[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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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/.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \113\ 80 FR 43560 (July 22, 2015).
    \114\ 80 FR 43560 (July 22, 2015).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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/.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \134\ N.M. H.B. 347.
    \135\ N.M. H.B. 347.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \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/.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \242\ CFPB Payday Loans and Deposit Advance Products White 
Paper, at 27-28.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \243\ CFPB Payday Loans and Deposit Advance Products White 
Paper, at 33 fig. 11, 37 fig. 14.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \253\ Lenders described in part II.C as payday installment 
lenders may not use this terminology.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \257\ Miss. Code Ann. sec. 75-67-603(e) (2017).
    \258\ Miss. Code Ann. sec. 75-67-619 (2017)
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
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    \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.'').
---------------------------------------------------------------------------

    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.
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    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.
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    \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.
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    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.
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    \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.'').
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    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.
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    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\
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    \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.
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    \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.'').
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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/.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
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    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\
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    \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.
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    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.
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    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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)).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \371\ 12 U.S.C. 5531(c)(1).
    \372\ 12 U.S.C. 5531(c)(2).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.'').
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \387\ 12 U.S.C. 5531(c)(2).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \395\ 12 U.S.C. 5532(a).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \397\ 12 U.S.C. 5532(b)(1).
    \398\ 12 U.S.C. 5532(b)(2).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \399\ 12 U.S.C. 5532(b)(3).
    \400\ 12 U.S.C. 5532(d).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \401\ 12 U.S.C. 5512(b)(1).
    \402\ 12 U.S.C. 5481(14).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \403\ 12 U.S.C. 5512(b)(2).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \422\ Public Law 111-203, 124 Stat. 1376, 1955 (2010).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \430\ 80 FR 37496 (June 30, 2015).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \441\ 74 FR 59033 (Nov. 17, 2009) (EFTA); 70 FR 29582 (May 24, 
2005) (TISA).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.'').
---------------------------------------------------------------------------

    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.
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    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.
---------------------------------------------------------------------------

    \509\ See CFPB Single-Payment Vehicle Title Lending, at 18.
---------------------------------------------------------------------------

    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/.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
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    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\
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    \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.
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    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\
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    \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\
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    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
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    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \668\ 12 U.S.C. 5512(b)(2)(A).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \704\ 12 U.S.C. 5512(b)(2)(A).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \762\ One lender commenter included a slide deck from this 
presentation in its comment letter as an attachment.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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/.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.' '').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \828\ As noted in the proposal, based on its market outreach the 
Bureau understands that at least some online lenders utilize account 
aggregator services.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \831\ CFPB Report on Supplemental Findings, at Chapter 4.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \864\ 12 U.S.C. 5512(b)(3)(A).
    \865\ 12 U.S.C. 5511(a).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \878\ 12 U.S.C. 5532(b)(1).
    \879\ 12 U.S.C. 5532(d).
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \881\ See CFPB Data Point: Payday Lending, at 16, 17 panel A & 
panel B.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
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    \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.
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     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\
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    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \940\ CFPB Online Payday Loan Payments, at 16-17 figs. 2-3.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    \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.
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    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \994\ See, e.g., FTC Final Amendments to Telemarketing Sales 
Rule, 80 FR 77520, 77532 (Dec. 14, 2015) (discussing marketing by 
payment processors).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \996\ See, e.g., Consent Order, In the Matter of EZCORP, Inc., 
CFPB No. 2015-CFPB-0031 (Dec. 16, 2015).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \999\ 12 U.S.C. 5531(c).
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    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \1008\ CFPB Report on Supplemental Findings, at Chapter 6.
---------------------------------------------------------------------------

    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\
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    \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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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/.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \1048\ 12 U.S.C. 5532(a).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1049\ 12 U.S.C. 5532(c).
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    \1050\ Dodd-Frank Act section 1032(b)(2); 12 U.S.C. 5532(b)(2).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \1051\ 15 U.S.C. 7001 et seq.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
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    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.
---------------------------------------------------------------------------

    \1059\ 12 CFR part 1026.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1067\ 12 U.S.C. 5531(b).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1068\ 12 U.S.C. 5514(b)(7)(A)-(C).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.''
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    Pursuant to the authorities described above, the Bureau is thus 
finalizing subpart D.\1076\
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
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    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------

[[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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \1289\ 5 U.S.C. 604(a)(5).
    \1290\ 5 U.S.C. 604(a)(6).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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:
---------------------------------------------------------------------------

    \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).
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    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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BILLING CODE 4810-AM-C

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

[[Page 54893]]

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

[[Page 54895]]

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

[[Page 54896]]

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

[[Page 54897]]

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