borrower's account or make other payment
arrangements. However, lenders would likely have attempted to make
contact with borrowers to obtain payment even in the absence of this
requirement.
The requirement will impose on lenders the cost of providing the
notice. Lenders already need to track whether they can still attempt to
collect payments directly from a borrower's account, so identifying
which borrowers should receive the notice should not impose any
additional cost on lenders. The Bureau also expects that lenders
normally attempt to contact borrowers in these circumstances in an
attempt to identify other means of obtaining payment. If they are
contacting the consumer via mail, the lender will be able to include
the required notice in that mailing.
The Bureau expects that lenders will incorporate the ability to
provide this notice into their payment notification process. The Bureau
estimates that vendors will charge $0.53 per notice sent via paper mail
for lenders that send a large number of mailings and $1.00 per notice
for lenders that send a small volume of mailing. For disclosures
delivered through email, the Bureau estimates vendors will charge $0.01
to create and deliver each email such that it complies with the
requirements of the rule. For disclosures delivered through text
message, the Bureau estimates vendors will charge $0.08 to create and
deliver each text message. The vendor will also need to provide either
a PDF attachment of the full disclosure or a Web page where the full
disclosure linked to in the text message would be provided. The cost of
providing this PDF attachment or web disclosure is
[[Page 54850]]
included in the cost estimate of providing the text message.
b. Benefits and Costs to Consumers
Consumers will benefit from the notice because it will inform them
that the lender cannot continue to collect payment directly from their
account without their express permission. Absent this notice, borrowers
may believe that they are obligated to re-authorize a lender to begin
collecting directly from their account, when in many cases the borrower
has the option to repay the loan through some other means that carries
less risk of fees and provides the borrower with greater control over
the timing and prioritization of their expenditures. Conversely, absent
some communication from the lender, the borrower may not realize that
payment can no longer be withdrawn and, as a result, fail to make
payments on a loan.
Some consumers may incur costs for notices sent by text. Consumers
can avoid these costs by choosing email or paper delivery of the
notices. The Bureau does not believe the required disclosures will
impose any other costs on consumers.
H. Benefits and Costs of the Rule to Covered Persons and Consumers--
Recordkeeping
The rule requires lenders to maintain sufficient records to
demonstrate compliance with the rule. This includes, among other
records, loan records; materials collected during the process of
originating loans, including the information used to determine whether
a borrower had the ability to repay the loan, if applicable; records of
reporting loan information to a registered information system, as
required; and, records of attempts to withdraw payments from borrowers
accounts, and the outcomes of those attempts.
1. Benefits and Costs to Covered Persons
The Bureau believes that some of the records that lenders are
required to maintain would have already been maintained in the ordinary
course of business. Given the very low cost of electronic storage,
however, the Bureau did not believe that these new requirements would
impose a meaningful new burden on lenders. However, a number of trade
groups provided comments suggesting there are indeed costs associated
with retaining these records. These comments note that lenders may
incur some costs in developing a document retention policy, obtaining
additional computer storage space to maintain the documents,
programming the computer system to keep the documents for 36 months,
training employees to comply with the recordkeeping requirements, and
monitoring the implementation of these new procedures modify systems.
The Bureau acknowledges these costs but believes them to be small.
The development of retention policy should be straightforward, as the
requirements are not opaque. Computer storage is inexpensive and even
the largest lenders should not require more than one terabyte of
additional storage to manage the retention of their files enterprise-
wide (and that assumes their computer systems are already storage-
constrained). As such, the Bureau estimates this cost to be less than
$50 per lender if they wish to purchase additional storage themselves
(e.g., a portable hard drive), or $10 per month if they wish to lease
storage (e.g., from one of the many online cloud storage vendors).
There may be a need to develop procedures and train staff to retain
materials that they would not normally retain in the ordinary course of
business, as well as design systems to generate and retain required
records; those costs are included in earlier estimates of the costs of
developing procedures, upgrading systems, and training staff. The
Bureau also finds that maintaining the records will facilitate lenders'
ability to comply, and document their compliance, with other aspects of
the rule.
2. Benefits and Costs to Consumers
Consumers will benefit from the requirement to maintain records
sufficient to demonstrate compliance because this will make compliance
by lenders more likely, and facilitates enforcement of the rule,
ensuring that consumers receive the benefits of the rule.
I. Benefits and Costs of the Rule to Covered Persons and Consumers--
Registered Information Systems
As discussed above, the rule will generally require lenders to
report covered loans to registered information systems in close to real
time. Entities wishing to become registered information systems must
apply to the Bureau to become registered. The process for becoming a
registered information system prior to August 19, 2019 requires an
entity to submit an application for preliminary approval with
information sufficient to determine that the entity would be reasonably
likely to satisfy the conditions to become a registered information
system. These conditions include, among other things, that the entity
possesses the technical capabilities to carry out the functions of a
registered information system; that the entity has developed,
implemented, and maintains a program reasonably designed to ensure
compliance with all applicable Federal consumer financial laws; and
that the entity has developed, implemented, and maintains a
comprehensive information security program. If an entity obtains
preliminary approval to become a registered information system from the
Bureau, it will need to submit an application to be a registered
information system that includes certain written third-party
assessments contemplated by the rule. The rule also permits the Bureau
to require an entity to submit to the Bureau additional information and
documentation to facilitate determination of whether the entity
satisfies the eligibility criteria to become a registered information
system, or otherwise to assess whether registration of the entity will
pose an unreasonable risk to consumers.
On or after August 19, 2019, the rule contemplates a slightly
different two-stage process. Specifically, an entity can become
provisionally registered by submitting an application that contains
information and documentation sufficient to determine that the entity
satisfies the conditions to become a registered information system,
including the written third-party assessments contemplated by the rule.
Lenders will be required to furnish information to a provisionally
registered system, but a consumer report from such a system will not
satisfy the lenders' obligations under the rule to check borrowing
history until a 240-day period from the date of provisional
registration has expired, after which time the system will be deemed a
fully registered information system.
Once an entity is a registered information system under either
process, the rule requires the entity to submit biennial assessments of
its information security program.
The Bureau expects that applicants to become registered information
systems will be primarily, or exclusively, existing consumer reporting
agencies. These entities have the technical capacity to receive data on
consumer loans from a large number of entities and, in turn, deliver
that data to a large number of entities. Depending on their current
operations, some firms that wish to apply to become registered
information systems may need to develop additional capabilities to
satisfy the requirements of the rule. These requirements include that
an entity possess the technical capability to receive specific
information from lenders immediately upon furnishing,
[[Page 54851]]
using reasonable data standards that facilitate the timely and accurate
transmission and processing of information in a manner that does not
impose unreasonable costs or burdens on lenders, as well as the
technical capability to generate a consumer report containing all
required information substantially simultaneous to receiving the
information from a lender. Because firms currently operating as
consumer reporting agencies must comply with applicable existing laws
and regulations, including Federal consumer financial laws and the
Standards for Safeguarding Customer Information, the Bureau also
expects that they should already have programs in place to ensure such
compliance.
1. Benefits and Costs to Covered Persons
The rule will benefit firms that apply to become registered
information systems by requiring lenders to furnish information
regarding most covered loans to all registered information systems and
to obtain a consumer report from a registered information system before
originating most covered loans. The requirement to furnish information
will provide registered information systems with data on borrowing of
covered short-term and longer-term balloon payment loans. The
requirement to obtain a consumer report before originating covered
short-term and longer-term balloon-payment loans will ensure that there
will be a market for these reports, which will provide a source of
revenue for registered information systems. Registered systems will
also be well-positioned to offer lenders supplemental services, for
instance in providing assistance with determining consumers' ability to
repay.
Any firm wishing to become a registered information system will
need to incur the costs of applying to the Bureau. For some firms these
costs may consist solely of compiling information about the firms'
practices, capabilities, and policies and procedures, all of which
should be readily available, and obtaining the required third-party
written assessments. Some firms may choose to invest in additional
technological or compliance capabilities so as to be able to satisfy
the requirements for registered information systems. Firms currently
operating as consumer reporting agencies must comply with applicable
existing laws and regulations, including Federal consumer financial
laws and the Standards for Safeguarding Customer Information. As such,
it is the Bureau's expectation that these firms have programs in place
to ensure such compliance. However, the independent assessments of
these programs outlined in the rule may impose additional costs for
some firms.
Once approved, a registered information system will be required to
submit biennial assessments of its information security program. Firms
that already obtain independent assessments of their information
security programs at least biennially, similar to those contemplated in
the rule, will incur very limited additional costs. Firms that do not
obtain biennial independent assessments similar to those contemplated
in the rule will need to incur the cost of doing so, which may be
substantial.
2. Benefits and Costs to Consumers
The requirement that registered information systems have certain
technical capabilities will ensure that the consumer reports that
lenders obtain from these systems are sufficiently timely and accurate
to achieve the consumer protections that are the goal of this part.
This will benefit borrowers by facilitating compliance with the rule's
ability to repay requirements and the conditional exemption in Sec.
1041.6 to the ability to repay requirements.
J. Alternatives Considered
In preparing the rule, the Bureau has considered a number of
alternatives to the provisions. The alternatives discussed here are:
Limits on re-borrowing covered short-term loans without
an ability-to-repay requirement;
An ability-to-repay requirement for short-term loans
with no principal step-down approach;
Disclosures as an alternative to the ability-to-repay
requirement; and
Limitations on withdrawing payments from borrowers'
accounts without such disclosures.
In this section, the major alternatives are briefly described and
their potential impacts relative to each provision are discussed.
1. Limits on Re-Borrowing of Covered Short-Term Loans Without an
Ability-To-Repay Requirement
The Bureau considered not imposing a requirement that lenders
making covered short-term and longer-term balloon-payment loans
determine the ability of borrowers to repay the loans, and instead
proposing solely to limit the number of times that a lender could make
a covered short-term loan to a borrower. Such a restriction could take
the form of either a limit on the number of loans that could be made in
sequence or a limit on the number of loans that could be made in a
certain period of time.
The impacts of such an approach would depend on the specific
limitation adopted. One approach the Bureau considered would have been
to prevent a lender from making a covered short-term loan to a borrower
if that loan would be the fourth covered short-term loan to the
borrower in a sequence. A loan would be considered part of the same
sequence as a prior loan if it were taken out within 30 days of when
the prior loan were repaid or otherwise ceased to be outstanding.
A limit on repeated lending of this type would have procedural
costs similar to the principal step-down approach, and therefore lower
than the ATR approach to making short-term loans. The Bureau simulated
the effects of a ``principal step-down approach only'' policy. More
specifically, the simulation assumed one possible implementation of
this type of policy: A three-loan sequence cap, a six-loan annual cap,
and a principal step-down requirement within each sequence. In this
simulation, loan volumes and revenues decreased by 71-76 percent.
Without an annual cap on loans, the impacts of this alternative on
payday or vehicle title lender revenue would likely be less than the
current rule. The ATR approach and the repeated lending limit both
place a three-loan cap on loan sequences, but the ATR approach imposes
the requirement that a lender not make a first loan without determining
the borrower has the ability to repay the loan.
The repeated lending limit without an annual cap on loans would
likely also have less impact on payday lender revenue than would the
principal step-down approach. The principal step-down approach limits
loan sequences to no more than three loans, but, in addition, imposes
loan size limitations and limits borrowers to no more than six loans in
a year and no more than 90 days in debt per year on a covered short-
term loan. While payday lenders could make loans using the ATR approach
to borrowers who had reached the annual limits for loans issued via the
principal step-down approach, the ATR approach will likely limit the
total loans available to many consumers.
The Bureau believes that limiting repeated lending should create
stronger incentives to underwrite borrowers for ability to repay than
exist in the current market. This is due to the reduction in expected
revenue from loan sequences that would be cut off after the threshold
is reached, rather than being able to continue for as long as the
consumer is able to sustain rollover payments.
[[Page 54852]]
However, a rule that relied solely on limiting repeat lending would
increase the risk that borrowers take out loans that they would not
have the ability to repay relative to the rule. This alternative would
also lack the protections of the principal step-down approach, which
include mandatory reductions in loan size across a sequence of loans.
The Bureau believes that this step-down system will make it more likely
that borrowers will successfully repay a loan or short loan sequence
than would a limit on repeated lending, which might produce more
defaults at the point that further re-borrowing would be prohibited.
And, without the principal step-down approach's limits on the number of
loans per year and the limit on the time in debt, some borrowers might
effectively continue their cycle of re-borrowing by returning as soon
the 30-day period has ended.
2. An Ability-To-Repay Requirement for Short-Term Loans With No
Principal Step-Down Approach
The Bureau also considered the ATR approach without the principal
step-down approach for covered short-term loans. Many consumer groups
suggested this alternative. Without the principal step-down approach,
lenders would be required to incur the expenses of the ATR approach for
all payday loans. This effect, together with the impact of the ATR
requirements, would have a larger impact on the total volume of payday
loans that could be originated than would the rule. The Bureau
simulated the effects of an ``ATR approach only'' policy, applying the
same assumption that 33 percent of borrowers would qualify for an
initial ATR loan (see part VII.F.1.c for more details on the Bureau's
simulations); and, as described in part VII.F.1.c, using various
assumptions about how borrowers behave when the loan sequences are cut
off. In this simulation, loan volumes and revenues decreased by 92 to
93 percent. Borrowers who could not demonstrate an ability to repay the
loan would be unable to take out a payday loan.
3. Disclosures as an Alternative to the Ability-To-Repay Requirement
The Bureau considered whether to require disclosures to borrowers
warning of the risk of re-borrowing or default, rather than the ATR
approach and the principal step-down approach, and the Bureau received
a number of comments asserting that this approach would be sufficient
or more advantageous, as discussed in the section-by-section analysis
above.
The Bureau believes that a disclosure-only approach would have
lower procedural costs for lenders than would the ATR approach or the
principal step-down approach. Requiring lenders to prepare disclosures
that were customized to a particular loan would impose some additional
cost over current practices. If lenders could simply provide
standardized disclosures, that would impose almost no additional cost
on lenders.
A disclosure-only approach would also have substantially less
impact on the volume of covered short-term lending. Evidence from a
field trial of several disclosures designed specifically to warn of the
risks of re-borrowing and the costs of re-borrowing showed that these
disclosures had a marginal effect on the total volume of payday
borrowing.\1269\ Analysis by the Bureau of similar disclosures
implemented by the State of Texas showed a reduction in loan volume of
13 percent, consistent with the limited magnitude of the impacts from
the field trial.\1270\
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\1269\ Marianne Bertrand and Adair Morse, ``Information
Disclosure, Cognitive Biases and Payday Borrowing,'' 66 J. of Fin.
1865 (2011).
\1270\ See CFPB Supplemental Findings, section 3.
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The Bureau believes that a disclosure-only approach would also have
substantially less impact on the harms consumers experience from long
sequences of payday and single-payment vehicle title loans. Given that
loans in very long sequences make up well over half of all payday and
single-payment vehicle title loans, a reduction of 13 percent in total
lending has only a marginal impact on those harms. In addition,
analysis by the Bureau of the impacts of the disclosures in Texas shows
that the probability of re-borrowing on a payday loan declined by
approximately 2 percent once the disclosure was put in place,
indicating that high levels of re-borrowing and long sequences of
payday loans remain a significant source of consumer harm. A
disclosure-only approach would also not change the lender's incentives
to encourage borrowers to take out long sequences of covered short-term
loans.
Given the evidence of unanticipated re-borrowing discussed above in
Market Concerns--Underwriting, borrowers are likely to dismiss warnings
of possible negative outcomes as not applying to them, and to not focus
on disclosures of the possible harms associated with a negative outcome
that they do not anticipate experiencing. To the extent the borrowers
have thought about the likelihood that they themselves will default on
a loan, a general warning about how often people default is unlikely to
cause them to revise their own expectations about the chances they
themselves will default. Additionally, there is evidence that borrowers
are generally aware of the average durations of sequences, but in spite
of this are not good at predicting whether or not they themselves will
experience a long duration.\1271\ As such, warnings about the potential
for long durations are also unlikely to elicit changes in these
borrowers' behaviors.
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\1271\ See the discussion in Market Concerns--Underwriting and
above in this section of Ronald Mann, ``Assessing the Optimism of
Payday Loan Borrowers,'' 21 Sup. Ct. Econ. Rev. 105 (2013).
---------------------------------------------------------------------------
The Bureau received comments suggesting that the potential for
disclosures to impact behavior in this market was not fully considered.
They pointed to the research of Bertrand and Morse (cited above), to
the Texas disclosure law (described and analyzed above), and for the
finding that disclosures alerting borrowers to the availability of
payment plans in certain States increase participation in said payment
plans. While the Bureau believes disclosures can be effective in
certain applications--especially when there is a market failure
resulting in a lack of information about a more immediate and certain
outcome--the available evidence suggests that a disclosure-only
intervention in this market would yield substantially lower benefits to
consumers than the ATR with principal step-down approach in the rule.
The Bureau discusses this topic in the section-by-section analysis in
part V as well.
4. Limitations on Withdrawing Payments From Borrowers' Accounts Without
Disclosures
The Bureau considered including the limitation on lenders
continuing to attempt to withdraw payment from borrowers' accounts
after two sequential failed attempts to do so, but not including the
required initial disclosure of usual payments or the additional
disclosure in the event of unusual payments, or the notice that would
be sent when a lender could no longer continue to attempt to collect
payments from a borrower account. The impacts of excluding the upcoming
payment notices would simply be to not cause lenders and borrowers to
experience the benefits and costs that are described in the discussion
of the impacts of those provisions. With regard to the notice that a
lender could no longer attempt to withdraw payment from a borrower's
account, the primary effect would be analogous, and the benefits and
costs are described in the discussion of the
[[Page 54853]]
impacts of the provision that would require that notice. However, there
may also have been a particular interaction if lenders had been
prevented from continuing to attempt to withdraw payment from a
borrower's account, but the borrower did not receive a notice
explaining that. Absent some communication from the lender, the
borrower may not realize that payment would no longer be withdrawn and,
as a result, fail to make payments on a loan. Lenders would presumably
reach out to borrowers to avoid this eventuality. In addition, absent
the notice, borrowers may have been more likely to believe that they
are required to provide lenders with a new authorization to continue to
withdraw payments directly from their accounts, when they may have been
better off using some alternative method of payment.
K. Potential Impact on Depository Creditors With $10 Billion or Less in
Total Assets
The Bureau believes that depository institutions and credit unions
with less than 10 billion dollars in assets rarely originate loans that
are covered by this rule. To the extent depository institutions do make
loans in this market, many of those loans would be exempted under Sec.
1041.3(e) or (f) as alternative or accommodation loans.
L. Impact on Consumers in Rural Areas
Consumers in rural areas will have a greater reduction in the
availability of covered short-term and longer-term balloon-payment
loans originated through storefronts relative to consumers living in
non-rural areas. As described in part VII.F.1.c, the Bureau estimates
that the restrictions on making these loans will likely lead to a
substantial contraction in the markets for storefront payday loans and
storefront single-payment vehicle title loans.\1272\ The Bureau has
analyzed how State laws in Colorado, Virginia, and Washington that led
to significant contraction in the number of payday stores in those
States affected the geographic availability of storefront payday loans
in those States.\1273\ In those States, nearly all borrowers living in
non-rural areas (defined as Metropolitan Statistical Areas or ``MSA'')
still had physical access to a payday store.\1274\ A substantial
minority of borrowers living outside of MSAs, however, no longer had a
payday store readily available following the contraction in the
industry. In Colorado, Virginia, and Washington, 37 percent, 13
percent, and 30 percent of borrowers, respectively, would need to
travel at least five additional miles to reach a store that remained
open.\1275\ In Virginia, almost all borrowers had a store that remained
open within 20 miles of their previous store.\1276\ And, in Washington
9 percent of borrowers would have to travel at least 20 additional
miles.\1277\ While many borrowers who live outside of MSAs do travel
that far to take out a payday loan, many do not,\1278\ and the
additional travel distance resulting from closures of rural storefronts
will impose a cost on these borrowers and may make borrowing from
storefront lenders impractical or otherwise cause them to choose not to
borrow from such lenders. Rural borrowers for whom visiting a
storefront payday lender becomes impracticable retain the option to
seek covered loans from online lenders, subject to the restrictions of
State and local law.
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\1272\ The Bureau reiterates that, given their limited
prevalence, data on longer-term balloon-payment loans is scant. The
effects on these types of loans are extrapolations from the
empirical findings on short-term loans.
\1273\ CFPB Supplemental Findings.
\1274\ CFPB Supplemental Findings at 95 tbl. 17.
\1275\ CFPB Supplemental Findings.
\1276\ CFPB Supplemental Findings.
\1277\ CFPB Supplemental Findings.
\1278\ CFPB Supplemental Findings at 93 tbl. 15.
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The Bureau has not been able to study a similar contraction in the
single-payment vehicle title market, but expects that the relative
impacts on rural and non-rural consumers will be similar to what has
occurred in the payday market. That is, rural consumers are likely to
experience a greater reduction in the physical availability of single-
payment vehicle title loans made through storefronts than borrowers
living in non-rural areas.
The Bureau received numerous comments suggesting that the
proposal's consideration of rural borrowers was incomplete. However,
the specific shortcoming cited was almost universally that rural
borrowers displaced by the contraction in storefront lenders may not
retain access via online lenders if they do not have access to the
Internet. In assessing this, the Bureau notes that rural populations
are less likely to have access to high-speed broadband compared to the
overall population (39 percent vs 10 percent).\1279\ However, the
bandwidth and speed required to access an online payday lender is
minimal; even if high-speed access is currently beneficial to seeking
an online loan, lenders can scale down the bandwidth requirements if
the latent demand for loans amongst rural borrowers is sufficient to
justify doing so. Additionally, the Bureau believes most potential
borrowers in rural communities will likely be able to access the
Internet by some means (e.g., dial up, or access at the public library
or school). While the ease of access and quality of experience for
bandwidth-limited rural customers may be lower than for non-rural
customers, the Bureau believes that there will still be reasonable
access for rural customers in need of loans. Additionally, mobile
broadband access is growing rapidly in rural areas, with 67 percent of
adults in these areas reporting they own a smartphone.\1280\
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\1279\ Darrell M. West and Jack Karsten, ``Rural and Urban
America Divided by Broadband Access,'' Brookings Institution,
Techtank, July 18, 2016, available at https://www.brookings.edu/blog/techtank/2016/07/18/rural-and-urban-america-divided-by-broadband-access/.
\1280\ Pew Research Center, ``Digital gap between rural and
nonrural America persists.'' May 19, 2017.
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Additional commenters noted that some online payday lenders operate
in rural areas, and that some comprise large shares of their local
economies. If these lenders are amongst the number the Bureau expects
to contract, this could impose a cost on these rural communities that
would be avoided by more densely populated areas experiencing similar
labor market shocks. However, if the cost advantages realized by
lenders in rural areas (e.g., lower overhead, lower wages afforded by
lower costs of living) give them a competitive advantage over online
lenders in more densely populated areas, they may be less likely to
contract. However, the Bureau acknowledges that at least some rural
lenders will be substantially impacted by the rule.
Given the available evidence, the Bureau believes that, other than
the greater reduction in the physical availability of covered short-
term loans made through storefronts, a potentially small relative
reduction in access to any covered short-term loans, and the risk of
negative labor market shocks to some rural areas in which online
lenders comprise a significant share of employment, consumers living in
rural areas will not experience substantially different effects of the
regulation than other consumers. OMB designates this rule as major
under 5 U.S.C. 804(2).
VIII. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (RFA) generally requires an agency
to conduct an Initial Regulatory Flexibility Analysis (IRFA) and a
Final Regulatory Flexibility Analysis (FRFA) of any rule subject to
notice-and-comment
[[Page 54854]]
rulemaking requirements.\1281\ These analyses must ``describe the
impact of the proposed rule on small entities.'' \1282\ An IRFA or FRFA
is not required if the agency certifies that the proposal will not have
a significant economic impact on a substantial number of small
entities.\1283\ The Bureau also is subject to certain additional
procedures under the RFA involving the convening of a panel to consult
with small entity representatives prior to proposing a rule for which
the IRFA is required.\1284\
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\1281\ 5 U.S.C. 601, et seq.
\1282\ 5 U.S.C. 603(a).
\1283\ 5 U.S.C. 605(b).
\1284\ 5 U.S.C. 609.
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A. Overview of the Bureau's Approach
In the proposal the Bureau did not certify that the proposal would
not have a significant impact on a substantial number of small entities
within the meaning of the RFA. Accordingly, the Bureau convened and
chaired a Small Business Review Panel under the Small Business
Regulatory Enforcement Fairness Act (SBREFA) to consider the impact of
the rule on small entities that would be subject to the rule and to
obtain feedback from representatives of such small entities. The Small
Business Review Panel for the proposal is discussed in the SBREFA
Report. The proposal also contained an IRFA pursuant to section 603 of
the RFA, which among other things estimated the number of small
entities that would be subject to the proposal. In this IRFA, the
Bureau described the impact of the proposal on those entities, drawing
on the proposal's Section 1022(b)(2) Analysis. The Bureau also
solicited comments on any costs, recordkeeping requirements, compliance
requirements, or changes in operating procedures arising from the
application of the proposal to small businesses; comments regarding any
Federal rules that would duplicate, overlap, or conflict with the
proposal; and comments on alternative means of compliance for small
entities. Comments that addressed the impact on small entities are
discussed below. Many of these comments implicated individual
provisions of the final rule or the Bureau's Section 1022(b)(2)
Analysis and are also addressed in those parts.
Similar to its approach in the proposal, the Bureau is not
certifying that the final rule will not have a significant economic
impact on a substantial number of small entities. Instead, the Bureau
has completed a FRFA as detailed below.
Section 604(a) of the RFA sets forth the required elements of the
FRFA. Section 604(a)(1) requires the FRFA to contain a statement of the
need for, and objectives of, the rule.\1285\ Section 604(a)(2) requires
a statement of the significant issues raised by the public comments in
response to the IRFA, a statement of the assessment of the Bureau of
such issues, and a statement of any changes made in the proposed rules
as a result of such comments.\1286\ Section 604(a)(3) requires the
response of the Bureau to any comments filed by the Chief Counsel for
Advocacy of the Small Business Administration in response to the
proposed rule, and a detailed statement of any change made to the
proposed rule in the final rule as a result of the comments.\1287\ The
FRFA further must contain a description of and, where feasible, provide
an estimate of the number of small entities to which the final rule
will apply.\1288\
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\1285\ 5 U.S.C. 604(a)(1).
\1286\ 5 U.S.C. 604(a)(2).
\1287\ 5 U.S.C. 604(a)(3).
\1288\ 5 U.S.C. 604(a)(4).
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Section 604(a)(5) requires a description of the projected
reporting, recordkeeping, and other compliance requirements of the
rule, including an estimate of the classes of small entities that will
be subject to the requirement and the types of professional skills
necessary for the preparation of the report or record.\1289\ Finally,
section 604(a)(6) requires a description of the steps the Bureau has
taken to minimize the significant economic impact on small entities
consistent with the stated objectives of applicable statutes, including
a statement of the factual, policy, and legal reasons for selecting the
alternative adopted in the final rule and why each one of the other
significant alternatives to the rule considered by the agency which
affect the impact on small entities was rejected; and a description of
the steps the agency has taken to minimize any additional cost of
credit for small entities.\1290\
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\1289\ 5 U.S.C. 604(a)(5).
\1290\ 5 U.S.C. 604(a)(6).
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B. Rationale and Objectives of the Final Rule
As discussed in Market Concerns--Underwriting and Market Concerns--
Payments above, the Bureau is concerned that practices in the market
for payday, vehicle title, longer-term balloon-payment loans, and
certain other longer-term loans utilizing leveraged payment mechanisms
pose significant risk of harm to consumers. In particular, the Bureau
is concerned about the harmful impacts on consumers of the practice of
making these loans without making a reasonable determination that the
consumer has the ability to repay the loan while paying for major
financial obligations and basic living expenses. In addition, the
Bureau is concerned that lenders in this market are using their ability
to initiate payment withdrawals from consumers' accounts in ways that
harm consumers.
To address these concerns, the Bureau is issuing the final rule
pursuant to its authority under the Dodd-Frank Act in order to identify
certain unfair and abusive acts or practices in connection with certain
consumer credit transactions, to set forth requirements for preventing
such acts or practices, to exempt loans meeting certain conditions from
those requirements, to prescribe requirements to ensure that the
features of those consumer credit transactions are fully, accurately,
and effectively disclosed to consumers, and to prescribe processes and
criteria for registration of information systems. The legal basis for
the rule is discussed in detail in the legal authority analysis in part
IV and in the section-by-section analysis in part V.
1. Public Comments on the IRFA and the Bureau's Views and Treatment of
Those Comments
In accordance with section 603(a) of the RFA, the Bureau prepared
an IRFA. In the IRFA, the Bureau estimated the possible costs for small
entities with respect to the reporting, recordkeeping, and compliance
requirements of the proposed rule against a pre-statute baseline. The
Bureau requested comment on the IRFA.
A number of comments specifically addressed the IRFA or raised
concerns regarding the burden of compliance with the rule for small
entities. These comments are discussed first. Those comments that
repeated the same issues raised by the Office of Advocacy of the U.S.
Small Business Administration are addressed in the next section of the
FRFA, below. While many additional comments referred to economic
impacts affecting all entities, this FRFA discussion focuses on
comments addressing impacts that are particular to or differential for
small entities, supplementing the discussion in the section-by-section
analysis in part V, and the consideration of the broader impacts in the
Section 1022(b)(2) Analysis in part VII.
The significant comments addressing the IRFA or compliance burdens
for small entities raised specific concerns falling into one of the
following general categories: Anticipated direct costs to small
entities unaccounted for or unquantified in the IRFA; direct costs to
small entities accounted for but
[[Page 54855]]
underestimated; the lack of estimates for revenue losses specific to
small entities; indirect effects on costs or prices faced by small
entities not addressed; alternatives to the proposed rule which were
not addressed or not appropriately considered; conflicts with existing
laws and regulations not addressed; and categories of small entities
not included in the analysis.
a. Comments Asserting Anticipated Direct Costs to Small Entities Not
Accounted for in the IRFA
Commenters raised concerns about costs arising from several
requirements of the rule which, they asserted, were unaccounted for or
unquantified in the IRFA. First, commenters raised concerns that
although the IRFA states that small entities may contract with
attorneys, consultants, and vendors for assistance in complying with
the ability-to-repay, disclosure, and reporting requirements of the
rule, these costs were not made explicit. Related comments expressed
concern that the need for small entities to contract with attorneys and
vendors was in conflict with the Bureau's statement that professional
skills beyond those of existing employees would be required in only
rare circumstances.
The Bureau acknowledges that the need to contract with attorneys,
consultants, and vendors may entail new costs for some small entities.
For those small lenders which already maintain compliance processes for
existing rules or regulations, the Bureau believes that the marginal
added cost will be limited. In addition, some changes to the final rule
which simplify the ability-to-repay verification and calculation
requirements may lessen the need for these services. For those small
entities that do not have relationships with these types of service
providers under their current business process, the one-time costs may
be larger.
Second, commenters expressed concern that the costs associated with
the 36 month recordkeeping requirement of the rule would be more
substantial than the discussion in the IRFA implied. In the case of
recordkeeping, Regulation Z, implementing TILA, has a general record
retention rule that lenders ``shall retain evidence of compliance'' for
``two years after the date disclosures are required to be made or
action is required to be taken.'' \1291\ In addition, as discussed in
greater detail in the Background section, a number of States (including
Colorado, Texas, Virginia, and Washington) have record retention
requirements specific to payday loans, and numerous others have payday
lending requirements which implicitly require some form of
recordkeeping for compliance. Thus, the Bureau believes the 36 month
recordkeeping requirement constitutes only an adjustment or extension
of existing processes, with limited costs.
---------------------------------------------------------------------------
\1291\ Regulation Z, 12 CFR 1026.25(a).
---------------------------------------------------------------------------
Still, commenters noted that lenders may incur some costs in
developing a document retention policy, obtaining additional computer
storage space to maintain the documents, programming the computer
system to keep the documents for 36 months (and then delete them),
training employees to comply with the recordkeeping requirements, and
monitoring the implementation of these new procedures. The Bureau
acknowledges these costs but believes them to be small. The development
of retention policies should be straightforward, as the requirements
are not opaque. Computer storage is inexpensive and even the largest
lenders should not require more than one terabyte of additional storage
to manage the retention of their files enterprise-wide (and that
assumes their computer systems are already storage-constrained). As
such, the Bureau estimates this cost to be less than $50 per lender if
they wish to purchase additional storage themselves (e.g., a portable
hard drive) with any associated operations and maintenance costs, or
$10 per month if they wish to lease storage (e.g., from one of the many
online cloud storage vendors).
There may be a need to develop procedures and train staff to retain
materials that they would not normally retain in the ordinary course of
business, as well as design systems to generate and retain the required
records; those costs are included in earlier estimates of the costs of
developing procedures, upgrading systems, and training staff. The
Bureau also believes that maintaining the records will facilitate
lenders' ability to comply with, and to document their compliance with,
other aspects of the rule.
Third, commenters stated that tracking failed payment withdrawals
would require new systems and procedures to be developed, at a cost not
specified in the IRFA. While the Bureau acknowledges that some entities
may face costs in modifying existing systems to comply with the
recordkeeping and payment processing requirements of the rule, these
requirements largely build on processes required by existing laws or
necessitated by standard business practice.
b. Comments Asserting That Direct Costs to Small Entities Were
Underestimated
Commenters raised concerns that, among the costs to small entities
quantified in the IRFA, some of the Bureau's estimates of required time
and financial costs were too low. Comments stated that compliance with
the ability-to-repay requirements would be more costly and take
employees longer than the Bureau had estimated. In particular, comments
from industry trade associations and others asserted that the
complexity of the proposed rule meant that verification and
documentation of evidence for the ability-to-repay calculations would
take longer than the Bureau's estimate of three to five minutes.
Similarly, the commenters raised concerns that making the ability-to-
repay determination would take longer than 15 to 20 minutes for manual
decisions, and that the Bureau's statement that automated decisions
would take essentially no time neglected to account for the time
required for employees to monitor and maintain the automated decision-
making system. Based on a survey of community banks, one industry trade
association stated that respondents anticipate three hours of
processing time on average to complete ability-to-repay verification
and determination. As discussed in the section-by-section analysis for
Sec. 1041.5, part VII, and part VIII.C, in response to these concerns
the Bureau has lessened the documentation requirements and simplified
the calculations for the ability-to-repay determination in the
following respects.
First, if verification evidence for income is not reasonably
available, lenders may reasonably rely on stated amounts for income.
Second, if the verification evidence for major financial obligations
(e.g., the borrower's credit report) does not include a particular
obligation, lenders reasonably may rely on the stated amount of such
obligation. Third, lenders will not be required to perform a credit
check if they have already done so in the past 90 days and the consumer
has not recently triggered a cooling-off period following a three-loan
sequence. Fourth, lenders can use either a residual income or debt-to-
income ratio when making the ability-to-repay determination, and the
income and expenses can be based on a snapshot of the relevant calendar
month rather than a time period which depends on the length of the
loan. Fifth, lenders are not required to track the timing of income
receipts or payments on major financial obligations. Finally, the
Bureau has eliminated the
[[Page 54856]]
presumptions of unaffordability attached to the second and third loan
in a sequence made under the ability-to-repay requirements, likely
reducing the underwriting costs for these loans and increasing the
number of consumers determined to have the ability to repay such a
loan.
While these changes should reduce small entities' time costs for
compliance with the ability-to-repay requirements, the Bureau has
increased its estimate of the total time to conduct a manual ability-
to-repay determination to 15-45 minutes. This estimate is consistent
with comments received from a trade group representing covered lenders
and information provided by Small Entity Representatives.
Commenters also raised concerns that the Bureau's time estimates
for initial and periodic ongoing training estimates were too low. The
Bureau has reviewed its assessment, and the broader set of comments,
and has concluded that the training estimates laid out were reasonable.
The Bureau has clarified that the training estimates are per employee
engaged in the relevant business process.
Across a number of business processes, commenters raised concerns
that the Bureau's estimates for the one-time costs to update policies,
systems, and materials were underestimated. Regarding the disclosure
requirements of the proposed rule, commenters stated that the time and
costs to develop and ensure disclosures are accurate was
underestimated. Similarly, commenters also stated that the estimated
one-time costs to update credit reporting systems were too low.
Finally, commenters stated that the Bureau's estimates of the costs to
upgrade general computer systems--separate from licensed underwriting,
credit reporting, and disclosure systems--were underestimated.
The Bureau appreciates these comments, but believes its estimates,
and the cost framework used throughout the rule, are accurate.
Throughout the rule, the Bureau has updated its estimates when
appropriate, as in the case of possible setup costs for furnishing to
multiple registered information systems, and believes these changes and
the corresponding discussions in part VII where the Section 1022(b)(2)
Analysis address these concerns.
c. Comments Asserting That the IRFA Did Not Estimate Lost Revenue for
Smaller Entities
In the proposed rule, the Bureau estimated the loss of revenue from
the proposal (see for example the section in the proposed Section
1022(b)(2) Analysis on ``Effect on Loan Volumes and Revenue From
Underwriting Requirements and Restrictions on Certain Re-borrowing'').
These costs, while not specifically estimated for small entities, were
also referenced in the IRFA. Even assuming uniform compliance with the
rule across large and small entities, the Bureau believes that the
revenue impacts could differ between large and small entities. As noted
below in more detail in the next section of this FRFA, the Bureau does
not have data, and commenters provided only minimal evidence, that
allow for the separate estimation of revenue impacts for small lenders.
This issue is also discussed in part VII.F.1.c.
d. Comments Asserting Additional Indirect Effects on Costs and Prices
Commenters raised concerns regarding indirect costs and impacts on
small entities resulting from the responses of lenders or other market
participants to the rule. Several commenters stated that lenders
themselves may face higher costs of obtaining credit due to the rule's
impact on their profitability. Commenters also noted that lenders would
face adjustment costs if they were to shift their portfolio of products
away from covered loans. Related comments stated that if lenders were
to forgo leveraged payment mechanisms on new originations in response
to the rule, loan defaults were likely to increase. One commenter
raised the concern that a reduction in the total size of the market
could require vendors and consultants for small entities to raise
prices charged for services provided. Commenters raised concern over
possible increased litigation risk for lenders.
The Bureau appreciates these comments, and acknowledges that small
lenders may face higher costs of credit, and that business practice
adjustments would likely impact both the costs and revenues of these
firms. Litigation risks and the pricing of vendor or consulting
services could also change in response to the rule. While the exact
form of these indirect costs is uncertain and the Bureau does not have
the data available to estimate them, small lenders may face a
relatively higher burden than larger lenders, given their smaller scale
over which to spread fixed investments, and their potentially more
limited access to financing options. These impacts are likely to be
larger for small lenders that are highly specialized in short-term
loans, or longer-term balloon-payment loans, or vehicle title loans not
eligible for the exemption in Sec. 1041.6, and smaller for those with
more diversified product portfolios.
e. Comments Asserting That Certain Alternatives Were Not Addressed or
Appropriately Considered
Regarding the IRFA, commenters expressed concern that the Bureau
failed to provide a meaningful explanation for why it declined to
pursue significant alternatives to the proposed rule. The IRFA included
discussions of four significant alternatives to the proposed rule,
which referred to more detailed analyses in the section-by-section
discussions and the Section 1022(b)(2) Analysis. The Bureau believes
its discussion of the alternatives provided in the IRFA, along with the
alternatives considered in the proposal's Section 1022(b)(2) Analysis,
provided sufficient explanation for the choice of regulatory approach.
However, in order to provide improved detail and clarity, part VIII.D
below includes additional discussion in response to comments.
The Bureau received a number of comments requesting exemptions for
small entities. The Bureau is finalizing an exemption for accommodation
loans, which are loans made by lenders that make fewer than 2,500
covered short-term loans and covered longer-term balloon-payment loans
a year, and for which covered short-term loans and covered longer-term
balloon-payment loans make up less than 10 percent of annual receipts.
Additionally, the Bureau has adjusted its exemption for alternative
loans to ensure that all PAL loans, and loans made by non-Federal
credit unions which match the characteristic of a PAL loan, are exempt.
This exemption should significantly reduce burden for smaller credit
unions and other companies. Further, in response to comments the Bureau
has substantially adjusted the rule in order to lessen the burdens of
compliance, and also to reduce the degree to which the rule will impact
total loan volumes, as noted above and in the section-by-section
analysis for Sec. Sec. 1041.5 and 1041.8. Even with these changes,
there will still be a significant impact on small entities. The Bureau
declines to completely exempt small entities because it believes many
smaller entities, especially payday and vehicle title lenders, are
engaging in the unfair and abusive practices identified in Sec. Sec.
1041.4 and 1041.7. These practices cause substantial harm to consumers,
and an exemption for small entities that would allow the practices to
continue, albeit only at smaller companies, would substantially
undermine the goals of
[[Page 54857]]
this rule and permit a significant amount of consumer harm to continue.
f. Comments Asserting That Conflicts With Existing Law Were Not
Considered
The IRFA requires identification, to the extent practicable, of all
relevant Federal rules which may duplicate, overlap, or conflict with
the proposed rule. Several trade association commenters raised concerns
that the Bureau had not identified E-SIGN and ECOA/Regulation B as
duplicate or overlapping rules.
One comment stated that the proposed rule conflicts with E-SIGN and
Regulation E because it adopts a different and new definition for
consumer consent to receive electronic disclosures. The Bureau believes
there is no conflict with E-SIGN because E-SIGN is not implicated by
the consent process laid out in the rule. The Bureau decided not to use
the E-Sign framework because of concerns raised in the SBREFA process
about the burden of E-SIGN and the policy consideration of using an
electronic disclosure consent process that is tailored to the small-
dollar origination process and the situation the consumer is providing
consent for. The Bureau also believes that the framework for obtaining
consent for electronic notifications is more appropriate for the
specific purposes of the notices in this rule. Another comment raised
concerns about conflicts with EFTA, Regulation E, and Regulation CC.
EFTA and Regulation E were discussed in the Market Concerns--Payments
and section-by-section analysis for Sec. Sec. 1041.7 and 1041.8. There
are no provisions in EFTA, Regulation E, and Regulation CC that require
or limit re-presentments of payments; those regulations do not
conflict, duplicate or overlap with the limit on re-presentments. There
are longstanding private network rules regarding repeat presentments
that similarly do not raise conflicts.
One comment stated that the proposed rule conflicts with ECOA
because it does not permit lenders to consider household income or
expenses in making an ability-to-repay determination. Similarly,
another comment expressed concern that considerations in ECOA and
Regulation B for co-habitation arrangements, including ``spouses,
cosigners, roommates, parents and adult children residing together,
adult-children and elderly parents residing together,'' do not fit
neatly into the proposal's documentation requirements for income,
obligations, and living expenses. It also noted that ``the consumer
reporting and registered information systems do not address how such
information is reported under those varying arrangements.'' In the
section-by-section analysis of Sec. 1041.5, the Bureau discusses
changes made to the ability-to-repay requirements of the final rule
which now permits lenders to consider third party income to which a
consumer has a reasonable expectation of access, to consider whether
other persons are contributing towards the consumer's payment of major
financial obligations, and to consider whether other persons are
contributing towards the consumer's payment of basic living expenses
when a lender chooses to itemize basic living expenses. As noted in the
section-by-section analysis of Sec. 1041.5 above, the Bureau believes
that the requirements of the rule do not conflict with ECOA or
Regulation B.\1292\
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\1292\ Under the RFA, rules are duplicative or overlapping if
they are based on the same or similar reasons for the regulation,
the same or similar regulatory goals, and if they regulate the same
classes of industry. Rules are conflicting when they impose two
conflicting regulatory requirements on the same classes of industry.
The Bureau does not believe these standards are met in this case.
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The Bureau also received comments suggesting that it had failed to
consider the overlap between the proposal's provisions relating to
registered information systems and to lenders' obligation to furnish to
registered information systems, on the one hand, and the Fair Credit
Reporting Act, Regulation V, the Gramm Leach Bliley Act, Regulation P
or the Privacy Rule, and the Safeguards Rule, on the other hand. The
commenter claimed that the Bureau had opened the door to numerous
Regulation V issues relating to proper compliance with the duties of
users and furnishers of information in registered information systems,
and that the Bureau had not considered legal issues around the privacy
and data security of said data. Yet these laws do not conflict with the
rule in any way. To the contrary they would all have the same effect as
they are applicable, and they would operate to address the issues
raised by the commenter here in the same manner that they do in other
areas of the economy.
g. Comments Asserting That Categories of Entities Were Not Included
A small number of commenters raised concerns regarding the impacts
of the proposed rule on Indian tribes, which the IRFA did not
separately address. The Bureau did not specifically analyze effects on
Indian tribes, as it does not consider them to be small entities under
the RFA, consistent with the interpretation provided by the Small
Business Administration's comment. However, as many Tribal lenders may
be small lenders, and many exist in rural areas, there is the potential
for a more acute impact of the rule on Tribal lenders. This coincides
with the impact on small and rural entities, and is therefore
considered within the discussion of the impacts on those lenders.
2. Response to the Small Business Administration Chief Counsel for
Advocacy
The SBA Office of Advocacy (Advocacy) provided a formal comment
letter to the Bureau in response to the proposed rule. Among other
things, this letter expressed concern about the following issues: The
burden of complying with the ability-to-repay requirements; the lack of
estimates for the impact of the ability-to-repay requirements on lender
revenues; the length of the cooling-off period; the lack of an
exception for loans to address an emergency; the interaction of the
rule with State laws; the impact of the rule on credit unions, small
communities, and Indian tribes; the lack of clarity of the business
loan exemption; the effect of the rule on lender's own cost of credit;
and the implementation date of the final rule.
Advocacy expressed concern that the ability-to-repay requirements
in the proposed rule would be burdensome. The proposed rule would have
required lenders to verify a consumer's net income, debt obligations,
and housing expenses; project basic living expenses, net income, and
obligations for a time period based on the term of the loan; and use
this information to calculate the consumer's ability to repay the loan.
Advocacy expressed concern that these requirements were complicated and
extensive, turning an uncomplicated product into a complex product.
Advocacy also expressed concern that many customers may not qualify for
loans under the ability to repay requirements, particularly in small
rural communities where lenders contend that lending is relationship
based. Advocacy encouraged the Bureau to eliminate some of the ability-
to-repay requirements, and suggested eliminating the credit check
requirement as one possibility.
In response to comments from Advocacy and the public, the Bureau
has made changes to the ability-to-repay requirements to reduce
compliance costs for small entities of both obtaining evidence and
making the ability-to-repay determination. For example, if verification
evidence for income is not reasonably available, lenders may reasonably
rely on stated amounts for
[[Page 54858]]
income. Additionally, verification evidence is no longer required for
rental housing expenses. The Bureau estimates that these changes will
reduce the time and expense of obtaining the information required to
make an ability to repay determination, particularly for lenders
serving customers with income or expenses that are difficult to
document. And while the Bureau believes that the credit check
requirement is necessary to properly project a consumer's debt
obligations, lenders will not be required to perform a credit check if
they have already done so in the past 90 days and the consumer has not
recently triggered a cooling-off period following a three-loan
sequence. This change maintains the integrity of the ability to repay
requirements, while eliminating some marginal costs that both Advocacy
and the Bureau suggest are higher for small lenders compared to larger
lenders.
Additional changes were made to final rule to reduce the burden of
making the ability-to-repay determination. Lenders can use either
residual income or debt-to-income ratio when making the ability-to-
repay determination, and the income and expenses can be based on a
snapshot of the relevant calendar month rather than a time period which
depends on the length of the loan. The Bureau expects these changes to
ease implementation of the ability-to-repay requirement, particularly
for smaller lenders who have less scale over which to recoup their
fixed investment in compliance requirements. Finally, the Bureau has
eliminated the presumptions of unaffordability attached to the second
and third loan in a sequence made under the ability-to-repay
requirements, likely reducing the underwriting costs for these loans
and increasing the number of consumers determined to have the ability
to repay such a loan.
In addition to compliance burdens, Advocacy expressed concern that
the IRFA did not provide separate estimates of the impact of the
ability-to-repay requirements, or the proposed rule as a whole, on
revenue for small entities.
The Bureau does not have data that allow for the separate
estimation of revenue impacts for small lenders. However, even assuming
uniform compliance with the rule across large and small entities, the
Bureau believes that the revenue impacts could differ between large and
small entities. This possibility is discussed in part VII.F.1.c.
However, that discussion is based on economic theory and reasoning, as
the Bureau lacks the data required to differentiate the potential
impacts on small and large lenders.
In contrast, two studies of loan-level data cited by commenters
suggest the impacts on revenue may be similar for small and large
entities.\1293\ The studies separately simulated the effects of the
proposed rule on a dataset of loans made by small lenders and on a
dataset of loans made by large lenders, estimating total revenue
reductions of 82% and 83% respectively. As described earlier, the
Bureau's updated estimates in the Section 1022(b)(2) Analysis in part
VII.F.1.c indicate smaller reductions in revenue from the final rule
relative to the proposed rule; however, the Bureau is not able to
differentiate the impacts for smaller entities. As a result, the Bureau
has no evidence to suggest the revenue impacts on small entities will
exceed those on larger entities, but remains sympathetic to that
possibility. While not directly addressing revenue impacts, data on
market concentration before and after payday lending laws were
implemented in Colorado suggest that overall impacts were larger for
small lenders. Colorado implemented its payday lending laws in 2010,
and the share of storefront locations operated by the ten largest
companies increased from 64% to 78% between 2009 and 2011.\1294\ Note
that the provisions and market context of the Colorado law differ from
those in this rule.
---------------------------------------------------------------------------
\1293\ Arthur Baines et al., ``Economic Impact on Small Lenders
of the Payday Lending Rules Under Consideration by the CFPB,''
Charles River Associates (2015), available at http://www.crai.com/publication/economic-impact-small-lenders-payday-lending-rules-under-consideration-cfpb; Arthur Baines et al., ``Economic Impact on
Storefront Lenders of the Payday Lending Rules Proposed by the
CFPB,'' Charles River Associates (2016), available at http://www.crai.com/publication/economic-impact-storefront-lenders-payday-lending-rules-proposed-cfpb. Note that these estimates assume
lenders use the principal step-down approach, rather than ability-
to-repay, due to data limitations.
\1294\ See Adm'r of the Colo. Consumer Credit Unit, ``Colorado
Payday Lending--July Demographic and Statistical Information: July
2000 through December 2009,''; Adm'r of the Colo. Consumer Credit
Unit, ``Colorado Payday Lending--July Demographic and Statistical
Information: July 2000 through December 2011,''; Adm'r of the Colo.
Consumer Credit Unit, ``Colorado Uniform Consumer Credit Code:
Annual Report Composites,'' available at https://coag.gov/uccc/info/ar.
---------------------------------------------------------------------------
Beyond the ability-to-repay requirements, Advocacy stated that the
30-day cooling-off period for re-borrowing will harm small businesses.
As a result of the SBREFA panel, the Bureau reduced the cooling-off
period from 60 to 30 days, for which Advocacy expressed appreciation.
However, Advocacy asserted that the size of the revenue reductions
estimated by the Bureau may be detrimental to small entities, and
encouraged the Bureau to consider a shorter cooling-off period.
Additionally, Advocacy noted that consumers may have bills due more
frequently than monthly, in which case the 30-day cooling-off period
may prevent the consumer from obtaining funds to meet these needs.
While the Bureau considered a range of cooling-off periods in the
rulemaking process, the 30-day period was chosen, consistent with the
re-borrowing period described in the section-by-section analysis above,
so that borrowers must go a full billing cycle across all their
liabilities before being permitted to take out another loan. This
aligns the rule with the idea that short-term loans are intended to
cover unexpected and temporary financial shocks, rather than persistent
income deficits relative to expenses. See the section-by-section
analysis for Sec. Sec. 1041.4 and 1041.5 for more details.
Advocacy encouraged the Bureau to provide an exemption for
consumers who have experienced and unexpected emergency, and to provide
clear guidance on what qualifies as an emergency.
The Bureau has not created an exception for consumers who have
experienced an emergency, as defining an emergency in such a way that
does not allow broader evasion of the rule's requirements was not
feasible. The Bureau believes that the alternatives to the ability-to-
repay requirements present in the rule will make credit available to
these consumers enduring unusual and nonrecurring expenses or drops in
income. Specifically, the Bureau expects a consumer will be able to
obtain no less than six loans in a 12-month period, without needing to
satisfy any ability to repay requirements. The Bureau further expects
this will be sufficient to address the vast majority of discrete
events, such as emergencies and/or unexpected shocks to a consumer's
income or expenses. This issue was discussed in greater depth above in
Market Concerns--Underwriting.
Advocacy noted that many States have addressed the issue of payday
loans through their own lawmaking. Small entities in States with
existing payday lending laws have already made changes to their
practices to comply with these laws. Advocacy encouraged the Bureau to
recognize the States' ability to make the appropriate choices for their
citizens and exempt from the rule small businesses that operate in
States that currently have payday lending laws.
The Bureau has considered how this rule will interact with the
existing State payday lending laws, which are
[[Page 54859]]
discussed in greater detail in part II and part VII.C. Given the
varying stringency of State payday lending laws, the Bureau has found
evidence of harm to consumers even in States with these laws, as
discussed earlier. As such, the Bureau believes that State exemptions
would be inconsistent with the objectives of the rule. As noted
earlier, for those lenders in States with stricter limits on lending,
lenders will experience relatively low compliance costs and smaller
impacts from the rule, as the rule will be relatively less binding on
them.
Advocacy raised concerns that the Bureau had underestimated the
rule's impact on small credit unions. In particular, Advocacy expressed
concerns over the minimum length required for loans made by credit
unions, under the PAL program administered by the NCUA. The proposed
rule required loans made under the alternative PAL approach to be at
least 46 days in length, while NCUA requires a minimum length of only
30 days. Advocacy also raised concerns that the all-in APR calculation
required by the proposal may require credit unions to perform
additional calculations to populate new forms, disclosures, compliance
training, and other resources. Advocacy encouraged the Bureau to
recognize the NCUA's expertise in the area of credit unions and exempt
small credit unions from the proposed rule.
While the Bureau believes that exempting small credit unions
entirely would be inconsistent with the objectives of the rule, several
changes have been made to the final rule to address the concerns and
burden for small credit unions. First, the Bureau has lowered the
minimum length of a loan made under the PAL Approach to 30 days,
bringing the requirements into alignment with those of NCUA. In
addition, the Bureau has added a safe harbor to any loans made by
Federal credit unions in compliance with the PAL program as set forth
by NCUA. Finally, the Bureau has added an exemption for entities
offering loans on an accommodation basis that would otherwise be
covered loans, as evidenced by the volume of such loans that an entity
makes in absolute terms and relative to its overall business. The
Bureau believes that most small credit unions will fall within this
exemption. Thus the compliance costs of the rule will be significantly
reduced for small credit unions, as well as other small entities, which
make loans that follow the PAL Approach.
Advocacy expressed concern about the impact of the rule on small
rural communities and Tribal businesses and communities. Consumers in
rural communities may have fewer options for accessing credit than
consumers in more populated areas. Advocacy also stated that
consolidation of lenders will be more difficult in these areas, and the
resulting long distances between lenders may further reduce credit
access. Advocacy relayed the concerns of Tribal representatives
regarding the impact of the rule on their communities, many of which
are economically disadvantaged. Advocacy encouraged the Bureau to
consider the detrimental effects that the proposed rule may have on
small rural communities, and to work with federally recognized Indian
tribes to resolve the issue of Tribal consultation and Tribal
sovereignty.
The Bureau acknowledges that the effects of the rule may be felt
differentially in communities depending on their population density,
density of lenders, income, and wealth. Specifically, the Bureau
considered the impact of consolidation by estimating the additional
distance a rural customer may have to travel after this rule in part
VII.F.2.b.v and part VII.L. Regarding the specific effects on small
lenders, the Bureau believes that the changes made in the final rule
described above will mitigate some of the burden associated with
compliance in rural or Tribal areas.
Advocacy thanked the Bureau for clarifying that the proposed rule
would not apply to business loans, and encouraged the Bureau to provide
clear guidance on what qualifies as a small business loan. Advocacy
stated that some small businesses do use payday loan products to
finance their businesses, and this source of financing is important to
their operations. Advocacy raised concerns that even with clear
guidance, sources of credit for small businesses may be reduced if a
large percentage of payday lenders cease operating due to the rule. In
addition, Advocacy noted that if the rule affects the revenue stream of
payday lenders, those lenders themselves may face higher costs of
credit. Advocacy encouraged the Bureau to perform a full analysis of
the impact that this rulemaking may have on the cost of credit for
small entities as required by the RFA.
The Bureau's rule is not intended to effect business loans, and the
definitions of covered loans reflect this fact. Only loans extended to
a consumer primarily for personal, family, or household purposes are
covered by the rule. The Bureau appreciates the concern for a possible
reduction in business loan availability due to lender exit, and
acknowledges that those business relying on products offered by payday
lenders may have to travel further to obtain credit, or seek credit
from alternative sources. (e.g., online lenders). Regarding the
potentially higher cost of credit to payday lenders themselves,
Advocacy's point is well taken. The Bureau's analysis has focused on
estimating the direct effects of the rule, as the indirect effects rely
heavily on lender's responses to the rule, and the Bureau does not have
data which could be used to quantify these effects.
Finally, Advocacy encouraged the Bureau to allow at least 24 months
for small entities to comply with the rule, in part because small
entities have undergone a number of other regulatory changes, including
due to the implementation of State lending laws and the Military
Lending Act.
The Bureau appreciates the concern regarding the required
adjustments to small entities operations, and has increased the
compliance date of Sec. Sec. 1041.2 through 1041.10, 1041.12, and
1041.13 to 21 months after publication of the rule in the Federal
Register. The Bureau believes this is a sufficient period for
compliance with the final rule.
C. Effect of the Rule on Small Entities
1. Description and Estimate of the Number of Small Entities to Which
the Final Rule Will Apply
As discussed in the Small Business Review Panel Report, for
purposes of assessing the impacts of the rule on small entities,
``small entities'' is defined in the RFA to include small businesses,
small nonprofit organizations, and small government
jurisdictions.\1295\ A ``small business'' is determined by application
of SBA regulations and reference to the North American Industry
Classification System (NAICS) classifications and size standards.\1296\
Under such standards, banks and other depository institutions are
considered ``small'' if they have $550 million or less in assets, and
for most other financial businesses, the threshold is average annual
receipts (i.e., annual revenues) that do not exceed $38.5
million.\1297\
---------------------------------------------------------------------------
\1295\ 5 U.S.C. 601(6).
\1296\ 5 U.S.C. 601(3). The current SBA size standards are found
on SBA's Web site at http://www.sba.gov/content/table-small-business-size-standards.
\1297\ 5 U.S.C. 601(3).
---------------------------------------------------------------------------
During the SBREFA process, the Bureau identified four categories of
small entities that may be subject to the proposed rule for purposes of
the RFA. The categories and the SBA small entity
[[Page 54860]]
thresholds for those categories are: (1) Commercial banks, savings
associations, and credit unions with up to $550 million in assets; (2)
nondepository institutions engaged in consumer lending or credit
intermediation activities with up to $38.5 million in annual revenue;
(3) nondepository institutions engaged in other activities related to
credit intermediation activities with up to $20.5 million in annual
revenue; and (4) mortgage and non-mortgage loan brokers with up to $7.5
million in annual revenue.
The following Table 1 provides the Bureau's revised estimates of
the number and types of entities that may be affected by the rule:
\1298\
---------------------------------------------------------------------------
\1298\ In the Small Business Review Panel Report at Chapter 9.1,
a preliminary estimate of affected entities and small entities was
included in a similar format (a chart with clarifying notes). See
Small Business Review Panel Report, at 26 tbl. 9.1.1, 27 tbl. 9.1.2.
---------------------------------------------------------------------------
BILLING CODE 4810-AM-P
[GRAPHIC] [TIFF OMITTED] TR17NO17.007
As discussed in the Small Business Review Panel Report, the NAICS
categories are likely to include firms that do not extend credit that
will be covered by the rule. In addition, some of these firms may
qualify for exemptions under the rule. The following Table 2 provides
the Bureau's estimates, not accounting for exemptions, of the numbers
and types of small entities within particular segments of primary
industries that may be affected by the rule:
[[Page 54861]]
[GRAPHIC] [TIFF OMITTED] TR17NO17.008
[[Page 54862]]
[GRAPHIC] [TIFF OMITTED] TR17NO17.009
BILLING CODE 4810-AM-C
2. Projected Reporting, Recordkeeping, and Other Compliance
Requirements of the Rule
The rule imposes new reporting, recordkeeping, and compliance
requirements on certain small entities. These requirements and the
costs associated with them are discussed below.
a. Reporting Requirements and Their Costs for Small Entities
The rule imposes new reporting requirements to ensure that lenders
making covered short-term and longer-term balloon-payment loans under
the rule have access to timely and reasonably comprehensive information
about a consumer's current and recent borrowing history with other
lenders, as discussed in the section-by-section analysis for Sec.
1041.10. This section discusses these reporting requirements and their
associated costs on small entities.
Lenders making covered short-term or longer-term balloon-payment
loans are required to furnish information about those loans to all
information systems that have been registered with the Bureau for 180
days or more, have been provisionally registered with the Bureau for
180 days or more, or have subsequently become registered after being
provisionally registered (generally referred to here as registered
information systems). At loan consummation, the information furnished
needs to include identifying information about the borrower, the type
of loan, the loan consummation date, the principal amount borrowed or
credit limit (for certain loans), and the payment due dates and
amounts. While a loan is outstanding, lenders need to furnish any
update to information previously furnished pursuant to the rule within
a reasonable period of time following the event prompting the update.
And when a loan ceases to be an outstanding loan, lenders must furnish
the date as of which the loan ceased to be outstanding and whether all
amounts owed in connection with the loan were paid in full, including
the amount financed, charges included in the cost of credit, and
charges excluded from the cost of credit.
Furnishing information to registered information systems will
require small entities to incur one-time and ongoing costs. One-time
costs include those associated with establishing a relationship with
each registered information system and developing policies and
procedures for furnishing the loan data.\1299\ Lenders using automated
loan origination systems will likely modify those systems, or purchase
upgrades to those systems, to incorporate the ability to furnish the
required information to registered information systems.\1300\
---------------------------------------------------------------------------
\1299\ If multiple registered information systems exist, lenders
may be able to contract with a third party to furnish to all
registered information systems on their behalf. This third party may
be one of the registered information systems, as they may provide
this service to make them a more attractive option to lenders.
\1300\ Some software vendors that serve lenders that make payday
and other loans have developed enhancements to enable these lenders
to report loan information automatically to existing State reporting
systems.
---------------------------------------------------------------------------
The ongoing costs will be those of accurately furnishing the
data.\1301\
[[Page 54863]]
Lenders with automated loan origination and servicing systems with the
capacity to furnish the required data will have very low ongoing costs.
Lenders that furnish information manually will likely do so through a
web-based form, which the Bureau estimates will take three minutes to
fill out for each loan at the time of consummation, when information is
updated (as applicable), and when the loan ceases to be an outstanding
loan. If multiple registered information systems exist, it may be
necessary to incur this cost multiple times, unless there are services
that furnish to all registered information systems on behalf of a
lender.\1302\
---------------------------------------------------------------------------
\1301\ The Bureau also received comments noting that lenders
will have to incur additional costs associated with dispute
resolution. One commenter specifically noted that consumers would
dispute negative data contained on their reports which would require
investigation along with company responses. The commenter cited a
figure of $50,000 per year to handle these disputes and other costs
of furnishing. The Bureau acknowledges there may be ancillary costs
associated with such disputes, but believes that furnishing accurate
data and compliance with the records management requirements should
mitigate the costs associated with dispute resolutions (e.g.
confirming the existence of the loan and any payments made).
Additionally, many of the costs associated are expected to be borne
by registered information systems, as the FCRA allows consumers to
dispute information directly with the consumer reporting agency. As
such, the $50,000 figure cited by the commenter seems inflated.
Instead, the Bureau believes the costs associated with these
activities are included in the ongoing costs associated with
furnishing to registered information systems.
\1302\ Should there be multiple registered information systems,
the Bureau expects that one or more registered information systems
or other third parties will offer to furnish information to all
registered information systems on behalf of the lender.
---------------------------------------------------------------------------
The Bureau notes that some lenders in States where a private third-
party operates a database on behalf of State regulators are already
required to provide information similar to that required under the
rule, albeit to a single entity; such lenders thus have experience
complying with this type of requirement. Where possible, the Bureau
will also encourage the development of common data standards for
registered information systems in order to reduce the costs of
providing data to multiple information systems.
In addition to the costs of developing procedures for furnishing
the specified information to registered information systems, lenders
will also need to train their staff in those procedures. The Bureau
estimates that lender personnel engaging in furnishing information will
require approximately half an hour of initial training in carrying out
the tasks described in this section and 15 minutes of periodic ongoing
training per year.
b. Recordkeeping Requirements and Their Costs for Small Entities
The rule imposes new data retention requirements for the
requirements to assess borrowers' ability to repay and alternatives to
the requirement to assess borrowers' ability to repay for both short-
term and longer-term balloon-payment loans by requiring lenders to
maintain evidence of compliance in electronic tabular format for
certain records. The retention period is 36 months, as discussed above
in the section-by-section analysis for Sec. 1041.12.
The data retention requirement in the rule may result in costs to
small entities. The Bureau believes that not all small lenders
currently maintain data in an electronic tabular format. To comply with
the record retention provisions, therefore, lenders originating short-
term or longer-term balloon-payment loans may be required to
reconfigure existing document production and retention systems. For
small entities that maintain their own compliance systems and software,
the Bureau does not believe that adding the capacity to maintain data
in an electronic tabular format will impose a substantial burden. The
Bureau believes that the primary cost will be one-time systems changes
that could be accomplished at the same time that systems changes are
carried out to comply with the provisions of Sec. Sec. 1041.5 and
1041.6 of the rule. Similarly, small entities that rely on vendors will
likely rely on vendor software and systems to comply in part with the
data retention requirements.
In addition to the costs described above, lenders will also need to
train their staff in record retention procedures. The Bureau estimates
that lender personnel engaging in recordkeeping will require
approximately half an hour of initial training in carrying out the
tasks described in this section and 15 minutes of periodic ongoing
training per year.
c. Compliance Requirements and Their Costs for Small Entities
The analysis below discusses the costs of compliance for small
entities of the following major provisions: (i) Ability-to-repay
requirements for covered short-term and longer-term balloon-payment
loans, including the requirement to obtain a consumer report from a
registered information system; and a conditional exemption providing an
alternative to those specific underwriting criteria for short-term
loans, including notices to consumers taking out loans originated under
this alternative; and (ii) provisions relating to payment practices
that limit continuing attempts to withdraw money from borrowers'
accounts after two consecutive failed attempts; and payment notice
requirements.
The discussions of the impacts are organized into the two main
categories of provisions listed above--those relating to underwriting
and those related to payments. Within each category, the discussion is
organized to facilitate a clear and complete consideration of the
impacts of these major provisions of the rule on small entities.
In considering the potential impacts of the rule, the Bureau takes
as the baseline for the analysis the regulatory regime that currently
exists for the covered products and covered persons.\1303\ These
include State laws and regulations; Federal laws, such as the MLA,
FCRA, FDCPA, TILA, EFTA, ECOA, E-SIGN, and the regulations promulgated
under those laws; and, with regard to depository institutions that make
covered loans, the guidance and policy statements of those
institutions' prudential regulators.\1304\
---------------------------------------------------------------------------
\1303\ The Bureau has discretion in each rulemaking to choose
the relevant provisions to discuss and to choose the most
appropriate baseline for that particular rulemaking.
\1304\ See, e.g., FDIC, Fin. Institution Letter FIL-14-2005,
``Payday Lending Programs: Revised Examination Guidance,'' (Revisd
2015), available at https://www.fdic.gov/news/news/financial/2005/fil1405.pdf; OCC, Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Product, 78 FR 70624 (Nov. 26, 2013);
Guidance on Supervisory Concerns and Expectations Regarding Deposit
Advance Products, 78 FR 70552 (Nov. 26, 2013).
---------------------------------------------------------------------------
The rule includes several exemptions, and in places it is useful to
discuss their benefits, costs, and impacts relative to those of the
core provisions of the proposed regulation. The baseline for evaluating
the full potential benefits, costs, and impacts of the proposal,
however, is the current regulatory regime as of the issuance of the
proposal.
The discussion here is confined to the direct costs to small
entities of complying with the requirements of the rule. Other impacts,
such as the impacts of limitations on loans that could be made under
the rule, are discussed at length above. The Bureau believes that,
except where otherwise noted, the impacts discussed there would apply
to small entities.
i. Underwriting for Covered Short-Term and Longer-Term Balloon-Payment
Loans
(a). Requirement To Assess Borrowers' Ability To Repay
The rule will require that lenders determine that applicants for
short-term and longer-term balloon-payment loans have the ability to
repay the loan while still meeting their major financial obligations
and paying basic living expenses. For purposes of this discussion, the
practice of making loans after determining that the borrower has the
ability to repay the loan will be referred to as the ``ATR approach.''
Lenders making loans using the ATR approach will need to comply with
several procedural requirements when
[[Page 54864]]
originating loans. The Bureau's assessment of the benefits, costs, and
other relevant impacts on small entities of these procedural
requirements are discussed below.
The Bureau believes that many lenders use automated systems when
underwriting loans and will modify those systems, or purchase upgrades
to those systems, to incorporate many of the procedural requirements of
the ATR approach. The costs of modifying such a system or purchasing an
upgrade are discussed below, in the discussion of the costs of
developing procedures, upgrading systems, and training staff.
(1). Consulting Lender's Own Records and Costs to Small Entities
Under the rule, lenders will need to consult their own records and
the records of their affiliates to determine whether the borrower had
taken out any prior short-term loans or longer-term balloon-payment
loans that were still outstanding or were repaid within the prior 30
days. To do so, a lender will need a system for recording loans that
can be identified as being made to a particular consumer and a method
of reliably accessing those records. The Bureau has concluded that
lenders will most likely comply with this requirement by using
computerized recordkeeping. A lender operating a single storefront will
need a system of recording the loans made from that storefront and
accessing those loans by consumer. A lender operating multiple
storefronts or multiple affiliates will need a centralized set of
records or a way of accessing the records of all of the storefronts or
affiliates. A lender operating solely online will presumably maintain a
single set of records; if it maintained multiple sets of records, it
will need a way to access each set of records.
The Bureau believes that most small entities already have the
ability to comply with this provision, with the possible exception of
those with affiliates that are run as separate operations. Lenders' own
business needs likely lead them to have this capacity. Lenders need to
be able to track loans in order to service the loans. In addition,
lenders need to track the borrowing and repayment behavior of
individual consumers to reduce their credit risk, such as by avoiding
lending to a consumer who has defaulted on a prior loan. And most
States that allow payday lending have requirements that implicitly
require lenders to have the ability to check their records for prior
loans to a loan applicant, including limitations on renewals or
rollovers or cooling-off periods between loans. Despite these various
considerations, however, there may be some lenders that currently do
not have the capacity to comply with this requirement.
Small entities that do not already have a records system in place
will need to incur a one-time cost of developing such a system, which
may require investment in information technology hardware and/or
software. Lenders may instead contract with a vendor to supply part or
all of the systems and training needs.
As noted above, the Bureau believes that many lenders use automated
loan origination systems and will modify those systems or purchase
upgrades to those systems such that they would automatically access the
lender's own records. For lenders that access their records manually,
rather than through an automated origination system, the Bureau
estimates that accessing and utilizing these records in the ATR
determination will take an average of nine minutes of an employee's
time.
The Bureau received no comments from industry or trade groups
asserting that a substantial number of lenders currently lack the
ability to check their record for prior loans, or that implementing
such a system would constitute an undue cost or burden. The Bureau
believes this supports the cost framework laid out here.
(2). Obtaining a Consumer Report From a Registered Information System;
Costs to Small Entities
Under the rule, small entities will have to obtain a consumer
report from a registered information system containing timely
information about an applicant's borrowing history, if one or more such
systems were available. The Bureau believes that many lenders likely
already obtain from third parties some of the information that will be
included in the registered information system data, such as in States
where a private third-party operates a database containing loan
information on behalf of the State regulator or for their own risk
management purposes, such as fraud detection. However, the Bureau
recognizes that there also is a sizable segment of lenders making
short-term loans that operate only in States without a State-mandated
loan database and that make lending decisions without obtaining any
data from a specialty consumer reporting agency.
As noted above, the Bureau believes that many small entities use
automated loan origination systems and will modify those systems or
purchase upgrades to those systems such that they will automatically
order a report from a registered information system during the lending
process. For lenders that order reports manually, the Bureau estimates
that it will take approximately nine minutes on average for a lender to
request a report from a registered information system and utilize the
report in the ATR determination. For all lenders, the Bureau expects
that access to a registered information system will be priced on a
``per-hit'' basis, where a hit is a report successfully returned in
response to a request for information about a particular consumer at a
particular point in time. Based on industry outreach, the Bureau
estimates that the cost to small entities would be $0.50 per hit, based
on pricing in existing relevant consumer reporting markets.
The Bureau received comments from trade groups and lenders
discussing the estimated ``per hit'' costs of the registered
information system reports. The comments were approximately evenly
split as to whether the estimated costs were substantially too low,
slightly too low, or approximately accurate. A trade group representing
mostly large depository institutions argued the cost is substantially
too low, and cited its members' average costs of $10.97 to purchase a
credit report. Given the drastic difference between this cost and those
stated by other commenters, the Bureau believes the credit reports
referred to (e.g., tri-bureau credit reports) are not the type that
would be purchased for this type of loan. This comparison did not seem
relevant to the cost to obtain a report from a registered information
system. A trade group representing small-dollar lenders also asserted
the estimated cost was too low, citing its members' average cost of $1
to obtain a consumer report from a nationwide consumer reporting
reporting agency. Finally, a large small-dollar lender asserted the
$0.50 estimate ``appears to be right.'' Given that registered
information systems are likely to collect much less data than are
collected by consumer reporting agencies operating in the market today,
it follows that the cost of a report from a registered information
system should be lower. Given that the comments received directly from
lenders regarding the expected costs of a registered information system
report argued the estimate is generally accurate, the Bureau continues
to believe the cost per hit estimate of $0.50 is reasonable.
[[Page 54865]]
(3). Assessing Ability To Repay Based on Information and Verification
Evidence About Income and Major Financial Obligations; Costs to Small
Entities
Lenders making loans under the ATR approach are required to collect
information about the amount of income and major financial obligations,
make reasonable efforts to verify that information, and use that
information to make an ability-to-repay determination.
The Bureau believes that many small entities that make short-term
loans, such as small storefront lenders making payday loans, already
obtain some information on consumers' income. Many of these lenders,
however, only obtain income verification evidence the first time they
make a loan to a consumer or for the first loan following a substantial
break in borrowing. Other lenders, such as some vehicle title lenders
or some lenders operating online, may not currently obtain income
information at all, let alone verification evidence for that
information, before issuing loans. In addition, many consumers likely
have multiple income sources that are not all currently documented in
the ordinary course of short-term lending. Under the rule, consumers
and lenders might have incentives to provide and gather more income
information than they do currently in order to establish the borrower's
ability to repay a given loan. The Bureau believes that most lenders
that originate short-term loans and longer-term loans with balloon
payments do not currently collect information on applicants' major
financial obligations, let alone attempt to verify obligations, nor do
they determine consumers' ability to repay a loan, as will be required
under the rule.
There are two types of costs entailed in making an ATR
determination: The cost of obtaining and verifying evidence where
possible and the cost of making an ATR determination consistent with
that evidence.
As noted above, many lenders already use automated systems when
originating loans. These lenders will likely modify those systems or
purchase upgrades to those systems to automate many of the tasks that
would be required by the rule.
Under the rule, small lenders will be required to obtain a consumer
report from a nationwide consumer reporting agency to verify the amount
of payments for debt obligations, unless that lender has obtained a
report in the preceding 90 days or the consumer has triggered a
cooling-off period at the end of a three-loan sequence. As such, these
consumer reports will typically only be necessary to obtain for the
first loan in a new sequence of borrowing that begins more than 90 days
since the last consumer reports was obtained. This will be in addition
to the cost of obtaining a report from a registered information system,
though the Bureau expects some registered information systems will
provide consolidated reports. Based on industry outreach, the Bureau
believes these reports will cost approximately $2.00 for small
entities. As with the ordering of reports from registered information
systems, the Bureau believes that many small entities will modify their
loan origination system or purchase an upgrade to that system to allow
the system to automatically order a consumer report from a nationwide
consumer reporting agency during the lending process at a stage in the
process where the information is relevant. For lenders that order
reports manually, the Bureau estimates that it would take approximately
nine minutes on average for a lender to request a report and utilize it
in the ATR determination.
Small entities that do not currently collect income or verification
evidence for income will need to do so. The Bureau estimates it will
take roughly three to five minutes per application for lenders that use
a manual process to gather and review information a for consumers who
have straightforward documentation (e.g., pay stubs), and incorporate
the information into the ATR determination. Some industry commenters
suggested this value was too low in the proposal, often citing cases
where consumers may not have regular income from sources that provide
documentation. The Bureau notes that many lenders already require such
information prior to initiating loans. Additionally, the rule now
allows stated income to be used in appropriate cases, mitigating the
time costs associated with more rigorous verification efforts. As such,
the Bureau believes the time estimates provided here to be reasonable.
Some consumers may visit a lender's storefront without the required
documentation and may have income for which verification evidence
cannot be obtained electronically.
Small entities making loans online may face particular challenges
obtaining verification evidence, especially for income. It may be
feasible for online lenders to obtain scanned or photographed documents
as attachments to an electronic submission; the Bureau understands that
some online lenders are doing this today with success. And services
that use other sources of information, such as checking account or
payroll records, may mitigate the need for lenders to obtain
verification evidence directly from consumers. Additionally, for
consumers with cash income that is not deposited into a depository
account, lenders will be allowed to rely on stated information,
minimizing the lenders' costs and the chance that a consumer is unable
to complete an application.
Once information and verification evidence on income and major
financial obligations has been obtained, the lender must use that
information and evidence to make a reasonable determination that the
consumer will have the ability to repay the contemplated loan. In the
process of considering the information collected about income and major
financial obligations, lenders will need to estimate an amount that the
borrower needs for basic living expenses. They may do this in a number
of ways, including, for example, collecting information directly from
borrowers, using available estimates published by third parties, or
basing it on their experience with similarly situated consumers.
In total, the Bureau estimates that obtaining a statement from the
consumer and taking reasonable steps to verify income and required
payments for major financial obligations, projecting the consumer's
residual income, estimating the consumer's basic living expenses, and
arriving at a reasonable ATR determination will take essentially no
additional time for a fully automated electronic system and between 15
and 45 minutes for a fully manual system. Numerous industry commenters
suggested the estimate provided by the Bureau in the proposal (15 to
2010 minutes) was too low. In response to these comments, the Bureau
has increased its estimated time to manually underwrite these loans,
but also notes that all major financial obligations should be
obtainable either from a consumer report or consumer statement (in the
example of rental expense).
Further total costs will depend on the existing utilization rates
of and wages paid to staff that will spend time carrying out this work.
To the extent that existing staff has excess capacity (that is, that a
lender's employees have time that is not fully utilized), the extra
time to process applications for loans made via the ATR approach should
not result in higher wage bills for the lender. Further, as the Bureau
expects the majority of loans to be made via the principal step-down
approach, the expected increase in staff hours necessary to comply with
the new
[[Page 54866]]
procedural requirements should be modest. Still, to the extent that
lenders must increase staff and/or hours to comply with the procedural
requirements, they may experience increased costs from hiring,
training, wages, and benefits.
Dollar costs include a report from a registered information system
costing $.50 and a consumer report from a nationwide consumer reporting
agency containing housing costs estimates costing $2.00. Lenders
relying on electronic services to gather verification information about
income would face an additional small cost.
(4). Developing Procedures, Upgrading Systems, and Training Staff;
Costs to Small Entities
Small entities will need to develop procedures to comply with the
requirements of the ATR approach and train their staff in those
procedures. Many of these requirements do not appear qualitatively
different from many practices that most lenders already engage in, such
as gathering information and documents from borrowers and ordering
various types of consumer reports.
Developing procedures to make a reasonable determination that a
borrower has an ability to repay a loan without re-borrowing and while
paying for major financial obligations and living expenses is likely to
be a challenge for many small entities. The Bureau expects that
vendors, law firms, and trade associations are likely to offer both
products and guidance to lenders, potentially lowering the cost of
developing procedures as service providers can realize economies of
scale. Lenders must also develop a process for estimating borrowers'
basic living expenses if they choose not to make an individual
determination for each customer. Some lenders may rely on vendors that
provide services to determine ability to repay that include estimates
of basic living expenses. Some methods of conducting an analysis to
determine estimates of basic living expenses could be quite costly.
There are a number of government data sources and online services,
however, that lenders may be able to use to obtain living expense
estimates. Additionally, lenders may rely on their experiences with
similarly situated consumers in making this estimate, reducing the need
to rely on individual measures or third parties.
As noted above, the Bureau believes that many lenders use automated
systems when originating loans and would incorporate many of the
procedural requirements of the ATR approach into those systems. This
will likely include an automated system to make the ability-to-repay
determination; subtracting the component expense elements from income
itself is quite straightforward and should not require substantial
development costs. The Bureau believes small lenders that use automated
loan origination systems rely on licensed software. Depending on the
nature of the software license agreement, the Bureau estimates that the
one-time cost to upgrade this software will be $10,000 for lenders
licensing the software at the entity-level and $100 per seat for
lenders licensing the software using a seat-license contract. Given the
price differential between the entity-level licenses and the seat-
license contracts, the Bureau believes that only small entities with a
significant number of stores will rely on the entity-level licenses.
One trade group commented that they believe this to be too low an
estimate of the associated costs, citing a survey of their members.
However, the trade group's members are not predominately involved in
making loans that will be covered under the rule, so it is unclear how
their estimates relate to the systems contemplated here. Additionally,
the vast majority of the comments from more directly-related trade
groups, lenders, etc. remained silent on these estimates, despite the
invitation to provide feedback. As such, the Bureau has not changed
these values from those put forth in the proposal.
The Bureau estimates that lender personnel engaging in making loans
would require approximately 4 hours per employee of initial training in
carrying out the tasks described in this section and 2 hours per
employee of periodic ongoing training per year.\1305\
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\1305\ Note that the Bureau expects that this training would be
in addition to the training relating to furnishing loan information
as discussed in part VIII.C.2.a and recordkeeping as discussed in
part VIII.C.2b.
---------------------------------------------------------------------------
(b). Principal Step-Down Approach as an Alternative to the Underwriting
Criteria Used To Assess the Borrower's Ability To Repay; Costs to Small
Entities
The rule includes an alternative approach, as opposed to using the
underwriting criteria specified in Sec. 1041.5, for originating
certain short-term loans as in Sec. 1041.6. In this section, the
practice of making loans by complying with the alternative requirements
under Sec. 1041.6 will be referred to as the ``principal step-down
approach.''
The procedural requirements of the principal step-down approach
will generally have less impact on small lenders than the requirements
of the ATR approach. Lenders that make short-term loans under the
principal step-down approach will not have to obtain information or
verification evidence about income or major financial obligations,
estimate basic living expenses, or complete an ability-to-repay
determination prior to making loans.
The rule will instead require only that lenders making loans under
Sec. 1041.6 consult their internal records and those of affiliates,
access reports from a registered information system, furnish
information to all registered information systems, and make an
assessment as part of the origination process that certain loan
requirements (such as principal limitations and restrictions on certain
re-borrowing activity) are met. The requirement to consult the lender's
own records is slightly different than under the ATR Approach, as the
lender must check the records for the prior 12 months. This is unlikely
to have different impacts on small lenders, however, as any system that
allows the lender to comply with the requirement to check its own
records under the ATR approach should be sufficient for the principal
step-down approach and vice-versa. A lender will also have to develop
procedures and train staff.
Small entities making short-term loans under the principal step-
down approach will be required to provide borrowers with a disclosure,
described in the section-by-section analysis of Sec. 1041.6(e), with
information about their loans and about the restrictions on future
loans taken out using the principal step-down approach. One disclosure
will be required at the time of origination of a first principal step-
down approach loan, where a borrower had not had a principal step-down
approach loan within the prior 30 days. The other disclosure will be
required when originating a third principal step-down approach loan in
a sequence because the borrower will therefore be unable to take out
another principal step-down approach loan within 30 days of repaying
the loan being originated. The disclosures will need to be customized
to reflect the specifics of the individual loan.
The Bureau believes that all small entities have some disclosure
system in place to comply with existing disclosure requirements.
Lenders may enter data directly into the disclosure system, or the
system may automatically collect data from the lenders' loan
origination system. For disclosures provided via mail, email, or text
message, some disclosure systems forward the information necessary to
prepare the
[[Page 54867]]
disclosures to a vendor in electronic form, and the vendor then
prepares and delivers the disclosures. For disclosures provided in
person, disclosure systems produce a disclosure that the lender then
provides to the borrower.
Respondents will incur a one-time cost to upgrade their disclosure
systems to comply with new disclosure requirements.
The Bureau believes that small lenders generally rely on licensed
disclosure system software. Depending on the nature of the software
license agreement, the Bureau estimates that the cost to upgrade this
software will be $10,000 for lenders licensing the software at the
entity-level and $100 per seat for lenders licensing the software using
a seat- license contract. Given the price differential between the
entity-level licenses and the seat- license contracts, the Bureau
believes that only small lenders with a significant number of stores
will rely on entity-level licenses.
In addition to the upgrades to the disclosure systems, the Bureau
estimates that small storefront lenders will pay $200 to a vendor for a
standard electronic origination disclosure form template.
The Bureau estimates that providing disclosures in stores will take
a store employee two minutes and cost $0.10.
ii. Payment Practices and Related Notices for Certain Covered
Loans; Costs to Small Entities
The rule limits how lenders initiate payments on a covered loan
from a borrower's account and imposes two notice requirements relating
to such payments. The impacts of these provisions are discussed here
for all covered loans.
Note that the Bureau believes that the requirement to assess ATR
before making a short-term or longer-term balloon-payment loan, or to
comply with one of the conditional exemptions, will reduce the
frequency with which borrowers receive loans that they do not have the
ability to repay. This should make unsuccessful payment withdrawal
attempts less frequent, and lessen the impacts of the limitation on
payment withdrawal attempts and the requirement to notify consumers
when a lender is no longer permitted to attempt to withdraw payments
from a borrower's account.
(a). Limitation on Payment Withdrawal Attempts; Costs to Small Entities
The rule prevents lenders from attempting to withdraw payment from
a consumer's account if two consecutive prior attempts to withdraw
payment made through any channel are returned for nonsufficient funds.
The lender can resume initiating payment if the lender obtains from the
consumer a new and specific authorization to collect payment from the
consumer's account.
The impact of this restriction depends on how often the lender
attempts to collect from a consumers' account after more than two
consecutive failed transactions and how often they succeed in doing so.
Based on industry outreach, the Bureau understands that some small
entities already have a practice of not continuing to attempt to
collect using these means after one or two failed attempts. These
lenders will not incur costs from the restriction. Additionally, some
depository institutions disallowed repeated attempts to collect using
these means; lenders attempting to collect from such depositories would
also not incur costs from this restriction.
While not specific to small lenders, the Section 1022(b)(2)
Analysis discusses the Bureau's analysis of ACH payment request
behavior of online lenders making payday or payday installment loans.
The Bureau found that only 7 to 10 percent of the payments attempted
through the ACH system came after two failed payments requests.\1306\
Under the restriction, lenders can still seek payment from their
borrowers by engaging in other lawful collection practices. As such,
the preceding are high-end estimates of the impact of this restriction
on the collection efforts of these lenders. These other forms of lawful
collection practices, however, may be more costly for lenders than
attempting to collect directly from a borrower's account. After the
limitation is triggered by two consecutive failed attempts, lenders are
required to send a notice to consumers. To seek a new and specific
authorization to collect payment from a consumer's account, the lender
can send a request with the notice and may need to initiate additional
follow-up contact with the consumer. The Bureau believes that this will
most often be done in conjunction with general collections efforts and
will impose little additional cost on lenders.
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\1306\ CFPB Report on Supplemental Findings, at 150 tbl. 32.
These impacts may be lower now than they were at the time covered by
the data analyzed by the Bureau, due to changes in industry
practices and to changes in the rules governing the ACH system.
---------------------------------------------------------------------------
To the extent that lenders assess returned item fees when an
attempt to collect a payment fails and lenders are subsequently able to
collect on those fees, this rule may reduce lenders' revenues.
Small entities will also need the capability of identifying when
two consecutive payment requests have failed. The Bureau believes that
the systems small entities use to identify when a payment is due, when
a payment has succeeded or failed, and whether to request another
payment will have the capacity to identify when two consecutive
payments have failed, and therefore this requirement will not impose a
significant new cost.
The Bureau received comments stating that tracking failed payment
withdrawals would require new systems and procedures to be developed,
at a cost not specified in the IRFA. While the Bureau acknowledges that
some small entities may face costs in modifying existing systems to
comply with the recordkeeping and payment processing requirements of
the rule, these requirements largely build on processes required by
existing laws or necessitated by standard business practice.
(b). Required Notice To Collect Directly From a Borrower's Account;
Costs to Small Entities
The rule will require lenders to provide consumers with a notice
prior to the first lender-initiated attempt to withdraw payment from
consumers' accounts, including ACH entries, post-dated signature
checks, remotely created checks, remotely created payment orders, and
payments run through the debit networks. The notice will be required to
include the date the lender will initiate the payment request, the
payment channel, the amount of the payment, the breakdown of that
amount to principal, interest, and fees, the loan balance remaining if
the payment succeeds, the check number if the payment request is a
signature check or RCC, and contact information for the consumer to
reach the lender. There are separate notices required prior to unusual
payments.
This provision will not apply to small lenders making loans under
the PAL approach or making accommodation loans.
The costs to small entities of providing these notices will depend
heavily on whether they are able to provide the notice via email, text
messages, or on paper at origination or will have to send notices
through regular mail. In practice, the Bureau expects most small
lenders to provide the notice of initial payment withdrawal at
origination, minimizing the transmission costs. This can either be done
via a written disclosure (at a storefront), or as a PDF attachment or
Web page sent via an email or text (for either storefront or online
lenders). The variation in costs of notices provided
[[Page 54868]]
after origination (either regular notices, or notices in advance of
unusual payments) is due in part to differences in transmission costs
between different channels. Most borrowers are likely to have Internet
access or a mobile phone capable of receiving text messages, and during
the SBREFA process multiple SERs reported that most borrowers, when
given the opportunity, opt in to receiving notifications via text
message. The Bureau has intentionally structured the rule to encourage
transmission by email or text message because it believes those
channels are the most effective for consumers, as well as less
burdensome for lenders. However, should the lender choose to send paper
notifications via regular mail, they would incur higher costs of
transmission, as well as administrative costs associated with providing
the notification early enough to ensure sufficient time for it to be
received by the consumer.
The Bureau believes that small entities that will be affected by
the new disclosure requirements have some disclosure system in place to
comply with existing disclosure requirements, such as those imposed
under Regulation Z, 12 CFR part 1026, and Regulation E, 12 CFR part
1005. Lenders enter data directly into the disclosure system or the
system automatically collects data from the lenders' loan origination
system. For disclosures provided via mail, email, text message, or
immediately at the time of origination, the disclosure system often
forwards to a vendor, in electronic form, the information necessary to
prepare the disclosures, and the vendor then prepares and delivers the
disclosures. Lenders will incur a one-time burden to upgrade their
disclosure systems to comply with new disclosure requirements.
Small lenders will need to update their disclosure systems to
compile necessary loan information to send to the vendors that would
produce and deliver the disclosures relating to payments. The Bureau
believes small lenders rely on licensed disclosure system software.
Depending on the nature of the software license agreement, the Bureau
estimates that the cost to upgrade this software would be $10,000 for
lenders licensing the software at the entity-level and $100 per seat
for lenders licensing the software using a seat-license contract. For
lenders using seat license software, the Bureau estimates that each
location for small lenders has on average three seats licensed. Given
the price differential between the entity-level licenses and the seat-
license contracts, the Bureau believes that only small entities with a
significant number of stores will rely on the entity-level licenses.
Small entities with disclosure systems that do not automatically
pull information from the lenders' loan origination or servicing system
will need to enter payment information into the disclosure system
manually so that the disclosure system can generate payment
disclosures. The Bureau estimates that this will require two minutes
per loan in addition to the two minutes to provide the disclosures.
Lenders will need to update this information if the scheduled payments
were to change.
For disclosures delivered through the mail, the Bureau estimates
that vendors would charge two different rates, one for high volume
mailings and another for low volume mailings. The Bureau understands
that small entities will likely generate a low volume of mailings and
estimates vendors will charge such lenders $1.00 per disclosure. For
disclosures delivered through email, the Bureau estimates vendors will
charge $0.01 to create and deliver each email such that it complies
with the requirements of the rule. For disclosures delivered through
text message, the Bureau estimates vendors will charge $0.08 to create
and deliver each text message such that it complies with the
requirements of the rule. The vendor would also need to provide either
a PDF attachment of the full disclosure or a Web page where the full
disclosure linked to in the text message is provided. The cost of
providing this PDF attachment or web disclosure is included in the cost
estimate of providing the text message. Finally, for disclosures
delivered on paper at origination, the Bureau estimates costs will be
$0.10 per disclosures.
Again, the Bureau believes that virtually all notifications will be
provided at the time of origination (for regular notices), or
electronically via text or email (for notifications of unusual
payments). As such, the mailing costs discussed here are expected to be
almost completely avoided.
(c). Required Notice When Lender Can No Longer Collect Directly From a
Borrower's Account; Costs to Small Entities
The rule will require a lender that has made two consecutive
unsuccessful attempts to collect payment through any channel from a
borrower's account to provide a borrower, within three business days of
learning of the second unsuccessful attempt, with a consumer rights
notice explaining that the lender is no longer able to attempt to
collect payment directly from the borrower's account, along with
information identifying the loan and a record of the two failed
attempts to collect funds.
The requirement will impose on small entities the cost of providing
the notice. Lenders already need to track whether they can still
attempt to collect payments directly from a borrower's account, so
identifying which borrowers should receive the notice should not impose
any additional cost on lenders. The Bureau also expects that lenders
normally attempt to contact borrowers in these circumstances to
identify other means of obtaining payment. If they are contacting the
consumer via mail, the lender will be able to include the required
notice in that mailing.
The Bureau expects that small entities will incorporate the ability
to provide this notice into their payment notification process. The
Bureau estimates that vendors will charge $1.00 per notice for small
entities that send a small volume of mailing. For disclosures delivered
through email, the Bureau estimates vendors will charge $0.01 to create
and deliver each email such that it complies with the requirements of
the proposed rule. For disclosures delivered through text message, the
Bureau estimates vendors will charge $0.08 to create and deliver each
text message. The vendor would also need to provide either a PDF
attachment of the full disclosure or a Web page where the full
disclosure linked to in the text message would be provided. The cost of
providing this PDF attachment or web disclosure is included in the cost
estimate of providing the text message.
(d). Estimate of Small Entities Subject to the Rule and Costs for
Preparing Reports and Records
Section 604(a)(5) of the RFA also requires an estimate of the type
of professional skills necessary for the preparation of the reports or
records. The Bureau does not anticipate that, except in certain rare
circumstances, any professional skills will be required for
recordkeeping and other compliance requirements of this rule that are
not otherwise required in the ordinary course of business of the small
entities affected by the proposed rule. Parts VIII.C.2.b and VIII.C.2.c
summarize the recordkeeping and compliance requirements of the rule
that will affect small entities.
As discussed above, the Bureau believes that vendors will update
their software and provide small creditors with the ability to retain
the required data. The one situation in which a small entity would
require professional skills
[[Page 54869]]
that are not otherwise required in the ordinary course of business will
be if a small creditor does not use computerized systems to store
information relating to originated loans and therefore will either need
to hire staff with the ability to implement a machine-readable data
retention system or contract with one of the vendors that provides this
service. The Bureau believes that the small entities will otherwise
have the professional skills necessary to comply with the proposed
rule.
The Bureau believes efforts to train small entity staff on the
updated software and compliance systems will be reinforcing existing
professional skills sets above those needed in the ordinary course of
business. In addition, although the Bureau acknowledges the possibility
that certain small entities may have to hire additional staff as a
result of certain aspects of the rule, the Bureau has no evidence that
such additional staff will have to possess a qualitatively different
set of professional skills than small entity staff employed currently.
The Bureau presumes that additional staff that small entities may need
to hire will generally be of the same professional skill set as current
staff.
Several commenters raised concerns that the initial implementation
of the rule's requirements may require legal or consulting skills
beyond those of employees at typical small lenders. The Bureau
acknowledges this concern, and believes these costs are accounted for
in earlier estimates of the one-time costs of developing procedures,
upgrading systems, and training staff.
D. The Bureau's Efforts To Minimize the Economic Impact on Small
Entities
Section 604(a)(6) of the RFA requires the Bureau to describe in the
FRFA the steps taken to minimize the significant economic impact on
small entities consistent with the stated objectives of applicable
statutes. The Bureau has taken numerous steps to minimize the
significant economic impact on small entities consistent with the
stated objectives of applicable statues. These include simplification
of the ability-to-repay requirements, expanded exclusions from the
rule, expanded exemptions for alternative loans and accommodation
loans, increased flexibility and reduced number of required payment
disclosures, and a later compliance date of Sec. Sec. 1041.2 through
1041.10, 1041.12, and 1041.13, as described in the Bureau's responses
to public comments and the SBA Office for Advocacy.
1. Consideration of Alternatives to the Final Rule and Their Impact on
Small Entities
In the IRFA, four significant alternatives to the proposed rule
were considered, but the Bureau decided that none of them would
accomplish the stated objectives of Title X of the Dodd-Frank Act while
minimizing the impact of the rule on small entities.\1307\ In this
section, the Bureau presents its considerations in that regard. Four
significant alternatives are briefly described and their impacts on
small entities relative to the adopted provisions are discussed below.
The discussion of each alternative includes a statement of the factual,
policy, and legal reasons for selecting the adopted provisions and
rejecting the significant alternatives. The alternatives discussed here
are:
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\1307\ 5 U.S.C. 603(c).
Limits on re-borrowing of short-term loans without an
ability-to-repay requirement;
An ATR requirement for short-term loans with no
principal step-down approach;
Disclosures as an alternative to the ability-to-repay
requirement; and
Limitations on withdrawing payments from borrowers'
accounts without disclosures.
In addition to the significant alternatives outlined above, the
Bureau has considered comments on alternatives to specific provisions
of the rule, discussed in the section-by-section analysis of each
corresponding section.
a. Limits on Re-Borrowing Short-Term Loans Without an Ability-To-Repay
Requirement
As an alternative to the ability-to-repay requirements in Sec.
1041.5 for short-term loans, the Bureau considered a limitation on the
overall number of short-term loans that a consumer could take in a loan
sequence or within a short period of time. This alternative would limit
consumer injury from extended periods of re-borrowing on short-term
loans. However, as discussed further in part VII.J.1, the Bureau has
concluded that a limitation on re-borrowing without a requirement to
determine the consumer's ability to repay the loan will not provide
sufficient protection against consumer injury from making a short-term
loan without reasonably determining that the consumer will have the
ability to repay the loan. Accordingly, the Bureau finds that a
limitation on repeat borrowing alone will not be consistent with the
stated objectives of Title X to identify and prevent unfair, deceptive,
or abusive acts or practices. However, the Bureau has made changes to
the ability-to-pay requirements to reduce the burden of compliance for
small entities, as described in the Bureau's responses to the SBA
Office for Advocacy.
b. An ATR Requirement for Short-Term Loans With No Principal Step-Down
Approach
The Bureau considered adopting the ability-to-repay requirements in
Sec. 1041.5 for short-term loans without adopting the alternative
approach for originating certain short-term loans as described in Sec.
1041.6. In the absence of the principal step-down approach, lenders
would be required to make a reasonable determination that a consumer
has the ability to repay a loan and to therefore incur the costs
associated with the ability-to-repay requirements for every short-term
application that they process. However, the Bureau has determined that
the principal step-down approach will provide sufficient structural
consumer protections while reducing the compliance burdens associated
with the ATR approach on lenders and permitting access to less risky
credit for borrowers for whom it may be difficult for lenders to make a
reasonable determination that the borrower has the ability to repay a
loan, but who may nonetheless have sufficient income to repay the loan
and also meet other financial obligations and basic living expenses.
Comments from small entities expressed particular concern that the
ability-to-repay requirements would be burdensome given their smaller
scale over which to spread fixed cost investments.
In addition, comments suggested that because small lenders base
some lending decisions on their personal relationship with customers,
the full ability-to-repay assessment was not necessary for all loan
originations. Accordingly, the Bureau has concluded that providing the
principal step-down approach as described in Sec. 1041.6 will help
minimize the economic impact of the proposed rule on small entities
without undermining consumer protections in accordance with the stated
objectives of Title X to identify and prevent unfair, deceptive, or
abusive acts or practices.
c. Disclosures as an Alternative To the Ability-To-Repay Requirement
As an alternative to substantive regulation of the consumer credit
transactions that will be covered by the rule, the Bureau considered
whether enhanced disclosure requirements would prevent the consumer
injury that is the focus of the rule and minimize the impact of the
proposal on small entities.
[[Page 54870]]
In particular, the Bureau considered whether the disclosures required
by some States would accomplish the stated objectives of Title X of the
Dodd-Frank Act. The Bureau is adopting, in Sec. Sec. 1041.6 and 1041.9
requirements that lenders make specific disclosures in connection with
certain aspects of a transaction.
Analysis by the Bureau indicates that a disclosure-only approach
would have substantially less impact on the volume of short-term
lending, but also would have substantially less impact on the harms
consumers experience from long sequences of payday and single-payment
vehicle title loans, as discussed further in part VII.J.3. Because the
Bureau has concluded that disclosures alone would be ineffective in
warning borrowers of those risks and preventing the harms that the
Bureau seeks to address with the proposal, the Bureau is not adopting
disclosure as an alternative to the ability-to-repay and other
requirements of the rule.
d. Limitations on Withdrawing Payments From Borrowers' Accounts Without
Disclosures
The Bureau considered including the prohibition on lenders
attempting to collect payment from a consumer's accounts when two
consecutive attempts have been returned due to a lack of sufficient
funds in Sec. 1041.8 unless the lender obtains a new and specific
authorization, but not including the required disclosures of upcoming
payment withdrawals (both the first and unusual payments) or the notice
by lenders to consumers alerting them to the fact that two consecutive
withdrawal attempts to their account have failed and the lender can
therefore no longer continue to attempt to collect payments from a
borrower account. This alternative would reduce lenders' one-time costs
of upgrading their disclosure systems as well as the incremental burden
of providing each disclosure. The Bureau finds, however, that in the
absence of the disclosures, consumers face an increased risk of injury
in situations in which lenders intend to initiate a withdrawal in a way
that deviates from the loan agreement or prior course of conduct
between the parties. In addition, consumers would face an increased
risk of believing that they are required to provide lenders with a new
authorization to continue to withdraw payments directly from their
accounts when they may be better off using some alternative method of
payment.
To reduce the burden for small entities and other lenders, after
the first payment, any payment withdrawals for usual payments do not
require a disclosure under the final rule. Relative to the proposed
rule, this change will decrease compliance costs for small entities
while still accomplishing the stated objectives of the rule.
Some commenters expressed concern that the Bureau's position on
disclosures--that they are an insufficient alternative to the ability-
to-repay requirements but beneficial for payment withdrawals, is
inconsistent. Yet the mandated disclosures in these situations address
different harms. The primary harm from re-borrowing is unlikely to be
resolved by disclosures that long sequences may occur, as borrowers
seem to understand the average duration of sequences,\1308\ but cannot
accurately predict their own durations.\1309\ For re-borrowing,
providing evidence about the average would therefore not address the
market failure. However, disclosures about payments are different, as
they are more immediate and inform the borrower of more certain events.
Therefore, the Bureau has determined that they are an appropriate
intervention here.
---------------------------------------------------------------------------
\1308\ See, e.g., Marianne Bertrand and Adair Morse,
``Information Disclosure, Cognitive Biases and Payday Borrowing,''
66 J. of Fin. 1865 (2011).
\1309\ Ronald Mann, ``Assessing the Optimism of Payday Loan
Borrowers,'' 21 Sup. Ct. Econ. Rev. 105 (2013).
---------------------------------------------------------------------------
2. The Bureau's Efforts To Minimize Any Additional Cost of Credit for
Small Entities
Section 603(d) of the RFA requires the Bureau to consult with small
entities about the potential impact of the proposed rule on the cost of
credit for small entities and related matters. In the FRFA, the Bureau
is required to provide a description of the steps taken to minimize any
additional cost of credit for small entities.\1310\ To satisfy these
statutory requirements, the Bureau provided notification to the Chief
Counsel that the Bureau would collect the advice and recommendations of
the same small entity representatives identified in consultation with
the Chief Counsel through the SBREFA process concerning any projected
impact of the proposed rule on the cost of credit for small
entities.\1311\ The Bureau sought to collect the advice and
recommendations of the small entity representatives during the Small
Business Review Panel Outreach Meeting regarding the potential impact
on the cost of business credit because, as small financial service
providers, the SERs could provide valuable input on any such impact
related to the proposed rule.\1312\
---------------------------------------------------------------------------
\1310\ 5 U.S.C. 604(a)(6).
\1311\ See 5 U.S.C. 603(d)(2)(A). The Bureau provided this
notification as part of the notification and other information
provided to the Chief Counsel with respect to the SBREFA process
pursuant to section 609(b)(1) of the RFA.
\1312\ See 5 U.S.C. 603(d)(2)(B).
---------------------------------------------------------------------------
At the Small Business Review Panel Outreach Meeting, the Bureau
asked the SERs a series of questions regarding issues about the cost of
business credit.\1313\ The questions were focused on two areas. First,
the SERs were asked whether, and how often, they extend to their
customers covered loans to be used primarily for personal, family, or
household purposes but that are used secondarily to finance a small
business, and whether the proposals then under consideration would
result in an increase in their customers' cost of credit. Second, the
Bureau inquired as to whether the proposals under consideration would
increase the SERs' cost of credit.
---------------------------------------------------------------------------
\1313\ See Small Business Review Panel Report, at 25.
---------------------------------------------------------------------------
In general, some of the SERs expressed concern that the proposals
under consideration would have a substantial impact on the cost of
business credit, both by reducing access to credit for their customers
that are using loans to fund small business operations and by making
their businesses less creditworthy. As discussed in the Small Business
Review Panel Report, the Panel recommended that the Bureau cover only
loans extended primarily for personal, family, or household
purposes.\1314\ The Bureau agreed with that recommendation, and so in
Sec. 1041.3(b), the rule does in fact specify that it will apply only
to loans that are extended to consumers primarily for personal, family,
or household purposes. Loans that are made primarily for a business,
commercial, or agricultural purpose will not be subject to this part.
Nonetheless, the Bureau recognizes that some covered loans may
nonetheless be used in part or in whole to finance small businesses,
both with or without the knowledge of the lender.
---------------------------------------------------------------------------
\1314\ See id. at 33.
---------------------------------------------------------------------------
The Bureau also recognizes that the rules will impact the ability
of some small entities to access business credit themselves. As
discussed more fully part VII.J and just above in this section, in
developing the rule, the Bureau has considered a number of alternative
approaches, yet for the reasons stated it has concluded that none of
them would achieve the statutory objectives while minimizing the cost
of credit for small entities.
[[Page 54871]]
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\1315\ Federal
agencies are generally required to seek approval from the Office of
Management and Budget (OMB) for information collection requirements
prior to implementation. Under the PRA, the Bureau may not conduct or
sponsor and, notwithstanding any other provision of law, a person is
not required to respond to an information collection unless the
information collection displays a valid control number assigned by OMB.
OMB has tentatively assigned control #3170-0064 to these collections of
information, however this control number is not yet active.
---------------------------------------------------------------------------
\1315\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
This final rule contains information collection requirements that
have not yet been approved by the OMB and, therefore, are not effective
until OMB approval is obtained. The unapproved information collection
requirements are listed below. A complete description of the
information collection requirements, including the burden estimate
methods, is provided in the information collection request (ICR) that
the Bureau has submitted to OMB under the requirements of the PRA.
The Bureau believes the following aspects of the rule would be
information collection requirements under the PRA: (1) Development,
implementation, and continued use of notices for covered short-term
loans made under Sec. 1041.6, upcoming payment notices (including
unusual payment notices), and consumer rights notices; (2) obtaining a
consumer report from a registered information system; (3) furnishing
information about consumers' borrowing behavior to each registered
information system; (4) retrieval of borrowers' national consumer
report information; (5) collection of consumers' income and major
financial obligations during the underwriting process; (6) obtaining a
new and specific authorization to withdraw payment from a borrower's
deposit account after two consecutive failed payment transfer attempts;
(7) application to be a registered information system; (8) biennial
assessment of the information security programs for registered
information systems; (9) retention of loan agreement and documentation
obtained when making a covered loan, and electronic records of
origination calculations and determination, records for a consumer who
qualifies for an exception to or overcomes a presumption of
unaffordability, loan type and term, and payment history and loan
performance.
The Bureau received a fairly significant number of comments
pertaining to the expected burden of the proposal, including burdens
accounted for in the PRA. Some of those comments specifically noted the
PRA, and argued that the proposed collections of information did not
fill a legitimate regulatory purpose. Specifically, they claimed that
the paperwork burden, in particular the collection and verification of
income and debt information, did not serve a legitimate purpose and
would not advance the goal of ensuring that loans would be made based
on a reasonable assessment of the borrower's ability to repay.
As explained in detail in the section-by-section analysis,
especially the section-by-section analysis for Sec. 1041.5, as well as
the Section 1022(b)(2) Analysis in part VII, the Bureau has
significantly reduced the burden associated with the rule's
requirements in response to comments it received which stated concerns
that the proposed requirements would be too onerous. As finalized, and
as described above, the Bureau is confident that each of the
collections of information is worth the burden and serves an important
purpose. Specific to the verification of income and debt requirements,
the Bureau believes that these requirements are not overly burdensome.
In many cases, covered lenders already verify income. Verification of
debt will be achievable through obtaining consumer reports, an approach
that would not burden consumers, and is consistent with industry
practices in most other credit markets. These requirements advance the
stated goal of assessing ability to repay because they ensure that
lenders verify essential variables for a reasonable ability-to-repay
determination, and they combat significant risks associated with
lenders' potential evasion of the rule.
Pursuant to 44 U.S.C. 3507, the Bureau will publish a separate
notice in the Federal Register announcing the submission of these
information collection requirements to OMB as well as OMB's action on
these submissions, including the OMB control number and expiration
date.
The Bureau has a continuing interest in the public's opinion of its
collections of information. At any time, comments regarding the burden
estimate, or any other aspect of the information collection, including
suggestions for reducing the burden, may be sent to the Consumer
Financial Protection Bureau (Attention: PRA Office), 1700 G Street NW.,
Washington, DC 20552, or by email to [email protected].
Title of Collection: Payday, Vehicle Title, and Certain High-Cost
Installment Loans.
OMB Control Number: 3170-0064.
Type of Review: New collection (Request for a new OMB control
number).
Affected Public: Private Sector.
Estimated Number of Respondents: 9,900.
Estimated Total Annual Burden Hours: 8,199,815.
List of Subjects in 12 CFR Part 1041
Banks, Banking, Consumer protection, Credit, Credit Unions,
National banks, Registration, Reporting and recordkeeping requirements,
Savings associations, Trade practices.
Authority and Issuance
0
For the reasons set forth above, the Bureau adds 12 CFR part 1041 to
read as follows:
PART 1041--PAYDAY, VEHICLE TITLE, AND CERTAIN HIGH-COST INSTALLMENT
LOANS
Subpart A--General
Sec.
1041.1 Authority and purpose.
1041.2 Definitions.
1041.3 Scope of coverage; exclusions; exemptions.
Subpart B--Underwriting
1041.4 Identification of unfair and abusive practice.
1041.5 Ability-to-repay determination required.
1041.6 Conditional exemption for certain covered short-term loans.
Subpart C--Payments
1041.7 Identification of unfair and abusive practice.
1041.8 Prohibited payment transfer attempts.
1041.9 Disclosure of payment transfer attempts.
Subpart D--Information Furnishing, Recordkeeping, Anti-Evasion, and
Severability
1041.10 Information furnishing requirements.
1041.11 Registered information systems.
1041.12 Compliance program and record retention.
1041.13 Prohibition against evasion.
1041.14 Severability.
Appendix A to Part 1041--Model Forms
Supplement I to Part 1041--Official Interpretations
Authority: 12 U.S.C. 5511, 5512, 5514(b), 5531(b), (c), and
(d), 5532.
[[Page 54872]]
Subpart A--General
Sec. 1041.1 Authority and purpose.
(a) Authority. The regulation in this part is issued by the Bureau
of Consumer Financial Protection (Bureau) pursuant to Title X of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5481, et seq.).
(b) Purpose. The purpose of this part is to identify certain unfair
and abusive acts or practices in connection with certain consumer
credit transactions and to set forth requirements for preventing such
acts or practices. This part also prescribes requirements to ensure
that the features of those consumer credit transactions are fully,
accurately, and effectively disclosed to consumers. This part also
prescribes processes and criteria for registration of information
systems.
Sec. 1041.2 Definitions.
(a) Definitions. For the purposes of this part, the following
definitions apply:
(1) Account has the same meaning as in Regulation E, 12 CFR
1005.2(b).
(2) Affiliate has the same meaning as in 12 U.S.C. 5481(1).
(3) Closed-end credit means an extension of credit to a consumer
that is not open-end credit under paragraph (a)(16) of this section.
(4) Consumer has the same meaning as in 12 U.S.C. 5481(4).
(5) Consummation means the time that a consumer becomes
contractually obligated on a new loan or a modification that increases
the amount of an existing loan.
(6) Cost of credit means the cost of consumer credit as expressed
as a per annum rate and is determined as follows:
(i) Charges included in the cost of credit. The cost of credit
includes all finance charges as set forth by Regulation Z, 12 CFR
1026.4, but without regard to whether the credit is consumer credit, as
that term is defined in 12 CFR 1026.2(a)(12), or is extended to a
consumer, as that term is defined in 12 CFR 1026.2(a)(11).
(ii) Calculation of the cost of credit--(A) Closed-end credit. For
closed-end credit, the cost of credit must be calculated according to
the requirements of Regulation Z, 12 CFR 1026.22.
(B) Open-end credit. For open-end credit, the cost of credit must
be calculated according to the rules for calculating the effective
annual percentage rate for a billing cycle as set forth in Regulation
Z, 12 CFR 1026.14(c) and (d).
(7) Covered longer-term balloon-payment loan means a loan described
in Sec. 1041.3(b)(2).
(8) Covered longer-term loan means a loan described in Sec.
1041.3(b)(3).
(9) Covered person has the same meaning as in the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 12 U.S.C. 5481(6).
(10) Covered short-term loan means a loan described in Sec.
1041.3(b)(1).
(11) Credit has the same meaning as in Regulation Z, 12 CFR
1026.2(a)(14).
(12) Electronic fund transfer has the same meaning as in Regulation
E, 12 CFR 1005.3(b).
(13) Lender means a person who regularly extends credit to a
consumer primarily for personal, family, or household purposes.
(14) Loan sequence or sequence means a series of consecutive or
concurrent covered short-term loans or covered longer-term balloon-
payment loans, or a combination thereof, in which each of the loans
(other than the first loan) is made during the period in which the
consumer has a covered short-term loan or covered longer-term balloon-
payment loan outstanding and for 30 days thereafter. For the purpose of
determining where a loan is located within a loan sequence:
(i) A covered short-term loan or covered longer-term balloon-
payment loan is the first loan in a sequence if the loan is extended to
a consumer who had no covered short-term loan or covered longer-term
balloon-payment loan outstanding within the immediately preceding 30
days;
(ii) A covered short-term or covered longer-term balloon-payment
loan is the second loan in the sequence if the consumer has a currently
outstanding covered short-term loan or covered longer-term balloon-
payment loan that is the first loan in a sequence, or if the
consummation date of the second loan is within 30 days following the
last day on which the consumer's first loan in the sequence was
outstanding;
(iii) A covered short-term or covered longer-term balloon-payment
loan is the third loan in the sequence if the consumer has a currently
outstanding covered short-term loan or covered longer-term balloon-
payment loan that is the second loan in the sequence, or if the
consummation date of the third loan is within 30 days following the
last day on which the consumer's second loan in the sequence was
outstanding; and
(iv) A covered short-term or covered longer-term balloon-payment
loan would be the fourth loan in the sequence if the consumer has a
currently outstanding covered short-term loan or covered longer-term
balloon-payment loan that is the third loan in the sequence, or if the
consummation date of the fourth loan would be within 30 days following
the last day on which the consumer's third loan in the sequence was
outstanding.
(15) Motor vehicle means any self-propelled vehicle primarily used
for on-road transportation. The term does not include motor homes,
recreational vehicles, golf carts, and motor scooters.
(16) Open-end credit means an extension of credit to a consumer
that is an open-end credit plan as defined in Regulation Z, 12 CFR
1026.2(a)(20), but without regard to whether the credit is consumer
credit, as defined in 12 CFR 1026.2(a)(12), is extended by a creditor,
as defined in 12 CFR 1026.2(a)(17), is extended to a consumer, as
defined in 12 CFR 1026.2(a)(11), or permits a finance charge to be
imposed from time to time on an outstanding balance as defined in 12
CFR 1026.4.
(17) Outstanding loan means a loan that the consumer is legally
obligated to repay, regardless of whether the loan is delinquent or is
subject to a repayment plan or other workout arrangement, except that a
loan ceases to be an outstanding loan if the consumer has not made at
least one payment on the loan within the previous 180 days.
(18) Service provider has the same meaning as in the Dodd-Frank
Wall Street Reform and Consumer Protection Act, 12 U.S.C. 5481(26).
(19) Vehicle security means an interest in a consumer's motor
vehicle obtained by the lender or service provider as a condition of
the credit, regardless of how the transaction is characterized by State
law, including:
(i) Any security interest in the motor vehicle, motor vehicle
title, or motor vehicle registration whether or not the security
interest is perfected or recorded; or
(ii) A pawn transaction in which the consumer's motor vehicle is
the pledged good and the consumer retains use of the motor vehicle
during the period of the pawn agreement.
(b) Rule of construction. For purposes of this part, where
definitions are incorporated from other statutes or regulations, the
terms have the meaning and incorporate the embedded definitions,
appendices, and commentary from those other laws except to the extent
that this part provides a different definition for a parallel term.
[[Page 54873]]
Sec. 1041.3 Scope of coverage; exclusions; exemptions.
(a) General. This part applies to a lender that extends credit by
making covered loans.
(b) Covered loan. Covered loan means closed-end or open-end credit
that is extended to a consumer primarily for personal, family, or
household purposes that is not excluded under paragraph (d) of this
section or conditionally exempted under paragraph (e) or (f) of this
section; and:
(1) For closed-end credit that does not provide for multiple
advances to consumers, the consumer is required to repay substantially
the entire amount of the loan within 45 days of consummation, or for
all other loans, the consumer is required to repay substantially the
entire amount of any advance within 45 days of the advance;
(2) For loans not otherwise covered by paragraph (b)(1) of this
section:
(i) For closed-end credit that does not provide for multiple
advances to consumers, the consumer is required to repay substantially
the entire balance of the loan in a single payment more than 45 days
after consummation or to repay such loan through at least one payment
that is more than twice as large as any other payment(s).
(ii) For all other loans, either:
(A) The consumer is required to repay substantially the entire
amount of an advance in a single payment more than 45 days after the
advance is made or is required to make at least one payment on the
advance that is more than twice as large as any other payment(s); or
(B) A loan with multiple advances is structured such that paying
the required minimum payments may not fully amortize the outstanding
balance by a specified date or time, and the amount of the final
payment to repay the outstanding balance at such time could be more
than twice the amount of other minimum payments under the plan; or
(3) For loans not otherwise covered by paragraph (b)(1) or (2) of
this section, if both of the following conditions are satisfied:
(i) The cost of credit for the loan exceeds 36 percent per annum,
as measured:
(A) At the time of consummation for closed-end credit; or
(B) At the time of consummation and, if the cost of credit at
consummation is not more than 36 percent per annum, again at the end of
each billing cycle for open-end credit, except that:
(1) Open-end credit meets the condition set forth in this paragraph
(b)(3)(i)(B) in any billing cycle in which a lender imposes a finance
charge, and the principal balance is $0; and
(2) Once open-end credit meets the condition set forth in this
paragraph (b)(3)(i)(B), it meets the condition set forth in paragraph
(b)(3)(i)(B) for the duration of the plan.
(ii) The lender or service provider obtains a leveraged payment
mechanism as defined in paragraph (c) of this section.
(c) Leveraged payment mechanism. For purposes of paragraph (b) of
this section, a lender or service provider obtains a leveraged payment
mechanism if it has the right to initiate a transfer of money, through
any means, from a consumer's account to satisfy an obligation on a
loan, except that the lender or service provider does not obtain a
leveraged payment mechanism by initiating a single immediate payment
transfer at the consumer's request.
(d) Exclusions for certain types of credit. This part does not
apply to the following:
(1) Certain purchase money security interest loans. Credit extended
for the sole and express purpose of financing a consumer's initial
purchase of a good when the credit is secured by the property being
purchased, whether or not the security interest is perfected or
recorded.
(2) Real estate secured credit. Credit that is secured by any real
property, or by personal property used or expected to be used as a
dwelling, and the lender records or otherwise perfects the security
interest within the term of the loan.
(3) Credit cards. Any credit card account under an open-end (not
home-secured) consumer credit plan as defined in Regulation Z, 12 CFR
1026.2(a)(15)(ii).
(4) Student loans. Credit made, insured, or guaranteed pursuant to
a program authorized by subchapter IV of the Higher Education Act of
1965, 20 U.S.C. 1070 through 1099d, or a private education loan as
defined in Regulation Z, 12 CFR 1026.46(b)(5).
(5) Non-recourse pawn loans. Credit in which the lender has sole
physical possession and use of the property securing the credit for the
entire term of the loan and for which the lender's sole recourse if the
consumer does not elect to redeem the pawned item and repay the loan is
the retention of the property securing the credit.
(6) Overdraft services and lines of credit. Overdraft services as
defined in 12 CFR 1005.17(a), and overdraft lines of credit otherwise
excluded from the definition of overdraft services under 12 CFR
1005.17(a)(1).
(7) Wage advance programs. Advances of wages that constitute credit
if made by an employer, as defined in the Fair Labor Standards Act, 29
U.S.C. 203(d), or by the employer's business partner, to the employer's
employees, provided that:
(i) The advance is made only against the accrued cash value of any
wages the employee has earned up to the date of the advance; and
(ii) Before any amount is advanced, the entity advancing the funds
warrants to the consumer as part of the contract between the parties on
behalf of itself and any business partners, that it or they, as
applicable:
(A) Will not require the consumer to pay any charges or fees in
connection with the advance, other than a charge for participating in
the wage advance program;
(B) Has no legal or contractual claim or remedy against the
consumer based on the consumer's failure to repay in the event the
amount advanced is not repaid in full; and
(C) With respect to the amount advanced to the consumer, will not
engage in any debt collection activities if the advance is not deducted
directly from wages or otherwise repaid on the scheduled date, place
the amount advanced as a debt with or sell it to a third party, or
report to a consumer reporting agency concerning the amount advanced.
(8) No-cost advances. Advances of funds that constitute credit if
the consumer is not required to pay any charge or fee to be eligible to
receive or in return for receiving the advance, provided that before
any amount is advanced, the entity advancing the funds warrants to the
consumer as part of the contract between the parties:
(i) That it has no legal or contractual claim or remedy against the
consumer based on the consumer's failure to repay in the event the
amount advanced is not repaid in full; and
(ii) That, with respect to the amount advanced to the consumer,
such entity will not engage in any debt collection activities if the
advance is not repaid on the scheduled date, place the amount advanced
as a debt with or sell it to a third party, or report to a consumer
reporting agency concerning the amount advanced.
(e) Alternative loan. Alternative loans are conditionally exempt
from the requirements of this part. Alternative loan means a covered
loan that satisfies the following conditions and requirements:
(1) Loan term conditions. An alternative loan must satisfy the
following conditions:
(i) The loan is not structured as open-end credit, as defined in
Sec. 1041.2(a)(16);
[[Page 54874]]
(ii) The loan has a term of not less than one month and not more
than six months;
(iii) The principal of the loan is not less than $200 and not more
than $1,000;
(iv) The loan is repayable in two or more payments, all of which
payments are substantially equal in amount and fall due in
substantially equal intervals, and the loan amortizes completely during
the term of the loan; and
(v) The lender does not impose any charges other than the rate and
application fees permissible for Federal credit unions under
regulations issued by the National Credit Union Administration at 12
CFR 701.21(c)(7)(iii).
(2) Borrowing history condition. Prior to making an alternative
loan under this paragraph (e), the lender must determine from its
records that the loan would not result in the consumer being indebted
on more than three outstanding loans made under this section from the
lender within a period of 180 days. The lender must also make no more
than one alternative loan under this paragraph (e) at a time to a
consumer.
(3) Income documentation condition. In making an alternative loan
under this paragraph (e), the lender must maintain and comply with
policies and procedures for documenting proof of recurring income.
(4) Safe harbor. Loans made by Federal credit unions in compliance
with the conditions set forth by the National Credit Union
Administration at 12 CFR 701.21(c)(7)(iii) for a Payday Alternative
Loan are deemed to be in compliance with the requirements and
conditions of paragraphs (e)(1), (2), and (3) of this section.
(f) Accommodation loans. Accommodation loans are conditionally
exempt from the requirements of this part. Accommodation loan means a
covered loan if at the time that the loan is consummated:
(1) The lender and its affiliates collectively have made 2,500 or
fewer covered loans in the current calendar year, and made 2,500 or
fewer such covered loans in the preceding calendar year; and
(2)(i) During the most recent completed tax year in which the
lender was in operation, if applicable, the lender and any affiliates
that were in operation and used the same tax year derived no more than
10 percent of their receipts from covered loans; or
(ii) If the lender was not in operation in a prior tax year, the
lender reasonably anticipates that the lender and any of its affiliates
that use the same tax year will derive no more than 10 percent of their
receipts from covered loans during the current tax year.
(3) Provided, however, that covered longer-term loans for which all
transfers meet the conditions in Sec. 1041.8(a)(1)(ii), and receipts
from such loans, are not included for the purpose of determining
whether the conditions of paragraphs (f)(1) and (2) of this section
have been satisfied.
(g) Receipts. For purposes of paragraph (f) of this section,
receipts means ``total income'' (or in the case of a sole
proprietorship ``gross income'') plus ``cost of goods sold'' as these
terms are defined and reported on Internal Revenue Service (IRS) tax
return forms (such as Form 1120 for corporations; Form 1120S and
Schedule K for S corporations; Form 1120, Form 1065 or Form 1040 for
LLCs; Form 1065 and Schedule K for partnerships; and Form 1040,
Schedule C for sole proprietorships). Receipts do not include net
capital gains or losses; taxes collected for and remitted to a taxing
authority if included in gross or total income, such as sales or other
taxes collected from customers but excluding taxes levied on the entity
or its employees; or amounts collected for another (but fees earned in
connection with such collections are receipts). Items such as
subcontractor costs, reimbursements for purchases a contractor makes at
a customer's request, and employee-based costs such as payroll taxes
are included in receipts.
(h) Tax year. For purposes of paragraph (f) of this section, ``tax
year'' has the meaning attributed to it by the IRS as set forth in IRS
Publication 538, which provides that a ``tax year'' is an annual
accounting period for keeping records and reporting income and
expenses.
Subpart B--Underwriting
Sec. 1041.4 Identification of unfair and abusive practice.
It is an unfair and abusive practice for a lender to make covered
short-term loans or covered longer-term balloon-payment loans without
reasonably determining that the consumers will have the ability to
repay the loans according to their terms.
Sec. 1041.5 Ability-to-repay determination required.
(a) Definitions. For purposes of this section:
(1) Basic living expenses means expenditures, other than payments
for major financial obligations, that a consumer makes for goods and
services that are necessary to maintain the consumer's health, welfare,
and ability to produce income, and the health and welfare of the
members of the consumer's household who are financially dependent on
the consumer.
(2) Debt-to-income ratio means the ratio, expressed as a
percentage, of the sum of the amounts that the lender projects will be
payable by the consumer for major financial obligations during the
relevant monthly period and the payments under the covered short-term
loan or covered longer-term balloon-payment loan during the relevant
monthly period, to the net income that the lender projects the consumer
will receive during the relevant monthly period, all of which projected
amounts are determined in accordance with paragraph (c) of this
section.
(3) Major financial obligations means a consumer's housing expense,
required payments under debt obligations (including, without
limitation, outstanding covered loans), child support obligations, and
alimony obligations.
(4) National consumer report means a consumer report, as defined in
section 603(d) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(d),
obtained from a consumer reporting agency that compiles and maintains
files on consumers on a nationwide basis, as defined in section 603(p)
of the Fair Credit Reporting Act, 15 U.S.C. 1681a(p).
(5) Net income means the total amount that a consumer receives
after the payer deducts amounts for taxes, other obligations, and
voluntary contributions (but before deductions of any amounts for
payments under a prospective covered short-term loan or covered longer-
term balloon-payment loan or for any major financial obligation);
provided that, the lender may include in the consumer's net income the
amount of any income of another person to which the consumer has a
reasonable expectation of access.
(6) Payment under the covered short-term loan or covered longer-
term balloon-payment loan. (i) Means the combined dollar amount payable
by the consumer at a particular time following consummation in
connection with the covered short-term loan or covered longer-term
balloon-payment loan, assuming that the consumer has made preceding
required payments and in the absence of any affirmative act by the
consumer to extend or restructure the repayment schedule or to suspend,
cancel, or delay payment for any product, service, or membership
provided in connection with the loan;
[[Page 54875]]
(ii) Includes all principal, interest, charges, and fees; and
(iii) For a line of credit is calculated assuming that:
(A) The consumer will utilize the full amount of credit under the
covered short-term loan or covered longer-term balloon-payment loan as
soon as the credit is available to the consumer; and
(B) The consumer will make only minimum required payments under the
covered short-term loan or covered longer-term balloon-payment loan for
as long as permitted under the loan agreement.
(7) Relevant monthly period means the calendar month in which the
highest sum of payments is due under the covered short-term or covered
longer-term balloon-payment loan.
(8) Residual income means the sum of net income that the lender
projects the consumer will receive during the relevant monthly period,
minus the sum of the amounts that the lender projects will be payable
by the consumer for major financial obligations during the relevant
monthly period and payments under the covered short-term loan or
covered longer-term balloon-payment loan during the relevant monthly
period, all of which projected amounts are determined in accordance
with paragraph (c) of this section.
(b) Reasonable determination required. (1)(i) Except as provided in
Sec. 1041.6, a lender must not make a covered short-term loan or
covered longer-term balloon-payment loan or increase the credit
available under a covered short-term loan or covered longer-term
balloon-payment loan, unless the lender first makes a reasonable
determination that the consumer will have the ability to repay the loan
according to its terms.
(ii) For a covered short-term loan or covered longer-term balloon-
payment loan that is a line of credit, a lender must not permit a
consumer to obtain an advance under the line of credit more than 90
days after the date of a required determination under this paragraph
(b), unless the lender first makes a new determination that the
consumer will have the ability to repay the covered short-term loan or
covered longer-term balloon-payment loan according to its terms.
(2) A lender's determination of a consumer's ability to repay a
covered short-term loan or covered longer-term balloon-payment loan is
reasonable only if either:
(i) Based on the calculation of the consumer's debt-to-income ratio
for the relevant monthly period and the estimates of the consumer's
basic living expenses for the relevant monthly period, the lender
reasonably concludes that:
(A) For a covered short-term loan, the consumer can make payments
for major financial obligations, make all payments under the loan, and
meet basic living expenses during the shorter of the term of the loan
or the period ending 45 days after consummation of the loan, and for 30
days after having made the highest payment under the loan; and
(B) For a covered longer-term balloon-payment loan, the consumer
can make payments for major financial obligations, make all payments
under the loan, and meet basic living expenses during the relevant
monthly period, and for 30 days after having made the highest payment
under the loan; or
(ii) Based on the calculation of the consumer's residual income for
the relevant monthly period and the estimates of the consumer's basic
living expenses for the relevant monthly period, the lender reasonably
concludes that:
(A) For a covered short-term loan, the consumer can make payments
for major financial obligations, make all payments under the loan, and
meet basic living expenses during the shorter of the term of the loan
or the period ending 45 days after consummation of the loan, and for 30
days after having made the highest payment under the loan; and
(B) For a covered longer-term balloon-payment loan, the consumer
can make payments for major financial obligations, make all payments
under the loan, and meet basic living expenses during the relevant
monthly period, and for 30 days after having made the highest payment
under the loan.
(c) Projecting consumer net income and payments for major financial
obligations--(1) General. To make a reasonable determination required
under paragraph (b) of this section, a lender must obtain the
consumer's written statement in accordance with paragraph (c)(2)(i) of
this section, obtain verification evidence to the extent required by
paragraph (c)(2)(ii) of this section, assess information about rental
housing expense as required by paragraph (c)(2)(iii) of this section,
and use those sources of information to make a reasonable projection of
the amount of a consumer's net income and payments for major financial
obligations during the relevant monthly period. The lender must
consider major financial obligations that are listed in a consumer's
written statement described in paragraph (c)(2)(i)(B) of this section
even if they cannot be verified by the sources listed in paragraph
(c)(2)(ii)(B) of this section. To be reasonable, a projection of the
amount of net income or payments for major financial obligations may be
based on a consumer's written statement of amounts under paragraph
(c)(2)(i) of this section only as specifically permitted by paragraph
(c)(2)(ii) or (iii) or to the extent the stated amounts are consistent
with the verification evidence that is obtained in accordance with
paragraph (c)(2)(ii) of this section. In determining whether the stated
amounts are consistent with the verification evidence, the lender may
reasonably consider other reliable evidence the lender obtains from or
about the consumer, including any explanations the lender obtains from
the consumer.
(2) Evidence of net income and payments for major financial
obligations--(i) Consumer statements. A lender must obtain a consumer's
written statement of:
(A) The amount of the consumer's net income, which may include the
amount of any income of another person to which the consumer has a
reasonable expectation of access; and
(B) The amount of payments required for the consumer's major
financial obligations.
(ii) Verification evidence. A lender must obtain verification
evidence for the amounts of the consumer's net income and payments for
major financial obligations other than rental housing expense, as
follows:
(A) For the consumer's net income:
(1) The lender must obtain a reliable record (or records) of an
income payment (or payments) directly to the consumer covering
sufficient history to support the lender's projection under paragraph
(c)(1) of this section if a reliable record (or records) is reasonably
available. If a lender determines that a reliable record (or records)
of some or all of the consumer's net income is not reasonably
available, then, the lender may reasonably rely on the consumer's
written statement described in paragraph (c)(2)(i)(A) of this section
for that portion of the consumer's net income.
(2) If the lender elects to include in the consumer's net income
for the relevant monthly period any income of another person to which
the consumer has a reasonable expectation of access, the lender must
obtain verification evidence to support the lender's projection under
paragraph (c)(1) of this section.
(B) For the consumer's required payments under debt obligations,
the lender must obtain a national consumer report, the records of the
lender and its affiliates, and a consumer report obtained from an
information system that has been registered for 180 days or
[[Page 54876]]
more pursuant to Sec. 1041.11(c)(2) or is registered pursuant to Sec.
1041.11(d)(2), if available. If the reports and records do not include
a debt obligation listed in the consumer's written statement described
in paragraph (c)(2)(i)(B) of this section, the lender may reasonably
rely on the written statement in determining the amount of the required
payment.
(C) For a consumer's required payments under child support
obligations or alimony obligations, the lender must obtain a national
consumer report. If the report does not include a child support or
alimony obligation listed in the consumer's written statement described
in paragraph (c)(2)(i)(B) of this section, the lender may reasonably
rely on the written statement in determining the amount of the required
payment.
(D) Notwithstanding paragraphs (c)(2)(ii)(B) and (C) of this
section, the lender is not required to obtain a national consumer
report as verification evidence for the consumer's debt obligations,
alimony obligations, and child support obligations if during the
preceding 90 days:
(1) The lender or an affiliate obtained a national consumer report
for the consumer, retained the report under Sec. 1041.12(b)(1)(ii),
and checked it again in connection with the new loan; and
(2) The consumer did not complete a loan sequence of three loans
made under this section and trigger the prohibition under paragraph
(d)(2) of this section since the previous report was obtained.
(iii) Rental housing expense. For a consumer's housing expense
other than a payment for a debt obligation that appears on a national
consumer report obtained pursuant to paragraph (c)(2)(ii)(B) of this
section, the lender may reasonably rely on the consumer's written
statement described in paragraph (c)(2)(i)(B) of this section.
(d) Additional limitations on lending--covered short-term loans and
covered longer-term balloon-payment loans--(1) Borrowing history
review. Prior to making a covered short-term loan or covered longer-
term balloon-payment loan under this section, in order to determine
whether any of the prohibitions in this paragraph (d) are applicable, a
lender must obtain and review information about the consumer's
borrowing history from the records of the lender and its affiliates,
and from a consumer report obtained from an information system that has
been registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or
is registered with the Bureau pursuant to Sec. 1041.11(d)(2), if
available.
(2) Prohibition on loan sequences of more than three covered short-
term loans or covered longer-term balloon-payment loans made under this
section. A lender must not make a covered short-term loan or covered
longer-term balloon-payment loan under this section during the period
in which the consumer has a covered short-term loan or covered longer-
term balloon-payment loan made under this section outstanding and for
30 days thereafter if the new covered short-term loan or covered
longer-term balloon-payment loan would be the fourth loan in a sequence
of covered short-term loans, covered longer-term balloon-payment loans,
or a combination of covered short-term loans and covered longer-term
balloon-payment loans made under this section.
(3) Prohibition on making a covered short-term loan or covered
longer-term balloon-payment loan under this section following a covered
short-term loan made under Sec. 1041.6. A lender must not make a
covered short-term loan or covered longer-term balloon-payment loan
under this section during the period in which the consumer has a
covered short-term loan made under Sec. 1041.6 outstanding and for 30
days thereafter.
(e) Prohibition against evasion. A lender must not take any action
with the intent of evading the requirements of this section.
Sec. 1041.6 Conditional exemption for certain covered short-term
loans.
(a) Conditional exemption for certain covered short-term loans.
Sections 1041.4 and 1041.5 do not apply to a covered short-term loan
that satisfies the requirements set forth in paragraphs (b) through (e)
of this section. Prior to making a covered short-term loan under this
section, a lender must review the consumer's borrowing history in its
own records, the records of the lender's affiliates, and a consumer
report from an information system that has been registered for 180 days
or more pursuant to Sec. 1041.11(c)(2) or is registered with the
Bureau pursuant to Sec. 1041.11(d)(2). The lender must use this
borrowing history information to determine a potential loan's
compliance with the requirements in paragraphs (b) and (c) of this
section.
(b) Loan term requirements. A covered short-term loan that is made
under this section must satisfy the following requirements:
(1) The loan satisfies the following principal amount limitations,
as applicable:
(i) For the first loan in a loan sequence of covered short-term
loans made under this section, the principal amount is no greater than
$500.
(ii) For the second loan in a loan sequence of covered short-term
loans made under this section, the principal amount is no greater than
two-thirds of the principal amount of the first loan in the loan
sequence.
(iii) For the third loan in a loan sequence of covered short-term
loans made under this section, the principal amount is no greater than
one-third of the principal amount of the first loan in the loan
sequence.
(2) The loan amortizes completely during the term of the loan and
the payment schedule provides for the lender allocating a consumer's
payments to the outstanding principal and interest and fees as they
accrue only by applying a fixed periodic rate of interest to the
outstanding balance of the unpaid loan principal during every scheduled
repayment period for the term of the loan.
(3) The lender and any service provider do not take vehicle
security as a condition of the loan, as defined in Sec. 1041.2(a)(19).
(4) The loan is not structured as open-end credit, as defined in
Sec. 1041.2(a)(16).
(c) Borrowing history requirements. Prior to making a covered
short-term loan under this section, the lender must determine that the
following requirements are satisfied:
(1) The consumer has not had in the past 30 days an outstanding
covered short-term loan under Sec. 1041.5 or covered longer-term
balloon-payment loan under Sec. 1041.5;
(2) The loan would not result in the consumer having a loan
sequence of more than three covered short-term loans under this
section; and
(3) The loan would not result in the consumer having during any
consecutive 12-month period:
(i) More than six covered short-term loans outstanding; or
(ii) Covered short-term loans outstanding for an aggregate period
of more than 90 days.
(d) Restrictions on making certain covered loans and non-covered
loans following a covered short-term loan made under the conditional
exemption. If a lender makes a covered short-term loan under this
section to a consumer, the lender or its affiliate must not
subsequently make a covered loan, except a covered short-term loan made
in accordance with the requirements in this section, or a non-covered
loan to the consumer while the covered short-term loan made under this
section is outstanding and for 30 days thereafter.
(e) Disclosures--(1) General form of disclosures--(i) Clear and
conspicuous.
[[Page 54877]]
Disclosures required by this paragraph (e) must be clear and
conspicuous. Disclosures required by this section may contain commonly
accepted or readily understandable abbreviations.
(ii) In writing or electronic delivery. Disclosures required by
this paragraph (e) must be provided in writing or through electronic
delivery. The disclosures must be provided in a form that can be viewed
on paper or a screen, as applicable. This paragraph (e)(1)(ii) is not
satisfied by a disclosure provided orally or through a recorded
message.
(iii) Retainable. Disclosures required by this paragraph (e) must
be provided in a retainable form.
(iv) Segregation requirements for notices. Notices required by this
paragraph (e) must be segregated from all other written or provided
materials and contain only the information required by this section,
other than information necessary for product identification, branding,
and navigation. Segregated additional content that is not required by
this paragraph (e) must not be displayed above, below, or around the
required content.
(v) Machine readable text in notices provided through electronic
delivery. If provided through electronic delivery, the notices required
by paragraphs (e)(2)(i) and (ii) of this section must use machine
readable text that is accessible via both web browsers and screen
readers.
(vi) Model forms--(A) First loan notice. The content, order, and
format of the notice required by paragraph (e)(2)(i) of this section
must be substantially similar to Model Form A-1 in appendix A to this
part.
(B) Third loan notice. The content, order, and format of the notice
required by paragraph (e)(2)(ii) of this section must be substantially
similar to Model Form A-2 in appendix A to this part.
(vii) Foreign language disclosures. Disclosures required under this
paragraph (e) may be made in a language other than English, provided
that the disclosures are made available in English upon the consumer's
request.
(2) Notice requirements--(i) First loan notice. A lender that makes
a first loan in a sequence of loans made under this section must
provide to a consumer a notice that includes, as applicable, the
following information and statements, using language substantially
similar to the language set forth in Model Form A-1 in appendix A to
this part:
(A) Identifying statement. The statement ``Notice of restrictions
on future loans,'' using that phrase.
(B) Warning for loan made under this section--(1) Possible
inability to repay. A statement that warns the consumer not to take out
the loan if the consumer is unsure of being able to repay the total
amount of principal and finance charges on the loan by the contractual
due date.
(2) Contractual due date. Contractual due date of the loan made
under this section.
(3) Total amount due. Total amount due on the contractual due date.
(C) Restriction on a subsequent loan required by Federal law. A
statement that informs a consumer that Federal law requires a similar
loan taken out within the next 30 days to be smaller.
(D) Borrowing limits. In a tabular form:
(1) Maximum principal amount on loan 1 in a sequence of loans made
under this section.
(2) Maximum principal amount on loan 2 in a sequence of loans made
under this section.
(3) Maximum principal amount on loan 3 in a sequence of loans made
under this section.
(4) Loan 4 in a sequence of loans made under this section is not
allowed.
(E) Lender name and contact information. Name of the lender and a
telephone number for the lender and, if applicable, a URL of the Web
site for the lender.
(ii) Third loan notice. A lender that makes a third loan in a
sequence of loans made under this section must provide to a consumer a
notice that includes the following information and statements, using
language substantially similar to the language set forth in Model Form
A-2 in appendix A to this part:
(A) Identifying statement. The statement ``Notice of borrowing
limits on this loan and future loans,'' using that phrase.
(B) Two similar loans without 30-day break. A statement that
informs a consumer that the lender's records show that the consumer has
had two similar loans without taking at least a 30-day break between
them.
(C) Restriction on loan amount required by Federal law. A statement
that informs a consumer that Federal law requires the third loan to be
smaller than previous loans in the loan sequence.
(D) Prohibition on subsequent loan. A statement that informs a
consumer that the consumer cannot take out a similar loan for at least
30 days after repaying the loan.
(E) Lender name and contact information. Name of the lender and a
telephone number for the lender and, if applicable, a URL of the Web
site for the lender.
(3) Timing. A lender must provide the notices required in
paragraphs (e)(2)(i) and (ii) of this section to the consumer before
the applicable loan under this section is consummated.
Subpart C--Payments
Sec. 1041.7 Identification of unfair and abusive practice.
It is an unfair and abusive practice for a lender to make attempts
to withdraw payment from consumers' accounts in connection with a
covered loan after the lender's second consecutive attempts to withdraw
payments from the accounts from which the prior attempts were made have
failed due to a lack of sufficient funds, unless the lender obtains the
consumers' new and specific authorization to make further withdrawals
from the accounts.
Sec. 1041.8 Prohibited payment transfer attempts.
(a) Definitions. For purposes of this section and Sec. 1041.9:
(1) Payment transfer means any lender-initiated debit or withdrawal
of funds from a consumer's account for the purpose of collecting any
amount due or purported to be due in connection with a covered loan.
(i) Means of transfer. A debit or withdrawal meeting the
description in paragraph (a)(1) of this section is a payment transfer
regardless of the means through which the lender initiates it,
including but not limited to a debit or withdrawal initiated through
any of the following means:
(A) Electronic fund transfer, including a preauthorized electronic
fund transfer as defined in Regulation E, 12 CFR 1005.2(k).
(B) Signature check, regardless of whether the transaction is
processed through the check network or another network, such as the
automated clearing house (ACH) network.
(C) Remotely created check as defined in Regulation CC, 12 CFR
229.2(fff).
(D) Remotely created payment order as defined in 16 CFR 310.2(cc).
(E) When the lender is also the account-holder, an account-holding
institution's transfer of funds from a consumer's account held at the
same institution, other than such a transfer meeting the description in
paragraph (a)(1)(ii) of this section.
(ii) Conditional exclusion for certain transfers by account-holding
institutions. When the lender is also the account-holder, an account-
holding institution's transfer of funds from a consumer's account held
at the same institution is not a payment transfer if all of the
conditions in this paragraph (a)(1)(ii) are met, notwithstanding that
the transfer otherwise meets the
[[Page 54878]]
description in paragraph (a)(1) of this section.
(A) The lender, pursuant to the terms of the loan agreement or
account agreement, does not charge the consumer any fee, other than a
late fee under the loan agreement, in the event that the lender
initiates a transfer of funds from the consumer's account in connection
with the covered loan for an amount that the account lacks sufficient
funds to cover.
(B) The lender, pursuant to the terms of the loan agreement or
account agreement, does not close the consumer's account in response to
a negative balance that results from a transfer of funds initiated in
connection with the covered loan.
(2) Single immediate payment transfer at the consumer's request
means:
(i) A payment transfer initiated by a one-time electronic fund
transfer within one business day after the lender obtains the
consumer's authorization for the one-time electronic fund transfer.
(ii) A payment transfer initiated by means of processing the
consumer's signature check through the check system or through the ACH
system within one business day after the consumer provides the check to
the lender.
(b) Prohibition on initiating payment transfers from a consumer's
account after two consecutive failed payment transfers--(1) General. A
lender must not initiate a payment transfer from a consumer's account
in connection with any covered loan that the consumer has with the
lender after the lender has attempted to initiate two consecutive
failed payment transfers from that account in connection with any
covered loan that the consumer has with the lender. For purposes of
this paragraph (b), a payment transfer is deemed to have failed when it
results in a return indicating that the consumer's account lacks
sufficient funds or, if the lender is the consumer's account-holding
institution, it is for an amount that the account lacks sufficient
funds to cover.
(2) Consecutive failed payment transfers. For purposes of the
prohibition in this paragraph (b):
(i) First failed payment transfer. A failed payment transfer is the
first failed payment transfer from the consumer's account if it meets
any of the following conditions:
(A) The lender has initiated no other payment transfer from the
account in connection with the covered loan or any other covered loan
that the consumer has with the lender.
(B) The immediately preceding payment transfer was successful,
regardless of whether the lender has previously initiated a first
failed payment transfer.
(C) The payment transfer is the first payment transfer to fail
after the lender obtains the consumer's authorization for additional
payment transfers pursuant to paragraph (c) of this section.
(ii) Second consecutive failed payment transfer. A failed payment
transfer is the second consecutive failed payment transfer from the
consumer's account if the immediately preceding payment transfer was a
first failed payment transfer. For purposes of this paragraph
(b)(2)(ii), a previous payment transfer includes a payment transfer
initiated at the same time or on the same day as the failed payment
transfer.
(iii) Different payment channel. A failed payment transfer meeting
the conditions in paragraph (b)(2)(ii) of this section is the second
consecutive failed payment transfer regardless of whether the first
failed payment transfer was initiated through a different payment
channel.
(c) Exception for additional payment transfers authorized by the
consumer--(1) General. Notwithstanding the prohibition in paragraph (b)
of this section, a lender may initiate additional payment transfers
from a consumer's account after two consecutive failed payment
transfers if the additional payment transfers are authorized by the
consumer in accordance with the requirements and conditions in this
paragraph (c) or if the lender executes a single immediate payment
transfer at the consumer's request in accordance with paragraph (d) of
this section.
(2) General authorization requirements and conditions--(i) Required
payment transfer terms. For purposes of this paragraph (c), the
specific date, amount, and payment channel of each additional payment
transfer must be authorized by the consumer, except as provided in
paragraph (c)(2)(ii) or (iii) of this section.
(ii) Application of specific date requirement to re-initiating a
returned payment transfer. If a payment transfer authorized by the
consumer pursuant to this paragraph (c) is returned for nonsufficient
funds, the lender may re-initiate the payment transfer, such as by re-
presenting it once through the ACH system, on or after the date
authorized by the consumer, provided that the returned payment transfer
has not triggered the prohibition in paragraph (b) of this section.
(iii) Special authorization requirements and conditions for payment
transfers to collect a late fee or returned item fee. A lender may
initiate a payment transfer pursuant to this paragraph (c) solely to
collect a late fee or returned item fee without obtaining the
consumer's authorization for the specific date and amount of the
payment transfer only if the consumer has authorized the lender to
initiate such payment transfers in advance of the withdrawal attempt.
For purposes of this paragraph (c)(2)(iii), the consumer authorizes
such payment transfers only if the consumer's authorization obtained
under paragraph (c)(3)(iii) of this section includes a statement, in
terms that are clear and readily understandable to the consumer, that
payment transfers may be initiated solely to collect a late fee or
returned item fee and that specifies the highest amount for such fees
that may be charged and the payment channel to be used.
(3) Requirements and conditions for obtaining the consumer's
authorization--(i) General. For purposes of this paragraph (c), the
lender must request and obtain the consumer's authorization for
additional payment transfers in accordance with the requirements and
conditions in this paragraph (c)(3).
(ii) Provision of payment transfer terms to the consumer. The
lender may request the consumer's authorization for additional payment
transfers no earlier than the date on which the lender provides to the
consumer the consumer rights notice required by Sec. 1041.9(c). The
request must include the payment transfer terms required under
paragraph (c)(2)(i) of this section and, if applicable, the statement
required by paragraph (c)(2)(iii) of this section. The lender may
provide the terms and statement to the consumer by any one of the
following means:
(A) In writing, by mail or in person, or in a retainable form by
email if the consumer has consented to receive electronic disclosures
in this manner under Sec. 1041.9(a)(4) or agrees to receive the terms
and statement by email in the course of a communication initiated by
the consumer in response to the consumer rights notice required by
Sec. 1041.9(c).
(B) By oral telephone communication, if the consumer affirmatively
contacts the lender in that manner in response to the consumer rights
notice required by Sec. 1041.9(c) and agrees to receive the terms and
statement in that manner in the course of, and as part of, the same
communication.
(iii) Signed authorization required--(A) General. For an
authorization to be valid under this paragraph (c), it must be signed
or otherwise agreed to by the consumer in writing or electronically and
in a retainable format that memorializes the payment transfer
[[Page 54879]]
terms required under paragraph (c)(2)(i) of this section and, if
applicable, the statement required by paragraph (c)(2)(iii) of this
section. The signed authorization must be obtained from the consumer no
earlier than when the consumer receives the consumer rights notice
required by Sec. 1041.9(c) in person or electronically, or the date on
which the consumer receives the notice by mail. For purposes of this
paragraph (c)(3)(iii)(A), the consumer is considered to have received
the notice at the time it is provided to the consumer in person or
electronically, or, if the notice is provided by mail, the earlier of
the third business day after mailing or the date on which the consumer
affirmatively responds to the mailed notice.
(B) Special requirements for authorization obtained by oral
telephone communication. If the authorization is granted in the course
of an oral telephone communication, the lender must record the call and
retain the recording.
(C) Memorialization required. If the authorization is granted in
the course of a recorded telephonic conversation or is otherwise not
immediately retainable by the consumer at the time of signature, the
lender must provide a memorialization in a retainable form to the
consumer by no later than the date on which the first payment transfer
authorized by the consumer is initiated. A memorialization may be
provided to the consumer by email in accordance with the requirements
and conditions in paragraph (c)(3)(ii)(A) of this section.
(4) Expiration of authorization. An authorization obtained from a
consumer pursuant to this paragraph (c) becomes null and void for
purposes of the exception in this paragraph (c) if:
(i) The lender subsequently obtains a new authorization from the
consumer pursuant to this paragraph (c); or
(ii) Two consecutive payment transfers initiated pursuant to the
consumer's authorization fail, as specified in paragraph (b) of this
section.
(d) Exception for initiating a single immediate payment transfer at
the consumer's request. After a lender's second consecutive payment
transfer has failed as specified in paragraph (b) of this section, the
lender may initiate a payment transfer from the consumer's account
without obtaining the consumer's authorization for additional payment
transfers pursuant to paragraph (c) of this section if:
(1) The payment transfer is a single immediate payment transfer at
the consumer's request as defined in paragraph (a)(2) of this section;
and
(2) The consumer authorizes the underlying one-time electronic fund
transfer or provides the underlying signature check to the lender, as
applicable, no earlier than the date on which the lender provides to
the consumer the consumer rights notice required by Sec. 1041.9(c) or
on the date that the consumer affirmatively contacts the lender to
discuss repayment options, whichever date is earlier.
(e) Prohibition against evasion. A lender must not take any action
with the intent of evading the requirements of this section.
Sec. 1041.9 Disclosure of payment transfer attempts.
(a) General form of disclosures--(1) Clear and conspicuous.
Disclosures required by this section must be clear and conspicuous.
Disclosures required by this section may contain commonly accepted or
readily understandable abbreviations.
(2) In writing or electronic delivery. Disclosures required by this
section must be provided in writing or, so long as the requirements of
paragraph (a)(4) of this section are satisfied, through electronic
delivery. The disclosures must be provided in a form that can be viewed
on paper or a screen, as applicable. This paragraph (a)(2) is not
satisfied by a disclosure provided orally or through a recorded
message.
(3) Retainable. Disclosures required by this section must be
provided in a retainable form, except for electronic short notices
delivered by mobile application or text message under paragraph (b) or
(c) of this section.
(4) Electronic delivery. Disclosures required by this section may
be provided through electronic delivery if the following consent
requirements are satisfied:
(i) Consumer consent--(A) General. Disclosures required by this
section may be provided through electronic delivery if the consumer
affirmatively consents in writing or electronically to the particular
electronic delivery method.
(B) Email option required. To obtain valid consumer consent to
electronic delivery under this paragraph, a lender must provide the
consumer with the option to select email as the method of electronic
delivery, separate and apart from any other electronic delivery methods
such as mobile application or text message.
(ii) Subsequent loss of consent. Notwithstanding paragraph
(a)(4)(i) of this section, a lender must not provide disclosures
required by this section through a method of electronic delivery if:
(A) The consumer revokes consent to receive disclosures through
that delivery method; or
(B) The lender receives notification that the consumer is unable to
receive disclosures through that delivery method at the address or
number used.
(5) Segregation requirements for notices. All notices required by
this section must be segregated from all other written or provided
materials and contain only the information required by this section,
other than information necessary for product identification, branding,
and navigation. Segregated additional content that is not required by
this section must not be displayed above, below, or around the required
content.
(6) Machine readable text in notices provided through electronic
delivery. If provided through electronic delivery, the payment notice
required by paragraph (b) of this section and the consumer rights
notice required by paragraph (c) of this section must use machine
readable text that is accessible via both web browsers and screen
readers.
(7) Model forms--(i) Payment notice. The content, order, and format
of the payment notice required by paragraph (b) of this section must be
substantially similar to Model Forms A-3 through A-4 in appendix A to
this part.
(ii) Consumer rights notice. The content, order, and format of the
consumer rights notice required by paragraph (c) of this section must
be substantially similar to Model Form A-5 in appendix A to this part.
(iii) Electronic short notice. The content, order, and format of
the electronic short notice required by paragraph (b) of this section
must be substantially similar to Model Clauses A-6 and A-7 in appendix
A to this part. The content, order, and format of the electronic short
notice required by paragraph (c) of this section must be substantially
similar to Model Clause A-8 in appendix A to this part.
(8) Foreign language disclosures. Disclosures required under this
section may be made in a language other than English, provided that the
disclosures are made available in English upon the consumer's request.
(b) Payment notice--(1) General. Prior to initiating the first
payment withdrawal or an unusual withdrawal from a consumer's account,
a lender must provide to the consumer a payment notice in accordance
with the requirements in this paragraph (b) as applicable.
(i) First payment withdrawal means the first payment transfer
scheduled to be initiated by a lender for a particular
[[Page 54880]]
covered loan, not including a single immediate payment transfer
initiated at the consumer's request as defined in Sec. 1041.8(a)(2).
(ii) Unusual withdrawal means a payment transfer that meets one or
more of the conditions described in paragraph (b)(3)(ii)(C) of this
section.
(iii) Exceptions. The payment notice need not be provided when the
lender initiates:
(A) The initial payment transfer from a consumer's account after
obtaining consumer authorization pursuant to Sec. 1041.8(c),
regardless of whether any of the conditions in paragraph (b)(3)(ii)(C)
of this section apply; or
(B) A single immediate payment transfer initiated at the consumer's
request in accordance with Sec. 1041.8(a)(2).
(2) First payment withdrawal notice--(i) Timing--(A) Mail. If the
lender provides the first payment withdrawal notice by mail, the lender
must mail the notice no earlier than when the lender obtains payment
authorization and no later than six business days prior to initiating
the transfer.
(B) Electronic delivery. (1) If the lender provides the first
payment withdrawal notice through electronic delivery, the lender must
send the notice no earlier than when the lender obtains payment
authorization and no later than three business days prior to initiating
the transfer.
(2) If, after providing the first payment withdrawal notice through
electronic delivery pursuant to the timing requirements in paragraph
(b)(2)(i) of this section, the lender loses the consumer's consent to
receive the notice through a particular electronic delivery method
according to paragraph (a)(4)(ii) of this section, the lender must
provide notice of any future unusual withdrawal, if applicable, through
alternate means.
(C) In person. If the lender provides the first payment withdrawal
notice in person, the lender must provide the notice no earlier than
when the lender obtains payment authorization and no later than three
business days prior to initiating the transfer.
(ii) Content requirements. The notice must contain the following
information and statements, as applicable, using language substantially
similar to the language set forth in Model Form A-3 in appendix A to
this part:
(A) Identifying statement. The statement, ``Upcoming Withdrawal
Notice,'' using that phrase, and, in the same statement, the name of
the lender providing the notice.
(B) Transfer terms--(1) Date. Date that the lender will initiate
the transfer.
(2) Amount. Dollar amount of the transfer.
(3) Consumer account. Sufficient information to permit the consumer
to identify the account from which the funds will be transferred. The
lender must not provide the complete account number of the consumer,
but may use a truncated version similar to Model Form A-3 in appendix A
to this part.
(4) Loan identification information. Sufficient information to
permit the consumer to identify the covered loan associated with the
transfer.
(5) Payment channel. Payment channel of the transfer.
(6) Check number. If the transfer will be initiated by a signature
or paper check, remotely created check (as defined in Regulation CC, 12
CFR 229.2(fff)), or remotely created payment order (as defined in 16
CFR 310.2(cc)), the check number associated with the transfer.
(C) Payment breakdown. In a tabular form:
(1) Payment breakdown heading. A heading with the statement
``Payment Breakdown,'' using that phrase.
(2) Principal. The amount of the payment that will be applied to
principal.
(3) Interest. The amount of the payment that will be applied to
accrued interest on the loan.
(4) Fees. If applicable, the amount of the payment that will be
applied to fees.
(5) Other charges. If applicable, the amount of the payment that
will be applied to other charges.
(6) Amount. The statement ``Total Payment Amount,'' using that
phrase, and the total dollar amount of the payment as provided in
paragraph (b)(2)(ii)(B)(2) of this section.
(7) Explanation of interest-only or negatively amortizing payment.
If applicable, a statement explaining that the payment will not reduce
principal, using the applicable phrase ``When you make this payment,
your principal balance will stay the same and you will not be closer to
paying off your loan'' or ``When you make this payment, your principal
balance will increase and you will not be closer to paying off your
loan.''
(D) Lender name and contact information. Name of the lender, the
name under which the transfer will be initiated (if different from the
consumer-facing name of the lender), and two different forms of lender
contact information that may be used by the consumer to obtain
information about the consumer's loan.
(3) Unusual withdrawal notice--(i) Timing--(A) Mail. If the lender
provides the unusual withdrawal notice by mail, the lender must mail
the notice no earlier than 10 business days and no later than six
business days prior to initiating the transfer.
(B) Electronic delivery. (1) If the lender provides the unusual
withdrawal notice through electronic delivery, the lender must send the
notice no earlier than seven business days and no later than three
business days prior to initiating the transfer.
(2) If, after providing the unusual withdrawal notice through
electronic delivery pursuant to the timing requirements in paragraph
(b)(3)(i)(B) of this section, the lender loses the consumer's consent
to receive the notice through a particular electronic delivery method
according to paragraph (a)(4)(ii) of this section, the lender must
provide notice of any future unusual withdrawal attempt, if applicable,
through alternate means.
(C) In person. If the lender provides the unusual withdrawal notice
in person, the lender must provide the notice no earlier than seven
business days and no later than three business days prior to initiating
the transfer.
(D) Exception for open-end credit. If the unusual withdrawal notice
is for open-end credit as defined in Sec. 1041.2(a)(16), the lender
may provide the unusual withdrawal notice in conjunction with the
periodic statement required under Regulation Z, 12 CFR 1026.7(b), in
accordance with the timing requirements of that section.
(ii) Content requirements. The unusual withdrawal notice must
contain the following information and statements, as applicable, using
language substantially similar to the language set forth in Model Form
A-4 in appendix A to this part:
(A) Identifying statement. The statement, ``Alert: Unusual
Withdrawal,'' using that phrase, and, in the same statement, the name
of the lender that is providing the notice.
(B) Basic payment information. The content required for the first
withdrawal notice under paragraphs (b)(2)(ii)(B) through (D) of this
section.
(C) Description of unusual withdrawal. The following content, as
applicable, in a form substantially similar to the form in Model Form
A-4 in appendix A to this part:
(1) Varying amount--(i) General. If the amount of a transfer will
vary in amount from the regularly scheduled payment amount, a statement
that the transfer will be for a larger or smaller amount than the
regularly scheduled payment amount, as applicable.
(ii) Open-end credit. If the payment transfer is for open-end
credit as defined in Sec. 1041.2(a)(16), the varying amount
[[Page 54881]]
content is required only if the amount deviates from the scheduled
minimum payment due as disclosed in the periodic statement required
under Regulation Z, 12 CFR 1026.7(b).
(2) Date other than date of regularly scheduled payment. If the
payment transfer date is not a date on which a regularly scheduled
payment is due under the terms of the loan agreement, a statement that
the transfer will be initiated on a date other than the date of a
regularly scheduled payment.
(3) Different payment channel. If the payment channel will differ
from the payment channel of the transfer directly preceding it, a
statement that the transfer will be initiated through a different
payment channel and a statement of the payment channel used for the
prior transfer.
(4) For purpose of re-initiating returned transfer. If the transfer
is for the purpose of re-initiating a returned transfer, a statement
that the lender is re-initiating a returned transfer, a statement of
the date and amount of the previous unsuccessful attempt, and a
statement of the reason for the return.
(4) Electronic delivery--(i) General. When the consumer has
consented to receive disclosures through electronic delivery, the
lender may provide the applicable payment notice required by paragraph
(b)(1) of this section through electronic delivery only if it also
provides an electronic short notice, except for email delivery as
provided in paragraph (b)(4)(iii) of this section.
(ii) Electronic short notice--(A) General content. The electronic
short notice required by this paragraph (b) must contain the following
information and statements, as applicable, in a form substantially
similar to Model Clause A-6 in appendix A to this part:
(1) Identifying statement, as required under paragraphs
(b)(2)(ii)(A) and (b)(3)(ii)(A) of this section;
(2) Transfer terms--(i) Date, as required under paragraphs
(b)(2)(ii)(B)(1) and (b)(3)(ii)(B) of this section;
(ii) Amount, as required under paragraphs (b)(2)(ii)(B)(2) and
(b)(3)(ii)(B) of this section;
(iii) Consumer account, as required and limited under paragraphs
(b)(2)(ii)(B)(3) and (b)(3)(ii)(B) of this section; and
(3) Web site URL. When the full notice is being provided through a
linked URL rather than as a PDF attachment, the unique URL of a Web
site that the consumer may use to access the full payment notice
required by paragraph (b) of this section.
(B) Additional content requirements. If the transfer meets any of
the conditions for unusual attempts described in paragraph
(b)(3)(ii)(C) of this section, the electronic short notice must also
contain the following information and statements, as applicable, using
language substantially similar to the language in Model Clause A-7 in
appendix A to this part:
(1) Varying amount, as defined under paragraph (b)(3)(ii)(C)(1) of
this section;
(2) Date other than due date of regularly scheduled payment, as
defined under paragraph (b)(3)(ii)(C)(2) of this section; and
(3) Different payment channel, as defined under paragraph
(b)(3)(ii)(C)(3) of this section.
(iii) Email delivery. When the consumer has consented to receive
disclosures through electronic delivery, and the method of electronic
delivery is email, the lender may either deliver the full notice
required by paragraph (b)(1) of this section in the body of the email
or deliver the full notice as a linked URL Web page or PDF attachment
along with the electronic short notice as provided in paragraph
(b)(4)(ii) of this section.
(c) Consumer rights notice--(1) General. After a lender initiates
two consecutive failed payment transfers from a consumer's account as
described in Sec. 1041.8(b), the lender must provide to the consumer a
consumer rights notice in accordance with the requirements of
paragraphs (c)(2) through (4) of this section.
(2) Timing. The lender must send the notice no later than three
business days after it receives information that the second consecutive
attempt has failed.
(3) Content requirements. The notice must contain the following
information and statements, using language substantially similar to the
language set forth in Model Form A-5 in appendix A to this part:
(i) Identifying statement. A statement that the lender, identified
by name, is no longer permitted to withdraw loan payments from the
consumer's account.
(ii) Last two attempts were returned. A statement that the lender's
last two attempts to withdraw payment from the consumer's account were
returned due to non-sufficient funds, or, if applicable to payments
initiated by the consumer's account-holding institution, caused the
account to go into overdraft status.
(iii) Consumer account. Sufficient information to permit the
consumer to identify the account from which the unsuccessful payment
attempts were made. The lender must not provide the complete account
number of the consumer, but may use a truncated version similar to
Model Form A-5 in appendix A to this part.
(iv) Loan identification information. Sufficient information to
permit the consumer to identify any covered loans associated with the
unsuccessful payment attempts.
(v) Statement of Federal law prohibition. A statement, using that
phrase, that in order to protect the consumer's account, Federal law
prohibits the lender from initiating further payment transfers without
the consumer's permission.
(vi) Contact about choices. A statement that the lender may be in
contact with the consumer about payment choices going forward.
(vii) Previous unsuccessful payment attempts. In a tabular form:
(A) Previous payment attempts heading. A heading with the statement
``previous payment attempts.''
(B) Payment due date. The scheduled due date of each previous
unsuccessful payment transfer attempted by the lender.
(C) Date of attempt. The date of each previous unsuccessful payment
transfer initiated by the lender.
(D) Amount. The amount of each previous unsuccessful payment
transfer initiated by the lender.
(E) Fees. The fees charged by the lender for each unsuccessful
payment attempt, if applicable, with an indication that these fees were
charged by the lender.
(viii) CFPB information. A statement, using that phrase, that the
Consumer Financial Protection Bureau created this notice, a statement
that the CFPB is a Federal government agency, and the URL to
www.consumerfinance.gov/payday-rule. This statement must be the last
piece of information provided in the notice.
(4) Electronic delivery--(i) General. When the consumer has
consented to receive disclosures through electronic delivery, the
lender may provide the consumer rights notice required by paragraph (c)
of this section through electronic delivery only if it also provides an
electronic short notice, except for email delivery as provided in
paragraph (c)(4)(iii) of this section.
(ii) Electronic short notice--(A) Content. The notice must contain
the following information and statements, as applicable, using language
substantially similar to the language set forth in Model Clause A-8 in
appendix A to this part:
(1) Identifying statement. As required under paragraph (c)(3)(i) of
this section;
(2) Last two attempts were returned. As required under paragraph
(c)(3)(ii) of this section;
[[Page 54882]]
(3) Consumer account. As required and limited under paragraph
(c)(3)(iii) of this section;
(4) Statement of Federal law prohibition. As required under
paragraph (c)(3)(v) of this section; and
(5) Web site URL. When the full notice is being provided through a
linked URL rather than as a PDF attachment, the unique URL of a Web
site that the consumer may use to access the full consumer rights
notice required by paragraph (c) of this section.
(B) [Reserved]
(iii) Email delivery. When the consumer has consented to receive
disclosures through electronic delivery, and the method of electronic
delivery is email, the lender may either deliver the full notice
required by paragraph (c)(1) of this section in the body of the email
or deliver the full notice as a linked URL Web page or PDF attachment
along with the electronic short notice as provided in paragraph
(c)(4)(ii) of this section.
Subpart D--Information Furnishing, Recordkeeping, Anti-Evasion, and
Severability
Sec. 1041.10 Information furnishing requirements.
(a) Loans subject to furnishing requirement. For each covered
short-term loan and covered longer-term balloon-payment loan a lender
makes, the lender must furnish the loan information described in
paragraph (c) of this section to each information system described in
paragraph (b)(1) of this section.
(b) Information systems to which information must be furnished. (1)
A lender must furnish information as required in paragraphs (a) and (c)
of this section to each information system that, as of the date the
loan is consummated:
(i) Has been registered with the Bureau pursuant to Sec.
1041.11(c)(2) for 180 days or more; or
(ii) Has been provisionally registered with the Bureau pursuant to
Sec. 1041.11(d)(1) for 180 days or more or subsequently has become
registered with the Bureau pursuant to Sec. 1041.11(d)(2).
(2) The Bureau will publish on its Web site and in the Federal
Register notice of the provisional registration of an information
system pursuant to Sec. 1041.11(d)(1), registration of an information
system pursuant to Sec. 1041.11(c)(2) or (d)(2), and suspension or
revocation of the provisional registration or registration of an
information system pursuant to Sec. 1041.11(h). For purposes of
paragraph (b)(1) of this section, an information system is
provisionally registered or registered, and its provisional
registration or registration is suspended or revoked, on the date that
the Bureau publishes notice of such provisional registration,
registration, suspension, or revocation on its Web site. The Bureau
will maintain on the Bureau's Web site a current list of information
systems provisionally registered pursuant to Sec. 1041.11(d)(1) and
registered pursuant to Sec. 1041.11(c)(2) and (d)(2). In the event
that a provisional registration or registration of an information
system is suspended, the Bureau will provide instructions on its Web
site concerning the scope and terms of the suspension.
(c) Information to be furnished. A lender must furnish the
information described in this paragraph (c), at the times described in
this paragraph (c), concerning each covered loan as required in
paragraphs (a) and (b) of this section. A lender must furnish the
information in a format acceptable to each information system to which
it must furnish information.
(1) Information to be furnished at loan consummation. A lender must
furnish the following information no later than the date on which the
loan is consummated or as close in time as feasible to the date the
loan is consummated:
(i) Information necessary to uniquely identify the loan;
(ii) Information necessary to allow the information system to
identify the specific consumer(s) responsible for the loan;
(iii) Whether the loan is a covered short-term loan or a covered
longer-term balloon-payment loan;
(iv) Whether the loan is made under Sec. 1041.5 or Sec. 1041.6,
as applicable;
(v) The loan consummation date;
(vi) For a loan made under Sec. 1041.6, the principal amount
borrowed;
(vii) For a loan that is closed-end credit:
(A) The fact that the loan is closed-end credit;
(B) The date that each payment on the loan is due; and
(C) The amount due on each payment date; and
(viii) For a loan that is open-end credit:
(A) The fact that the loan is open-end credit;
(B) The credit limit on the loan;
(C) The date that each payment on the loan is due; and
(D) The minimum amount due on each payment date.
(2) Information to be furnished while loan is an outstanding loan.
During the period that the loan is an outstanding loan, a lender must
furnish any update to information previously furnished pursuant to this
section within a reasonable period of the event that causes the
information previously furnished to be out of date.
(3) Information to be furnished when loan ceases to be an
outstanding loan. A lender must furnish the following information no
later than the date the loan ceases to be an outstanding loan or as
close in time as feasible to the date the loan ceases to be an
outstanding loan:
(i) The date as of which the loan ceased to be an outstanding loan;
and
(ii) Whether all amounts owed in connection with the loan were paid
in full, including the amount financed, charges included in the cost of
credit, and charges excluded from the cost of credit.
Sec. 1041.11 Registered information systems.
(a) Definitions. (1) Consumer report has the same meaning as in
section 603(d) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(d).
(2) Federal consumer financial law has the same meaning as in
section 1002(14) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 12 U.S.C. 5481(14).
(b) Eligibility criteria for information systems. An entity is
eligible to be a provisionally registered information system pursuant
to paragraph (d)(1) of this section or a registered information system
pursuant to paragraph (c)(2) or (d)(2) of this section only if the
Bureau determines that the following conditions are satisfied:
(1) Receiving capability. The entity possesses the technical
capability to receive information lenders must furnish pursuant to
Sec. 1041.10 immediately upon the furnishing of such information and
uses reasonable data standards that facilitate the timely and accurate
transmission and processing of information in a manner that does not
impose unreasonable costs or burdens on lenders.
(2) Reporting capability. The entity possesses the technical
capability to generate a consumer report containing, as applicable for
each unique consumer, all information described in Sec. 1041.10
substantially simultaneous to receiving the information from a lender.
(3) Performance. The entity will perform or performs in a manner
that facilitates compliance with and furthers the purposes of this
part.
(4) Federal consumer financial law compliance program. The entity
has developed, implemented, and maintains a program reasonably designed
to ensure compliance with all applicable Federal consumer financial
laws, which
[[Page 54883]]
includes written policies and procedures, comprehensive training, and
monitoring to detect and to promptly correct compliance weaknesses.
(5) Independent assessment of Federal consumer financial law
compliance program. The entity provides to the Bureau in its
application for provisional registration or registration a written
assessment of the Federal consumer financial law compliance program
described in paragraph (b)(4) of this section and such assessment:
(i) Sets forth a detailed summary of the Federal consumer financial
law compliance program that the entity has implemented and maintains;
(ii) Explains how the Federal consumer financial law compliance
program is appropriate for the entity's size and complexity, the nature
and scope of its activities, and risks to consumers presented by such
activities;
(iii) Certifies that, in the opinion of the assessor, the Federal
consumer financial law compliance program is operating with sufficient
effectiveness to provide reasonable assurance that the entity is
fulfilling its obligations under all Federal consumer financial laws;
and
(iv) Certifies that the assessment has been conducted by a
qualified, objective, independent third-party individual or entity that
uses procedures and standards generally accepted in the profession,
adheres to professional and business ethics, performs all duties
objectively, and is free from any conflicts of interest that might
compromise the assessor's independent judgment in performing
assessments.
(6) Information security program. The entity has developed,
implemented, and maintains a comprehensive information security program
that complies with the Standards for Safeguarding Customer Information,
16 CFR part 314.
(7) Independent assessment of information security program. (i) The
entity provides to the Bureau in its application for provisional
registration or registration and on at least a biennial basis
thereafter, a written assessment of the information security program
described in paragraph (b)(6) of this section and such assessment:
(A) Sets forth the administrative, technical, and physical
safeguards that the entity has implemented and maintains;
(B) Explains how such safeguards are appropriate to the entity's
size and complexity, the nature and scope of its activities, and the
sensitivity of the customer information at issue;
(C) Explains how the safeguards that have been implemented meet or
exceed the protections required by the Standards for Safeguarding
Customer Information, 16 CFR part 314;
(D) Certifies that, in the opinion of the assessor, the information
security program is operating with sufficient effectiveness to provide
reasonable assurance that the entity is fulfilling its obligations
under the Standards for Safeguarding Customer Information, 16 CFR part
314; and
(E) Certifies that the assessment has been conducted by a
qualified, objective, independent third-party individual or entity that
uses procedures and standards generally accepted in the profession,
adheres to professional and business ethics, performs all duties
objectively, and is free from any conflicts of interest that might
compromise the assessor's independent judgment in performing
assessments.
(ii) Each written assessment obtained and provided to the Bureau on
at least a biennial basis pursuant to paragraph (b)(7)(i) of this
section must be completed and provided to the Bureau within 60 days
after the end of the period to which the assessment applies.
(8) Bureau supervisory authority. The entity acknowledges it is, or
consents to being, subject to the Bureau's supervisory authority.
(c) Registration of information systems prior to August 19, 2019--
(1) Preliminary approval. Prior to August 19, 2019, the Bureau may
preliminarily approve an entity for registration only if the entity
submits an application for preliminary approval to the Bureau by the
deadline set forth in paragraph (c)(3)(i) of this section containing
information sufficient for the Bureau to determine that the entity is
reasonably likely to satisfy the conditions set forth in paragraph (b)
of this section by the deadline set forth in paragraph (c)(3)(ii) of
this section. The assessments described in paragraphs (b)(5) and (7) of
this section need not be included with an application for preliminary
approval for registration or completed prior to the submission of the
application. The Bureau may require additional information and
documentation to facilitate this determination.
(2) Registration. Prior to August 19, 2019, the Bureau may approve
the application of an entity to be a registered information system only
if:
(i) The entity received preliminary approval pursuant to paragraph
(c)(1) of this section; and
(ii) The entity submits an application to the Bureau by the
deadline set forth in paragraph (c)(3)(ii) of this section that
contains information and documentation sufficient for the Bureau to
determine that the entity satisfies the conditions set forth in
paragraph (b) of this section. The Bureau may require additional
information and documentation to facilitate this determination or
otherwise to assess whether registration of the entity would pose an
unreasonable risk to consumers.
(3) Deadlines. (i) The deadline to submit an application for
preliminary approval for registration pursuant to paragraph (c)(1) of
this section is April 16, 2018.
(ii) The deadline to submit an application to be a registered
information system pursuant to paragraph (c)(2) of this section is 120
days from the date preliminary approval for registration is granted.
(iii) The Bureau may waive the deadlines set forth in this
paragraph (c).
(d) Registration of information systems on or after August 19,
2019--(1) Provisional registration. On or after August 19, 2019, the
Bureau may approve an entity to be a provisionally registered
information system only if the entity submits an application to the
Bureau that contains information and documentation sufficient for the
Bureau to determine that the entity satisfies the conditions set forth
in paragraph (b) of this section. The Bureau may require additional
information and documentation to facilitate this determination or
otherwise to assess whether provisional registration of the entity
would pose an unreasonable risk to consumers.
(2) Registration. An information system that is provisionally
registered pursuant to paragraph (d)(1) of this section shall
automatically become a registered information system pursuant to this
paragraph (d)(2) upon the expiration of the 240-day period commencing
on the date the information system is provisionally registered. For
purposes of this paragraph (d)(2), an information system is
provisionally registered on the date that the Bureau publishes notice
of the provisional registration on the Bureau's Web site.
(e) Applications. Applications for preliminary approval,
registration, and provisional registration shall be submitted in the
form required by the Bureau and shall include, in addition to the
information described in paragraph (c) or (d) of this section, as
applicable, the following information:
(1) The name under which the applicant conducts business, including
any ``doing business as'' or other trade name;
(2) The applicant's main business address, mailing address if it is
different from the main business address,
[[Page 54884]]
telephone number, electronic mail address, and Internet Web site; and
(3) The name and contact information (including telephone number
and electronic mail address) of the person authorized to communicate
with the Bureau on the applicant's behalf concerning the application.
(f) Denial of application. The Bureau will deny the application of
an entity seeking preliminary approval for registration under paragraph
(c)(1) of this section, registration under paragraph (c)(2) of this
section, or provisional registration under paragraph (d)(1) of this
section, if the Bureau determines, as applicable, that:
(1) The entity does not satisfy the conditions set forth in
paragraph (b) of this section, or, in the case of an entity seeking
preliminary approval for registration, is not reasonably likely to
satisfy the conditions as of the deadline set forth in paragraph
(c)(3)(ii) of this section;
(2) The entity's application is untimely or materially inaccurate
or incomplete; or
(3) Preliminary approval, provisional registration, or registration
of the entity would pose an unreasonable risk to consumers.
(g) Notice of material change. An entity that is a provisionally
registered or registered information system must provide to the Bureau
in writing a description of any material change to information
contained in its application for registration submitted pursuant to
paragraph (c)(2) of this section or provisional registration submitted
pursuant to paragraph (d)(1) of this section, or to information
previously provided to the Bureau pursuant to this paragraph (g),
within 14 days of such change.
(h) Suspension and revocation. (1) The Bureau will suspend or
revoke an entity's preliminary approval for registration pursuant to
paragraph (c)(1) of this section, provisional registration pursuant to
paragraph (d)(1) of this section, or registration pursuant to paragraph
(c)(2) or (d)(2) of this section if the Bureau determines:
(i) That the entity has not satisfied or no longer satisfies the
conditions described in paragraph (b) of this section or has not
complied with the requirement described in paragraph (g) of this
section; or
(ii) That preliminary approval, provisional registration, or
registration of the entity poses an unreasonable risk to consumers.
(2) The Bureau may require additional information and documentation
from an entity if it has reason to believe suspension or revocation
under paragraph (h)(1) of this section may be warranted.
(3) Except in cases of willfulness or those in which the public
interest requires otherwise, prior to suspension or revocation under
paragraph (h)(1) of this section, the Bureau will provide written
notice of the facts or conduct that may warrant the suspension or
revocation and an opportunity for the entity or information system to
demonstrate or achieve compliance with this section or otherwise
address the Bureau's concerns.
(4) The Bureau will revoke an entity's preliminary approval for
registration, provisional registration, or registration if the entity
submits a written request to the Bureau that its preliminary approval,
provisional registration, or registration be revoked.
(5) For purposes of Sec. Sec. 1041.5 and 1041.6, suspension or
revocation of an information system's registration is effective five
days after the date that the Bureau publishes notice of the suspension
or revocation on the Bureau's Web site. For purposes of Sec.
1041.10(b)(1), suspension or revocation of an information system's
provisional registration or registration is effective on the date that
the Bureau publishes notice of the suspension or revocation on the
Bureau's Web site. The Bureau will also publish notice of a suspension
or revocation in the Federal Register.
(6) In the event that a provisional registration or registration of
an information system is suspended, the Bureau will provide
instructions concerning the scope and terms of the suspension on its
Web site and in the notice of suspension published in the Federal
Register.
(i) Administrative appeals--(1) Grounds for administrative appeals.
An entity may appeal a determination of the Bureau that:
(i) Denies the application of an entity seeking preliminary
approval for registration under paragraph (c)(1) of this section,
registration under paragraph (c)(2) of this section, or provisional
registration under paragraph (d)(1) of this section; or
(ii) Suspends or revokes the entity's preliminary approval for
registration pursuant to paragraph (c)(1) of this section, provisional
registration pursuant to paragraph (d)(1) of this section, or
registration pursuant to paragraph (c)(2) or (d)(2) of this section.
(2) Time limits for filing administrative appeals. An appeal must
be submitted on a date that is within 30 business days of the date of
the determination. The Bureau may extend this time for good cause.
(3) Form and content of administrative appeals. An appeal shall be
made by electronic means as follows:
(i) The appeal shall be submitted as set forth on the Bureau's Web
site. The appeal shall be labeled ``Information System Registration
Appeal;''
(ii) The appeal shall set forth contact information for the
appellant including, to the extent available, a mailing address,
telephone number, or email address at which the Bureau may contact the
appellant regarding the appeal;
(iii) The appeal shall specify the date of the letter of
determination, and enclose a copy of the determination being appealed;
and
(iv) The appeal shall include a description of the issues in
dispute, specify the legal and factual basis for appealing the
determination, and include appropriate supporting information.
(4) Appeals process. The filing and pendency of an appeal does not
by itself suspend the determination that is the subject of the appeal
during the appeals process. Notwithstanding the foregoing, the Bureau
may, in its discretion, suspend the determination that is the subject
of the appeal during the appeals process.
(5) Decisions to grant or deny administrative appeals. The Bureau
shall decide whether to affirm the determination (in whole or in part)
or to reverse the determination (in whole or in part) and shall notify
the appellant of this decision in writing.
Sec. 1041.12 Compliance program and record retention.
(a) Compliance program. A lender making a covered loan must develop
and follow written policies and procedures that are reasonably designed
to ensure compliance with the requirements in this part. These written
policies and procedures must be appropriate to the size and complexity
of the lender and its affiliates, and the nature and scope of the
covered loan lending activities of the lender and its affiliates.
(b) Record retention. A lender must retain evidence of compliance
with this part for 36 months after the date on which a covered loan
ceases to be an outstanding loan.
(1) Retention of loan agreement and documentation obtained in
connection with originating a covered short-term or covered longer-term
balloon-payment loan. To comply with the requirements in this paragraph
(b), a lender must retain or be able to reproduce an image of the loan
agreement and documentation obtained in connection
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with a covered short-term or covered longer-term balloon-payment loan,
including the following documentation, as applicable:
(i) Consumer report from an information system that has been
registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or is
registered with the Bureau pursuant to Sec. 1041.11(d)(2);
(ii) Verification evidence, as described in Sec. 1041.5(c)(2)(ii);
and
(iii) Written statement obtained from the consumer, as described in
Sec. 1041.5(c)(2)(i).
(2) Electronic records in tabular format regarding origination
calculations and determinations for a covered short-term or covered
longer-term balloon-payment loan under Sec. 1041.5. To comply with the
requirements in this paragraph (b), a lender must retain electronic
records in tabular format that include the following information for a
covered loan made under Sec. 1041.5:
(i) The projection made by the lender of the amount of a consumer's
net income during the relevant monthly period;
(ii) The projections made by the lender of the amounts of a
consumer's major financial obligations during the relevant monthly
period;
(iii) Calculated residual income or debt-to-income ratio during the
relevant monthly period;
(iv) Estimated basic living expenses for the consumer during the
relevant monthly period; and
(v) Other consumer-specific information considered in making the
ability-to-repay determination.
(3) Electronic records in tabular format regarding type, terms, and
performance of covered short-term or covered longer-term balloon-
payment loan. To comply with the requirements in this paragraph (b), a
lender must retain electronic records in tabular format that include
the following information for a covered short-term or covered longer-
term balloon-payment loan:
(i) As applicable, the information listed in Sec. 1041.10(c)(1)(i)
through (viii) and (c)(2);
(ii) Whether the lender obtained vehicle security from the
consumer;
(iii) The loan number in a loan sequence of covered short-term
loans, covered longer-term balloon-payment loans, or a combination
thereof;
(iv) For any full payment on the loan that was not received or
transferred by the contractual due date, the number of days such
payment was past due, up to a maximum of 180 days;
(v) For a loan with vehicle security: Whether repossession of the
vehicle was initiated;
(vi) Date of last or final payment received; and
(vii) The information listed in Sec. 1041.10(c)(3).
(4) Retention of records relating to payment practices for covered
loans. To comply with the requirements in this paragraph (b), a lender
must retain or be able to reproduce an image of the following
documentation, as applicable, in connection with a covered loan:
(i) Leveraged payment mechanism(s) obtained by the lender from the
consumer;
(ii) Authorization of additional payment transfer, as described in
Sec. 1041.8(c)(3)(iii); and
(iii) Underlying one-time electronic transfer authorization or
underlying signature check, as described in Sec. 1041.8(d)(2).
(5) Electronic records in tabular format regarding payment
practices for covered loans. To comply with the requirements in this
paragraph (b), a lender must retain electronic records in tabular
format that include the following information for covered loans:
(i) History of payments received and attempted payment transfers,
as defined in Sec. 1041.8(a)(1), including:
(A) Date of receipt of payment or attempted payment transfer;
(B) Amount of payment due;
(C) Amount of attempted payment transfer;
(D) Amount of payment received or transferred; and
(E) Payment channel used for attempted payment transfer.
(ii) If an attempt to transfer funds from a consumer's account is
subject to the prohibition in Sec. 1041.8(b)(1), whether the lender or
service provider obtained authorization to initiate a payment transfer
from the consumer in accordance with the requirements in Sec.
1041.8(c) or (d).
Sec. 1041.13 Prohibition against evasion.
A lender must not take any action with the intent of evading the
requirements of this part.
Sec. 1041.14 Severability.
The provisions of this part are separate and severable from one
another. If any provision is stayed or determined to be invalid, the
remaining provisions shall continue in effect.
Appendix A to Part 1041--Model Forms
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Supplement I to Part 1041--Official Interpretations
Section 1041.2--Definitions
2(a)(3) Closed-End Credit
1. In general. Institutions may rely on 12 CFR 1026.2(a)(10) and
its related commentary in determining the meaning of closed-end credit,
but without regard to whether the credit is consumer credit, as that
term is defined in 12 CFR 1026.2(a)(12), or is extended to a consumer,
as that term is defined in 12 CFR 1026.2(a)(11).
2(a)(5) Consummation
1. New loan. When a contractual obligation on the consumer's part
is created is a matter to be determined under applicable law. A
contractual commitment agreement, for example, that under applicable
law binds the consumer to the loan terms would be consummation.
Consummation, however, does not occur merely because the consumer has
made some financial investment in the transaction (for example, by
paying a non-refundable fee) unless applicable law holds otherwise.
2. Modification of existing loan that triggers underwriting
requirements. A modification of an existing loan that increases the
amount of an existing loan triggers underwriting requirements under
Sec. 1041.5 in certain circumstances. If the outstanding amount of an
existing loan is increased, or if the total amount available under an
open-end credit plan is increased, the modification is consummated as
of the time that the consumer becomes contractually obligated on such a
modification or increase. In those cases, the modification must comply
with the requirements of Sec. 1041.5(b). A loan modification does not
trigger underwriting requirements under Sec. 1041.5 if the
modification reduces the outstanding amount or the total amount
available under an open-end credit plan, or if the modification results
only in the consumer receiving additional time in which to repay the
loan. For example, providing a cost-free ``off-ramp'' or repayment plan
to a consumer who cannot repay a loan during the allotted term of the
loan is a modification of an existing loan--not a new loan--that
results only in the consumer receiving additional time in which to
repay the loan. Thus, providing a no-cost repayment plan does not
constitute a modification that increases the amount of an existing
loan.
2(a)(11) Credit
1. In general. Institutions may rely on 12 CFR 1026.2(a)(14) and
its related commentary in determining the meaning of credit.
2(a)(12) Electronic Fund Transfer
1. In general. Institutions may rely on 12 CFR 1005.3(b) and its
related commentary in determining the meaning of electronic fund
transfer.
[[Page 54891]]
2(a)(13) Lender
1. Regularly extends credit. The test for determining whether a
person regularly extends credit for personal, family, or household
purposes is explained in Regulation Z, 12 CFR 1026.2(a)(17)(v). Any
loan to a consumer primarily for personal, family, or household
purposes, whether or not the loan is a covered loan under this part,
counts toward the numeric threshold for determining whether a person
regularly extends credit.
2(a)(16) Open-End Credit
1. In general. Institutions may rely on 12 CFR 1026.2(a)(20) and
its related commentary in determining the meaning of open-end credit,
but without regard to whether the credit permits a finance charge to be
imposed from time to time on an outstanding balance as defined in 12
CFR 1026.4. Also, for the purposes of defining open-end credit under
this part, the term credit, as defined in Sec. 1041.2(a)(11), is
substituted for the term consumer credit, as defined in 12 CFR
1026.2(a)(12); the term lender, as defined in Sec. 1041.2(a)(13), is
substituted for the term creditor, as defined in 12 CFR 1026.2(a)(17);
and the term consumer, as defined in Sec. 1041.2(a)(4), is substituted
for the term consumer, as defined in 12 CFR 1026.2(a)(11). See
generally Sec. 1041.2(b).
2(a)(17) Outstanding Loan
1. Payments owed to third parties. A loan is an outstanding loan if
it meets all the criteria set forth in Sec. 1041.2(a)(17), regardless
of whether the consumer is required to pay the lender, an affiliate of
the lender, or a service provider. A lender selling the loan or the
loan servicing rights to a third party does not affect whether a loan
is an outstanding loan under Sec. 1041.2(a)(17).
2. Stale loans. A loan is generally an outstanding loan if the
consumer has a legal obligation to repay the loan, even if the consumer
is delinquent or if the consumer is in a repayment plan or workout
arrangement. However, a loan that the consumer otherwise has a legal
obligation to repay is not an outstanding loan for purposes of this
part if the consumer has not made any payment on the loan within the
previous 180-day period. A loan ceases to be an outstanding loan as of:
The earliest of the date the consumer repays the loan in full, the date
the consumer is released from the legal obligation to repay, the date
the loan is otherwise legally discharged, or the date that is 180 days
following the last payment that the consumer has made on the loan, even
if the payment is not a regularly scheduled payment in a scheduled
amount. If the consumer does not make any payments on a loan and none
of these other events occur, the loan ceases to be outstanding 180 days
after consummation. A loan cannot become an outstanding loan due to any
events that occur after the consumer repays the loan in full, the
consumer is released from the legal obligation to repay, the loan is
otherwise legally discharged, 180 days following the last payment that
the consumer has made on the loan, or 180 days after consummation of a
loan on which the consumer makes no payments.
2(a)(18) Service Provider
1. Credit access businesses and credit services organizations.
Persons who provide a material service to lenders in connection with
the lenders' offering or provision of covered loans are service
providers, subject to the specific limitations in section 1002(26) of
the Dodd-Frank Act. Accordingly, credit access businesses and credit
service organizations that provide a material service to lenders during
the course of obtaining for consumers, or assisting consumers in
obtaining, loans from lenders, are service providers, subject to the
specific limitations in section 1002(26) of the Dodd-Frank Act.
2(a)(19) Vehicle Security
1. An interest in a consumer's motor vehicle as a condition of
credit. Subject to the exclusion described in Sec. 1041.3(d)(1), a
lender's or service provider's interest in a consumer's motor vehicle
constitutes vehicle security only to the extent that the security
interest is obtained in connection with the credit. If a party obtains
such a security interest in a consumer's motor vehicle for a reason
that is unrelated to an extension of credit, the security interest does
not constitute vehicle security. For example, if a mechanic performs
work on a consumer's motor vehicle and a mechanic's lien attaches to
the consumer's motor vehicle by operation of law because the consumer
did not timely pay the mechanic's bill, the mechanic does not obtain
vehicle security for the purposes of Sec. 1041.2(a)(19).
2(b) Rule of Construction
1. Incorporation of terms from underlying statutes and regulations.
For purposes of this part, where definitions are incorporated from
other statutes or regulations, users may as applicable rely on embedded
definitions, appendices, and commentary for those other laws. For
example, 12 CFR 1005.2(b) and its related commentary determine the
meaning of account under Sec. 1041.2(a)(1). However, where this part
defines the same term or a parallel term in a way that creates a
substantive distinction, the definition in this part shall control.
See, for example, the definition of open-end credit in Sec.
1041.2(a)(16), which is generally determined according to 12 CFR
1026.2(a)(20) and its related commentary but without regard to whether
the credit is consumer credit, as that term is defined in 12 CFR
1026.2(a)(12), or is extended to a consumer, as that term is defined in
12 CFR 1026.2(a)(11), because this part provides a different and
arguably broader definition of consumer in Sec. 1041.2(a)(4).
Section 1041.3--Scope of Coverage; Exclusions; Exemptions
3(b) Covered Loans
1. Credit structure. The term covered loan includes open-end credit
and closed-end credit, regardless of the form or structure of the
credit.
2. Primary purpose. Under Sec. 1041.3(b), a loan is not a covered
loan unless it is extended primarily for personal, family, or household
purposes. Institutions may rely on 12 CFR 1026.3(a) and its related
commentary in determining the primary purpose of a loan.
Paragraph 3(b)(1)
1. Closed-end credit that does not provide for multiple advances to
consumers. A loan does not provide for multiple advances to a consumer
if the loan provides for full disbursement of the loan proceeds only
through disbursement on a single specific date.
2. Loans that provide for multiple advances to consumers. Both
open-end credit and closed-end credit may provide for multiple advances
to consumers. Open-end credit can have a fixed expiration date, as long
as during the plan's existence the consumer may use credit, repay, and
reuse the credit. Likewise, closed-end credit may consist of a series
of advances. For example:
i. Under a closed-end commitment, the lender might agree to lend a
total of $1,000 in a series of advances as needed by the consumer. When
a consumer has borrowed the full $1,000, no more is advanced under that
particular agreement, even if there has been repayment of a portion of
the debt.
3. Facts and circumstances test for determining whether loan is
substantially repayable within 45 days. Substantially repayable means
that the
[[Page 54892]]
substantial majority of the loan or advance is required to be repaid
within 45 days of consummation or advance, as the case may be.
Application of the standard depends on the specific facts and
circumstances of each loan, including the timing and size of the
scheduled payments. A loan or advance is not substantially repayable
within 45 days of consummation or advance merely because a consumer
chooses to repay within 45 days when the loan terms do not require the
consumer to do so.
4. Deposit advance products. A loan or advance is substantially
repayable within 45 days of consummation or advance if the lender has
the right to be repaid through a sweep or withdrawal of any qualifying
electronic deposit made into the consumer's account within 45 days of
consummation or advance. A loan or advance described in this paragraph
is substantially repayable within 45 days of consummation or advance
even if no qualifying electronic deposit is actually made into or
withdrawn by the lender from the consumer's account.
5. Loans with alternative, ambiguous, or unusual payment schedules.
If a consumer, under any applicable law, would breach the terms of the
agreement between the consumer and the lender or service provider by
not substantially repaying the entire amount of the loan or advance
within 45 days of consummation or advance, as the case may be, the loan
is a covered short-term loan under Sec. 1041.3(b)(1). For loans or
advances that are not required to be repaid within 45 days of
consummation or advance, if the consumer, under applicable law, would
not breach the terms of the agreement between the consumer and the
lender by not substantially repaying the loan or advance in full within
45 days, the loan is a covered longer-term balloon-payment loan under
Sec. 1041.3(b)(2) or a covered longer-term loan under Sec.
1041.3(b)(3) if the loan otherwise satisfies the criteria specified in
Sec. 1041.3(b)(2) or (3), respectively.
Paragraph 3(b)(2)
1. Closed-end credit that does not provide for multiple advances to
consumers. See comments 3(b)(1)-1 and 3(b)(1)-2.
2. Payments more than twice as large as other payments. For
purposes of Sec. 1041.3(b)(2)(i) and (ii), all required payments of
principal and any charges (or charges only, depending on the loan
features) due under the loan are used to determine whether a particular
payment is more than twice as large as another payment, regardless of
whether the payments have changed during the loan term due to rate
adjustments or other payment changes permitted or required under the
loan.
3. Charges excluded. Charges for actual unanticipated late
payments, for exceeding a credit limit, or for delinquency, default, or
a similar occurrence that may be added to a payment are excluded from
the determination of whether the loan is repayable in a single payment
or a particular payment is more than twice as large as another payment.
Likewise, sums that are accelerated and due upon default are excluded
from the determination of whether the loan is repayable in a single
payment or a particular payment is more than twice as large as another
payment.
4. Multiple-advance structures. Loans that provide for more than
one advance are considered to be a covered longer-term balloon-payment
loan under Sec. 1041.3(b)(2)(ii) if either:
i. The consumer is required to repay substantially the entire
amount of an advance more than 45 days after the advance is made or is
required to make at least one payment on the advance that is more than
twice as large as any other payment; or
ii. A loan with multiple advances is structured such that paying
the required minimum payment may not fully amortize the outstanding
balance by a specified date or time, and the amount of the final
payment to repay the outstanding balance at such time could be more
than twice the amount of other minimum payments under the plan. For
example, the lender extends an open-end credit plan with a $500 credit
limit, monthly billing cycles, and a minimum payment due each billing
cycle that is equal to 10% of the outstanding principal. Fees or
interest on the plan are equal to 10% of the outstanding principal per
month, so that if a consumer pays nothing other than the minimum
payment amount, the outstanding principal remains the same. All
outstanding amounts must be repaid within six months of the advance.
The credit plan is a covered loan under Sec. 1041.3(b)(2)(ii) because
if the consumer drew the entire amount at one time and then made only
minimum payments, the sixth payment would be more than twice the amount
of the minimum payment required ($50).
Paragraph 3(b)(3)
1. Conditions for coverage of a longer-term loan. A loan that is
not a covered short-term loan or a covered longer-term balloon-payment
loan is a covered longer-term loan only if it satisfies both the cost
of credit requirement of Sec. 1041.3(b)(3)(i) and leveraged payment
mechanism requirement of Sec. 1041.3(b)(3)(ii). If the requirements of
Sec. 1041.3(b)(3) are met, and the loan is not otherwise excluded or
conditionally exempted from coverage by Sec. 1041.3(d), (e), or (f),
the loan is a covered longer-term loan. For example, a 60-day loan that
is not a covered longer-term balloon-payment loan is not a covered
longer-term loan if the cost of credit as measured pursuant to Sec.
1041.2(a)(6) is less than or equal to a rate of 36 percent per annum
even if the lender or service provider obtains a leveraged payment
mechanism.
2. No balance during a billing cycle. Under Sec.
1041.2(a)(6)(ii)(B), the cost of credit for open-end credit must be
calculated according to the rules for calculating the effective annual
percentage rate for a billing cycle as set forth in Regulation Z, 12
CFR 1026.14(c) and (d), which provide that the annual percentage rate
cannot be calculated for billing cycles in which there is a finance
charge but no other balance. Accordingly, pursuant to Sec.
1041.2(a)(6)(ii)(B), the cost of credit could not be calculated for
such billing cycles. Section 1041.3(b)(3)(i)(B)(1) provides that, for
such billing cycles, an open-end credit plan is determined to have
exceeded the threshold set forth in that paragraph if there is no
balance other than a finance charge imposed by the lender.
3. Timing for coverage determination. A loan may become a covered
longer-term loan at any such time as both of the requirements of Sec.
1041.3(b)(3)(i) and (ii) are met. For example:
i. A lender originates a closed-end loan that is not a longer-term
balloon-payment loan to be repaid within six months of consummation
with a cost of credit equal to 60 percent. At the time of consummation,
the loan is not a covered longer-term loan because it does not have a
leveraged payment mechanism. After two weeks, the lender obtains a
leveraged payment mechanism. The loan is now a covered longer-term loan
because it meets both of the requirements of Sec. 1041.3(b)(3)(i) and
(ii).
ii. A lender extends an open-end credit plan with monthly billing
cycles and a leveraged payment mechanism. At consummation and again at
the end of the first billing cycle, the plan is not a covered longer-
term loan because its cost of credit is below 36 percent. In the second
billing cycle, the plan's cost of credit is 45 percent because several
fees are triggered in addition to interest on the principal balance.
The plan is now a covered longer-term loan because it meets both of the
requirements of
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Sec. 1041.3(b)(3)(i) and (ii). Beginning on the first day of the third
billing cycle, and thereafter for the duration of the plan, the lender
must therefore comply with the requirements of this part including by,
for example, providing a first withdrawal notice before initiating the
first payment transfer on or after the first day of the third billing
cycle. The requirements to provide certain payment withdrawal notices
under Sec. 1041.9 have been structured so that the notices can be
provided in the same mailing as the periodic statements that are
required by Regulation Z, 12 CFR 1026.7(b). See, e.g., Sec.
1041.9(b)(3)(i)(D).
Paragraph 3(b)(3)(ii)
1. Timing. The condition in Sec. 1041.3(b)(3)(ii) is satisfied if
a lender or service provider obtains a leveraged payment mechanism
before, at the same time as, or after the consumer receives the entire
amount of funds that the consumer is entitled to receive under the
loan, regardless of the means by which the lender or service provider
obtains a leveraged payment mechanism.
2. Leveraged payment mechanism in contract. The condition in Sec.
1041.3(b)(3)(ii) is satisfied if a loan agreement authorizes the lender
to elect to obtain a leveraged payment mechanism, regardless of the
time at which the lender actually obtains a leveraged payment
mechanism. The following are examples of situations in which a lender
obtains a leveraged payment mechanism under Sec. 1041.3(b)(3)(ii):
i. Future authorization. A loan agreement provides that the
consumer, at some future date, must authorize the lender or service
provider to debit the consumer's account on a recurring basis.
ii. Delinquency or default provisions. A loan agreement provides
that the consumer must authorize the lender or service provider to
debit the consumer's account on a one-time or a recurring basis if the
consumer becomes delinquent or defaults on the loan.
Paragraph 3(c)
1. Initiating a transfer of money from a consumer's account. A
lender or service provider obtains the ability to initiate a transfer
of money when that person can collect payment, or otherwise withdraw
funds, from a consumer's account, either on a single occasion or on a
recurring basis, without the consumer taking further action. Generally,
when a lender or service provider has the ability to ``pull'' funds or
initiate a transfer from the consumer's account, that person has a
leveraged payment mechanism. However, a ``push'' transaction from the
consumer to the lender or service provider does not in itself give the
lender or service provider a leveraged payment mechanism.
2. Lender-initiated transfers. The following are examples of
situations in which a lender or service provider has the ability to
initiate a transfer of money from a consumer's account:
i. Check. A lender or service provider obtains a check, draft, or
similar paper instrument written by the consumer, other than a single
immediate payment transfer at the consumer's request as described in
Sec. 1041.3(c) and comment 3(c)-3.
ii. Electronic fund transfer authorization. The consumer authorizes
a lender or service provider to initiate an electronic fund transfer
from the consumer's account in advance of the transfer, other than a
single immediate payment transfer at the consumer's request as
described in Sec. 1041.3(c) and comment 3(c)-3.
iii. Remotely created checks and remotely created payment orders. A
lender or service provider has authorization to create or present a
remotely created check (as defined by Regulation CC, 12 CFR
229.2(fff)), remotely created payment order (as defined in 16 CFR
310.2(cc)), or similar instrument drafted on the consumer's account.
iv. Transfer by account-holding institution. A lender or service
provider that is an account-holding institution has a right to initiate
a transfer of funds between the consumer's account and an account of
the lender or affiliate, including, but not limited to, an account-
holding institution's right of set-off.
3. Single immediate payment transfer at the consumer's request
excluded. A single immediate payment transfer at the consumer's
request, as defined in Sec. 1041.8(a)(2), is excluded from the
definition of leveraged payment mechanism. Accordingly, if the loan or
other agreement between the consumer and the lender or service provider
does not otherwise provide for the lender or service provider to
initiate a transfer without further consumer action, the lender or
service provider can initiate a single immediate payment transfer at
the consumer's request without causing the loan to become a covered
loan under Sec. 1041.3(b)(3). See Sec. 1041.8(a)(2) and related
commentary for guidance on what constitutes a single immediate payment
transfer at the consumer's request.
4. Transfers not initiated by the lender. A lender or service
provider does not initiate a transfer of money from a consumer's
account if the consumer authorizes a third party, such as a bank's
automatic bill pay service, to initiate a transfer of money from the
consumer's account to a lender or service provider.
3(d) Exclusions
3(d)(1) Certain Purchase Money Security Interest Loans
1. ``Sole purpose'' test. The requirements of this part do not
apply to loans made solely and expressly to finance the consumer's
initial purchase of a good in which the lender takes a security
interest as a condition of the credit. For example, the requirements of
this part would not apply to a transaction in which a lender makes a
loan to a consumer for the express purpose of initially purchasing a
motor vehicle, television, household appliance, or furniture in which
the lender takes a security interest and the amount financed is
approximately equal to, or less than, the cost of acquiring the good,
even if the cost of credit exceeds 36 percent per annum and the lender
also obtains a leveraged payment mechanism. A loan is made solely and
expressly to finance the consumer's initial purchase of a good even if
the amount financed under the loan includes Federal, State, or local
taxes or amounts required to be paid under applicable State and Federal
licensing and registration requirements. This exclusion does not apply
to refinances of credit extended for the purchase of a good.
3(d)(2) Real Estate Secured Credit
1. Real estate and dwellings. The requirements of this part do not
apply to credit secured by any real property, or by any personal
property, such as a mobile home, used or expected to be used as a
dwelling if the lender records or otherwise perfects the security
interest within the term of the loan, even if the cost of credit
exceeds 36 percent per annum and the lender or servicer provider also
obtains a leveraged payment mechanism. If the lender does not record or
perfect the security interest during the term of the loan, however, the
credit is not excluded from the requirements of this part under Sec.
1041.3(d)(2).
3(d)(5) Non-Recourse Pawn Loans
1. Lender possession required and no recourse permitted. A pawn
loan must satisfy two conditions to be excluded from the requirements
of this part under Sec. 1041.3(d)(5). First, the lender must have sole
physical possession and use of the property securing the pawned
property at all times during the entire
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term of the loan. If the consumer retains either possession or use of
the property, however limited the consumer's possession or use of the
property might be, the loan is not excluded from the requirements of
this part under Sec. 1041.3(d)(5). Second, the lender must have no
recourse if the consumer does not elect to redeem the pawned item and
repay the loan other than retaining the pawned property to dispose of
according to State or local law. If any consumer, or if any co-signor,
guarantor, or similar person, is personally liable for the difference
between the outstanding balance on the loan and the value of the pawned
property, the loan is not excluded from the requirements of this part
under Sec. 1041.3(d)(5).
3(d)(6) Overdraft Services
1. Definitions. Institutions may rely on 12 CFR 1005.17(a) and its
related commentary in determining whether credit is an overdraft
service or an overdraft line of credit that is excluded from the
requirements of this part under Sec. 1041.3(d)(6).
3(d)(7) Wage Advance Programs
1. Advances of wages under Sec. 1041.3(d)(7) must be offered by an
employer, as defined in the Fair Labor Standards Act, 29 U.S.C. 203(d),
or by the employer's business partner to the employer's employees
pursuant to a wage advance program. For example, an advance program
might be offered by a company that provides payroll card services or
accounting services to the employer, or by the employer with the
assistance of such a company. Similarly, an advance program might be
offered by a company that provides consumer financial products and
services as part of the employer's benefits program, such that the
company would have information regarding the wages accrued by the
employee.
Paragraph 3(d)(7)(i)
1. Under the exclusion in Sec. 1041.3(d)(7)(i), the advance must
be made only against accrued wages. To qualify for that exclusion, the
amount advanced must not exceed the amount of the employee's accrued
wages. Accrued wages are wages that the employee is entitled to receive
under State law in the event of separation from the employer for work
performed for the employer, but for which the employee has yet to be
paid.
Paragraph 3(d)(7)(ii)(B)
1. Under Sec. 1041.3(d)(7)(ii)(B), the entity advancing the funds
is required to warrant that it has no legal or contractual claim or
remedy against the consumer based on the consumer's failure to repay in
the event the amount advanced is not repaid in full. This provision
does not prevent the entity from obtaining a one-time authorization to
seek repayment from the consumer's transaction account.
3(d)(8) No-Cost Advances
1. Under Sec. 1041.3(d)(8)(i), the entity advancing the funds is
required to warrant that it has no legal or contractual claim or remedy
against the consumer based on the consumer's failure to repay in the
event the amount advanced is not repaid in full. This provision does
not prevent the entity from obtaining a one-time authorization to seek
repayment from the consumer's transaction account.
3(e) Alternative Loans
1. General. Section 1041.3(e) conditionally exempts from this part
alternative covered loans that satisfy the conditions and requirements
set forth in Sec. 1041.3(e). Nothing in Sec. 1041.3(e) provides
lenders with an exemption from the requirements of other applicable
laws, including State laws. The conditions for an alternative loan made
under Sec. 1041.3(e) largely track the conditions set forth by the
National Credit Union Administration at 12 CFR 701.21(c)(7)(iii) for a
Payday Alternative Loan made by a Federal credit union. All lenders,
including Federal credit unions and persons that are not Federal credit
unions, are permitted to make loans under Sec. 1041.3(e), provided
that such loans are permissible under other applicable laws, including
State laws.
3(e)(1) Loan Term Conditions
Paragraph 3(e)(1)(iv)
1. Substantially equal payments. Under Sec. 1041.3(e)(1)(iv),
payments are substantially equal in amount if the amount of each
scheduled payment on the loan is equal to or within a small variation
of the others. For example, if a loan is repayable in six biweekly
payments and the amount of each scheduled payment is within 1 percent
of the amount of the other payments, the loan is repayable in
substantially equal payments. In determining whether a loan is
repayable in substantially equal payments, a lender may disregard the
effects of collecting the payments in whole cents.
2. Substantially equal intervals. The intervals for scheduled
payments are substantially equal if the payment schedule requires
repayment on the same date each month or in the same number of days of
the prior scheduled payment. For example, a loan for which payment is
due every 15 days has payments due in substantially equal intervals. A
loan for which payment is due on the 15th day of each month also has
payments due in substantially equal intervals. In determining whether
payments fall due in substantially equal intervals, a lender may
disregard that dates of scheduled payments may be slightly changed
because the scheduled date is not a business day, that months have
different numbers of days, and the occurrence of leap years. Section
1041.3(e)(1)(iv) does not prevent a lender from accepting prepayment on
a loan made under Sec. 1041.3(e).
3. Amortization. Section 1041.3(e)(1)(iv) requires that the
scheduled payments fully amortize the loan over the contractual period
and prohibits lenders from making loans under Sec. 1041.3(e) with
interest-only payments or with a payment schedule that front-loads
payments of interest and fees. While under Sec. 1041.3(e)(1)(iv) the
payment amount must be substantially equal for each scheduled payment,
the amount of the payment that goes to principal and to interest will
vary. The amount of payment applied to interest will be greater for
earlier payments when there is a larger principal outstanding.
Paragraph 3(e)(1)(v)
1. Cost of credit. Under Sec. 1041.3(e)(1)(v), the lender must not
impose any charges other than the rate and application fees permissible
for Federal credit unions to charge under 12 CFR 701.21(c)(7)(iii).
Under 12 CFR 701.21(c)(7)(iii), application fees must reflect the
actual costs associated with processing the application and must not
exceed $20.
3(e)(2) Borrowing History Condition
1. Relevant records. A lender may make an alternative covered loan
under Sec. 1041.3(e) only if the lender determines from its records
that the consumer's borrowing history on alternative covered loans made
under Sec. 1041.3(e) meets the criteria set forth in Sec.
1041.3(e)(2). The lender is not required to obtain information about a
consumer's borrowing history from other persons, such as by obtaining a
consumer report from an information system that has been registered for
180 days or more pursuant to Sec. 1041.11(c)(2) or is registered with
the Bureau pursuant to Sec. 1041.11(d)(2).
2. Determining 180-day period. For purposes of counting the number
of loans made under Sec. 1041.3(e)(2), the 180-day period begins on
the date that is 180 days prior to the consummation date of the loan to
be made under
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Sec. 1041.3(e) and ends on the consummation date of such loan.
3. Total number of loans made under Sec. 1041.3(e)(2). Section
1041.3(e)(2) excludes loans from the conditional exemption in Sec.
1041.3(e) if the loan would result in the consumer being indebted on
more than three outstanding loans made under Sec. 1041.3(e) from the
lender in any consecutive 180-day period. See Sec. 1041.2(a)(17) for
the definition of outstanding loan. Under Sec. 1041.3(e)(2), the
lender is required to determine from its records the consumer's
borrowing history on alternative covered loans made under Sec.
1041.3(e) by the lender. The lender must use this information about
borrowing history to determine whether the loan would result in the
consumer being indebted on more than three outstanding loans made under
Sec. 1041.3(e) from the lender in a consecutive 180-day period,
determined in the manner described in comment 3(e)(2)-2. Section
1041.3(e) does not prevent lenders from making a covered loan subject
to the requirements of this part.
4. Example. For example, assume that a lender seeks to make an
alternative loan under Sec. 1041.3(e) to a consumer and the loan does
not qualify for the safe harbor under Sec. 1041.3(e)(4). The lender
checks its own records and determines that during the 180 days
preceding the consummation date of the prospective loan, the consumer
was indebted on two outstanding loans made under Sec. 1041.3(e) from
the lender. The loan, if made, would be the third loan made under Sec.
1041.3(e) on which the consumer would be indebted during the 180-day
period and, therefore, would be exempt from this part under Sec.
1041.3(e). If, however, the lender determined that the consumer was
indebted on three outstanding loans under Sec. 1041.3(e) from the
lender during the 180 days preceding the consummation date of the
prospective loan, the condition in Sec. 1041.3(e)(2) would not be
satisfied and the loan would not be an alternative loan subject to the
exemption under Sec. 1041.3(e) but would instead be a covered loan
subject to the requirements of this part.
3(e)(3) Income Documentation Condition
1. General. Section 1041.3(e)(3) requires lenders to maintain
policies and procedures for documenting proof of recurring income and
to comply with those policies and procedures when making alternative
loans under Sec. 1041.3(e). Section 1041.3(e)(3) does not require
lenders to undertake the same income documentation procedures required
by Sec. 1041.5(c)(2). For the purposes of Sec. 1041.3(e)(3), lenders
may establish any procedure for documenting recurring income that
satisfies the lender's own underwriting obligations. For example,
lenders may choose to use the procedure contained in the National
Credit Union Administration's guidance at 12 CFR 701.21(c)(7)(iii) on
Payday Alternative Loan programs recommending that Federal credit
unions document consumer income by obtaining two recent paycheck stubs.
3(f) Accommodation Lending
1. General. Section 1041.3(f) provides a conditional exemption for
covered loans if, at the time of origination: (1) The lender and its
affiliates collectively have made 2,500 or fewer covered loans in the
current calendar year and made 2,500 or fewer covered loans in the
preceding calendar year; and (2) during the most recent completed tax
year in which the lender was in operation, if applicable, the lender
and any affiliates that were in operation and used the same tax year
derived no more than 10 percent of their receipts from covered loans,
or if the lender was not in operation in a prior tax year, the lender
reasonably anticipates that the lender and any of its affiliates that
use the same tax year will, during the current tax year, derive no more
than 10 percent of their combined receipts from covered loans. For
example, assume a lender begins operation in January 2019, uses the
calendar year as its tax year, and has no affiliates. In 2019, the
lender could originate up to 2,500 covered loans that are not subject
to the requirements of this part if at the time of each origination it
reasonably anticipates that no more than 10 percent of its receipts
during the current tax year will derive from covered loans. In 2020,
the lender could originate up to 2,500 covered loans that are not
subject to the requirements of this part if the lender made 2,500 or
fewer covered loans in 2019 and the lender derived no more than 10
percent of its receipts in the 2019 tax year from covered loans.
Section 1041.3(f) provides that covered longer-term loans for which all
transfers meet the conditions in Sec. 1041.8(a)(1)(ii), and receipts
from such loans, are not included for the purpose of determining
whether the conditions of Sec. 1041.3(f)(1) and (2) have been
satisfied. For example, a bank that makes a covered longer-term loan
using a loan agreement that includes the conditions in Sec.
1041.8(a)(1)(ii) does not need to include that loan, or the receipts
from that loan, in determining whether it is below the 2,500 loan
threshold or the 10 percent of receipts threshold in Sec. 1041.3(f)(1)
and (2).
2. Reasonable anticipation of receipts for current tax year. A
lender and its affiliates can look to receipts to date in forecasting
their total receipts for the current tax year, but are expected to make
reasonable adjustments to account for an upcoming substantial change in
business plans or other relevant and known factors.
Section 1041.4-- Identification of Unfair and Abusive Practice
1. General. A lender who complies with Sec. 1041.5 in making a
covered short-term loan or a covered longer-term balloon-payment loan
has not engaged in the unfair and abusive practice under Sec. 1041.4.
A lender who complies with Sec. 1041.6 in making a covered short-term
loan has not committed the unfair and abusive practice under Sec.
1041.4 and is not subject to Sec. 1041.5.
Section 1041.5--Ability-to-Repay Determination Required
5(a) Definitions
5(a)(1) Basic Living Expenses
1. General. Under Sec. 1041.5(b), a lender must make a reasonable
determination that the consumer has the ability to repay a covered
short-term loan or covered longer-term balloon-payment loan according
to its terms. The consumer's ability to meet basic living expenses is
part of the broader ability-to-repay determination under Sec.
1041.5(b). See comment 5(b)-1 for additional clarification. The
lender's estimate of basic living expenses must be reasonable. The
lender may make a reasonable estimate of basic living expenses without
making an individualized determination. See comment 5(b)-2.i.C for
additional clarification.
2. Expenditures included in basic living expenses. Section
1041.5(a)(1) defines basic living expenses as expenditures, other than
payments for major financial obligations, that the consumer makes for
goods and services necessary to maintain the consumer's health,
welfare, and ability to produce income, and the health and welfare of
the members of the consumer's household who are financially dependent
on the consumer. Examples of basic living expenses include food,
utilities not paid as part of rental housing expenses, transportation,
out-of-pocket medical expenses, phone and Internet services, and
childcare. Basic living expenses do not include expenditures for
discretionary personal and household goods or services, such as
newspaper subscriptions, or vacation
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activities. If the consumer is responsible for payment of household
goods and services on behalf of the consumer's dependents, those
expenditures are included in basic living expenses. As part of its
reasonable ability-to-repay determination, the lender may reasonably
consider whether another person (e.g., a spouse or adult family member
living with the consumer) is regularly contributing toward the
consumer's payment of basic living expenses (see comment 5(b)-2.i.C.2).
5(a)(2) Debt-to-Income Ratio
1. General. Section 1041.5(a)(2) defines debt-to-income ratio as
the ratio, expressed as a percentage, of the sum of the amounts that
the lender projects will be payable by the consumer for major financial
obligations during the relevant monthly period and the payments under
the covered short-term loan or covered longer-term balloon-payment loan
during the relevant monthly period, to the monthly net income that the
lender projects the consumer will receive during the relevant monthly
period, all of which projected amounts are determined in accordance
with Sec. 1041.5(c). See Sec. 1041.5(b)(2)(i) and associated
commentary for further clarification on the use of debt-to-income
methodology to determine ability to repay. For covered longer-term
balloon-payment loans, where the relevant monthly period may fall well
into the future relative to the consummation of the loan, the lender
must calculate the debt-to-income ratio using the projections made
under Sec. 1041.5(c) and in so doing must make reasonable assumptions
about the consumer's net income and major financial obligations during
the relevant monthly period compared to the period covered by the
verification evidence. For example, the lender cannot assume, absent a
reasonable basis, that there will be a substantial increase in net
income or decrease in major financial obligations between consummation
and the relevant monthly period. For further clarification, see comment
5(c)(1)-1 regarding the consistency between the consumer's written
statement and verification evidence and comment 5(c)(2)(ii)(A)-2
regarding what constitutes sufficient history of net income for
purposes of verification evidence.
5(a)(3) Major Financial Obligations
1. General. Section 1041.5(a)(3) defines major financial
obligations as a consumer's housing expense, required payments due
under debt obligations (including, without limitation, outstanding
covered loans), child support obligations, and alimony obligations.
Housing expense includes the total periodic amount that the consumer
pays for housing during the relevant monthly period, such as the amount
the consumer pays to a landlord for rent or to a creditor for a
mortgage (including principal, interest, and any escrowed amounts if
required). Debt obligations for purposes of Sec. 1041.5(a)(3) do not
include amounts due or past due for medical bills, utilities, and other
items that are generally defined as basic living expenses under Sec.
1041.5(a)(1). The amount of a payment required under a debt obligation
includes the amount the consumer must pay when due to avoid delinquency
under the debt obligation in the absence of any affirmative act by the
consumer to extend, delay, or restructure the repayment schedule. Thus,
this would include periodic or lump-sum payments for automobile loans,
student loans, and other covered and non-covered loans, and minimum
monthly credit card payments due during the relevant monthly period. It
also includes any delinquent amounts on such obligations that are due
as of the relevant monthly period, except where an obligation on a
covered short-term loan or a covered longer-term balloon-payment loan
is no longer outstanding or where the obligation is listed as charged
off on a national consumer report. For example, if the consumer has a
periodic automobile loan payment from a prior period that is past due
and the automobile finance company adds the past due payment to the
next regularly scheduled periodic payment which falls during the
relevant monthly period, then the past due periodic payment is a major
financial obligation.
2. Motor vehicle leases. For purposes of this rule, motor vehicle
leases shall be treated as a debt obligation.
5(a)(5) Net Income
1. General. Section 1041.5(a)(5) defines a consumer's net income to
mean the total amount that a consumer receives after the payer has
deducted amounts for taxes withheld by the consumer, other obligations,
and voluntary contributions (but before deductions of any amounts for
payments under a prospective covered short-term loan or covered longer-
term balloon-payment loan or for any major financial obligation);
provided that, a lender may elect to include in the consumer's net
income the amount of any income of another person to which a consumer
has a reasonable expectation of access (see comment 5(a)(5)-3). Net
income includes income that is regularly received by the consumer as
take-home pay, whether the consumer is treated as an employee or
independent contractor. Net income also includes income regularly
received by the consumer from other sources, such as child support or
alimony received by the consumer and any payments received by the
consumer from retirement, social security, disability, or other
government benefits, or annuity plans. Lenders may include in net
income irregular or seasonal income, such as tips, bonuses, and
overtime pay. Net income does not include one-time payments anticipated
to be received in the future from non-standard sources, such as legal
settlements, tax refunds, jury prizes, or remittances, unless there is
verification evidence of the amount and expected timing of such income.
If the consumer receives a traditional pay check but the verification
evidence obtained under Sec. 1041.5(c)(2) shows payment of gross
income or otherwise is unclear about whether deductions for the
consumer's taxes, other obligations, or voluntary contributions have
been made, or if the consumer is not paid via a traditional pay check,
then the lender may draw reasonable conclusions from the information
provided and is not required to inquire further about deductions for
the consumer's taxes, other obligations, or voluntary contributions.
2. Other obligations and voluntary contributions. An example of
other obligations is a consumer's portion of payments for premiums for
employer-sponsored health insurance plans. An example of a voluntary
contribution is a consumer's contribution to a defined contribution
plan meeting the requirements of Internal Revenue Code section 401(a),
26 U.S.C. 401(a). The lender may inquire about and reasonably consider
whether voluntary contributions will be discontinued prior to the
relevant monthly period, in which case they would not be deducted from
the amount of net income that is projected.
3. Reasonable expectation of access to another person's income.
Under Sec. 1041.5(a)(5), a lender may elect to include in the
consumer's net income the amount of any income of another person to
which the consumer has a reasonable expectation of access. The income
of any other person is considered net income to which the consumer has
a reasonable expectation of access if the consumer has direct access to
those funds on a regular basis through a transaction account in which
the consumer is an accountholder or cardholder. If the lender elects to
include any income of another person to which the consumer has a
reasonable
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expectation of access, then as part of the lender's obligation to make
a reasonable projection of the consumer's net income during the
applicable period, the lender must obtain verification evidence
demonstrating that the consumer has a reasonable expectation of access
to the portion of the other person's income that the lender includes
within its net income projection. See Sec. 1041.5(c)(2)(ii)(A) and
associated commentary. The following examples illustrate when a
consumer has reasonable expectation of access to the income of another
person for purposes of Sec. 1041.5(a)(5):
i. The consumer's spouse has a salary or income that is deposited
regularly into a joint account the spouse shares with the consumer. The
consumer has a reasonable expectation of access to the spouse's income.
ii. The consumer shares a household with a sibling. The sibling's
salary or other income is deposited into an account in which the
consumer does not have access. However, the sibling regularly transfers
a portion of that income from the sibling's deposit account into the
consumer's deposit account. The consumer has a reasonable expectation
of access to that portion of the sibling's income.
iii. The consumer's spouse has a salary or other income that is
deposited into an account to which the consumer does not have access,
and the spouse does not regularly transfer a portion of that income
into the consumer's account. The consumer does not have a reasonable
expectation of access to the spouse's income.
iv. The consumer does not have a joint bank account with his
spouse, nor does the spouse make regular deposits into the consumer's
individual deposit account. However, the spouse regularly pays for a
portion of the consumer's basic living expenses. The consumer does not
have a reasonable expectation of access to the spouse's income.
However, regular contributions toward payment of the consumer's basic
living expenses may be considered by the lender as a consumer-specific
factor that is relevant if the lender makes an individualized estimate
of basic living expenses (see comment 5(b)-2.i.C.2 for further
clarification).
5(a)(6) Payment Under the Covered Short-Term Loan or Covered Longer-
Term Balloon-Payment Loan
Paragraphs 5(a)(6)(i) and (ii)
1. General. Section 1041.5(a)(6)(i) defines payment under a covered
short-term loan or covered longer-term balloon-payment loan as the
combined dollar amount payable by the consumer at a particular time
following consummation in connection with the loan, assuming that the
consumer has made preceding required payments and in the absence of any
affirmative act by the consumer to extend or restructure the repayment
schedule or to suspend, cancel, or delay payment for any product,
service, or membership provided in connection with the covered short-
term loan or covered longer-term balloon-payment loan. Section
1041.5(a)(6)(ii) clarifies that it includes all principal, interest,
charges, and fees. A lender may not exclude a portion of the payment
simply because a consumer could avoid or delay paying a portion of the
payment, such as by requesting forbearance for that portion or by
cancelling a service provided in exchange for that portion. For
example:
i. Assume that in connection with a covered longer-term balloon-
payment loan, a consumer would owe a periodic payment on a particular
date of $100 to the lender, which consists of $15 in finance charges,
$80 in principal, and a $5 service fee, and the consumer also owes $10
as a credit insurance premium to a separate insurance company. Assume
further that under the terms of the loan or other agreements entered
into in connection with the loan, the consumer has the right to cancel
the credit insurance at any time and avoid paying the $10 credit
insurance premium. The payment under the loan is $110.
ii. Assume that in connection with a covered short-term loan, a
consumer would owe on a particular date $25 in finance charges to the
lender. Under the terms of the loan, the consumer has the option of
paying $50 in principal on that date, in which case the lender would
charge $20 in finance charges instead. The payment under the loan is
$25.
iii. Assume that in connection with a covered short-term loan, a
consumer would owe on a particular date $25 in finance charges to the
lender and $70 in principal. Under the terms of the loan, the consumer
has the option of logging into her account on the lender's Web site and
selecting an option to defer the due date of the $70 payment toward
principal. The payment under the covered loan is $95.
Paragraph 5(a)(6)(iii)
1. General. Section 1041.5(a)(6)(iii) provides assumptions that a
lender must make in calculating the payment under Sec. 1041.5(a)(6)
for a covered short-term loan or covered longer-term balloon-payment
loan that is a line of credit (regardless of the extent to which
available credit will be replenished as the consumer repays earlier
advances). For a line of credit, the amount and timing of the
consumer's actual payments after consummation may depend on the
consumer's utilization of the credit or on amounts that the consumer
has repaid prior to the payments in question. Section 1041.5(a)(6)(iii)
requires the lender to calculate the total loan payment assuming that
the consumer will utilize the full amount of credit under the loan as
soon as the credit is available and that the consumer will make only
minimum required payments for as long as permitted under the loan
agreement. Lenders should use the same test with the same assumptions
when they make a new ability-to-repay determination under Sec.
1041.5(b)(1)(ii) prior to an advance under the line of credit that is
more than 90 days after the date of a prior ability-to-repay
determination for the line of credit, in order to determine whether the
consumer still has the ability to repay the current credit line.
5(a)(8) Residual Income
1. General. Under Sec. 1041.5(a)(8), residual income is defined as
the sum of net income that the lender projects the consumer will
receive during the relevant monthly period, minus the sum of amounts
that the lender projects will be payable by the consumer for major
financial obligations during the relevant monthly period and payments
under the covered short-term loan or covered longer-term balloon-
payment loan during the relevant monthly period, all of which projected
amounts are determined in accordance with Sec. 1041.5(c). See Sec.
1041.5(b)(2)(ii) and associated commentary for further clarification on
the use of residual income methodology to determine ability to repay.
For covered longer-term balloon-payment loans, where the relevant
monthly period may fall well into the future relative to the
consummation of the loan, the lender must calculate the residual income
using the projections made under Sec. 1041.5(c) and in so doing must
make reasonable assumptions about the consumer's net income and major
financial obligations during the relevant monthly period compared to
the period covered by the verification evidence. For example, the
lender cannot assume, absent a reasonable basis, that there will be a
substantial increase in net income or decrease in major financial
obligations between consummation and the relevant monthly period. For
further clarification, see comment 5(c)(1)-1 regarding the consistency
between the consumer's written statement and
[[Page 54898]]
verification evidence and comment 5(c)(2)(ii)(A)-2 regarding what
constitutes sufficient history of net income for purposes of
verification evidence.
5(b) Reasonable Determination Required
1. Overview. Section 1041.5(b) prohibits a lender from making a
covered short-term loan (other than a covered short-term loan described
in Sec. 1041.6) or a covered longer-term balloon-payment loan or
increasing the amount of credit available on such loan unless it first
makes a reasonable determination that the consumer will have the
ability to repay the loan according to its terms. For discussion of
loan modifications, see comment 2(a)(5)-2. Section 1041.5(b) provides
minimum standards that the lender's determination must meet to
constitute a reasonable determination. Section 1041.5(b)(2) provides
that a lender's ability-to-repay determination for a covered short-term
loan or covered longer-term balloon-payment loan is reasonable only if
the lender reasonably concludes that, based on the estimates of the
consumer's basic living expenses for the relevant monthly period and
the calculation of the consumer's residual income or the debt-to-income
ratio for the relevant monthly period, as applicable, the consumer can
pay for major financial obligations, make any payments under the loan,
and meet basic living expenses during the periods specified in Sec.
1041.5(b)(2). For covered short-term loans, the periods are the shorter
of the term of the loan or the period ending 45 days after consummation
of the loan, and 30 days after having made the highest payment on the
loan. For covered longer-term balloon-payment loans, the periods are
the relevant monthly period, and 30 days after having made the highest
payment on the loan. Thus, the rule requires lenders to make a debt-to-
income ratio or residual income calculation and an estimate of basic
living expenses for the relevant monthly period--the calendar month in
which the highest payments are due on the covered short-term loan or
covered longer-term balloon payment loan--and to use the results of the
calculation and estimate to make reasonable inferences and draw a
reasonable conclusion about whether the consumer can make loan
payments, pay for major financial obligations, and meet basic living
expenses during the periods specified in Sec. 1041.5(b)(2). This
analysis is designed to determine whether the consumer has the ability
to repay the loan according to its terms. See Sec. 1041.5(b)(2)(i) and
(ii) and corresponding commentary.
2. Reasonable determination. To comply with the requirements of
Sec. 1041.5(b), a lender's determination that a consumer will have the
ability to repay a covered short-term loan or covered longer-term
balloon-payment loan must be reasonable in all respects.
i. To be reasonable, a lender's determination of a consumer's
ability to repay a covered short-term loan or covered longer-term
balloon-payment loan must:
A. Include the reasonable conclusions required in Sec.
1041.5(b)(2), using either the debt-to-income ratio methodology under
Sec. 1041.5(b)(2)(i) or the residual income methodology under Sec.
1041.5(b)(2)(ii) as applied to the relevant monthly period;
B. Be based on reasonable projections of a consumer's net income
and major financial obligations during the relevant monthly period in
accordance with Sec. 1041.5(c);
C. Be based on reasonable estimates of basic living expenses during
the relevant monthly period. The following provides additional
clarification on what constitutes reasonable estimates of basic living
expenses:
1. Section 1041.5(a)(1) and (b) do not specify a particular method
that a lender must use to determine a consumer's basic living expenses.
A lender is not required to itemize the basic living expenses of each
consumer, but may instead arrive at estimates for the amount needed to
cover the costs of food, utilities not paid as part of rental housing
expenses, transportation, out-of-pocket medical expenses, phone and
Internet services, and childcare. A lender may reasonably estimate the
dollar amount or percentage of net income the consumer will need to
meet these basic living expenses based upon such sources as the
lender's own experience in making covered short-term or longer-term
balloon-payment loans to similarly-situated consumers, reasonably
reliable information available from government surveys or other
publications about the basic living expenses of similarly-situated
consumers, or some combination thereof. For example, it would be
reasonable for the lender to use data about relevant categories of
expenses from the Consumer Expenditure Survey of the Bureau of Labor
Statistics or the Internal Revenue Code's Collection Financial
Standards, or a combination of the two data sources, to develop non-
individualized estimates of food, utilities not paid as part of rental
housing expenses, transportation, out-of-pocket medical expenses, phone
and internet services, and childcare for consumers seeking covered
short-term or longer-term balloon-payment loans. In using the data from
those sources to estimate the amount spent on a particular category,
the lender may make reasonable adjustments to arrive at an estimate of
basic living expenses, for instance where a data source's information
on a particular type of basic living expenses overlaps with a type of
major financial obligation as defined in Sec. 1041.5(a)(3) or where a
data source groups expenses into different categories than comment
5(a)(1)-2.
2. If the lender is conducting an individualized estimate by
itemizing the consumer's costs of food, utilities not paid as part of
rental housing expenses, transportation, out-of-pocket medical
expenses, phone and Internet services, and childcare, the lender may
reasonably consider other factors specific to the consumer that are not
required to be projected under Sec. 1041.5(c). Such consumer-specific
factors could include whether other persons are regularly contributing
toward the consumer's payment of basic living expenses. The lender may
consider such consumer-specific factors only when it is reasonable to
do so. It is not reasonable for the lender to consider whether other
persons are regularly contributing toward the consumer's payment of
basic living expenses if the lender is separately including in its
projection of net income any income of another person to which the
consumer has a reasonable expectation of access; and
D. Be consistent with a lender's written policies and procedures
required under Sec. 1041.12 and grounded in reasonable inferences and
conclusions as to a consumer's ability to repay a covered short-term
loan or covered longer-term balloon-payment loan according to its terms
in light of information the lender is required to obtain or consider as
part of its determination under Sec. 1041.5(b).
ii. A determination of ability to repay is not reasonable if it:
A. Relies on an implicit or explicit assumption that the consumer
will obtain additional consumer credit to be able to make payments
under the covered short-term loan or covered longer-term balloon-
payment loan, to make payments under major financial obligations, or to
meet basic living expenses;
B. Assumes that a consumer needs implausibly low amounts of funds
to meet basic living expenses under the residual income methodology or
an implausibly low percentage of net income to meet basic living
expenses if a lender uses the debt-to-income methodology. For example,
assume a
[[Page 54899]]
consumer seeks a covered short-term loan. The lender uses a debt-to-
income methodology to make an ability-to-repay determination. Based on
the lender's projections of the consumer's net income and major
financial obligations under Sec. 1041.5(c), the lender calculates that
the consumer's debt-to-income ratio would be 90 percent, which means
that only 10 percent of the consumer's net income will be remaining to
pay for basic living expenses. It is not reasonable for the lender to
conclude under Sec. 1041.5(b)(2) that a consumer with a 90 percent
debt-to-income ratio would have the ability to repay the loan. See
comment 5(b)(2)(i)-3 for additional examples of ability-to-repay
determinations using the debt-to-income methodology; or
C. For covered longer-term balloon-payment loans, if the lender
relies on an assumption that a consumer will accumulate savings while
making one or more payments under a covered longer-term balloon-payment
loan and that, because of such assumed savings, the consumer will be
able to make a subsequent loan payment under the loan.
iii. Evidence that a lender's determinations of ability to repay
are not reasonable may include, without limitation, the factors
described under paragraphs (A) through (E) of comment 5(b)-2.iii. These
factors may be evaluated across a lender's entire portfolio of covered
short-term loans or covered longer-term balloon-payment loans or with
respect to particular products, geographic regions, particular periods
during which the loans were made, or other relevant categorizations.
Other relevant categorizations would include, without limitation, loans
made in reliance on consumer statements of income in the absence of
verification evidence (see comment 5(c)(2)(ii)(A)-4). The factors
described under paragraphs (A) through (E) of comment 5(b)-2.iii may be
considered either individually or in combination with one another.
These factors also are not absolute in their application; instead, they
exist on a continuum and may apply to varying degrees. Each of these
factors is viewed in the context of the facts and circumstances
relevant to whether the lender's ability-to-repay determinations are
reasonable. Relevant evidence may also include a comparison of the
following factors on the part of the lender to that of other lenders
making covered short-term loans or covered longer-term balloon-payment
loans to similarly situated consumers; however, such evidence about
comparative performance is not dispositive as to the evaluation of a
lender's ability-to-repay determinations.
A. Default rates. This evidence includes defaults during and at the
expiration of covered loan sequences as calculated on a per sequence or
per consumer basis;
B. Re-borrowing rates. This evidence includes the frequency with
which the lender makes consumers multiple covered short-term loans or
covered longer-term balloon-payment loans within a loan sequence as
defined in Sec. 1041.2(a)(14) (i.e., consecutive or concurrent loans
taken out within 30 days of a prior loan being outstanding);
C. Patterns of lending across loan sequences. This evidence
includes the frequency with which the lender makes multiple sequences
of covered short-term loans or covered longer-term balloon-payment
loans to consumers. This evidence also includes the frequency with
which the lender makes consumers new covered short-term loans or
covered longer-term balloon-payment loans immediately or soon after the
expiration of a cooling-off period under Sec. 1041.5(d)(2) or the 30-
day period that separates one loan sequence from another (see Sec.
1041.2(a)(14));
D. Evidence of delinquencies and collateral impacts. This evidence
includes the proportion of consumers who incur late fees, failed
presentments, delinquencies, and repossessions of motor vehicles for
loans involving vehicle security; and
E. Patterns of non-covered lending. This evidence includes the
frequency with which the lender makes non-covered loans shortly before
or shortly after consumers repay a covered short-term loan or covered
longer-term balloon-payment loan, and the non-covered loan bridges all
or a substantial part of either the period between two loans that
otherwise would be part of a loan sequence or of a cooling-off period.
An example would be where the lender, its affiliate, or a service
provider frequently makes 30-day non-recourse pawn loans to consumers
shortly before or soon after repayment of covered short-term loans made
by the lender, and where the lender then makes additional covered
short-term loans to the same consumers soon after repayment of the pawn
loans.
iv. Examples of evidence of the reasonableness of ability-to-repay
determinations. The following examples illustrate how the factors
described in comment 5(b)-2.iii may constitute evidence about whether
lenders' determinations of ability to repay are reasonable under Sec.
1041.5(b):
A. A significant percentage of consumers who obtain covered short-
term loans from a lender under Sec. 1041.5 re-borrow within 30 days of
repaying their initial loan, re-borrow within 30 days of repaying their
second loan, and re-borrow shortly after the end of the cooling-off
period that follows the initial loan sequence of three loans. Based on
the combination of these factors, this evidence suggests that the
lender's ability-to-repay determinations are not reasonable.
B. A lender frequently makes at or near the maximum number of loans
permitted under Sec. 1041.6 to consumers early within a 12-month
period (i.e., the loans do not require ability-to-repay determinations)
and then makes a large number of additional covered short-term loans to
those same consumers under Sec. 1041.5 (i.e., the loans require
ability-to-repay determinations) later within the 12-month period.
Assume that the loans made under Sec. 1041.5 are part of multiple loan
sequences of two or three loans each and the sequences begin soon after
the expiration of applicable cooling-off periods or 30-day periods that
separate one loan sequence from another. This evidence suggests that
the lender's ability-to-repay determinations for the covered short-term
loans made under Sec. 1041.5 are not reasonable. The fact that some of
the loans in the observed pattern were made under Sec. 1041.6 and thus
are conditionally exempted from the ability-to-repay requirements does
not mitigate the potential unreasonableness of the ability-to-repay
determinations for the covered short-term loans that were made under
Sec. 1041.5.
C. A lender frequently makes at or near the maximum number of loans
permitted under Sec. 1041.6 to consumers early within a 12-month
period (i.e., the loans do not require ability-to-repay determinations)
and then only occasionally makes additional covered short-term loans to
those same consumers under Sec. 1041.5 (i.e., the loans require
ability-to-repay determinations) later within the 12-month period. Very
few of those additional loans are part of loans sequences longer than
one loan. Absent other evidence that the ability-to-repay determination
is unreasonable (see comment 5(b)-2.iii.A through E), this evidence
suggests that the lender's ability-to-repay determinations for the
loans made under Sec. 1041.5 are reasonable.
D. Within a lender's portfolio of covered short-term loans, a small
percentage of loans result in default, consumers generally have short
loan sequences (fewer than three loans), and
[[Page 54900]]
the consumers who take out multiple loan sequences typically do not
begin a new loan sequence until several months after the end of a prior
loan sequence. There is no evidence of the lender or an affiliate
making non-covered loans to consumers to bridge cooling-off periods or
the periods between loan sequences. This evidence suggests that the
lender's ability-to-repay determinations are reasonable.
3. Payments under the covered short-term loan or longer-term
balloon-payment loan. Under the ability-to-repay requirements in Sec.
1041.5(b)(2)(i) and (ii), a lender must determine the amount of the
payments due in connection with the covered short-term loan or covered
longer-term balloon-payment loan during the relevant monthly period.
See Sec. 1041.5(a)(6) for the definition of payment under a covered
short-term loan or covered longer-term balloon-payment loan, including
assumptions that the lender must make in calculating the amount of
payments under a loan that is a line of credit.
Paragraph 5(b)(2)
1. General. For a covered short-term loan, Sec. 1041.5(b)(2)
requires the lender to reasonably conclude that, based on the estimates
of the consumer's basic living expenses for the relevant monthly period
and the lender's calculation of the consumer's debt-to-income ratio or
residual income for the relevant monthly period, as applicable, the
consumer can pay major financial obligations, make any payments on the
loan, and meet basic living expenses during the shorter of the term of
the loan or the period ending 45 days after consummation of the loan,
and for 30 days after having made the highest payment on the loan. See
Sec. 1041.5(b)(2)(i)(A) (the debt-to-income methodology) and Sec.
1041.5(b)(2)(ii)(A) (the residual income methodology) and corresponding
commentary. For a covered longer-term balloon-payment loan, Sec.
1041.5(b)(2) requires the lender to reasonably conclude that, based on
the estimates of the consumer's basic living expenses for the relevant
monthly period and the lender's calculation of the consumer's debt-to-
income ratio or residual income, as applicable, the consumer can pay
major financial obligations, make any payments on the loan, and meet
basic living expenses during the relevant monthly period, and for 30
days after having made the highest payment on the loan. See Sec.
1041.5(b)(2)(i)(B) (the debt-to-income methodology) and Sec.
1041.5(b)(2)(ii)(B) (the residual income methodology) and corresponding
commentary. If the loan has two or more payments that are equal to each
other in amount and higher than all other payments, the date of the
highest payment under the loan is considered the later in time of the
two or more highest payments. Under Sec. 1041.5(b)(2), lenders must
comply with either Sec. 1041.5(b)(2)(i) or (ii) depending on whether
they utilize the residual income or debt-to-income ratio methodology.
Paragraph 5(b)(2)(i)
1. Relation of periods under Sec. 1041.5(b)(2)(i) to relevant
monthly period. Section 1041.5(a)(2) defines debt-to-income ratio as
the ratio, expressed as a percentage, of the sum of the amounts that
the lender projects will be payable by the consumer for major financial
obligations during the relevant monthly period and the payments under
the covered short-term loan or covered longer-term balloon-payment loan
during the relevant monthly period, to the net income that the lender
projects the consumer will receive during the relevant monthly period,
all of which projected amounts are determined in accordance with Sec.
1041.5(c). Comment 5(a)(2)-1 clarifies that the relevant monthly period
is the calendar month during which the highest sum of payments on the
loan is due. The relevant monthly period is not the same period as the
periods set forth in Sec. 1041.5(b)(2)(i), which for covered short-
term loans are the shorter of the loan term or 45 days following
consummation, and 30 days following the date of the highest payment
under the loan, and for covered longer-term balloon-payment loans are
the relevant monthly period, and 30 days following the date of the
highest payment under the loan. There may be overlap between the
relevant monthly period and the periods set forth in Sec.
1041.5(b)(2)(i), but the degree of overlap will depend on the
contractual duration of the loan and the consummation and contractual
due dates. For example, assume a consumer takes a covered short-term
loan of 30 days in duration that is consummated on June 15 and with a
single payment due on July 14. The relevant monthly period is the
calendar month in which the sum of the highest payments on the loan is
due, which is the calendar month of July. This means that a portion of
both the loan term (i.e., June 15 to June 30) and the 30-day period
following the date of the highest payment on the loan (i.e., August 1
to August 13) are outside of the relevant monthly period.
2. Use of projections for relevant monthly period to comply with
Sec. 1041.5(b)(2)(i). The lender is not required under Sec.
1041.5(b)(2)(i) to estimate the consumer's basic living expenses, make
a projection under Sec. 1041.5(c) of the consumer's net income and
major financial obligations, or calculate the consumer's debt-to-income
ratio for any period other than the relevant monthly period. The lender
may use the estimates of the consumer's basic living expenses for the
relevant monthly period, the projections about the consumer's net
income and major financial obligations during the relevant monthly
period, and the calculation of the consumer's debt-to-income ratio as a
baseline of information from which to make reasonable inferences and
draw a reasonable conclusion about whether the consumer will pay major
financial obligations, make the payments on the loan, and meet basic
living expenses during the periods specified in Sec. 1041.5(b)(2)(i).
To make reasonable inferences and draw a reasonable conclusion, the
lender cannot, for example, assume that the consumer will defer payment
of major financial obligations and basic living expenses until after
the 30-day period that follows the date of the highest payment on the
loan, or assume that obligations and expenses (other than payments on
the covered loan itself) during the 30-day period will be less than
during the relevant monthly period. Nor can the lender assume the
consumer will be able to obtain additional credit during the loan term
or during the 30-day period that follows the highest payment on the
loan.
3. Examples. The following examples illustrate Sec.
1041.5(b)(2)(i):
i. Assume a lender considers making a covered short-term loan to a
consumer on March 1. The prospective loan would be repayable in a
single payment of $385 on March 17. The lender calculates that, based
on its projections of the consumer's net income and major financial
obligations during March (i.e., the relevant monthly period), the
consumer will have a debt-to-income ratio of 55 percent. The lender
complies with the requirement in Sec. 1041.5(b)(2) if, using that
debt-to-income ratio, the lender reasonably concludes that the consumer
can pay for major financial obligations, make the loan payment, and
meet basic living expenses during the loan term and to pay for major
financial obligations and meet basic living expenses for 30 days
following the contractual due date (i.e., from March 18 to April 16).
The lender would not make a reasonable conclusion if the lender were to
assume, for example, that the consumer would defer payment of major
financial obligations until after April 16 or that the consumer would
obtain an
[[Page 54901]]
additional extension of credit on April 1.
ii. Assume a lender considers making a covered longer-term balloon-
payment loan to a consumer on March 1. The prospective loan would be
repayable in six biweekly payments. The first five of which would be
for $100, and the last of which would be for $275, due on May 20. The
highest sum of these payments that would be due within a monthly period
would be $375, during the month of May. The lender further calculates
that, based on its projections of net income and major financial
obligations during the relevant monthly period, the consumer will have
a debt-to-income ratio of 50 percent. The lender complies with the
requirement in Sec. 1041.5(b)(2)(i) if, applying that debt-to-income
ratio, the lender reasonably concludes that the consumer can pay for
major financial obligations, make the payments under the loan, and meet
basic living expenses during the month in which the highest sum of
payments on the loan are due (i.e., during the month of May) and for 30
days following the highest payment on the loan (i.e., from May 21 to
June 19). The lender would not make a reasonable conclusion if the
lender were to assume, for example, that the consumer would defer
payment of major financial obligations until after June 19 or that the
consumer would obtain an additional extension of credit on June 1.
Paragraph 5(b)(2)(ii)
1. Relation of periods under Sec. 1041.5(b)(2)(ii) to relevant
monthly period. Section 1041.5(a)(8) defines residual income as the sum
of net income that the lender projects the consumer will receive during
the relevant monthly period, minus the sum of the amounts that the
lender projects will be payable by the consumer for major financial
obligations during the relevant monthly period and payments under the
covered short-term loan or covered longer-term balloon-payment loan
during the relevant monthly period, all of which projected amounts are
determined in accordance with paragraph (c). The relevant monthly
period is the calendar month in which the highest sum of payments on
the loan is due. The relevant monthly period is not the same period as
the periods set forth in Sec. 1041.5(b)(2)(ii), although there may be
some overlap. See comment 5(b)(2)(i)-1 for further clarification and an
analogous example.
2. Use of projections for relevant monthly period to comply with
Sec. 1041.5(b)(2)(ii). The lender is not required under Sec.
1041.5(b)(2)(ii) to estimate the consumer's basic living expenses, make
a projection under Sec. 1041.5(c) of the consumer's net income and
major financial obligations, or calculate the consumer's residual
income for any period other than the relevant monthly period. The
lender may use the estimates of the consumer's basic living expenses
for the relevant monthly period, projections about the consumer's net
income and major financial obligations during the relevant monthly
period and the calculation of the consumer's residual income as a
baseline of information on which to make reasonable inferences and draw
a reasonable conclusion about whether the consumer will pay major
financial obligations, make the payments on the loan, and meet basic
living expenses during the periods specified in Sec. 1041.5(b)(2)(ii).
See comment 5(b)(2)(i)-2 for further clarification.
3. Examples. The following examples illustrate Sec.
1041.5(b)(2)(ii):
i. Assume a lender considers making a covered short-term loan to a
consumer on March 1. The prospective loan would be repayable in a
single payment of $385 on March 17. The lender calculates that, based
on its projections of the consumer's net income and major financial
obligations during March (i.e., the relevant monthly period), the
consumer will have $1,000 in residual income for the month. The lender
complies with the requirement in Sec. 1041.5(b)(2)(ii) if, based on
the calculation of residual income, it reasonably concludes that the
consumer will be able to pay major financial obligations, make the loan
payment, and meet basic living expenses during the loan term and for 30
days following the contractual due date (i.e., from March 18 to April
16). The lender would not make a reasonable conclusion if the lender
were to assume, for example, that the consumer would defer payment of
major financial obligations until after April 16, that the consumer
would obtain an additional extension of credit on April 1, or that the
consumer's net income will increase in April relative to the relevant
monthly period (i.e., March).
ii. Assume a lender considers making a covered longer-term balloon-
payment loan to a consumer on March 1. The prospective loan would be
repayable in six biweekly payments. The first five payments would be
for $100, and the last payment would be for $275, on May 20. The
highest sum of these payments that would be due within a monthly period
would be $375, during the month of May. The lender further calculates
that, based on its projections of net income and major financial
obligations during the relevant monthly period (i.e., May), and
accounting for the $375 amount, which is the highest sum of loan
payments due within a monthly period, the consumer will have $1,200 in
residual income. The lender complies with the requirement in Sec.
1041.5(b)(2)(ii) if, based on the calculation of residual income, it
reasonably concludes that the consumer will be able to pay major
financial obligations, make the loan payments, and meet basic living
expenses during the relevant monthly period (i.e., May) and to pay for
basic living expenses and major financial obligations for 30 days
following the highest payment on the loan (i.e., from May 21 to June
19). The lender would not make a reasonable conclusion if the lender
were to assume, for example, that the consumer would be able to defer
payment of major financial obligations until after June 19 or that the
consumer would obtain an additional extension of credit on June 1, or
that the consumer's net income will increase in June relative to the
relevant monthly period (i.e., May).
5(c) Projecting Consumer Net Income and Payments for Major Financial
Obligations
Paragraph 5(c)(1)
1. General. Section 1041.5(c)(1) requires lenders to consider major
financial obligations that are listed in a consumer's written statement
described in Sec. 1041.5(c)(2)(i)(B) even if the obligations do not
appear in the national credit report or other verification
documentation that lenders are required to compile under Sec.
1041.5(c)(2)(ii)(B). To be reasonable, Sec. 1041.5(c)(1) provides that
a projection of the amount of net income or payments for major
financial obligations may be based on a consumer's written statement of
amounts under Sec. 1041.5(c)(2)(i) only as specifically permitted by
Sec. 1041.5(c)(2)(ii) or (iii) or to the extent the stated amounts are
consistent with the verification evidence that is obtained in
accordance with Sec. 1041.5(c)(2)(ii). Section 1041.5(c)(1) further
provides that, in determining whether the stated amounts are consistent
with the verification evidence, the lender may reasonably consider
other reliable evidence the lender obtains from or about the consumer,
including any explanations the lender obtains from the consumer. For
example:
i. Assume that a consumer states that her net income is $900 every
two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The consumer pay stub
the lender obtains as reasonably available verification evidence
pursuant to Sec. 1041.5(c)(2)(ii)(A) shows that the consumer received
$900 during the
[[Page 54902]]
preceding pay period. The lender complies with Sec. 1041.5(c)(1) if it
makes the determination required under Sec. 1041.5(b) based on a
projection of $1,800 in net income for the relevant monthly period
because the reasonably available verification evidence supports a
projection of $900 in net income every two weeks.
ii. Assume that a consumer states that net income is $1,000 every
two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The lender obtains a
copy of the consumer's recent deposit account transaction records as
verification evidence pursuant to Sec. 1041.5(c)(2)(ii)(A). The
account transaction records show biweekly take-home pay of $800 during
the preceding two-week period. The lender does not comply with Sec.
1041.5(c)(1) if it makes the determination required under Sec.
1041.5(b) based on a net income projection of a $2,000 for the relevant
monthly period because this projection is not consistent with the
reasonably available verification evidence (which, rather, is
consistent with a total of $1,600 net income for the relevant monthly
period). The lender may request additional deposit account transaction
records for prior recent pay cycles and may reasonably project $2,000
in net income for the relevant monthly period if such additional
evidence is consistent with the consumer's statement.
iii. Assume that a consumer states that net income is $1,000 every
two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The lender obtains a
copy of the consumer's recent deposit account transaction records as
verification evidence pursuant to Sec. 1041.5(c)(2)(ii)(A). The
account transaction records show biweekly take-home pay of $800 during
the preceding two-week period. Assume also, however, that the consumer
states that the consumer supplements his regular payroll income with
cash income from a second job, for which verification evidence is not
reasonably available because the consumer is paid in cash and does not
deposit the cash into the consumer's bank account, and that the
consumer earns between $100 and $300 every two weeks from this job. In
this instance, the lender complies with Sec. 1041.5(c)(1) if it makes
the determination required under Sec. 1041.5(b) based on a net income
projection of $2,000 for the relevant monthly period. The lender's
projection includes both the payroll income from the first job for
which verification evidence is reasonably available and the cash income
from the second job for which verification evidence is not reasonably
available (see comment 5(c)(2)(ii)(A)-3). In such circumstances, the
lender may reasonably consider the additional income reflected in the
consumer's written statement pursuant to Sec. 1041.5(c)(2)(ii)(A)(1).
iv. Assume that a consumer states that her net income is $1,000
every two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The lender
obtains electronic records of the consumer's deposit account
transactions as verification evidence pursuant to Sec.
1041.5(c)(2)(ii)(A) showing a biweekly direct deposit $800 during the
preceding two-week period and a biweekly direct deposit of $1,000
during the prior two-week period. The consumer explains that the most
recent income was lower than her usual income of $1,000 because she
missed two days of work due to illness. The lender complies with Sec.
1041.5(c)(1) if it makes the determination required under Sec.
1041.5(b) based on a projection of $2,000 for the relevant monthly
period because it reasonably considers the consumer's explanation in
determining whether the stated amount is consistent with the
verification evidence.
v. Assume that a consumer states that her net income is $2,000
every two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The lender
obtains electronic records of the consumer's deposit account
transactions as verification evidence pursuant to Sec.
1041.5(c)(2)(ii)(A) showing no income transactions in the preceding
month but showing consistent biweekly direct deposits of $2,000 from
ABC Manufacturing prior to that month. The consumer explains that she
was temporarily laid off for one month while ABC Manufacturing retooled
the plant where she works but that she recently resumed work there. The
lender complies with Sec. 1041.5(c)(1) if it makes the determination
required under Sec. 1041.5(b) based on a projection of $4,000 for the
relevant monthly period because it reasonably considers the consumer's
explanation in determining whether the stated amount is consistent with
the verification evidence.
vi. Assume that a consumer states that she owes a child support
payment of $200 each month, pursuant to Sec. 1041.5(c)(2)(i)(B). The
national consumer report that the lender obtains as verification
evidence pursuant to Sec. 1041.5(c)(2)(ii)(C) does not include any
child support payment. The lender must consider the child support
obligation listed in the written statement. The lender complies with
Sec. 1041.5(c)(1) if it reasonably relies on the amount in the
consumer's written statement pursuant to Sec. 1041.5(c)(2)(ii)(C) to
make the determination required under Sec. 1041.5(b) based on a
projection of a $200 child support payment each month.
vii. Assume that a consumer does not list a student loan in her
written statement pursuant to Sec. 1041.5(c)(2)(i)(B), but the
national consumer report that the lender obtains as verification
evidence pursuant to Sec. 1041.5(c)(2)(ii)(B) lists such a loan with a
payment due during the relevant monthly period. The lender does not
comply with Sec. 1041.5(c)(1) if it makes the determination required
under Sec. 1041.5(b) without including the student loan payment based
on the consumer's failure to list the loan in the written statement or
on the consumer's explanation that the loan has recently been paid off.
The lender may obtain and reasonably consider other reliable evidence,
such as records from the consumer or an updated national consumer
report, and may exclude the student loan payment if such additional
evidence is consistent with the consumer's statement or explanation.
viii. Assume that a consumer states that he owes a child support
payment of $200 each month, pursuant to Sec. 1041.5(c)(2)(i)(B). The
national consumer report that the lender obtains as verification
evidence pursuant to Sec. 1041.5(c)(2)(ii)(C) includes the child
support payment. The consumer states, further, that his child support
payment is deducted out of his paycheck prior to his receipt of take-
home pay. The lender obtains a recent pay stub of the consumer as
verification evidence which shows a $200 deduction but does not
identify the payee or include any other information regarding the
nature of the deduction. The lender complies with Sec. 1041.5(c)(1) if
it makes the determination required under Sec. 1041.5(b) based on a
projection of major financial obligations that does not include the
$200 child support payment each month, because it relies on the
consumer's statement that the child support payment is deducted from
his paycheck prior to receipt of take-home pay and nothing in the
verification evidence is inconsistent with the statement.
2. Consumer-specific factors regarding payment of major financial
obligations. Under Sec. 1041.5(c)(1), in projecting major financial
obligations the lender may consider consumer-specific factors, such as
whether other persons are regularly contributing toward the consumer's
payment of major financial obligations. The lender may consider such
consumer-specific factors only when it is reasonable to do so. It is
not reasonable for the lender to consider whether other persons are
regularly
[[Page 54903]]
contributing toward the consumer's payment of major financial
obligations if the lender is separately including in its projection of
net income any income of another person to which the consumer has a
reasonable expectation of access (see comment 5(a)(5)-3).
5(c)(2) Evidence of Net Income and Payments for Major Financial
Obligations
Paragraph 5(c)(2)(i)
1. Statements from the consumer. Section 1041.5(c)(2)(i) requires a
lender to obtain a consumer's written statement of the amounts of the
consumer's net income and payments for the consumer's major financial
obligations currently and for the relevant monthly period. Section
1041.5(c)(2)(i) also provides that the written statement from the
consumer may include a statement from the consumer about the amount of
any income of another person to which the consumer has a reasonable
expectation of access. A consumer's written statement includes a
statement the consumer writes on a paper application or enters into an
electronic record, or an oral consumer statement that the lender
records and retains or memorializes in writing or electronically and
retains.
Paragraph 5(c)(2)(ii)
1. Verification requirement. Section 1041.5(c)(2)(ii) establishes
requirements for a lender to obtain verification evidence for the
amounts of a consumer's net income and required payments for major
financial obligations other than rental housing expense.
Paragraph 5(c)(2)(ii)(A)
1. Income. Section 1041.5(c)(2)(ii)(A) requires a lender to obtain
a reliable record (or records) of an income payment (or payments)
directly to the consumer covering sufficient history to support the
lender's projection under Sec. 1041.5(c)(1) if a reliable record (or
records) of income payment (or payments) is reasonably available.
Section 1041.5(c)(2)(ii)(A) also provides that if the lender elects to
include as the consumer's net income for the relevant monthly period
the income of another person to which the consumer has a reasonable
expectation of access, the lender must obtain verification evidence of
that income in the form of a reliable record (or records) demonstrating
that the consumer has regular access to that income. Such verification
evidence could consist of bank account statements indicating that the
consumer has access to a joint bank account in which the other person's
income is deposited, or that the other person regularly deposits income
into the consumer's bank account (see comment 5(a)(5)-3 for further
clarification). For purposes of verifying net income, a reliable
transaction record includes a facially genuine original, photocopy, or
image of a document produced by or on behalf of the payer of income, or
an electronic or paper compilation of data included in such a document,
stating the amount and date of the income paid to the consumer. A
reliable transaction record also includes a facially genuine original,
photocopy, or image of an electronic or paper record of depository
account transactions, prepaid account transactions (including
transactions on a general purpose reloadable prepaid card account, a
payroll card account, or a government benefits card account) or money
services business check-cashing transactions showing the amount and
date of a consumer's receipt of income.
2. Sufficient history. Under Sec. 1041.5(c)(2)(ii)(A), the lender
must obtain a reliable record or records of the consumer's net income
covering sufficient history to support the lender's projection under
Sec. 1041.5(c). For a covered short-term loan, sufficient history
typically would consist of one biweekly pay cycle or one monthly pay
cycle, depending on how frequently the consumer is paid. However, if
there is inconsistency between the consumer's written statement
regarding net income and the verification evidence which must be
reconciled by the lender (see comment 5(c)(1)-1), then depending on the
circumstances more than one pay cycle may be needed to constitute
sufficient history. For a covered longer-term balloon-payment loan,
sufficient history would generally consist of two biweekly pay cycles
or two monthly pay cycles, depending on how frequently the consumer is
paid. However, depending on the length of the loan, and the need to
resolve inconsistency between the consumer's written statement
regarding net income and the verification evidence, more than two pay
cycles may be needed to constitute sufficient history.
3. Reasonably available. The lender's obligation to obtain a
reliable record (or records) of income payment (or payments) covering
sufficient history to support the lender's projection under Sec.
1041.5(c)(1) applies if and to the extent a reliable record (or
records) is reasonably available. A reliable record of the consumer's
net income is reasonably available if, for example, the consumer's
source of income is from her employment and she possesses or can access
a copy of the consumer's recent pay stub. The consumer's recent
transaction account deposit history is a reliable record (or records)
that is reasonably available if the consumer has such an account. With
regard to such bank account deposit history, the lender could obtain it
directly from the consumer or, at its discretion, with the consumer's
permission via an account aggregator service that obtains and
categorizes consumer deposit account and other account transaction
data. In situations in which income is neither documented through pay
stubs nor transaction account records, the reasonably available
standard requires the lender to act in good faith and exercise due
diligence as appropriate for the circumstances to determine whether
another reliable record (or records) is reasonably available.
4. Reasonable reliance on consumer's statement if reliable record
not reasonably available. Under Sec. 1041.5(c)(2)(ii)(A), if a lender
determines that a reliable record (or records) of some or all of the
consumer's net income is not reasonably available, the lender may
reasonably rely on the consumer's written statement described in Sec.
1041.5(c)(2)(i)(A) for that portion of the consumer's net income.
Section 1041.5(c)(2)(ii)(A) does not permit a lender to rely on a
consumer's written statement that the consumer has a reasonable
expectation of access to the income of another person (see comment
5(c)(2)(ii)(A)-1). A lender reasonably relies on the consumer's written
statement if such action is consistent with a lender's written policies
and procedures required under Sec. 1041.12 and there is no indication
that the consumer's stated amount of net income on a particular loan is
implausibly high or that the lender is engaged in a pattern of
systematically overestimating consumers' income. Evidence of the
lender's systematic overestimation of consumers' income could include
evidence that the subset of the lender's portfolio consisting of the
loans where the lender relies on the consumers' statements to project
income in the absence of verification evidence perform worse, on a non-
trivial level, than other covered loans made by the lender with respect
to the factors noted in comment 5(b)-2.iii indicating poor loan
performance (e.g., high rates of default, frequent re-borrowings). If
the lender periodically reviews the performance of covered short-term
loans or covered longer-term balloon-payment loans where the lender has
relied on consumers' written statements of income and uses the results
of those reviews to make necessary adjustments to its policies and
procedures and future lending decisions, such actions indicate
[[Page 54904]]
that the lender is reasonably relying on consumers' statements. Such
necessary adjustments could include, for example, the lender changing
its underwriting criteria for covered short-term loans to provide that
the lender may not rely on the consumer's statement of net income in
absence of reasonably available verification evidence unless the
consumer's debt-to-income ratio is lower, on a non-trivial level, than
that of similarly situated applicants who provide verification evidence
of net income. A lender is not required to consider income that cannot
be verified other than through the consumer's written statement. For an
illustration of a lender's reliance on a consumer's written statement
as to a portion of her income for which verification evidence is not
reasonably available, see comment 5(c)(1)-1.iii.
Paragraph 5(c)(2)(ii)(B)
1. Payments under debt obligations. To verify a consumer's required
payments under debt obligations, Sec. 1041.5(c)(2)(ii)(B) requires a
lender to obtain a national consumer report, the records of the lender
and its affiliates, and a consumer report obtained from an information
system that has been registered for 180 days or more pursuant to Sec.
1041.11(c)(2) or is registered pursuant to Sec. 1041.11(d)(2), if
available. A lender satisfies its obligation under Sec. 1041.5(d)(1)
to obtain a consumer report from an information system that has been
registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or is
registered pursuant to Sec. 1041.11(d)(2), if available, when it
complies with the requirement in Sec. 1041.5(c)(2)(ii)(B) to obtain
this same consumer report. See comment 5(a)(3)-1 regarding the
definition of required payments.
2. Deduction of debt obligations prior to consumer's receipt of
take-home pay. If verification evidence shows that a debt obligation is
deducted prior to the consumer's receipt of take-home pay, the lender
does not include the debt obligation in the projection of major
financial obligations under Sec. 1041.5(c).
3. Inconsistent information. If the consumer reports and lender and
affiliate records do not include a debt obligation listed in the
consumer's written statement described in Sec. 1041.5(c)(2)(ii)(B),
the lender must consider the debt obligation listed in the consumer's
written statement to make a reasonable projection of the amount of
payments for debt obligations. The lender may reasonably rely on the
written statement in determining the amount of the required payment for
the debt obligation. If the reports and records include a debt
obligation that is not listed in the consumer's written statement, the
lender must consider the debt obligation listed in the report or record
unless it obtains additional verification evidence confirming that the
obligation has been paid off or otherwise released. A lender is not
responsible for information about a major financial obligation that is
not owed to the lender, its affiliates, or its service providers if
such obligation is not listed in a consumer's written statement, a
national consumer report, or a consumer report from an information
system that has been registered for 180 days or more pursuant to Sec.
1041.11(c)(2) or is registered pursuant to Sec. 1041.11(d)(2).
Paragraph 5(c)(2)(ii)(C)
1. Payments under child support or alimony obligations. Section
1041.5(c)(2)(ii)(B) requires a lender to obtain a national consumer
report to verify a consumer's required payments under child support
obligations or alimony obligations under Sec. 1041.5(c)(2)(ii)(C). A
lender may use the same national consumer report to satisfy the
verification requirements under both Sec. 1041.5(c)(2)(ii)(B) and (C).
See comment 5(c)(2)(ii)(B)-1 for clarification on the interplay between
this obligation and Sec. 1041.5(d)(1). If the report does not include
a child support or alimony obligation listed in the consumer's written
statement described in Sec. 1041.5(c)(2)(i)(B), the lender must
consider the obligation listed in the consumer's written statement to
make a reasonable projection of the amount of payments for the child
support or alimony obligation. The lender may reasonably rely on the
written statement in determining the amount of the required payment for
the obligation.
2. Deduction of child support or alimony obligations prior to
consumer's receipt of take-home pay. If verification evidence shows
that a child support or alimony obligation is deducted prior to the
consumer's receipt of take-home pay, the lender does not include the
child support or alimony obligation in the projection of major
financial obligations under Sec. 1041.5(c). For an illustration, see
comment 5(c)(1)-1.viii.
Paragraph 5(c)(2)(ii)(D)
1. Exception to obligation to obtain consumer report. Section
1041.5(c)(2)(ii)(D) provides that notwithstanding Sec.
1041.5(c)(2)(ii)(B) and (C), a lender is not required to obtain a
national consumer report to verify debt obligations and child support
and alimony obligations if during the preceding 90 days: The lender or
its affiliate has obtained a national consumer report for the consumer,
retained the report under Sec. 1041.12(b)(1)(ii) and checked it again
in connection with the new loan; and the consumer did not complete a
loan sequence of three loans under Sec. 1041.5 and trigger the 30-day
cooling-off period under Sec. 1041.5(d)(2) since the previous report
was obtained. To illustrate how the two conditions relate to each
other, assume a consumer obtains a sequence of three covered short-term
loans under Sec. 1041.5, with each loan being 15 days in duration, the
first loan consummating on June 1, and the final loan no longer being
outstanding as of July 15. The lender obtained a consumer report on May
30 as part of its ability-to-repay determination for the first loan in
the sequence. Under Sec. 1041.5(c)(2)(ii)(D), the lender is not
required to obtain a consumer report for the second and third loan in
the sequence. Because the consumer took a three-loan sequence, the
consumer is subject to a 30-day cooling-off period which expires on
August 15 pursuant to Sec. 1041.5(d)(2). If the consumer returns to
the lender for another covered short-term loan under Sec. 1041.5 on
August 15, the lender must obtain a consumer report under Sec.
1041.5(c)(2)(ii)(B) and (C) to verify debt obligations and child
support and alimony obligations even though fewer than 90 days has
elapsed since the lender previously obtained a consumer report for the
consumer because the consumer completed a three-loan sequence and
triggered the 30-day cooling-off period since the previous report was
obtained.
2. Conflicts between consumer's written statement and national
consumer report. A lender is not required to obtain a new national
consumer report if the conditions under Sec. 1041.5(c)(2)(ii)(D) are
met; however, there may be circumstances in which a lender would
voluntarily obtain a new national consumer report to resolve potential
conflicts between a consumer's written statement and a national
consumer report obtained in the previous 90 days. See comments 5(c)(1)-
1.vii and 5(c)(2)(ii)(B)-3.
Paragraph 5(c)(2)(iii)
1. Rental housing expense. Section 1041.5(c)(2)(iii) provides that
for the consumer's housing expense other than a payment for a debt
obligation that appears on a national consumer report obtained pursuant
to Sec. 1041.5(c)(2)(ii)(B) (i.e., with respect to lease or other
rental housing payments), the lender may reasonably rely on the
consumer's statement described in Sec. 1041.5(c)(2)(i)(B). A lender
reasonably relies on the consumer's written
[[Page 54905]]
statement if such actions are consistent with a lender's written
policies and procedures required under Sec. 1041.12, and there is no
evidence that the stated amount for rental housing expense on a
particular loan is implausibly low or that there is a pattern of the
lender underestimating consumers' rental housing expense.
2. Mortgage obligations. For a housing expense under a debt
obligation (i.e., a mortgage), a lender generally must verify the
obligation by obtaining a national consumer report that includes the
housing expense under a debt obligation pursuant to Sec.
1041.5(c)(2)(ii)(B). Under Sec. 1041.5(c)(2)(ii)(D), however, a lender
is not required to obtain a national consumer report if, during the
preceding 90 days: the lender or its affiliate has obtained a national
consumer report for the consumer and retained the report under Sec.
1041.12(b)(1)(ii) and checked it again in connection with the new loan;
and the consumer did not complete a loan sequence of three loans under
Sec. 1041.5 and trigger the 30-day cooling-off period under Sec.
1041.5(d)(2) since the previous report was obtained (see comment
5(c)(2)(ii)(D)-1).
5(d) Additional Limitations on Lending--Covered Short-Term Loans and
Covered Longer-Term Balloon-Payment Loans
Paragraph 5(d)
1. General. Section 1041.5(d) specifies certain circumstances in
which making a new covered short-term loan or a covered longer-term
balloon-payment loan under Sec. 1041.5 during or after a sequence of
covered short-term loans, covered longer-term balloon-payment loans, or
a combination of covered short-term loans and covered longer-term
balloon-payment loans is prohibited during a mandatory cooling-off
period. The prohibitions apply to making a covered short-term loan or
covered longer-term balloon-payment loan under Sec. 1041.5.
2. Application to rollovers. The prohibitions in Sec. 1041.5(d)
apply to new covered short-term loans or covered longer-term balloon-
payment loans under Sec. 1041.5, as well as to loans that are a
rollover of a prior loan (or what is termed a ``renewal'' in some
States). Rollovers are defined as a matter of State law but typically
involve deferral of repayment of the principal amount of a short-term
loan for a period of time in exchange for a fee. In the event that a
lender is permitted under State law to roll over a loan, the rollover
would be treated as applicable as a new covered short-term loan or
covered longer-term balloon-payment loan that, depending on when it
occurs in the sequence, would be subject to the prohibitions in Sec.
1041.5(d). For example, assume that a lender is permitted under
applicable State law to roll over a covered short-term loan and the
lender makes a covered short-term loan with $500 in principal and a 14-
day contractual duration. Assume that the consumer returns to the
lender on day 14 (the repayment date of the first loan), the lender
reasonably determines that the consumer has the ability to repay a new
loan, and the consumer is offered the opportunity to roll over the
first loan for an additional 14 days for a $75 fee. The rollover would
be the second loan in a loan sequence, as defined under Sec.
1041.2(a)(14), because fewer than 30 days would have elapsed between
consummation of the new covered short-term loan (the rollover) and the
consumer having had a covered short-term loan made under Sec. 1041.5
outstanding. Assume that the consumer returns on day 28 (the repayment
date of the first rollover, i.e., the second loan in the sequence) and
the lender again reasonably determines that the consumer has the
ability to repay a new loan and offers to roll over the loan again for
an additional 14 days for a $75 fee. The second rollover would be the
third loan in a loan sequence. If the consumer were to return on day 42
(the repayment date of the second rollover, which is the third loan in
the sequence) and attempt to roll over the loan again, that rollover
would be considered the fourth loan in the loan sequence. Therefore,
that rollover would be prohibited and the consumer could not obtain
another covered short-term loan or covered longer-term balloon-payment
loan until the expiration of the 30-day cooling-off period, which
begins after the consumer repays the second rollover (i.e., the third
loan in the sequence).
5(d)(1) Borrowing History Review
1. Relationship to Sec. 1041.5(c)(2)(ii)(B) and (C). A lender
satisfies its obligation under Sec. 1041.5(d)(1) to obtain a consumer
report from an information system that has been registered for 180 days
or more pursuant to Sec. 1041.11(c)(2) or is registered pursuant to
Sec. 1041.11(d)(2), if available, when it complies with the
requirement in Sec. 1041.5(c)(2)(ii)(B) and (C) to obtain this same
consumer report.
2. Availability of information systems that have been registered
for 180 days or more pursuant to Sec. 1041.11(c)(2) or are registered
pursuant to Sec. 1041.11(d)(2). If no information systems that have
been registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or
are registered pursuant to Sec. 1041.11(d)(2) are available at the
time that the lender is required to obtain the information about the
consumer's borrowing history, the lender is nonetheless required to
obtain information about the consumer's borrowing history from the
records of the lender and its affiliates and to obtain the consumer's
statement about the amount and timing of payments of major financial
obligations as required under Sec. 1041.5(c)(2)(i)(B) (which would
include information on current debt obligations including any
outstanding covered loans). A lender may be unable to obtain a consumer
report from an information system that has been registered for 180 days
or more pursuant to Sec. 1041.11(c)(2) or that is registered pursuant
to Sec. 1041.11(d)(2) if, for example, all registered information
systems are temporarily unavailable.
5(d)(2) Prohibition on Loan Sequences of More Than Three Covered Short-
Term Loans or Covered Longer-Term Balloon-Payment Loans Made Under
Sec. 1041.5.
1. Prohibition. Section 1041.5(d)(2) prohibits a lender from making
a fourth covered short-term loan or covered longer-term balloon-payment
loan under Sec. 1041.5 in a loan sequence of covered short-term loans,
covered longer-term balloon-payment loans, or a combination of covered
short-term loans and covered longer-term balloon-payment loans made
under Sec. 1041.5. See Sec. 1041.2(a)(14) for the definition of a
loan sequence.
2. Examples. The following examples illustrate application of the
prohibition under Sec. 1041.5(d)(2):
i. Assume that a lender makes a covered short-term loan to a
consumer under the requirements of Sec. 1041.5 on February 1 with a
contractual due date of February 15, the consumer repays the loan on
February 15, and the consumer returns to the lender on March 1 for
another loan. Assume that the second loan is a covered short-term loan
with a contractual due date of March 15. The second loan would be part
of the same loan sequence as the first loan because 30 or fewer days
have elapsed since repayment of the first loan. Assume that the lender
makes the second loan, the consumer repays the loan on March 15, and
the consumer returns to the lender on April 1 for another loan. Assume
that the third loan is a covered short-term loan with a contractual due
date of April 15. The third loan would be part of the same loan
sequence as the first and second loans because 30 or fewer days have
elapsed since repayment of the second loan. Assume that the lender
[[Page 54906]]
makes the third loan and the consumer repays the loan on April 15.
Assume that all loans are reported to a registered information system.
The consumer would not be eligible for another covered short-term loan
or covered longer-term balloon-payment loan under Sec. 1041.5(d) from
any lender until a 30-day cooling-off period following April 15 has
elapsed, that is, starting on May 16. The consumer also would not be
eligible for another covered short-term loan under Sec. 1041.6 during
the same 30-day cooling-off period. See Sec. 1041.6(c)(1) and
accompanying commentary.
ii. Assume that a lender makes a covered short-term loan to a
consumer under the requirements of Sec. 1041.5 on February 1 with a
contractual due date of February 15, the consumer repays the loan on
February 15, and the consumer returns to the lender on March 1 for
another loan. Assume that the second loan is a covered longer-term
balloon-payment loan that has biweekly installment payments followed by
a final balloon payment on the contractual due date of May 1. The
second loan would be part of the same loan sequence as the first loan
because 30 or fewer days have elapsed since repayment of the first
loan. Assume that the lender makes the second loan, the consumer repays
the loan in full as of May 1, and the consumer returns to the lender on
May 15 for another loan. Assume that the third loan is a covered short-
term loan with a contractual due date of May 30. The third loan would
be part of the same loan sequence as the first and second loans because
30 or fewer days have elapsed since repayment of the second loan.
Assume that the lender makes the third loan and the consumer repays the
loan on May 30. Assume that all loans are reported to a registered
information system. The consumer would not be eligible to receive
another covered short-term loan or covered longer-term balloon-payment
loan under Sec. 1041.5(d) from any lender until a 30-day cooling-off
period following May 30 has elapsed, that is until after June 29. The
consumer also would not be eligible for another covered short-term loan
under Sec. 1041.6 during the same 30-day cooling-off period. See Sec.
1041.6(c)(1) and accompanying commentary.
5(e) Prohibition Against Evasion
1. General. Section 1041.5(e) provides that a lender must not take
any action with the intent of evading the requirements of Sec. 1041.5.
In determining whether a lender has taken action with the intent of
evading the requirements of Sec. 1041.5, the form, characterization,
label, structure, or written documentation of the lender's action shall
not be dispositive. Rather, the actual substance of the lender's action
as well as other relevant facts and circumstances will determine
whether the lender's action was taken with the intent of evading the
requirements of Sec. 1041.5. If the lender's action is taken solely
for legitimate business purposes, it is not taken with the intent of
evading the requirements of Sec. 1041.5. By contrast, if a
consideration of all relevant facts and circumstances reveals a purpose
that is not a legitimate business purpose, the lender's action may have
been taken with the intent of evading the requirements of Sec. 1041.5.
A lender action that is taken with the intent of evading the
requirements of this part may be knowing or reckless. Fraud, deceit, or
other unlawful or illegitimate activity may be one fact or circumstance
that is relevant to the determination of whether a lender's action was
taken with the intent of evading the requirements of Sec. 1041.5, but
fraud, deceit, or other unlawful or illegitimate activity is not a
prerequisite to such a finding.
2. Illustrative example--lender action that may have been taken
with the intent of evading the requirements of the rule. The following
example illustrates a lender action that, depending on the relevant
facts and circumstances, may have been taken with the intent of evading
the requirements of Sec. 1041.5 and thus may have violated Sec.
1041.5(e):
i. A storefront payday lender makes covered short-term loans to
consumers with a contractual duration of 14 days and a lump-sum
repayment structure. The lender's policies and procedures provide for a
standard loan contract including a ``recurring late fee'' as a lender
remedy that is automatically triggered in the event of the consumer's
delinquency (i.e., if the consumer does not pay the entire lump-sum
amount on the contractual due date, with no grace period), and in the
loan contract the consumer grants the lender authorization to initiate
a recurring ACH in the event such remedy is triggered. Assume that the
recurring late fee is to be paid biweekly while the loan remains
outstanding and is substantially equal to or greater than the fee that
the lender charges on transactions that are considered rollovers under
applicable State law. The practice of imposing a recurring late fee by
contract differs from the lender's prior practice of contacting the
consumer on or about the contractual due date requesting that the
consumer visit the store to discuss payment options including
rollovers. Assume that as a matter of practice, if a consumer does not
repay the first loan in a sequence when it is due, the lender charges
recurring late fees for 60 days unless the consumer repays the
outstanding balance. Such a period is roughly equivalent to two 14-day
loan cycles or two rollovers following the initial loan in the
sequence, plus a 30-day cooling-off period. See Sec. 1041.5(d)(2) and
related commentary. Depending on the relevant facts and circumstances,
this action may have been taken with the intent of evading the
requirements of Sec. 1041.5. By charging the recurring late fee for 60
days after the initial loan was due, the lender avoided its obligation
under Sec. 1041.5(b) to make an ability-to-repay determination for the
second and third loans in the sequence and to comply with the mandatory
cooling-off period in Sec. 1041.5(d)(2) after the third loan was no
longer outstanding.
Section 1041.6--Conditional Exemption for Certain Covered Short-Term
Loans
6(a) Conditional Exemption for Certain Covered Short-Term Loans
1. General. Under Sec. 1041.6(a), a lender that complies with
Sec. 1041.6(b) through (e) can make a covered short-term loan without
complying with the otherwise applicable requirements under Sec.
1041.5. A lender who complies with Sec. 1041.6 in making a covered
short-term loan has not committed the unfair and abusive practice under
Sec. 1041.4 and is not subject to Sec. 1041.5. However, nothing in
Sec. 1041.6 provides lenders with an exemption to the requirements of
other applicable laws, including subpart C of this part and State laws.
2. Obtaining consumer borrowing history information. Under Sec.
1041.6(a), the lender must determine prior to making a covered short-
term loan under Sec. 1041.6 that requirements under Sec. 1041.6(b)
and (c) are satisfied. In particular, Sec. 1041.6(a) requires the
lender to obtain information about the consumer's borrowing history
from the records of the lender and the records of the lender's
affiliates. (This information about borrowing history with the lender
and its affiliates is also important to help a lender avoid violations
of Sec. 1041.6(d)). Furthermore, Sec. 1041.6(a) requires the lender
to obtain a consumer report from an information system that has been
registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or is
registered pursuant to Sec. 1041.11(d)(2). If no information systems
have been registered for 180 days or more pursuant to Sec.
1041.11(c)(2) or are registered pursuant to Sec. 1041.11(d)(2) and
available as of the time the lender is required to obtain the report,
the lender
[[Page 54907]]
cannot comply with the requirements in Sec. 1041.6(b) and (c). A
lender may be unable to obtain such a consumer report if, for example:
i. No information systems have been registered for 180 days or more
pursuant to Sec. 1041.11(c)(2) or are registered pursuant to Sec.
1041.11(d)(2); or
ii. If information systems have been registered for 180 days or
more pursuant to Sec. 1041.11(c)(2) or are registered pursuant to
Sec. 1041.11(d)(2) but all such registered information systems are
temporarily unavailable. Under these circumstances, a lender cannot
make a covered short-term loan under Sec. 1041.6.
3. Consumer reports. A lender is not responsible for inaccurate or
incomplete information contained in a consumer report from an
information system that has been registered for 180 days or more
pursuant to Sec. 1041.11(c)(2) or is registered pursuant to Sec.
1041.11(d)(2).
6(b) Loan Term Requirements
Paragraph 6(b)(1)
1. Loan sequence. Section 1041.2(a)(14) defines a loan sequence.
For further clarification and examples regarding the definition of loan
sequence, see Sec. 1041.2(a)(14).
2. Principal amount limitations--general. For a covered short-term
loan made under Sec. 1041.6, different principal amount limitations
apply under Sec. 1041.6(b)(1) depending on whether the loan is the
first, second, or third loan in a loan sequence. The principal amount
limitations apply regardless of whether any or all of the loans are
made by the same lender, an affiliate, or unaffiliated lenders. Under
Sec. 1041.6(b)(1)(i), for the first loan in a loan sequence, the
principal amount must be no greater than $500. Under Sec.
1041.6(b)(1)(ii), for the second loan in a loan sequence, the principal
amount must be no greater than two-thirds of the principal amount of
the first loan in the loan sequence. Under Sec. 1041.6(b)(1)(iii), for
the third loan in a loan sequence, the principal amount must be no
greater than one-third of the principal amount of the first loan in the
loan sequence.
3. Application to rollovers. The principal amount limitations under
Sec. 1041.6 apply to rollovers of the first or second loan in a loan
sequence as well as new loans that are counted as part of the same loan
sequence. Rollovers are defined as a matter of State law but typically
involve deferral of repayment of the principal amount of a short-term
loan for a period of time in exchange for a fee. In the event the
lender is permitted under State law to make rollovers, the lender may,
in a manner otherwise consistent with applicable State law and Sec.
1041.6, roll over a covered short-term loan made under Sec. 1041.6,
but the rollover would be treated as the next loan in the loan
sequence, as applicable, and would therefore be subject to the
principal amount limitations set forth in Sec. 1041.6(b)(1) as well as
other limitations in Sec. 1041.6. For example, assume that a lender is
permitted under applicable State law to make a rollover. If the
consumer obtains a first loan in a loan sequence under Sec. 1041.6
with a principal amount of $300, under Sec. 1041.6(b)(1)(ii), the
lender may allow the consumer to roll over that loan so long as the
consumer repays at least $100, so that the principal of the loan that
is rolled over would be no greater than $200. Similarly, under Sec.
1041.6(b)(1)(iii), the lender may allow the consumer to roll over the
second loan in the loan sequence as permitted by State law, so long as
the consumer repays at least an additional $100, so that the principal
of the loan that is rolled over would be no greater than $100.
4. Example. Assume that a consumer who otherwise satisfies the
requirements of Sec. 1041.6 seeks a covered short-term loan and that
the lender chooses to make the loan without meeting all the specified
underwriting criteria required in Sec. 1041.5. Under Sec.
1041.6(b)(1)(i), the principal amount of the loan must not exceed $500.
Assume that the consumer obtains a covered short-term loan under Sec.
1041.6 with a principal amount of $450, the loan is contractually due
in 14 days, and the consumer repays the loan on the contractual due
date. Assume that the consumer returns to the lender 10 days after the
repayment of the first loan to take out a second covered short-term
loan under Sec. 1041.6. Under Sec. 1041.6(b)(1)(ii), the principal
amount of the second loan may not exceed $300. Assume, further, that
the consumer is then made a covered short-term loan under Sec. 1041.6
with a principal amount of $300, the loan is contractually due in 14
days, and the consumer repays the loan on the contractual due date. If
the consumer returns to the lender 25 days after the repayment of the
second loan to take out a third covered short-term loan under Sec.
1041.6, under Sec. 1041.6(b)(1)(iii), the principal amount of the
third loan may not exceed $150. These same limitations would apply if
the consumer went to a different, unaffiliated lender for the second or
third loan. If, however, the consumer does not return to the lender
seeking a new loan under Sec. 1041.6 until 32 days after the date on
which the second loan in the loan sequence was repaid, the subsequent
loan would not be part of the prior loan sequence and instead would be
the first loan in a new loan sequence. Therefore, if otherwise
permissible under Sec. 1041.6, that loan would be subject to the $500
principal amount limitation under Sec. 1041.6(b)(1)(i).
Paragraph 6(b)(2)
1. Equal payments and amortization for loans with multiple
payments. Section 1041.6(b)(2) provides that for a loan with multiple
payments, the loan must amortize completely during the term of the loan
and the payment schedule must allocate a consumer's payments to the
outstanding principal and interest and fees as they accrue only by
applying a fixed periodic rate of interest to the outstanding balance
of the unpaid loan principal during every repayment period for the term
of the loan. For example, if the loan has a contractual duration of 30
days with two scheduled biweekly payments, under Sec. 1041.6(b)(2) the
lender cannot require the consumer to pay interest only for the first
scheduled biweekly payment and the full principal balance at the second
scheduled biweekly payment. Rather, the two scheduled payments must be
equal in amount and amortize over the course of the loan term in the
manner required under Sec. 1041.6(b)(2).
Paragraph 6(b)(3)
1. Inapplicability of conditional exemption to a loan with vehicle
security. Section 1041.6(b)(3) prohibits a lender from making a
covered-short-term loan under Sec. 1041.6 with vehicle security. If
the lender or its service provider take vehicle security in connection
with a covered short-term loan, the loan must be originated in
compliance with all of the requirements under Sec. 1041.5, including
the ability-to-repay determination.
Paragraph 6(b)(4)
1. Inapplicability of conditional exemption to an open-end loan.
Section 1041.6(b)(4) prohibits a lender from making a covered short-
term loan under Sec. 1041.6 structured as an open-end loan under Sec.
1041.2(a)(16). If a covered short-term loan is structured as an open-
end loan, the loan must be originated in compliance with all of the
requirements under Sec. 1041.5.
6(c) Borrowing History Requirements
Paragraph 6(c)(1)
1. Preceding loans. Section 1041.6(c)(1) provides that prior to
making a covered short-term loan under
[[Page 54908]]
Sec. 1041.6, the lender must determine that more than 30 days has
elapsed since the consumer had an outstanding loan that was either a
covered short-term loan (as defined in Sec. 1041.2(a)(10)) made under
Sec. 1041.5 or a covered longer-term balloon-payment loan (as defined
in Sec. 1041.2(a)(7)) made under Sec. 1041.5. This requirement
applies regardless of whether this prior loan was made by the same
lender, an affiliate, or an unaffiliated lender. For example, assume
that a lender makes a covered short-term loan to a consumer under Sec.
1041.5, that the loan has a contractual duration of 14 days, and that
the consumer repays the loan on the contractual due date. If the
consumer returns for a second loan 20 days after repaying the loan, the
lender cannot make a covered short-term loan under Sec. 1041.6.
Paragraph 6(c)(2)
1. Loan sequence limitation. Section 1041.6(c)(2) provides that a
lender cannot make a covered short-term loan under Sec. 1041.6 if the
loan would result in the consumer having a loan sequence of more than
three covered short-term loans under Sec. 1041.6 made by any lender.
This requirement applies regardless of whether any or all of the loans
in the loan sequence are made by the same lender, an affiliate, or
unaffiliated lenders. See comments 6(b)(1)-1 and -2 for further
clarification on the definition of loan sequence, as well as Sec.
1041.2(a)(14) and accompanying commentary. For example, assume that a
consumer obtains a covered short-term loan under the requirements of
Sec. 1041.6 on February 1 that has a contractual due date of February
15, that the consumer repays the loan on February 15, and that the
consumer returns to the lender on March 1 for another loan under Sec.
1041.6. The second loan under Sec. 1041.6 would be part of the same
loan sequence because 30 or fewer days have elapsed since repayment of
the first loan. Assume that the lender makes the second loan with a
contractual due date of March 15, that the consumer repays the loan on
March 15, and that the consumer returns to the lender on April 1 for
another loan under Sec. 1041.6. The third loan under Sec. 1041.6
would be part of the same loan sequence as the first and second loans
because fewer than 30 days have elapsed since repayment of the second
loan. Assume that the lender makes the third loan, which has a
contractual due date of April 15 and that the consumer repays the loan
on April 15. The consumer would not be permitted to receive another
covered short-term loan under Sec. 1041.6 until the 30-day period
following April 15 has elapsed, that is until after May 15, assuming
the other requirements under Sec. 1041.6 are satisfied. The consumer
would also be prohibited from obtaining other forms of credit from the
same lender or its affiliate for 30 days under Sec. 1041.6(d); see
comment 6(d)-1. Loans that are rollovers count toward the sequence
limitation under Sec. 1041.6(c)(2). For further clarification on how
the requirements of Sec. 1041.6 apply to rollovers, see comment
6(b)(1)-3.
Paragraph 6(c)(3)
1. Consecutive 12-month period. Section 1041.6(c)(3) requires that
a covered short-term loan made under Sec. 1041.6 not result in the
consumer having more than six covered short-term loans outstanding
during a consecutive 12-month period or having covered short-term loans
outstanding for an aggregate period of more than 90 days during a
consecutive 12-month period. The consecutive 12-month period begins on
the date that is 12 months prior to the proposed contractual due date
of the new covered short-term loan to be made under Sec. 1041.6 and
ends on the proposed contractual due date. The lender must review the
consumer's borrowing history on covered short-term loans for the 12
months preceding the consummation date of the new covered short-term
loan less the period of proposed contractual indebtedness on that loan.
For example, for a new covered short-term loan to be made under Sec.
1041.6 with a proposed contractual term of 14 days, the lender must
review the consumer's borrowing history during the 351 days preceding
the consummation date of the new loan. The lender also must consider
the making of the new loan and the days of proposed contractual
indebtedness on that loan to determine whether the requirement under
Sec. 1041.6(c)(3) regarding the total number of covered short-term
loans and total time of indebtedness on covered short-term loans during
a consecutive 12-month period is satisfied.
Paragraph 6(c)(3)(i)
1. Total number of covered short-term loans. Section
1041.6(c)(3)(i) provides that a lender cannot make a covered-short term
loan under Sec. 1041.6 if the loan would result in the consumer having
more than six covered short-term loans outstanding in any consecutive
12-month period. The requirement counts covered short-term loans made
under either Sec. 1041.5 or Sec. 1041.6 toward the limit. This
requirement applies regardless of whether any or all of the loans
subject to the limitations are made by the same lender, an affiliate,
or an unaffiliated lender. Under Sec. 1041.6(c)(3)(i), the lender must
use the consumer's borrowing history to determine whether the loan
would result in the consumer having more than six covered short-term
loans outstanding during a consecutive 12-month period. A lender may
make a loan that would comply with the requirement under Sec.
1041.6(c)(3)(i) even if the six-loan limit would prohibit the consumer
from taking out one or two subsequent loans in the sequence.
2. Example. Assume that a lender seeks to make a covered short-term
loan to a consumer under Sec. 1041.6 with a contractual duration of 14
days. Assume, further, that the lender determines that during the past
30 days the consumer has not had an outstanding covered short-term loan
and that during the 351 days preceding the consummation date of the new
loan the consumer had outstanding a total of five covered short-term
loans. The new loan would be the sixth covered short-term loan that was
outstanding during a consecutive 12-month period. Therefore, the loan
would comply with the requirement regarding the aggregate number of
covered short-term loans under Sec. 1041.6. Because the consumer has
not had an outstanding covered short-term loan in the preceding 30
days, this loan would be the first loan in a new loan sequence. Assume
that a week after repaying this first loan the consumer seeks another
covered short-term loan under Sec. 1041.6, also with a contractual
duration of 14 days. Under Sec. 1041.6(c)(3)(i), this second loan in
the loan sequence cannot be made if it would result in the consumer
taking out more than six covered short-term loans in the 351 days
preceding the proposed consummation date of this loan.
Paragraph 6(c)(3)(ii)
1. Aggregate period of indebtedness. Section 1041.6(c)(3)(ii)
provides that a lender cannot make a covered short-term loan under
Sec. 1041.6 if the loan would result in the consumer having covered
short-term loans outstanding for an aggregate period of more than 90
days in any consecutive 12-month period. In addition to the proposed
contractual duration of the new loan, the aggregate period in which all
covered short-term loans made to the consumer during the consecutive
12-month period under either Sec. 1041.5 or Sec. 1041.6 were
outstanding is counted toward the limit. This requirement applies
regardless of whether any or all of the covered short-term loans are
made by the same lender, an affiliate, or
[[Page 54909]]
an unaffiliated lender. Under Sec. 1041.6(c)(3)(ii), the lender must
use the information it has obtained about the consumer's borrowing
history to determine whether the loan would result in the consumer
having covered short-term loans outstanding for an aggregate period of
more than 90 days during a consecutive 12-month period. A lender may
make a loan that would comply with the requirement under Sec.
1041.6(c)(3)(ii) even if the 90-day limit would prohibit the consumer
from taking out one or two subsequent loans in the sequence.
2. Example. Assume that Lender A seeks to make a covered short-term
loan under Sec. 1041.6 with a contractual duration of 14 days. Assume,
further, that Lender A determines that during the past 30 days the
consumer did not have an outstanding covered short-term loan and that
during the 351 days preceding the consummation date of the new loan the
consumer had outstanding three covered short-term loans made by Lender
A and a fourth covered short-term loan made by Lender B. Assume that
each of the three loans made by Lender A had a contractual duration of
14 days and that the loan made by Lender B had a contractual duration
of 30 days, for an aggregate total of 72 days of contractual
indebtedness. Assume, further, that the consumer repaid each loan on
its contractual due date. The new loan, if made, would result in the
consumer having covered short-term loans outstanding for an aggregate
period of 86 days during the consecutive 12-month period. Therefore,
the loan would comply with the requirement regarding aggregate time of
indebtedness. Because the consumer has not had an outstanding covered
short-term loan in the preceding 30 days, this loan would be the first
loan in a new loan sequence. Assume that a week after repaying this
first loan the consumer seeks another covered short-term loan under
Sec. 1041.6, also with a contractual duration of 14 days. Under Sec.
1041.6(c)(3)(ii), this second loan in the loan sequence cannot be made
if it would result in the consumer being in debt on covered short-term
loans for more than 90 days in the 351 days preceding the proposed
consummation date of this loan.
6(d) Restrictions on Making Certain Covered Loans and Non-Covered Loans
Following a Covered Short-Term Loan Made Under the Conditional
Exemption
1. General. If a lender makes a covered short-term loan under Sec.
1041.6 to a consumer, Sec. 1041.6(d) prohibits the lender or its
affiliate from making a covered short-term loan under Sec. 1041.5, a
covered longer-term balloon payment loan under Sec. 1041.5, a covered
longer-term loan, or a non-covered loan to the consumer while the
covered short-term loan made under Sec. 1041.6 is outstanding and for
30 days thereafter. During this period, a lender or its affiliate could
make a subsequent covered short-term loan in accordance with the
requirements in Sec. 1041.6.
2. Example. Assume that a lender makes both covered short-term
loans under Sec. 1041.6 and non-covered installment loans. Assume,
further, that the lender makes on April 1 a covered short-term loan
under Sec. 1041.6 to a consumer who has not obtained a covered short-
term loan under Sec. 1041.6 in the previous 30 days. Assume that the
consumer repays this loan on April 15 and that the consumer returns to
the lender on April 30 to seek a non-covered installment loan. Because
30 days have not elapsed since the consumer repaid the loan made under
Sec. 1041.6, neither the lender nor its affiliate can make a non-
covered installment loan to the consumer on April 30. May 16 is the
earliest the lender or its affiliate could make a non-covered
installment loan to the consumer. The prohibition in Sec. 1041.6(d)
applies to covered short-term loans and covered longer-term balloon
payment loans made under Sec. 1041.5 and covered longer-term loans but
not to covered short-term loans made under Sec. 1041.6. Section
1041.6(d) would, therefore, not prohibit the consumer from obtaining an
additional covered short-term loan under Sec. 1041.6 from the same
lender or its affiliate on April 30, provided that such loan complies
with the principal amount reduction and other requirements of Sec.
1041.6. The prohibition in Sec. 1041.6(d) on making subsequent non-
covered loans applies only to a lender and its affiliates. Section
1041.6(d) would, therefore, not prohibit the consumer from obtaining on
April 30 a non-covered installment loan from a lender not affiliated
with the lender that made the covered short-term loan on April 1.
6(e) Disclosures
1. General. Section 1041.6(e) sets forth two main disclosure
requirements related to a loan made under the requirements in Sec.
1041.6. The first, set forth in Sec. 1041.6(e)(2)(i), is a notice of
the restriction on the principal amount on the loan and restrictions on
the number of future loans and the principal amounts of such loans,
which is required to be provided to a consumer when the consumer seeks
the first loan in a sequence of covered short-term loans made under
Sec. 1041.6. The second, set forth in Sec. 1041.6(e)(2)(ii), is a
notice of the restriction on the principal amount on the loan and the
prohibition on another similar loan for at least 30 days after the loan
is repaid, which is required to be provided to a consumer when the
consumer seeks the third loan in a sequence of covered short-term loans
made under Sec. 1041.6.
6(e)(1) General Form of Disclosures
6(e)(1)(i) Clear and Conspicuous
1. Clear and conspicuous standard. Disclosures are clear and
conspicuous for purposes of Sec. 1041.6(e) if they are readily
understandable by the consumer and their location and type size are
readily noticeable to the consumer.
6(e)(1)(ii) In Writing or Electronic Delivery
1. General. Section 1041.6(e)(1)(ii) requires that disclosures
required by Sec. 1041.6 be provided to the consumer in writing or
through electronic delivery.
2. E-Sign Act requirements. The notices required by Sec.
1041.6(e)(2)(i) and (ii) may be provided to the consumer in electronic
form without regard to the Electronic Signatures in Global and National
Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
6(e)(1)(iii) Retainable
1. General. Electronic disclosures are retainable for purposes of
Sec. 1041.6(e) if they are in a format that is capable of being
printed, saved, or emailed by the consumer.
6(e)(1)(iv) Segregation Requirements for Notices
1. Segregated additional content. Although segregated additional
content that is not required by this section may not appear above,
below, or around the required content, this additional content may be
delivered through a separate form, such as a separate piece of paper or
Web page.
6(e)(1)(vi) Model Forms
1. Safe harbor provided by use of model forms. Although the use of
the model forms and clauses is not required, lenders using them will be
deemed to be in compliance with the disclosure requirement with respect
to such model forms consistent with section 1032(d) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (12 U.S.C. 5481, et
seq.)
6(e)(2) Notice Requirements
6(e)(2)(i) First Loan Notice
1. As applicable standard. Due to the requirements in Sec.
1041.6(c)(3), a consumer may not be eligible to
[[Page 54910]]
complete a three-loan sequence of covered short-term loans under Sec.
1041.6 because additional loans within 30 days of the expected pay-off
date for the first loan would violate one or more provisions of Sec.
1041.6(c)(3). Such a consumer may be permitted to obtain only one or
two loans in a sequence of covered short-term loans under Sec. 1041.6,
as applicable. Under these circumstances, Sec. 1041.6(e)(2)(i) would
require the lender to modify the notice in Sec. 1041.6(e)(2)(i) to
reflect these limitations on subsequent loans. For example, if a
consumer can receive only a sequence of two covered short-term loans
under Sec. 1041.6 because of the requirements in Sec. 1041.6(c)(3),
the lender would have to modify the notice to list the maximum
principal amount on loans 1 and 2 and to indicate that loan 3 would not
be permitted.
6(e)(3) Timing
1. General. Section 1041.6(e)(3) requires a lender to provide the
notices required in Sec. 1041.6(e)(2)(i) and (ii) to the consumer
before the applicable covered short-term loan under Sec. 1041.6 is
consummated. For example, a lender can provide the notice after a
consumer has completed a loan application but before the consumer has
signed the loan agreement. A lender would not have to provide the
notices to a consumer who inquires about a covered short-term loan
under Sec. 1041.6 but does not fill out an application to obtain this
type of loan.
2. Electronic notices. If a lender delivers a notice required by
this section electronically in accordance with Sec. 1041.6(e)(1)(ii),
Sec. 1041.6(e)(3) requires a lender to provide the electronic notice
to the consumer before a covered short-term loan under Sec. 1041.6 is
consummated. Specifically, Sec. 1041.6(e)(3) requires a lender to
present the retainable notice to the consumer before the consumer is
contractually obligated on the loan. To comply with Sec. 1041.6(e)(3),
a lender could, for example, display a screen on a web browser with the
notices required in Sec. 1041.6(e)(2)(i) and (ii), provided the screen
can be emailed, printed, or saved, before the covered short-term loan
under Sec. 1041.6 has been consummated.
Section 1041.7--Identification of Unfair and Abusive Practice
1. General. A lender who complies with Sec. 1041.8 with regard to
a covered loan has not committed the unfair and abusive practice under
Sec. 1041.7.
Section 1041.8--Prohibited Payment Transfer Attempts
8(a) Definitions
8(a)(1) Payment Transfer
1. Lender-initiated. A lender-initiated debit or withdrawal
includes a debit or withdrawal initiated by the lender's agent, such as
a payment processor.
2. Any amount due. The following are examples of funds transfers
that are for the purpose of collecting any amount due in connection
with a covered loan:
i. A transfer for the amount of a scheduled payment due under a
loan agreement for a covered loan.
ii. A transfer for an amount smaller than the amount of a scheduled
payment due under a loan agreement for a covered loan.
iii. A transfer for the amount of the entire unpaid loan balance
collected pursuant to an acceleration clause in a loan agreement for a
covered loan.
iv. A transfer for the amount of a late fee or other penalty
assessed pursuant to a loan agreement for a covered loan.
3. Amount purported to be due. A transfer for an amount that the
consumer disputes or does not legally owe is a payment transfer if it
otherwise meets the definition set forth in Sec. 1041.8(a)(1).
4. Transfers of funds not initiated by the lender. A lender does
not initiate a payment transfer when:
i. A consumer, on her own initiative or in response to a request or
demand from the lender, makes a payment to the lender in cash withdrawn
by the consumer from the consumer's account.
ii. A consumer makes a payment via an online or mobile bill payment
service offered by the consumer's account-holding institution.
iii. The lender seeks repayment of a covered loan pursuant to a
valid court order authorizing the lender to garnish a consumer's
account.
Paragraph 8(a)(1)(i)(A)
1. Electronic fund transfer. Any electronic fund transfer meeting
the general definition in Sec. 1041.8(a)(1) is a payment transfer,
including but not limited to an electronic fund transfer initiated by a
debit card or a prepaid card.
Paragraph 8(a)(1)(i)(B)
1. Signature check. A transfer of funds by signature check meeting
the general definition in Sec. 1041.8(a)(1) is a payment transfer
regardless of whether the transaction is processed through the check
network or through another network, such as the ACH network. The
following example illustrates this concept: A lender processes a
consumer's signature check through the check system to collect a
scheduled payment due under a loan agreement for a covered loan. The
check is returned for nonsufficient funds. The lender then converts and
processes the check through the ACH system, resulting in a successful
payment. Both transfers are payment transfers, because both were
initiated by the lender for purposes of collecting an amount due in
connection with a covered loan.
Paragraph 8(a)(1)(i)(E)
1. Transfer by account-holding institution. Under Sec.
1041.8(a)(1)(i)(E), when the lender is the account holder, a transfer
of funds by the account-holding institution from a consumer's account
held at the same institution is a payment transfer if it meets the
general definition in Sec. 1041.8(a)(1)(i), unless the transfer of
funds meets the conditions in Sec. 1041.8(a)(1)(ii) and is therefore
excluded from the definition. See Sec. 1041.8(a)(1)(ii) and related
commentary.
2. Examples. Payment transfers initiated by an account-holding
institution from a consumer's account include, but are not limited to,
the following:
i. Initiating an internal transfer from a consumer's account to
collect a scheduled payment on a covered loan.
ii. Sweeping the consumer's account in response to a delinquency on
a covered loan.
iii. Exercising a right of offset to collect against an outstanding
balance on a covered loan.
Paragraph 8(a)(1)(ii) Conditional Exclusion for Certain Transfers by
Account-Holding Institutions
1. General. The exclusion in Sec. 1041.8(a)(1)(ii) applies only to
a lender that is also the consumer's account-holding institution. The
exclusion applies only if the conditions in both Sec.
1041.8(a)(1)(ii)(A) and (B) are met with respect to a particular
transfer of funds. A lender whose transfer meets the exclusion has not
committed the unfair and abusive practice under Sec. 1041.7 and is not
subject to Sec. 1041.8 or Sec. 1041.9 in connection with that
transaction, but is subject to subpart C for any transfers that do not
meet the exclusion in Sec. 1041.8(a)(1)(ii) and are therefore payment
transfers under Sec. 1041.8(a)(1).
Paragraph 8(a)(1)(ii)(A)
1. Terms of loan agreement or account agreement. The condition in
Sec. 1041.8(a)(1)(ii)(A) is met only if the terms of the loan
agreement or account agreement setting forth the restrictions on
charging fees are in effect at the time
[[Page 54911]]
the covered loan is made and remain in effect for the duration of the
loan.
2. Fees prohibited. Examples of the types of fees restricted under
Sec. 1041.8(a)(1)(ii)(A) include, but are not limited to,
nonsufficient fund fees, overdraft fees, and returned-item fees. A
lender seeking to initiate transfers of funds pursuant to the exclusion
in Sec. 1041.8(a)(1)(ii) may still charge the consumer a late fee for
failure to make a timely payment, as permitted under the terms of the
loan agreement and other applicable law, notwithstanding that the
lender has initiated a transfer of funds meeting the description in
Sec. 1041.8(a)(1)(ii)(A) in an attempt to collect the payment.
Paragraph 8(a)(1)(ii)(B)
1. General. Under Sec. 1041.8(a)(1)(ii)(B), to be eligible for the
exclusion in Sec. 1041.8(a)(1)(ii), a lender may not close the
consumer's account in response to a negative balance that results from
a lender-initiated transfer of funds in connection with the covered
loan. A lender is not restricted from closing the consumer's account in
response to another event, even if the event occurs after a lender-
initiated transfer of funds has brought the account to a negative
balance. For example, a lender may close the account at the consumer's
request, for purposes of complying with other regulatory requirements,
or to protect the account from suspected fraudulent use or unauthorized
access, and still meet the condition in Sec. 1041.8(a)(1)(ii)(B).
2. Terms of loan agreement or account agreement. The condition in
Sec. 1041.8(a)(1)(ii)(B) is met only if the terms of the loan
agreement or account agreement providing that the lender will not close
the account in the specified circumstances are in effect at the time
the covered loan is made and remain in effect for the duration of the
loan.
8(a)(2) Single Immediate Payment Transfer at the Consumer's Request
Paragraph 8(a)(2)(i)
1. Time of initiation. A one-time electronic fund transfer is
initiated at the time that the transfer is sent out of the lender's
control. Thus, the electronic fund transfer is initiated at the time
that the lender or its agent sends the transfer to be processed by a
third party, such as the lender's bank. The following example
illustrates this concept: A lender obtains a consumer's authorization
for a one-time electronic fund transfer at 2 p.m. and sends the payment
entry to its agent, a payment processor, at 5 p.m. on the same day. The
agent then sends the payment entry to the lender's bank for further
processing the next business day at 8 a.m. The timing condition in
Sec. 1041.8(a)(2)(ii) is satisfied, because the lender's agent sent
the transfer out of its control within one business day after the
lender obtained the consumer's authorization.
Paragraph 8(a)(2)(ii)
1. Time of processing. A signature check is processed at the time
that the check is sent out of the lender's control. Thus, the check is
processed at the time that the lender or its agent sends the check to
be processed by a third party, such as the lender's bank. For an
example illustrating this concept within the context of initiating a
one-time electronic fund transfer, see comment 8(a)(2)(i)-1.
2. Check provided by mail. For purposes of Sec. 1041.8(a)(2)(ii),
if the consumer provides the check by mail, the check is deemed to be
provided on the date that the lender receives it.
8(b) Prohibition on Initiating Payment Transfers From a Consumer's
Account After Two Consecutive Failed Payment Transfers
1. General. When the prohibition in Sec. 1041.8(b) applies, a
lender is generally restricted from initiating any further payment
transfers from the consumer's account in connection with any covered
loan that the consumer has with the lender at the time the prohibition
is triggered, unless the requirements and conditions in either Sec.
1041.8(c) or (d) are satisfied for each such covered loan for which the
lender seeks to initiate further payment transfers. The prohibition
applies, for example, to payment transfers that might otherwise be
initiated to collect payments that later fall due under a loan
agreement for a covered loan and to transfers to collect late fees or
returned item fees as permitted under the terms of such a loan
agreement. In addition, the prohibition applies regardless of whether
the lender holds an otherwise valid authorization or instrument from
the consumer, including but not limited to an authorization to collect
payments by preauthorized electronic fund transfers or a post-dated
check. See Sec. 1041.8(c) and (d) and accompanying commentary for
guidance on the requirements and conditions that a lender must satisfy
to initiate a payment transfer from a consumer's account after the
prohibition applies.
2. Account. The prohibition in Sec. 1041.8(b) applies only to the
account from which the lender attempted to initiate the two consecutive
failed payment transfers.
3. More than one covered loan. The prohibition in Sec. 1041.8(b)
is triggered after the lender has attempted to initiate two consecutive
failed payment transfers in connection with any covered loan or covered
loans that the consumer has with the lender. Thus, when a consumer has
more than one covered loan with the lender, the two consecutive failed
payment transfers need not be initiated in connection with the same
loan in order for the prohibition to be triggered, but rather can be
initiated in connection with two different loans. For example, the
prohibition is triggered if the lender initiates the first failed
payment transfer to collect payment on one covered loan and the second
consecutive failed payment transfer to collect payment on a different
covered loan, assuming that the conditions for a first failed payment
transfer, in Sec. 1041.8(b)(2)(i), and second consecutive failed
transfer, in Sec. 1041.8(b)(2)(ii), are met.
4. Application to bona fide subsequent loan. If a lender triggers
the prohibition in Sec. 1041.8(b), the lender is not prohibited under
Sec. 1041.8(b) from initiating a payment transfer in connection with a
bona fide subsequent covered loan that was originated after the
prohibition was triggered, provided that the lender has not attempted
to initiate two consecutive failed payment transfers from the
consumer's account in connection with the bona fide subsequent covered
loan. For purposes of Sec. 1041.8(b) only, a bona fide subsequent
covered loan does not include a covered loan that refinances or rolls
over any covered loan that the consumer has with the lender at the time
the prohibition is triggered.
8(b)(1) General
1. Failed payment transfer. A payment transfer results in a return
indicating that the consumer's account lacks sufficient funds when it
is returned unpaid, or is declined, due to nonsufficient funds in the
consumer's account.
2. Date received. The prohibition in Sec. 1041.8(b) applies as of
the date on which the lender or its agent, such as a payment processor,
receives the return of the second consecutive failed transfer or, if
the lender is the consumer's account-holding institution, the date on
which the second consecutive failed payment transfer is initiated.
3. Return for other reason. A transfer that results in a return for
a reason other than a lack of sufficient funds, such as a return made
due to an incorrectly entered account number, is not a failed transfer
for purposes of Sec. 1041.8(b).
[[Page 54912]]
4. Failed payment transfer initiated by a lender that is the
consumer's account-holding institution. When a lender that is the
consumer's account-holding institution initiates a payment transfer for
an amount that the account lacks sufficient funds to cover, the payment
transfer is a failed payment transfer for purposes of the prohibition
in Sec. 1041.8(b), regardless of whether the result is classified or
coded in the lender's internal procedures, processes, or systems as a
return for nonsufficient funds or, if applicable, regardless of whether
the full amount of the payment transfer is paid out of overdraft. Such
a lender does not initiate a failed payment transfer for purposes of
the prohibition if the lender merely defers or foregoes debiting or
withdrawing payment from an account based on the lender's observation
that the account lacks sufficient funds.
8(b)(2) Consecutive Failed Payment Transfers
8(b)(2)(i) First Failed Payment Transfer
1. Examples. The following examples illustrate concepts of first
failed payment transfers under Sec. 1041.8(b)(2)(i). All of the
examples assume that the consumer has only one covered loan with the
lender:
i. A lender, having made no other attempts, initiates an electronic
fund transfer to collect the first scheduled payment due under a loan
agreement for a covered loan, which results in a return for
nonsufficient funds. The failed transfer is the first failed payment
transfer. The lender, having made no attempts in the interim, re-
presents the electronic fund transfer and the re-presentment results in
the collection of the full payment. Because the subsequent attempt did
not result in a return for nonsufficient funds, the number of
consecutive failed payment transfers resets to zero. The following
month, the lender initiates an electronic fund transfer to collect the
second scheduled payment due under the covered loan agreement, which
results in a return for nonsufficient funds. That failed transfer is a
first failed payment transfer.
ii. A storefront lender, having made no prior attempts, processes a
consumer's signature check through the check system to collect the
first scheduled payment due under a loan agreement for a covered loan.
The check is returned for nonsufficient funds. This constitutes the
first failed payment transfer. The lender does not thereafter convert
and process the check through the ACH system, or initiate any other
type of payment transfer, but instead contacts the consumer. At the
lender's request, the consumer comes into the store and makes the full
payment in cash withdrawn from the consumer's account. The number of
consecutive failed payment transfers remains at one, because the
consumer's cash payment was not a payment transfer as defined in Sec.
1041.8(a)(2).
8(b)(2)(ii) Second Consecutive Failed Payment Transfer
1. General. Under Sec. 1041.8(b)(2)(ii), a failed payment transfer
is the second consecutive failed transfer if the previous payment
transfer was a first failed payment transfer. The following examples
illustrate this concept:
i. Assume that a consumer has only one covered loan with a lender.
The lender, having initiated no other payment transfer in connection
with the covered loan, initiates an electronic fund transfer to collect
the first scheduled payment due under the loan agreement. The transfer
is returned for nonsufficient funds. The returned transfer is the first
failed payment transfer. The lender next initiates an electronic fund
transfer for the following scheduled payment due under the loan
agreement for the covered loan, which is also returned for
nonsufficient funds. The second returned transfer is the second
consecutive failed payment transfer.
ii. Assume that a consumer has two covered loans, Loan A and Loan
B, with a lender. Further assume that the lender has initiated no
failed payment transfers in connection with either covered loan. On the
first of the month, the lender initiates an electronic fund transfer to
collect a regularly scheduled payment on Loan A, resulting in a return
for nonsufficient funds. The returned transfer is the first failed
payment transfer. Two weeks later, the lender, having initiated no
further payment transfers in connection with either covered loan,
initiates an electronic fund transfer to collect a regularly scheduled
payment on Loan B, also resulting in a return for nonsufficient funds.
The second returned transfer is the second consecutive failed payment
transfer, and the lender is thus prohibited under Sec. 1041.8(b) from
initiating further payment transfers in connection with either covered
loan.
2. Previous payment transfer. Section 1041.8(b)(2)(ii) provides
that a previous payment transfer includes a payment transfer initiated
at the same time or on the same day as the first failed payment
transfer. The following example illustrates how this concept applies in
determining whether the prohibition in Sec. 1041.8(b) is triggered:
Assume that a consumer has only one covered loan with a lender. The
lender has made no other payment transfers in connection with the
covered loan. On Monday at 9 a.m., the lender initiates two electronic
fund transfers to collect the first scheduled payment under the loan
agreement, each for half of the total amount due. Both transfers are
returned for nonsufficient funds. Because each transfer is one of two
failed transfers initiated at the same time, the lender has initiated a
second consecutive failed payment transfer under Sec.
1041.8(b)(2)(ii), and the prohibition in Sec. 1041.8(b) is therefore
triggered.
3. Application to exception in Sec. 1041.8(d). When, after a
second consecutive failed payment transfer, a lender initiates a single
immediate payment transfer at the consumer's request pursuant to the
exception in Sec. 1041.8(d), the failed transfer count remains at two,
regardless of whether the transfer succeeds or fails. Further, the
exception is limited to a single payment transfer. Accordingly, if a
payment transfer initiated pursuant to the exception fails, the lender
is not permitted to re-initiate the transfer, such as by re-presenting
it through the ACH system, unless the lender obtains a new
authorization under Sec. 1041.8(c) or (d).
8(b)(2)(iii) Different Payment Channel
1. General. Section 8(b)(2)(iii) provides that if a failed payment
transfer meets the descriptions set forth in Sec. 1041.8(b)(2)(ii), it
is the second consecutive failed transfer regardless of whether the
first failed transfer was made through a different payment channel. The
following example illustrates this concept: A lender initiates an
electronic funds transfer through the ACH system for the purpose of
collecting the first payment due under a loan agreement for a covered
loan. The transfer results in a return for nonsufficient funds. This
constitutes the first failed payment transfer. The lender next
processes a remotely created check through the check system for the
purpose of collecting the same first payment due. The remotely created
check is returned for nonsufficient funds. The second failed attempt is
the second consecutive failed attempt because it meets the description
set forth in Sec. 1041.8(b)(2)(ii).
8(c) Exception for Additional Payment Transfers Authorized by the
Consumer
1. General. Section 1041.8(c) sets forth one of two exceptions to
the prohibition in Sec. 1041.8(b). Under the exception in Sec.
1041.8(c), a lender is permitted to initiate additional payment
transfers from a consumer's account
[[Page 54913]]
after the lender's second consecutive transfer has failed if the
additional transfers are authorized by the consumer in accordance with
certain requirements and conditions as specified in the rule. In
addition to the exception under Sec. 1041.8(c), a lender is permitted
to execute a single immediate payment transfers at the consumer's
request under Sec. 1041.8(d), if certain requirements and conditions
are satisfied.
8(c)(1) General
1. Consumer's underlying payment authorization or instrument still
required. The consumer's authorization required by Sec. 1041.8(c) is
in addition to, and not in lieu of, any separate payment authorization
or instrument required to be obtained from the consumer under
applicable laws.
8(c)(2) General Authorization Requirements and Conditions
8(c)(2)(i) Required Payment Transfer Terms
1. General. Section 1041.8(c)(2)(i) sets forth the general
requirement that, for purposes of the exception in Sec. 1041.8(c), the
specific date, amount, and payment channel of each additional payment
transfer must be authorized by the consumer, subject to a limited
exception in Sec. 1041.8(c)(2)(iii) for payment transfers solely to
collect a late fee or returned item fee. Accordingly, for the exception
to apply to an additional payment transfer, the transfer's specific
date, amount, and payment channel must be included in the signed
authorization obtained from the consumer under Sec. 1041.8(c)(3)(iii).
For guidance on the requirements and conditions that apply when
obtaining the consumer's signed authorization, see Sec.
1041.8(c)(3)(iii) and accompanying commentary.
2. Specific date. The requirement that the specific date of each
additional payment transfer be authorized by the consumer is satisfied
if the consumer authorizes the month, day, and year of each transfer.
3. Amount larger than specific amount. The exception in Sec.
1041.8(c)(2) does not apply if the lender initiates a payment transfer
for an amount larger than the specific amount authorized by the
consumer. Accordingly, such a transfer would violate the prohibition on
additional payment transfers under Sec. 1041.8(b).
4. Smaller amount. A payment transfer initiated pursuant to Sec.
1041.8(c) is initiated for the specific amount authorized by the
consumer if its amount is equal to or smaller than the authorized
amount.
8(c)(2)(iii) Special Authorization Requirements and Conditions for
Payment Transfers To Collect a Late Fee or Returned Item Fee
1. General. If a lender obtains the consumer's authorization to
initiate a payment transfer solely to collect a late fee or returned
item fee in accordance with the requirements and conditions under Sec.
1041.8(c)(2)(iii), the general requirement in Sec. 1041.8(c)(2) that
the consumer authorize the specific date and amount of each additional
payment transfer need not be satisfied.
2. Highest amount. The requirement that the consumer's signed
authorization include a statement that specifies the highest amount
that may be charged for a late fee or returned item fee is satisfied,
for example, if the statement specifies the maximum amount permitted
under the loan agreement for a covered loan.
3. Varying fee amounts. If a fee amount may vary due to the
remaining loan balance or other factors, the rule requires the lender
to assume the factors that result in the highest amount possible in
calculating the specified amount.
8(c)(3) Requirements and Conditions for Obtaining the Consumer's
Authorization
8(c)(3)(ii) Provision of Payment Transfer Terms to the Consumer
1. General. A lender is permitted under Sec. 1041.8(c)(3)(ii) to
request a consumer's authorization on or after the day that the lender
provides the consumer rights notice required by Sec. 1041.9(c). For
the exception in Sec. 1041.8(c) to apply, however, the consumer's
signed authorization must be obtained no earlier than the date on which
the consumer is considered to have received the consumer rights notice,
as specified in Sec. 1041.8(c)(3)(iii).
2. Different options. Nothing in Sec. 1041.8(c)(3)(ii) prohibits a
lender from providing different options for the consumer to consider
with respect to the date, amount, or payment channel of each additional
payment transfer for which the lender is requesting authorization. In
addition, if a consumer declines a request, nothing in Sec.
1041.8(c)(3)(ii) prohibits a lender from making a follow-up request by
providing a different set of terms for the consumer to consider. For
example, if the consumer declines an initial request to authorize two
recurring payment transfers for a particular amount, the lender may
make a follow-up request for the consumer to authorize three recurring
payment transfers for a smaller amount.
Paragraph 8(c)(3)(ii)(A)
1. Request by email. Under Sec. 1041.8(c)(3)(ii)(A), a lender is
permitted to provide the required terms and statement to the consumer
in writing or in a retainable form by email if the consumer has
consented to receive electronic disclosures in that manner under Sec.
1041.9(a)(4) or agrees to receive the terms and statement by email in
the course of a communication initiated by the consumer in response to
the consumer rights notice required by Sec. 1041.9(c). The following
example illustrates a situation in which the consumer agrees to receive
the required terms and statement by email after affirmatively
responding to the notice:
i. After a lender provides the consumer rights notice in Sec.
1041.9(c) by mail to a consumer who has not consented to receive
electronic disclosures under Sec. 1041.9(a)(4), the consumer calls the
lender to discuss her options for repaying the loan, including the
option of authorizing additional payment transfers pursuant to Sec.
1041.8(c). In the course of the call, the consumer asks the lender to
provide the request for the consumer's authorization via email. Because
the consumer has agreed to receive the request via email in the course
of a communication initiated by the consumer in response to the
consumer rights notice, the lender is permitted under Sec.
1041.8(c)(3)(ii)(A) to provide the request to the consumer by that
method.
2. E-Sign Act does not apply to provision of terms and statement.
The required terms and statement may be provided to the consumer
electronically in accordance with the requirements for requesting the
consumer's authorization in Sec. 1041.8(c)(3) without regard to the E-
Sign Act. However, under Sec. 1041.8(c)(3)(iii)(A), an authorization
obtained electronically is valid only if it is signed or otherwise
agreed to by the consumer in accordance with the signature requirements
in the E-Sign Act. See Sec. 1041.8(c)(3)(iii)(A) and comment
8(c)(3)(iii)(A)-1.
3. Same communication. Nothing in Sec. 1041.8(c)(3)(ii) prohibits
a lender from requesting the consumer's authorization for additional
payment transfers and providing the consumer rights notice in the same
communication, such as a single written mailing or a single email to
the consumer. Nonetheless, the consumer rights notice may be provided
to the consumer only in accordance with the requirements and conditions
in Sec. 1041.9, including but not limited to the segregation
requirements that apply to the notice. Thus, for example, if a lender
mails the request for
[[Page 54914]]
authorization and the notice to the consumer in the same envelope, the
lender must provide the notice on a separate piece of paper, as
required under Sec. 1041.9. Similarly, a lender could provide the
notice to a consumer in the body of an email and attach a document
containing the request for authorization. In such cases, it would be
permissible for the lender to add language after the text of the notice
explaining that the other document is a request for a new
authorization.
Paragraph 8(c)(3)(ii)(B)
1. Request by oral telephone communication. Nothing in Sec.
1041.8(c)(3)(ii) prohibits a lender from contacting the consumer by
telephone to discuss repayment options, including the option of
authorizing additional payment transfers. However, under Sec.
1041.8(c)(3)(ii)(B), a lender is permitted to provide the required
terms and statement to the consumer by oral telephone communication for
purposes of requesting authorization only if the consumer affirmatively
contacts the lender in that manner in response to the consumer rights
notice required by Sec. 1041.9(c) and agrees to receive the terms and
statement by that method of delivery in the course of, and as part of,
the same communication.
8(c)(3)(iii) Signed Authorization Required
8(c)(3)(iii)(A) General
1. E-Sign Act signature requirements. For authorizations obtained
electronically, the requirement that the authorization be signed or
otherwise agreed to by the consumer is satisfied if the E-Sign Act
requirements for electronic records and signatures are met. Thus, for
example, the requirement is satisfied by an email from the consumer or
by a code entered by the consumer into the consumer's telephone keypad,
assuming that in each case the signature requirements in the E-Sign Act
are complied with.
2. Consumer's affirmative response to the notice. A consumer
affirmatively responds to the consumer rights notice that was provided
by mail when, for example, the consumer calls the lender on the
telephone to discuss repayment options after receiving the notice.
8(c)(3)(iii)(C) Memorialization Required
1. Timing. The memorialization is deemed to be provided to the
consumer on the date it is mailed or transmitted.
2. Form of memorialization. The requirement that the
memorialization be provided in a retainable form is not satisfied by a
copy of a recorded telephone call, notwithstanding that the
authorization was obtained in that manner.
3. Electronic delivery. A lender is permitted under Sec.
1041.8(c)(3)(iii)(C) to provide the memorialization to the consumer by
email in accordance with the requirements and conditions for requesting
authorization in Sec. 1041.8(c)(3)(ii)(A), regardless of whether the
lender requested the consumer's authorization in that manner. For
example, if the lender requested the consumer's authorization by
telephone but also has obtained the consumer's consent to receive
electronic disclosures by email under Sec. 1041.9(a)(4), the lender
may provide the memorialization to the consumer by email, as specified
in Sec. 1041.8(c)(3)(ii)(A).
8(d) Exception for Initiating a Single Immediate Payment Transfer at
the Consumer's Request
1. General. For guidance on the requirements and conditions that
must be satisfied for a payment transfer to meet the definition of a
single immediate payment transfer at the consumer's request, see Sec.
1041.8(a)(2) and accompanying commentary.
2. Application of prohibition. A lender is permitted under the
exception in Sec. 1041.8(d) to initiate a single payment transfer
requested by the consumer only once and thus is prohibited under Sec.
1041.8(b) from re-initiating the payment transfer if it fails, unless
the lender subsequently obtains the consumer's authorization to re-
initiate the payment transfer under Sec. 1041.8(c) or (d). However, a
lender is permitted to initiate any number of payment transfers from a
consumer's account pursuant to the exception in Sec. 1041.8(d),
provided that the requirements and conditions are satisfied for each
such transfer. See comment 8(b)(2)(ii)-3 for further guidance on how
the prohibition in Sec. 1041.8(b) applies to the exception in Sec.
1041.8(d).
3. Timing. A consumer affirmatively contacts the lender when, for
example, the consumer calls the lender after noticing on her bank
statement that the lender's last two payment withdrawal attempts have
been returned for nonsufficient funds.
8(e) Prohibition Against Evasion
1. General. Section 1041.8(e) provides that a lender must not take
any action with the intent of evading the requirements of Sec. 1041.8.
In determining whether a lender has taken action with the intent of
evading the requirements of Sec. 1041.8, the form, characterization,
label, structure, or written documentation of the lender's action shall
not be dispositive. Rather, the actual substance of the lender's action
as well as other relevant facts and circumstances will determine
whether the lender's action was taken with the intent of evading the
requirements of Sec. 1041.8. If the lender's action is taken solely
for legitimate business purposes, it is not taken with the intent of
evading the requirements of Sec. 1041.8. By contrast, if a
consideration of all relevant facts and circumstances reveals a purpose
that is not a legitimate business purpose, the lender's action may have
been taken with the intent of evading the requirements of Sec. 1041.8.
A lender action that is taken with the intent of evading the
requirements of this part may be knowing or reckless. Fraud, deceit, or
other unlawful or illegitimate activity may be one fact or circumstance
that is relevant to the determination of whether a lender's action was
taken with the intent of evading the requirements of Sec. 1041.8, but
fraud, deceit, or other unlawful or illegitimate activity is not a
prerequisite to such a finding.
2. Illustrative example. A lender collects payment on its covered
loans primarily through recurring electronic fund transfers authorized
by consumers at consummation. As a matter of lender policy and
practice, after a first attempt to initiate an ACH payment transfer
from a consumer's account for the full payment amount is returned for
nonsufficient funds, the lender initiates a second payment transfer
from the account on the following day for $1.00. If the second payment
transfer succeeds, the lender immediately splits the amount of the full
payment into two separate payment transfers and initiates both payment
transfers from the account at the same time, resulting in two returns
for nonsufficient funds in the vast majority of cases. The lender
developed the policy and began the practice shortly prior to August 19,
2019. The lender's prior policy and practice when re-presenting the
first failed payment transfer was to re-present for the payment's full
amount. Depending on the relevant facts and circumstances, the lender's
actions may have been taken with the intent of evading the requirements
of Sec. 1041.8. Specifically, by initiating a second payment transfer
for $1.00 from the consumer's account the day after a first transfer
for the full payment amount fails and, if that payment transfer
succeeds, initiating two simultaneous payment transfers from the
account for the split amount of the full payment, resulting in two
returns for
[[Page 54915]]
nonsufficient funds in the vast majority of cases, the lender avoided
the prohibition in Sec. 1041.8(b) on initiating payment transfers from
a consumer's account after two consecutive payment transfers have
failed.
Section 1041.9--Disclosure of Payment Transfer Attempts
1. General. Section 1041.9 sets forth two main disclosure
requirements related to collecting payments from a consumer's account
in connection with a covered loan. The first, set forth in Sec.
1041.9(b), is a payment notice required to be provided to a consumer in
advance of a initiating the first payment withdrawal or an unusual
withdrawal from the consumer's account, subject to certain exceptions.
The second, set forth in Sec. 1041.9(c), is a consumer rights notice
required to be provided to a consumer after a lender receives notice of
a second consecutive failed payment transfer from the consumer's
account, as described in Sec. 1041.8(b). In addition, Sec. 1041.9
requires lenders to provide an electronic short notice in two
situations when they are providing the disclosures required by this
section through certain forms of electronic delivery. The first, set
forth in Sec. 1041.9(b)(4), is an electronic short notice that must be
provided along with the payment notice. This provision allows an
exception for when the method of electronic delivery is email; for that
method, the lender may use the electronic short notice under Sec.
1041.9(b)(4)(ii) or may provide the full notice within the body of the
email. The second, set forth in Sec. 1041.9(c)(4), is an electronic
short notice that must be provided along with the consumer rights
notice. As with the payment notices, this consumer rights notice
provision also allows an exception for when the method of electronic
delivery is email; for that method, the lender may use the electronic
short notice under Sec. 1041.9(c)(4)(ii) or may provide the full
notice within the body of the email.
9(a) General Form of Disclosures
9(a)(1) Clear and Conspicuous
1. Clear and conspicuous standard. Disclosures are clear and
conspicuous for purposes of Sec. 1041.9 if they are readily
understandable and their location and type size are readily noticeable
to consumers.
9(a)(2) In Writing or Electronic Delivery
1. Electronic delivery. Section 1041.9(a)(2) allows the disclosures
required by Sec. 1041.9 to be provided through electronic delivery as
long as the requirements of Sec. 1041.9(a)(4) are satisfied, without
regard to the Electronic Signatures in Global and National Commerce Act
(E-Sign Act) (15 U.S.C. 7001 et seq.).
9(a)(3) Retainable
1. General. Electronic disclosures, to the extent permitted by
Sec. 1041.9(a)(4), are retainable for purposes of Sec. 1041.9 if they
are in a format that is capable of being printed, saved, or emailed by
the consumer. The general requirement to provide disclosures in a
retainable form does not apply when the electronic short notices are
provided in via mobile application or text message. For example, the
requirement does not apply to an electronic short notice that is
provided to the consumer's mobile telephone as a text message. In
contrast, if the access is provided to the consumer via email, the
notice must be in a retainable form, regardless of whether the consumer
uses a mobile telephone to access the notice.
9(a)(4) Electronic Delivery
1. General. Section 1041.9(a)(4) permits disclosures required by
Sec. 1041.9 to be provided through electronic delivery if the consumer
consent requirements under Sec. 1041.9(a)(4) are satisfied.
9(a)(4)(i) Consumer Consent
9(a)(4)(i)(A) General
1. General. Section 1041.9(a)(4)(i) permits disclosures required by
Sec. 1041.9 to be provided through electronic delivery if the lender
obtains the consumer's affirmative consent to receive the disclosures
through a particular electronic delivery method. This affirmative
consent requires lenders to provide consumers with an option to select
a particular electronic delivery method. The consent must clearly show
the method of electronic delivery that will be used, such as email,
text message, or mobile application. Consent provided by checking a box
during the origination process may qualify as being in writing. Consent
can be obtained for multiple methods of electronic delivery, but the
consumer must have affirmatively selected and provided consent for each
method.
9(a)(4)(i)(B) Email Option Required
1. General. Section Sec. 1041.9(a)(4)(i)(B) provides that when
obtaining consumer consent to electronic delivery under Sec.
1041.9(a)(4), a lender must provide the consumer with an option to
receive the disclosures through email. The lender may choose to offer
email as the only method of electronic delivery under Sec.
1041.9(a)(4).
9(a)(4)(ii) Subsequent Loss of Consent
1. General. The prohibition on electronic delivery of disclosures
in Sec. 1041.9(a)(4)(ii) applies to the particular electronic method
for which consent is lost. When a lender loses a consumer's consent to
receive disclosures via text message, for example, but has not lost the
consumer's consent to receive disclosures via email, the lender may
continue to provide disclosures via email, assuming that all of the
requirements in Sec. 1041.9(a)(4) are satisfied.
2. Loss of consent applies to all notices. The loss of consent
applies to all notices required by Sec. 1041.9. For example, if a
consumer revokes consent in response to the electronic short notice
text message delivered along with the payment notice under Sec.
1041.9(b)(4)(ii), that revocation also applies to text delivery of the
electronic short notice that would be delivered with the consumer
rights notice under Sec. 1041.9(c)(4)(ii).
Paragraph 9(a)(4)(ii)(A)
1. Revocation. For purposes of Sec. 1041.9(a)(4)(ii)(A), a
consumer may revoke consent for any reason and by any reasonable means
of communication. Reasonable means of communication may include calling
the lender and revoking consent orally, mailing a revocation to an
address provided by the lender on its consumer correspondence, sending
an email response or clicking on a revocation link provided in an email
from the lender, and responding by text message to a text message sent
by the lender.
Paragraph 9(a)(4)(ii)(B)
1. Notice. A lender receives notification for purposes of Sec.
1041.9(a)(4)(ii)(B) when the lender receives any information indicating
that the consumer did not receive or is unable to receive disclosures
in a particular electronic manner. Examples of notice include but are
not limited to the following:
i. An email returned with a notification that the consumer's
account is no longer active or does not exist.
ii. A text message returned with a notification that the consumer's
mobile telephone number is no longer in service.
iii. A statement from the consumer that the consumer is unable to
access or review disclosures through a particular electronic delivery
method.
[[Page 54916]]
9(a)(5) Segregation Requirements for Notices
1. Segregated additional content. Although segregated additional
content that is not required by Sec. 1041.9 may not appear above,
below, or around the required content, additional content may be
delivered through a separate form, such as a separate piece of paper or
Web page.
9(a)(7) Model Forms
1. Safe harbor provided by use of model forms. Although the use of
the model forms and clauses is not required, lenders using them will be
deemed to be in compliance with the disclosure requirement with respect
to such model forms.
9(b) Payment Notice
9(b)(1)(i) First Payment Withdrawal
1. First payment withdrawal. Depending on when the payment
authorization granted by the consumer is obtained on a covered loan and
whether the exception for a single immediate payment transfer made at
the consumer's request applies, the first payment withdrawal may or may
not be the first payment made on a covered loan. When a lender obtains
payment authorization during the origination process, the lender may
provide the first payment withdrawal notice at that time. A lender that
obtains payment authorization after a payment has been made by the
consumer in cash, or after initiating a single immediate payment
transfer at the consumer's request, would deliver the notice later in
the loan term. If a consumer provides one payment authorization that
the lender uses to initiate a first payment withdrawal after a notice
as required by Sec. 1041.9(b)(1)(i), but the consumer later changes
the authorization or provides an additional authorization, the lender's
exercise of that new authorization would not be the first payment
withdrawal; however, it may be an unusual withdrawal under Sec.
1041.9(b)(1)(ii).
2. First payment withdrawal is determined when the loan is in
covered status. As discussed in comment 3(b)(3)-3, there may be
situations where a longer-term loan is not covered at the time of
origination but becomes covered at a later date. The lender's first
attempt to execute a payment transfer after a loan becomes a covered
loan under this part is the first payment withdrawal. For example,
consider a loan that is not considered covered at the time of
origination. If the lender initiates a payment withdrawal during the
first and second billing cycles and the loan becomes covered at the end
of the second cycle, any lender initiated payment during the third
billing cycle is considered a first payment withdrawal under this
section.
3. Intervening payments. Unscheduled intervening payments do not
change the determination of first payment withdrawal for purposes of
the notice requirement. For example, a lender originates a loan on
April 1, with a payment scheduled to be withdrawn on May 1. At
origination, the lender provides the consumer with a first payment
withdrawal notice for May 1. On April 28, the consumer makes the
payment due on May 1 in cash. The lender does not initiate a withdrawal
on May 1. The lender initiates a withdrawal for the next scheduled
payment June 1. The lender satisfied its notice obligation with the
notice provided at origination, so it is not required to send a first
payment notice in connection with the June 1 payment although it may
have to send an unusual payment notice if the transfer meets one of the
conditions in Sec. 1041.9(b)(3)(ii)(C).
9(b)(1)(iii) Exceptions
1. Exception for initial payment transfer applies even if the
transfer is unusual. The exception in Sec. 1041.9(b)(1)(iii)(A)
applies even if the situation would otherwise trigger the additional
disclosure requirements for unusual attempts under Sec. 1041.9(b)(3).
For example, if the payment channel of the initial payment transfer
after obtaining the consumer's consent is different than the payment
channel used before the prohibition under Sec. 1041.8 was triggered,
the exception in Sec. 1041.9(b)(1)(iii)(A) applies.
2. Multiple transfers in advance. If a consumer has affirmatively
consented to multiple transfers in advance, the exception in Sec.
1041.9(b)(1)(iii)(A) applies only to the first initial payment transfer
of that series.
9(b)(2) First Payment Withdrawal Notice
9(b)(2)(i) Timing
1. When the lender obtains payment authorization. For all methods
of delivery, the earliest point that the lender may provide the first
payment withdrawal notice is when the lender obtains the payment
authorization. For example, the notice can be provided simultaneously
when the lender provides a consumer with a copy of a completed payment
authorization, or after providing the authorization copy. The provision
allows the lender to provide consumers with the notice at a convenient
time because the lender and consumer are already communicating about
the loan, but also allows flexibility for lenders that prefer to
provide the notice closer to the payment transfer date. For example,
the lender could obtain consumer consent to electronic delivery and
deliver the notice through email 4 days before initiating the transfer,
or the lender could hand deliver it to the consumer at the end of the
loan origination process.
9(b)(2)(i)(A) Mail
1. General. The six business-day period begins when the lender
places the notice in the mail, not when the consumer receives the
notice. For example, if a lender places the notice in the mail on
Monday, June 1, the lender may initiate the transfer of funds on
Tuesday, June 9, if it is the 6th business day following mailing of the
notice.
9(b)(2)(i)(B) Electronic Delivery
Paragraph 9(b)(2)(i)(B)(1)
1. General. The three-business-day period begins when the lender
sends the notice, not when the consumer receives or is deemed to have
received the notice. For example, if a lender sends the notice by email
on Monday, June 1, the lender may initiate the transfer of funds on
Thursday, June 4, the third business day following transmitting the
notice.
Paragraph 9(b)(2)(i)(B)(2)
1. General. In some circumstances, a lender may lose a consumer's
consent to receive disclosures through a particular electronic delivery
method after the lender has provided the notice. In such circumstances,
the lender may initiate the transfer for the payment currently due as
scheduled. If the lender is scheduled to make a future unusual
withdrawal attempt following the one that was disclosed in the
previously provided first withdrawal notice, the lender must provide
notice for that unusual withdrawal through alternate means, in
accordance with the applicable timing requirements in Sec.
1041.9(b)(3)(i).
2. Alternate Means. The alternate means may include a different
electronic delivery method that the consumer has consented to, in
person, or by mail, in accordance with the applicable timing
requirements in Sec. 1041.9(b)(3)(i).
9(b)(2)(ii) Content Requirements
9(b)(2)(ii)(B) Transfer Terms
Paragraph 9(b)(2)(ii)(B)(1) Date
1. Date. The initiation date is the date that the payment transfer
is sent outside of the lender's control. Accordingly, the initiation
date of the transfer is the date
[[Page 54917]]
that the lender or its agent sends the payment to be processed by a
third party. For example, if a lender sends its ACH payments to a
payment processor working on the lender's behalf on Monday, June 1, but
the processor does not submit them to its bank and the ACH network
until Tuesday, June 2, the date of the payment transfer is Tuesday the
2nd.
Paragraph 9(b)(2)(ii)(B)(2) Amount
1. Amount. The amount of the transfer is the total amount of money
that will be transferred from the consumer's account, regardless of
whether the total corresponds to the amount of a regularly scheduled
payment. For example, if a single transfer will be initiated for the
purpose of collecting a regularly scheduled payment of $50.00 and a
late fee of $30.00, the amount that must be disclosed under Sec.
1041.9(b)(2)(ii)(B)(2) is $80.00.
Paragraph 9(b)(2)(ii)(B)(5) Payment Channel
1. General. Payment channel refers to the specific payment method,
including the network that the transfer will travel through and the
form of the transfer. For example, a lender that uses the consumer's
paper check information to initiate a payment transfer through the ACH
network would use the ACH payment channel under Sec.
1041.9(b)(2)(ii)(B)(5). A lender that uses consumer account and routing
information to initiate a remotely created check over the check network
would use the remotely created check payment channel. A lender that
uses a post-dated signature check to initiate a transfer over the check
network would use the signature check payment channel. A lender that
initiates a payment from a consumer's prepaid card would specify
whether that payment is processed as an ACH transfer, a PIN debit card
network payment, or a signature debit card network payment.
2. Illustrative examples. In describing the payment channel in the
disclosure, the most common payment channel descriptions include, but
are not limited to, ACH transfers, checks, remotely created checks,
remotely created payment orders, internal transfers, PIN debit card
payments, and signature debit card network payments.
9(b)(2)(ii)(C) Payment Breakdown
9(b)(2)(ii)(C)(2) Principal
1. General. The amount of the payment that is applied to principal
must always be included in the payment breakdown table, even if the
amount applied is $0.
9(b)(2)(ii)(C)(4) Fees
1. General. This field must only be provided if some of the payment
amount will be applied to fees. In situations where more than one fee
applies, fees may be disclosed separately or aggregated. A lender may
use its own term to describe the fee, such as ``late payment fee.''
9(b)(2)(ii)(C)(5) Other Charges
1. General. This field must only be provided if some of the payment
amount will be applied to other charges. In situations when more than
one other charge applies, other charges may be disclosed separately or
aggregated. A lender may use its own term to describe the charge, such
as ``insurance charge.''
9(b)(3) Unusual Withdrawal Notice
9(b)(3)(i) Timing
1. General. See comments on 9(b)(2) regarding the first payment
withdrawal notice.
9(b)(3)(ii) Content Requirements
1. General. If the payment transfer is unusual according to the
circumstances described in Sec. 1041.9(b)(3)(ii)(C), the payment
notice must contain both the basic payment information required by
Sec. 1041.9(b)(2)(ii)(B) through (D) and the description of unusual
withdrawal required by Sec. 1041.9(b)(3)(ii)(C).
9(b)(3)(ii)(C) Description of Unusual Withdrawal
1. General. An unusual withdrawal notice is required under Sec.
1041.9(b)(3) if one or more conditions are present. The description of
an unusual withdrawal informs the consumer of the condition that makes
the pending payment transfer unusual.
2. Illustrative example. The lender provides a first payment
withdrawal notice at origination. The first payment withdrawal
initiated by the lender occurs on March 1, for $75, as a paper check.
The second payment is scheduled for April 1, for $75, as an ACH
transfer. Before the second payment, the lender provides an unusual
withdrawal notice. The notice contains the basic payment information
along with an explanation that the withdrawal is unusual because the
payment channel has changed from paper check to ACH. Because the amount
did not vary, the payment is taking place on the regularly scheduled
date, and this is not a re-initiated payment, the only applicable
content under Sec. 1041.9(b)(3)(ii)(C) is the different payment
channel information.
3. Varying amount. The information about varying amount for closed-
end loans in Sec. 1041.9(b)(3)(ii)(C)(1)(i) applies in two
circumstances. First, the requirement applies when a transfer is for
the purpose of collecting a payment that is not specified by amount on
the payment schedule, including, for example, a one-time electronic
payment transfer to collect a late fee. Second, the requirement applies
when the transfer is for the purpose of collecting a regularly
scheduled payment for an amount different from the regularly scheduled
payment amount according to the payment schedule. Given existing
requirements for open-end credit, circumstances that trigger an unusual
withdrawal for open-end credit are more limited according to Sec.
1041.9(b)(3)(ii)(C)(1)(ii). Because the outstanding balance on open-end
credit may change over time, the minimum payment due on the scheduled
payment date may also fluctuate. However, the minimum payment amount
due for open-end credit would be disclosed to the consumer according to
the periodic statement requirement in Regulation Z. The payment
transfer amount would not be considered unusual with regards to open-
end credit unless the amount deviates from the minimum payment due as
disclosed in the periodic statement. The requirement for a first
payment withdrawal notice under Sec. 1041.9(b)(2) and the other
circumstances that could trigger an unusual withdrawal notice under
Sec. 1041.9(b)(3)(ii)(C)(2) through (4), continue to apply.
4. Date other than due date of regularly scheduled payment. The
changed date information in Sec. 1041.9(b)(3)(ii)(C)(2) applies in two
circumstances. First, the requirement applies when a transfer is for
the purpose of collecting a payment that is not specified by date on
the payment schedule, including, for example, a one-time electronic
payment transfer to collect a late fee. Second, the requirement applies
when the transfer is for the purpose of collecting a regularly
scheduled payment on a date that differs from the regularly scheduled
payment date according to the payment schedule.
9(b)(4) Electronic Delivery
1. General. If the lender is using a method of electronic delivery
other than email, such as text or mobile application, the lender must
provide the notice with the electronic short notice as provided in
Sec. 1041.9(b)(4)(ii). If the lender is using email as the method of
electronic delivery, Sec. 1041.9(b)(4)(iii) allows the lender to
determine whether to use the electronic short notice
[[Page 54918]]
approach or to include the full text of the notice in the body of the
email.
9(b)(4)(ii) Electronic Short Notice
9(b)(4)(ii)(A) General Content
1. Identifying statement. If the lender is using email as the
method of electronic delivery, the identifying statement required in
Sec. 1041.9(b)(2)(ii)(A) and (b)(3)(ii)(A) must be provided in both
the email subject line and the body of the email.
9(c) Consumer Rights Notice
9(c)(2) Timing
1. General. Any information provided to the lender or its agent
that the payment transfer has failed would trigger the timing
requirement provided in Sec. 1041.9(c)(2). For example, if the
lender's agent, a payment processor, learns on Monday, June 1 that an
ACH payment transfer initiated by the processor on the lender's behalf
has been returned for non-sufficient funds, the lender would be
required to send the consumer rights notice by Thursday, June 4.
9(c)(3) Content Requirements
1. Identifying statement. If the lender is using email as the
method of electronic delivery, the identifying statement required in
Sec. 1041.9(c)(3)(i) must be provided in both the email subject line
and the body of the email.
2. Fees. If the lender is also the consumer's account-holding
institution, this includes all fees charged in relation to the
transfer, including any returned payment fees charged to outstanding
loan balance and any fees, such as overdraft or insufficient fund fees,
charged to the consumer's account.
9(c)(4) Electronic Delivery
1. General. See comments 9(b)(4)-1 and 9(b)(4)(ii)(A)-1.
Section 1041.10--Furnishing Information to Registered Information
Systems
10(a) Loans Subject to Furnishing Requirement
1. Application to rollovers. The furnishing requirements in Sec.
1041.10(a) apply to each covered short-term loan or covered longer-term
balloon-payment loan a lender makes, as well as to loans that are a
rollover of a prior covered short-term loan or covered longer-term
balloon-payment loan (or what is termed a ``renewal'' in some States).
Rollovers are defined as a matter of State law but typically involve
deferral of repayment of the principal amount of a short-term loan for
a period of time in exchange for a fee. In the event that a lender is
permitted under State law to roll over a covered short-term loan or
covered longer-term balloon-payment loan and does so in accordance with
the requirements of Sec. 1041.5 or Sec. 1041.6, the rollover would be
treated, as applicable, as a new covered short-term loan or as a new
covered longer-term balloon-payment loan for purposes of Sec. 1041.10.
For example, assume that a lender is permitted under applicable State
law to roll over a covered short-term loan; the lender makes a covered
short-term loan with a 14-day contractual duration; and on day 14 the
lender reasonably determines that the consumer has the ability to repay
a new loan under Sec. 1041.5 and offers the consumer the opportunity
to roll over the first loan for an additional 14 days. If the consumer
accepts the rollover, the lender would report the original loan as no
longer outstanding and would report the rollover as a new covered
short-term loan.
2. Furnishing through third parties. Section 1041.10(a) requires
that, for each covered short-term loan and covered longer-term balloon
loan a lender makes, the lender must furnish the information concerning
the loan described in Sec. 1041.10(c) to each information system
described in Sec. 1041.10(b). A lender may furnish information to such
information system directly, or may furnish through a third party
acting on its behalf, including a provisionally registered or
registered information system.
10(b) Information Systems to Which Information Must Be Furnished
1. Provisional registration and registration of information system
while loan is outstanding. Pursuant to Sec. 1041.10(b)(1), a lender is
only required to furnish information about a covered loan to an
information system that, at the time the loan is consummated, has been
registered pursuant to Sec. 1041.11(c)(2) for 180 days or more or has
been provisionally registered pursuant to Sec. 1041.11(d)(1) for 180
days or more or subsequently has become registered pursuant to Sec.
1041.11(d)(2). For example, if an information system is provisionally
registered on March 1, 2020, the obligation to furnish information to
that system begins on August 28, 2020, 180 days from the date of
provisional registration. A lender is not required to furnish
information about a loan consummated on August 27, 2020 to an
information system that became provisionally registered on March 1,
2020.
2. Preliminary approval. Section 1041.10(b) requires that lenders
furnish information to information systems that are provisionally
registered pursuant to Sec. 1041.11(d)(1) and information systems that
are registered pursuant to Sec. 1041.11(c)(2) or (d)(2). Lenders are
not required to furnish information to entities that have received
preliminary approval for registration pursuant to Sec. 1041.11(c)(1)
but are not registered pursuant to Sec. 1041.11(c)(2).
10(c) Information To Be Furnished
1. Deadline for furnishing under Sec. 1041.10(c)(1) and (3).
Section 1041.10(c)(1) requires that a lender furnish specified
information no later than the date on which the loan is consummated or
as close in time as feasible to the date the loan is consummated.
Section 1041.10(c)(3) requires that a lender furnish specified
information no later than the date the loan ceases to be an outstanding
loan or as close in time as feasible to the date the loan ceases to be
an outstanding loan. Under each of Sec. 1041.10(c)(1) and (3), if it
is feasible to report on the specified date (such as the consummation
date), the specified date is the date by which the information must be
furnished.
10(c)(1) Information To Be Furnished at Loan Consummation
1. Type of loan. Section 1041.10(c)(1)(iii) requires that a lender
furnish information that identifies a covered loan as either a covered
short-term loan or a covered longer-term balloon-payment loan. For
example, a lender must identify a covered short-term loan as a covered
short-term loan.
2. Whether a loan is made under Sec. 1041.5 or Sec. 1041.6.
Section 1041.10(c)(1)(iv) requires that a lender furnish information
that identifies a covered loan as made under Sec. 1041.5 or made under
Sec. 1041.6. For example, a lender must identify a loan made under
Sec. 1041.5 as a loan made under Sec. 1041.5.
10(c)(2) Information To Be Furnished While Loan Is an Outstanding Loan
1. Examples. Section 1041.10(c)(2) requires that, during the period
that the loan is an outstanding loan, a lender must furnish any update
to information previously furnished pursuant to Sec. 1041.10 within a
reasonable period of the event that causes the information previously
furnished to be out of date. Information previously furnished can
become out of date due to changes in the loan terms or due to actions
by the consumer. For example, if a lender extends the term of a closed-
end loan, Sec. 1041.10(c)(2) would require the lender to furnish an
update to the date that each payment on the loan is due, previously
furnished pursuant to
[[Page 54919]]
Sec. 1041.10(c)(1)(vii)(B), and to the amount due on each payment
date, previously furnished pursuant to Sec. 1041.10(c)(1)(vii)(C), to
reflect the updated payment dates and amounts. If the amount or minimum
amount due on future payment dates changes because the consumer fails
to pay the amount due on a scheduled payment date, Sec. 1041.10(c)(2)
would require the lender to furnish an update to the amount or minimum
amount due on each payment date, previously furnished pursuant to Sec.
1041.10(c)(1)(vii)(C) or (c)(1)(viii)(D), as applicable, to reflect the
updated amount or minimum amount due on each payment date. However, if
a consumer makes payment on a closed-end loan as agreed and the loan is
not modified to change the dates or amounts of future payments on the
loan, Sec. 1041.10(c)(2) would not require the lender to furnish an
update to information concerning the date that each payment on the loan
is due, previously furnished pursuant to Sec. 1041.10(c)(1)(vii)(B),
or the amount due on each payment date, previously furnished pursuant
to Sec. 1041.10(c)(1)(vii)(C). Section 1041.10(c)(2) does not require
a lender to furnish an update to reflect that a payment was made.
2. Changes to information previously furnished pursuant to Sec.
1041.10(c)(2). Section 1041.10(c)(2) requires that, during the period
that the loan is an outstanding loan, a lender must furnish any update
to information previously furnished pursuant to Sec. 1041.10 within a
reasonable period of the event that causes the information previously
furnished to be out of date. This requirement extends to information
previously furnished pursuant to Sec. 1041.10(c)(2). For example, if a
lender furnishes an update to the amount or minimum amount due on each
payment date, previously furnished pursuant to Sec.
1041.10(c)(1)(vii)(C) or (c)(1)(viii)(D), as applicable, and the amount
or minimum amount due on each payment date changes again after the
update, Sec. 1041.10(c)(2) requires that the lender must furnish an
update to the information previously furnished pursuant to Sec.
1041.10(c)(2).
Section 1041.11--Registered Information Systems
11(b) Eligibility Criteria for Registered Information Systems
11(b)(2) Reporting Capability
1. Timing. To be eligible for provisional registration or
registration, an entity must possess the technical capability to
generate a consumer report containing, as applicable for each unique
consumer, all information described in Sec. 1041.10 substantially
simultaneous to receiving the information from a lender. Technological
limitations may cause some slight delay in the appearance on a consumer
report of the information furnished pursuant to Sec. 1041.10, but any
delay must reasonable.
11(b)(3) Performance
1. Relationship with other law. To be eligible for provisional
registration or registration, an entity must perform in a manner that
facilitates compliance with and furthers the purposes of this part.
However, this requirement does not supersede consumer protection
obligations imposed upon a provisionally registered or registered
information system by other Federal law or regulation. For example, the
Fair Credit Reporting Act requires that, whenever a consumer reporting
agency prepares a consumer report it, shall follow reasonable
procedures to assure maximum possible accuracy of the information
concerning the individual about whom the report relates. See 15 U.S.C.
1681e(b). If including information furnished pursuant to Sec. 1041.10
in a consumer report would cause a provisionally registered or
registered information system to violate this requirement, Sec.
1041.11(b)(3) would not require that the information be included in a
consumer report.
2. Evidence of ability to perform in a manner that facilitates
compliance with and furthers the purposes of this part. Section
1041.11(c)(1) requires that an entity seeking preliminary approval to
be a registered information system must submit an application to the
Bureau containing information sufficient for the Bureau to determine
that the entity is reasonably likely to satisfy the conditions set
forth in Sec. 1041.11(b). Section 1041.11(c)(2) and (d)(1) requires
that an entity seeking to be a registered information system or a
provisionally registered information system must submit an application
that contains information and documentation sufficient for the Bureau
to determine that the entity satisfies the conditions set forth in
Sec. 1041.11(b). In evaluating whether an applicant is reasonably
likely to satisfy or satisfies the requirement set forth in Sec.
1041.11(b)(3), the Bureau will consider the extent to which an
applicant has experience functioning as a consumer reporting agency.
11(b)(4) Federal Consumer Financial Law Compliance Program
1. Policies and procedures. To be eligible for provisional
registration or registration, an entity must have policies and
procedures that are documented in sufficient detail to implement
effectively and maintain its Federal consumer financial law compliance
program. The policies and procedures must address compliance with
applicable Federal consumer financial laws in a manner reasonably
designed to prevent violations and to detect and prevent associated
risks of harm to consumers. The entity must also maintain and modify,
as needed, the policies and procedures so that all relevant personnel
can reference them in their day-to-day activities.
2. Training. To be eligible for provisional registration or
registration, an entity must provide specific, comprehensive training
to all relevant personnel that reinforces and helps implement written
policies and procedures. Requirements for compliance with Federal
consumer financial laws must be incorporated into training for all
relevant officers and employees. Compliance training must be current,
complete, directed to appropriate individuals based on their roles,
effective, and commensurate with the size of the entity and nature and
risks to consumers presented by its activity. Compliance training also
must be consistent with written policies and procedures and designed to
enforce those policies and procedures.
3. Monitoring. To be eligible for provisional registration or
registration, an entity must implement an organized and risk-focused
monitoring program to promptly identify and correct procedural or
training weaknesses so as to provide for a high level of compliance
with Federal consumer financial laws. Monitoring must be scheduled and
completed so that timely corrective actions are taken where
appropriate.
11(b)(5) Independent Assessment of Federal Consumer Financial Law
Compliance Program
1. Assessor qualifications. An objective and independent third-
party individual or entity is qualified to perform the assessment
required by Sec. 1041.11(b)(5) if the individual or entity has
substantial experience in performing assessments of a similar size,
scope, or subject matter; has substantial expertise in both the
applicable Federal consumer financial laws and in the entity's or
information system's business; and has the appropriate professional
qualifications necessary to perform the required assessment adequately.
2. Written assessment. A written assessment described in Sec.
1041.11(b)(5) need not conform to any particular
[[Page 54920]]
format or style as long as it succinctly and accurately conveys the
required information.
11(b)(7) Independent Assessment of Information Security Program
1. Periodic assessments. Section 1041.11(b)(7) requires that, to
maintain its registration, an information system must obtain and
provide to the Bureau, on at least a biennial basis, a written
assessment of the information security program described in Sec.
1041.11(b)(6). The period covered by each assessment obtained and
provided to the Bureau to satisfy this requirement must commence on the
day after the last day of the period covered by the previous assessment
obtained and provided to the Bureau.
2. Assessor qualifications. Professionals qualified to conduct
assessments required under Sec. 1041.11(b)(7) include: A person
qualified as a Certified Information System Security Professional
(CISSP) or as a Certified Information Systems Auditor (CISA); a person
holding Global Information Assurance Certification (GIAC) from the
SysAdmin, Audit, Network, Security (SANS) Institute; and an individual
or entity with a similar qualification or certification.
3. Written assessment. A written assessment described in Sec.
1041.11(b)(7) need not conform to any particular format or style as
long as it succinctly and accurately conveys the required information.
11(c) Registration of Information Systems Prior to August 19, 2019
11(c)(1) Preliminary Approval
1. In general. An entity seeking to become preliminarily approved
for registration pursuant to Sec. 1041.11(c)(1) must submit an
application to the Bureau containing information sufficient for the
Bureau to determine that the entity is reasonably likely to satisfy the
conditions set forth in Sec. 1041.11(b) as of the deadline set forth
in Sec. 1041.11(c)(3)(ii). The application must describe the steps the
entity plans to take to satisfy the conditions set forth in Sec.
1041.11(b) by the deadline and the entity's anticipated timeline for
such steps. The entity's plan must be reasonable and achievable.
11(c)(2) Registration
1. In general. An entity seeking to become a registered information
system pursuant to Sec. 1041.11(c)(2) must submit an application to
the Bureau by the deadline set forth in Sec. 1041.11(c)(3)(ii)
containing information and documentation adequate for the Bureau to
determine that the conditions described in Sec. 1041.11(b) are
satisfied. The application must succinctly and accurately convey the
required information, and must include the written assessments
described in Sec. 1041.11(b)(5) and (7).
11(d) Registration of Information Systems on or After August 19, 2019
11(d)(1) Provisional Registration
1. In general. An entity seeking to become a provisionally
registered information system pursuant to Sec. 1041.11(d)(1) must
submit an application to the Bureau containing information and
documentation adequate for the Bureau to determine that the conditions
described in Sec. 1041.11(b) are satisfied. The application must
succinctly and accurately convey the required information, and must
include the written assessments described in Sec. 1041.11(b)(5) and
(7).
Section 1041.12--Compliance Program and Record Retention
12(a) Compliance Program
1. General. Section 1041.12(a) requires a lender making a covered
loan to develop and follow written policies and procedures that are
reasonably designed to ensure compliance with the applicable
requirements in this part. These written policies and procedures must
provide guidance to a lender's employees on how to comply with the
requirements in this part. In particular, under Sec. 1041.12(a), a
lender must develop and follow detailed written policies and procedures
reasonably designed to achieve compliance, as applicable, with the
ability-to-repay requirements in Sec. 1041.5, alternative requirements
in Sec. 1041.6, payments requirements in Sec. Sec. 1041.8 and 1041.9,
and requirements on furnishing loan information to registered and
provisionally registered information systems in Sec. 1041.10. The
provisions and commentary in each section listed above provide guidance
on what specific directions and other information a lender must include
in its written policies and procedures.
2. Examples. The written policies and procedures a lender must
develop and follow under Sec. 1041.12(a) depend on the types of loans
that the lender makes. A lender that makes a covered loan under Sec.
1041.5 must develop and follow written policies and procedures to
ensure compliance with the ability-to-repay requirements, including on
projecting a consumer's net income and payments on major financial
obligations, and estimating a consumer's basic living expenses. Among
other written policies and procedures, a lender that makes a covered
loan under Sec. 1041.5 or Sec. 1041.6 must develop and follow written
policies and procedures to furnish loan information to registered and
provisionally registered information systems in accordance with Sec.
1041.10. A lender that makes a covered loan subject to the requirements
in Sec. 1041.6 or Sec. 1041.9 must develop and follow written
policies and procedures to provide the required disclosures to
consumers.
12(b) Record Retention
1. General. Section 1041.12(b) requires a lender to retain various
categories of documentation and information in connection with the
underwriting and performance of covered short-term loans and covered
longer-term balloon payment loans, as well as payment practices in
connection with covered loans generally. The items listed are non-
exhaustive as to the records that may need to be retained as evidence
of compliance with this part concerning loan origination and
underwriting, terms and performance, and payment practices.
12(b)(1) Retention of Loan Agreement and Documentation Obtained in
Connection With Originating a Covered Short-Term or Covered Longer-Term
Balloon-Payment Loan
1. Methods of retaining loan agreement and documentation obtained
for a covered short-term or covered longer-term balloon-payment loan.
Section 1041.12(b)(1) requires a lender either to retain the loan
agreement and documentation obtained in connection with a covered
short-term or covered longer-term balloon-payment loan in original form
or to be able to reproduce an image of the loan agreement and
documentation accurately. For example, if the lender uses a consumer's
pay stub to verify the consumer's net income, Sec. 1041.12(b)(1)
requires the lender to either retain a paper copy of the pay stub
itself or be able to reproduce an image of the pay stub, and not merely
the net income information that was contained in the pay stub. For
documentation that the lender receives electronically, such as a
consumer report from a registered information system, the lender may
retain either the electronic version or a printout of the report.
[[Page 54921]]
12(b)(2) Electronic Records in Tabular Format Regarding Origination
Calculations and Determinations for a Covered Short-Term or Longer-Term
Balloon-Payment Loan Under Sec. 1041.5
1. Electronic records in tabular format. Section 1041.12(b)(2)
requires a lender to retain records regarding origination calculations
and determinations for a covered loan in electronic, tabular format.
Tabular format means a format in which the individual data elements
comprising the record can be transmitted, analyzed, and processed by a
computer program, such as a widely used spreadsheet or database
program. Data formats for image reproductions, such as PDF, and
document formats used by word processing programs are not tabular
formats. A lender does not have to retain the records required in Sec.
1041.12(b)(2) in a single, combined spreadsheet or database with the
records required in Sec. 1041.12(b)(3) and (5). Section 1041.12(b)(2),
however, requires a lender to be able to associate the records for a
particular covered short-term or covered longer-term balloon payment
loan in Sec. 1041.12(b)(2) with unique loan and consumer identifiers
in Sec. 1041.12(b)(3).
12(b)(3) Electronic Records in Tabular Format Regarding Type, Terms,
and Performance of Covered Short-Term or Covered Longer-Term Balloon-
Payment Loans
1. Electronic records in tabular format. Section 1041.12(b)(3)
requires a lender to retain records regarding loan type, terms, and
performance of covered short-term or covered longer-term balloon-
payment loans for a covered loan in electronic, tabular format. See
comment 12(b)(2)-1 for a description of how to retain electronic
records in tabular format. A lender does not have to retain the records
required in Sec. 1041.12(b)(3) in a single, combined spreadsheet or
database with the records required in Sec. 1041.12(b)(2). Section
1041.12(b)(3), however, requires a lender to be able to associate the
records for a particular covered short-term or covered longer-term
balloon payment loan in Sec. 1041.12(b)(2) and (5) with unique loan
and consumer identifiers in Sec. 1041.12(b)(3).
Paragraph 12(b)(3)(iv)
1. Maximum number of days, up to 180 days, any full payment was
past due. Section 1041.12(b)(3)(iv) requires a lender that makes a
covered loan to retain information regarding the number of days any
full payment is past due beyond the payment schedule established in the
loan agreement, up to 180 days. For this purpose, a full payment is
defined as principal, interest, and any charges. If a consumer makes a
partial payment on the contractual due date and the remainder of the
payment 10 days later, the lender must record the full payment as being
10 days past due. If a consumer fails to make a full payment on a
covered loan more than 180 days after the contractual due date, the
lender must only record the full payment as being 180 days past due.
12(b)(4) Retention of Records Relating to Payment Practices for Covered
Loans
1. Methods of retaining documentation. Section 1041.12(b)(4)
requires a lender either to retain certain payment-related information
in connection with covered loans in original form or to be able to
reproduce an image of such documents accurately. For example, Sec.
1041.12(b)(4) requires the lender to either retain a paper copy of the
leveraged payment mechanism obtained in connection with a covered
longer-term loan or to be able to reproduce an image of the mechanism.
For documentation that the lender receives electronically, the lender
may retain either the electronic version or a printout.
12(b)(5) Electronic Records in Tabular Format Regarding Payment
Practices for Covered Loans
1. Electronic records in tabular format. Section 1041.12(b)(5)
requires a lender to retain records regarding payment practices in
electronic, tabular format. See comment 12(b)(2)-1 for a description of
how to retain electronic records in tabular format. A lender does not
have to retain the records required in Sec. 1041.12(b)(5) in a single,
combined spreadsheet or database with the records required in Sec.
1041.12(b)(2) and (3). Section 1041.12(b)(5), however, requires a
lender to be able to associate the records for a particular covered
short-term or covered longer-term balloon payment loan in Sec.
1041.12(b)(5) with unique loan and consumer identifiers in Sec.
1041.12(b)(3).
Section 1041.13--Prohibition Against Evasion
1. Lender action taken with the intent of evading the requirements
of the rule. Section 1041.13 provides that a lender must not take any
action with the intent of evading the requirements of this part. In
determining whether a lender has taken action with the intent of
evading the requirements of this part, the form, characterization,
label, structure, or written documentation of the lender's action shall
not be dispositive. Rather, the actual substance of the lender's action
as well as other relevant facts and circumstances will determine
whether the lender's action was taken with the intent of evading the
requirements of this part. If the lender's action is taken solely for
legitimate business purposes, it is not taken with the intent of
evading the requirements of this part. By contrast, if a consideration
of all relevant facts and circumstances reveals the presence of a
purpose that is not a legitimate business purpose, the lender's action
may have been taken with the intent of evading the requirements of this
part. A lender action that is taken with the intent of evading the
requirements of this part may be knowing or reckless. Fraud, deceit, or
other unlawful or illegitimate activity may be one fact or circumstance
that is relevant to the determination of whether a lender's action was
taken with the intent of evading the requirements of this part, but
fraud, deceit, or other unlawful or illegitimate activity is not a
prerequisite to such a finding.
Dated: October 4, 2017.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2017-21808 Filed 11-16-17; 8:45 am]
BILLING CODE 4810-AM-P