Payday, Vehicle Title, and Certain High-Cost Installment Loans |
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Richard Cordray
Bureau of Consumer Financial Protection
22 July 2016
[Federal Register Volume 81, Number 141 (Friday, July 22, 2016)]
[Proposed Rules]
[Pages 47863-48218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13490]
[[Page 47863]]
Vol. 81
Friday,
No. 141
July 22, 2016
Part II
Bureau of Consumer Financial Protection
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12 CFR Part 1041
Payday, Vehicle Title, and Certain High-Cost Installment Loans;
Proposed Rule
Federal Register / Vol. 81, No. 141 / Friday, July 22, 2016 /
Proposed Rules
[[Page 47864]]
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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: Proposed rule with request for public comment.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau or CFPB)
is proposing to establish 12 CFR 1041, which would contain regulations
creating consumer protections for certain consumer credit products. The
proposed regulations would cover payday, vehicle title, and certain
high-cost installment loans.
DATES: Comments must be received on or before October 7, 2016.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2016-
0025 or RIN 3170-AA40, by any of the following methods:
Email: FederalRegisterComments@cfpb.gov. Include Docket
No. CFPB-2016-0025 or RIN 3170-AA40 in the subject line of the email.
Electronic: http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Monica Jackson, Office of the Executive Secretary,
Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC
20552.
Hand Delivery/Courier: Monica Jackson, Office of the
Executive Secretary, Consumer Financial Protection Bureau, 1275 First
Street NE., Washington, DC 20002.
Instructions: All submissions should include the agency name and
docket number or Regulatory Information Number (RIN) for this
rulemaking. Because paper mail in the Washington, DC area and at the
Bureau is subject to delay, commenters are encouraged to submit
comments electronically. In general, all comments received will be
posted without change to http://www.regulations.gov. In addition,
comments will be available for public inspection and copying at 1275
First Street NE., Washington, DC 20002, on official business days
between the hours of 10 a.m. and 5 p.m. eastern time. You can make an
appointment to inspect the documents by telephoning (202) 435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Sensitive personal information, such as account numbers or Social
Security numbers, should not be included. Comments will not be edited
to remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Eleanor Blume, Sarita Frattaroli,
Casey Jennings, Sandeep Vaheesan, Steve Wrone, Counsels; Daniel C.
Brown, Mark Morelli, Michael G. Silver, Laura B. Stack, Senior
Counsels, Office of Regulations, at 202-435-7700.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The Bureau is issuing this notice to propose consumer protections
for payday loans, vehicle title loans, and certain high-cost
installment loans (collectively ``covered loans''). Covered 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 is proposing to
issue regulations primarily pursuant to authority under section 1031 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) to identify and prevent unfair, deceptive, and abusive acts
and practices.\1\ 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 consumer Federal consumer financial laws,\2\ section
1024 of the Dodd-Frank Act to facilitate supervision of certain non-
bank financial service providers,\3\ 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.\4\
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\1\ Public Law 111-203, section 1031(b), 124 Stat. 1376 (2010)
(hereinafter Dodd-Frank Act).
\2\ Dodd-Frank Act section 1022(b).
\3\ Dodd-Frank Act section 1024(b)(7).
\4\ Dodd-Frank Act section 1032(a).
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The Bureau is concerned 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
believes that there may be a high likelihood of consumer harm in
connection with these covered loans because many consumers struggle to
repay their loans. In particular, many 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 is
concerned that consumers may be subject to multiple fees and other
harms when lenders make repeated unsuccessful attempts to withdraw
funds from consumers' accounts.
A. Scope of the Proposed Rule
The Bureau's proposal would apply to two types of covered loans.
First, it would apply 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.
Second, the proposal would apply 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 is a subcategory 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 is proposing 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.
B. Proposed Ability-to-Repay Requirements and Alternative Requirements
for Covered Short-Term Loans
The proposed rule would identify it as an abusive and unfair
practice for a lender to make a covered short-term loan without
reasonably determining that the consumer will have the ability
[[Page 47865]]
to repay the loan.\5\ The proposed rule would prescribe requirements to
prevent the practice. A lender, before making a covered short-term
loan, would have 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 reborrow over the ensuing 30 days. Specifically, a
lender would have to:
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\5\ This is a notice of proposed rulemaking, so the Bureau's
statements herein regarding this and other proposed identifications
of unfair and abusive practices, including the necessary elements of
such identifications, are provisional only. The Bureau is not herein
finding that such elements have been satisfied and identifying
unfair and abusive practices.
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Verify the consumer's net income;
verify the consumer's debt obligations using a national
consumer report and 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;
forecast 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 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 based
on the lender's projections of the consumer's income, debt obligations,
and housing costs and forecast of basic living expenses for the
consumer.
A lender would also have to make, under certain circumstances,
additional assumptions or presumptions when evaluating a consumer's
ability to repay a covered short-term loan. The proposal would specify
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 seeks a covered short-term loan within 30 days of a covered
short-term loan or a covered longer-term loan with a balloon payment, a
lender generally would be required to presume that the consumer is not
able to afford the new loan. A lender would be able to 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 be prohibited 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.
A lender would also be allowed to make a covered short-term loan,
without making an ability-to-repay determination, so long as the loan
satisfies certain prescribed terms and the lender confirms that the
consumer met specified borrowing history conditions and provides
required disclosures to the consumer. Among other conditions, a lender
would be 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 would not be
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 would not be permitted to take
vehicle security in connection with these loans.
C. Proposed Ability-to-Repay Requirements and Alternative Requirements
for Covered Longer-Term Loans
The proposed rule would identify it as an abusive and unfair
practice for a lender to make a covered longer-term loan without
reasonably determining that the consumer will have the ability to repay
the loan. The proposed rule would prescribe requirements to prevent the
practice. A lender, before making a covered longer-term loan, would
have to make a reasonable determination that the consumer has the
ability to make all required payments as scheduled. The proposed
ability-to-repay requirements for covered longer-term loans closely
track 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, reasonably account for the possibility of
volatility in the consumer's income, obligations, or basic living
expenses during the term of the loan.
A lender would also have to make, under certain circumstances,
additional assumptions or presumptions when evaluating a consumer's
ability to repay a covered longer-term loan. The proposal would specify
certain assumptions for determining the consumer's ability to repay a
line of credit that is a covered longer-term loan. In addition, if a
consumer seeks a covered longer-term loan within 30 days of a covered
short-term loan or a covered longer-term balloon-payment loan, the
lender would, under certain circumstances, be required to presume that
the consumer is not able to afford a new loan. A presumption of
unaffordability also generally would apply if the consumer has shown or
expressed difficulty in repaying other outstanding covered or non-
covered loans made by the same lender or its affiliate. A lender would
be able to overcome the presumption of unaffordability for a new
covered longer-term loan only if it could document a sufficient
improvement in the consumer's financial capacity.
A lender would also be permitted to make a covered longer-term loan
without having to satisfy the ability-to-repay requirements by making
loans under a conditional exemption modeled on the National Credit
Union Administration's (NCUA) Payday Alternative Loan (PAL) program.
Among other conditions, a covered longer-term loan under this exemption
would be required to have a principal amount of not less than $200 and
not more than $1,000, fully amortizing payments, and a term of at least
46 days but not longer than six months. In addition, loans made under
this exemption could not have an interest rate more that is more than
the interest rate that is permitted for Federal credit unions to charge
under the PAL regulations and an application fee of more than $20.
A lender would also be permitted to make a covered longer-term
loan, without having to satisfy the ability-to-repay requirements, so
long as the covered longer-term loan meets certain structural
conditions. Among other conditions, a covered longer-term loan under
this exemption would be required to have fully amortizing payments and
a term of at least 46 days but not longer than 24 months. In addition,
to qualify for this conditional exemption, a loan must carry a modified
total cost of credit of less than or equal to an annual rate of 36
percent, from which the lender could exclude a single origination fee
that is no more than $50 or that is reasonably proportionate to the
lender's costs of underwriting. The projected annual default rate on
all loans made pursuant to this conditional exemption must not exceed 5
percent. The lender would have to refund all of the origination fees
paid by all borrowers in
[[Page 47866]]
any year in which the annual default rate of 5 percent is exceeded.
D. Proposed Payments Practices Rules
The proposed rule would identify it as an abusive and unfair
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
apply 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 proposed rule would
require 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, a lender would be required 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 contain key
information about the upcoming payment attempt, and, if applicable,
alert the consumer to unusual payment attempts. A lender would be
permitted to provide electronic notices so long as the consumer
consents to electronic communications.
E. Additional Requirements
The Bureau is proposing to require lenders to furnish to registered
information systems basic information for most covered loans at
origination, any updates to that information over the life of the loan,
and certain information when the loan ceases to be outstanding. The
registered information systems would have to meet certain eligibility
criteria prescribed in the proposed rule. The Bureau is proposing a
sequential process that it believes would ensure that information
systems would be registered and lenders 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 be required
to obtain and review a consumer report from a registered information
system.
A lender would be required to establish and follow a compliance
program and retain certain records. A lender would be required to
develop and follow written policies and procedures that are reasonably
designed to ensure compliance with the requirements in this proposal.
Furthermore, a lender would 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 and terms. The proposed rule also would include an
anti-evasion clause.
F. Effective Date
The Bureau is proposing that, in general, the final rule would
become effective 15 months after publication of the final rule in the
Federal Register. The Bureau is proposing 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.
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
($9.99 trillion in outstanding balances), for student loans ($1.3
trillion), and for auto loans ($1 trillion). This is also one way in
which certain types of open-end credit--including home equity loans
($0.14 trillion) and lines of credit ($0.51 trillion)--and at least
some credit cards and revolving credit ($0.9 trillion)--can be used.\6\
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\6\ For mortgages (one- to four-family) see Bd. of Governors of
the Fed. Reserve Sys., Mortgage Debt Outstanding (1.54) (Release
Date Mar. 2016), available at http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm; for student loans,
auto loans, and revolving credit, see Bd. of Governors of the Fed.
Reserve Sys., Consumer Credit-G.19 February 2016 (Release Date Apr.
2016), available at http://www.federalreserve.gov/releases/g19/current/default.htm#fn11b. Home equity loans and lines of credit
outstanding estimate derived from Experian & Oliver Wyman, 2015 Q4
Market Intelligence Report: Home Equity Loans Report, at 16 fig. 21
(2016), available at http://www.marketintelligencereports.com and
Experian & Oliver Wyman, 2015 Q4 Market Intelligence Report Market
Intelligence Report: Home Equity Lines Report, at 21 fig. 30 (2016),
available at http://www.marketintelligencereports.com.
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Consumers living paycheck to paycheck and with little to no savings
have also used credit as a means of coping with shortfalls. These
shortfalls can arise from mismatched timing between income and
expenses, misaligned cash flows, income volatility, unexpected expenses
or income shocks, or expenses that simply exceed income.\7\ Whatever
the cause of the shortfall, consumers in these situations sometimes
seek what may broadly be termed a ``liquidity loan.'' \8\ 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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\7\ For a general discussion, see Rob Levy & Joshua Sledge, Ctr.
for Fin. Servs. Innovation, A Complex Portrait: An Examination of
Small-Dollar Credit Consumers (2012), available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
\8\ 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.\9\
[[Page 47867]]
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.\10\ 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
proposing to exclude non-recourse possessory pawn loans, as described
in proposed Sec. 1041.3(e)(5), from the scope of this rulemaking.
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\9\ Credit cards and deposit overdraft services would be
excluded from the proposed rule under proposed Sec. 1041.3(e)(3)
and (6) as discussed further below. The Bureau is engaged in a
separate rulemaking concerning credit offered in connection with
prepaid accounts and has proposed to treat such products generally
as credit cards. See 79 FR 77102 (Dec. 23, 2014). The Bureau has
issued a Notice and Request for Information on the Impacts of
Overdraft Programs on Consumers and has indicated that it is
preparing for a separate rulemaking that will address possible
consumer protection concerns from overdraft services. See 77 FR
12031-12034 (Feb. 28, 2012); Kelly Cochran, Spring 2016 Rulemaking
Agenda, CFPB Blog (May 18, 2016), http://www.consumerfinance.gov/about-us/blog/spring-2016-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), http://www.consumerfinance.gov/blog/new-insights-on-bank-overdraft-fees-and-4-ways-to-avoid-them/. The $11.16 billion total
does not include credit union 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)
[hereinafter CFPB Data Point: Checking Account Overdraft], available
at http://files.consumerfinance.gov/f/201407_cfpb_report_ data-
point_overdrafts.pdf. The Federal Reserve Board adopted a set of
regulations of overdraft services and the Bureau has published two
overdraft research reports on overdraft. See Regulation E, 75 FR
31665 (Jun. 4, 2010), available at https://www.gpo.gov/fdsys/pkg/FR-2010-06-04/pdf/2010-13280.pdf; Bureau of Consumer Fin. Prot., CFPB
Study of Overdraft Programs: A White Paper of Initial Data Findings,
(2013), [hereinafter CFPB Study of Overdraft Programs White Paper],
available at http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf; CFPB Data Point:
Checking Account Overdraft.
\10\ 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 (2012), available at https://my.vanderbilt.edu/susancarter/files/2011/07/Carter_Susan_JMP_Website2.pdf. Pawn
revenue for 2014 was estimated at $6.3 billion. EZCORP, EZCORP 2014
Institutional Investor Day, at 31 (Dec. 11, 2014), available at
http://investors.ezcorp.com/index.php?s=65&item=87. The three
largest pawn firms, Cash America, EZCorp, and First Cash Financial
Services, accounted for about one-third of total industry revenue
but only 13 percent of the over 11,000 storefronts, that are
operated by over 5,000 firms. Id.; First Cash Financial Services
Inc., 2015 Annual Report (Form 10-K), at 1, 33 (Feb. 17, 2016),
available at https://www.sec.gov/Archives/edgar/data/840489/000084048916000076/fcfs1231201510-k.htm; EZCORP, Inc., 2015 Annual
Report (Form 10-K), at 4, 21 (Dec. 23, 2015), available at (https://www.sec.gov/Archives/edgar/data/876523/000087652315000120/a201510-k.htm), and Cash America International, Inc., 2015 Annual Report
(Form 10-K), at 2, 36 (Feb. 25, 2016), available at https://www.sec.gov/Archives/edgar/data/807884/000080788416000055/0000807884-16-000055-index.htm. On April 28, 2016, First Cash
Financial Services and Cash America announced they had entered into
a merger agreement. The resulting company, FirstCash will operate in
26 States. Press Release, ``First Cash Financial Services and Cash
America International to Combine in Merger of Equals to Create
Leading Operator of Retail Pawn Stores in the United States and
Latin America'' (Apr. 28, 2016), available at http://ww2.firstcash.com/sites/default/files/20160428_PR_M.pdf. Revenue
calculations for each firm were made by taking the percentage of
total revenue associated with pawn lending activity. For more about
pawn lending in general, see John P. Caskey, Fringe Banking: Cash-
Checking Outlets, Pawnshops, and the Poor, at ch. 2 (1994).
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This rulemaking is focused on two general categories of liquidity
loan products: Short-term loans and certain higher-cost longer-term
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
second general category consists of certain higher-cost longer-term
loans. It includes both 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
generally having the ability to automatically collect payments from an
account into which the income payment is deposited--and vehicle title
installment loans. In addition, the latter category includes higher
cost, longer-term loans in which the principal is not amortized but is
scheduled to be paid off in a large lump sum payment after a series of
smaller, often interest-only, payments. Some of these loans are
available at storefront locations, others are available on the
internet, and some loans are available through multiple delivery
channels. This rulemaking is not limited to closed-end loans but
includes open-end lines of credit as well.\11\ It also includes short-
term products and some more traditional installment loans made by some
depository institutions and by traditional finance companies.
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\11\ The Dodd-Frank Act does not define ``payday loans,'' and
the Bureau is not proposing to do so 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 proposal.
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As described in more detail in part III, the Bureau has been
studying these markets for liquidity loans for over four 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.\12\ The Bureau has published four reports based upon
these data, and, concurrently with the issuance of this Notice of
Proposed Rulemaking, the Bureau is releasing a fifth report.\13\ 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 four 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, consultations with
Indian tribes, and through a Small Business Review Panel process as
described further below.
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\12\ 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).
\13\ Bureau of Consumer Fin. Prot., Payday Loans and Deposit
Advance Products: A White Paper of Initial Data Findings, (2013)
[hereinafter CFPB Payday Loans and Deposit Advance Products White
Paper], available at http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf; Bureau of Consumer Fin.
Prot., CFPB Data Point: Payday Lending, (2014) [hereinafter CFPB
Data Point: Payday Lending], available at http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf;
Bureau of Consumer Fin. Prot., Online Payday Loan Payments (2016)
[hereinafter CFPB Online Payday Loan Payments], available at http://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf; Bureau of Consumer Fin. Prot., Single-Payment Vehicle
Title Lending (2016) [hereinafter CFPB Single-Payment Vehicle Title
Lending], available at http://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf; Bureau of
Consumer Fin. Prot., Supplemental Findings on Payday, Payday
Installment, and Vehicle Title Loans, and Deposit Advance Products
(2016) [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 both short-term loans and certain higher-
cost longer-term loans, describing the product parameters, industry
size and structure, lending practices, and business models of each
component. It then goes on to describe recent State and Federal
regulatory activity in connection with these product markets. Market
Concerns--Short-Term Loans and Market Concerns--Longer-Term Loans
below, provide a more detailed description of consumer experiences with
short-term loans and certain higher-cost longer-term loans, describing
research about which consumers use the products, why they
[[Page 47868]]
use the products, and the outcomes they experience as a result of the
product structures and industry practices.
B. Single-payment and Other Short-Term Loans
At around 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.\14\ 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.'' \15\
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\14\ 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. See John P. Caskey, Fringe Banking and the Rise
of Payday Lending, in Credit Markets for the Poor 17, 23 (Patrick
Bolton & Howard Rosenthal eds., 2005).
\15\ Elisabeth Anderson, Experts, Ideas, and Policy Change: The
Russell Sage Foundation and Small Loan Reform, 1909-1941, 37 Theory
& Soc'y 271, 276, 283, 285 (2008), available at http://www.jstor.org/stable/40211037 (quoting Arthur Ham, Russell Sage
Foundation, Feb. 1911, Quarterly Report, Library of Congress Russell
Sage Foundation Archive, Box 55).
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New forms of short-term small-dollar lending appeared in several
States in the 1990s,\16\ 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'').\17\ Several
market factors had converged around the same time. Consumers were using
credit cards more frequently for short-term liquidity lending needs, a
trend that continues today.\18\ Storefront finance companies, described
below in part II.C that had provided small loans changed their focus to
larger, collateralized products, including vehicle financing and real
estate secured loans. At the same time there was substantial
consolidation in the storefront installment lending industry.
Depository institutions similarly moved away from short-term small-
dollar loans.
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\16\ A Short History of Payday Lending Law, The Pew Charitable
Trusts (July 18, 2012), http://www.pewtrusts.org/en/research-and-analysis/analysis/2012/07/a-short-history-of-payday-lending-law.
\17\ See, e.g., Adm'r of the Colo. Unif. Consumer Credit Code,
Colo. Dep't of Law, Administrative Interpretation No. 3.104-9201,
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 (June 23, 1992) (on file).
\18\ Robert D. Manning, Credit Card Nation: The Consequences of
America's Addiction to Credit (Basic Books 2000); Amy Traub, Demos,
Debt Disparity: What Drives Credit Card Debt in America, (2014),
available at http://www.demos.org/sites/default/files/publications/DebtDisparity_1.pdf)
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Around the same time, a number of State legislatures amended their
usury laws to allow lending by a broader group of both depository and
non-depository lenders by increasing maximum allowable State interest
rates or eliminating State usury laws, while other States created usury
carve-outs or special rules for short-term loans.\19\ 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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\19\ Pew Charitable Trusts, A Short History of Payday Lending
Law. This piece notes that State legislative changes were in part a
response to the ability of federally- and State-chartered banks to
lend without being subject to the usury laws of the borrower's
State.
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These markets as they have evolved over the last two decades are
not strictly segmented. There is substantial overlap between market
products and the borrowers who use them. For example, in a 2013 survey,
almost 18 percent of U.S. households that had used a payday loan in the
prior year had also used a vehicle title loan.\20\ 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.\21\ The following discussion
nonetheless provides a description of major product types.
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\20\ Data derived from Appendix D--Alternative Financial
Services: National Tables. Fed. Deposit Ins. Corp., 2013 FDIC
National Survey of Unbanked and Underbanked Households: Appendices,
at 57-93 (2014), available at https://www.fdic.gov/householdsurvey/2013appendix.pdf.
\21\ See for example, Advance America; Cash America Pawn; Check
Into Cash; Community Choice Financial/CheckSmart; Speedy Cash; PLS
Financial Services and Money Tree Inc. Title Loans, Advance America,
https://www.advanceamerica.net/services/title-loans; Auto Title
Loans (last visited Mar. 3, 2016); Auto Title Loans, Cash America
Pawn, http://www.cashamerica.com/LoanOptions/AutoTitleLoans.aspx)
(last visited Mar. 3, 2016); Our Process & Information, Check Into
Cash, https://checkintocash.com/title-loans/ (last visited Mar. 3,
2016); Title Loans, Community Choice Financial/CheckSmart, http://www.checksmartstores.com/utah/title-loans/ (last visited Mar. 3,
2016); Title Loans, Speedy Cash, https://www.speedycash.com/title-loans/ (last visited Mar. 3, 2016); Auto Title Loans, PLS Financial
Services, http://www.pls247.com/ms/loans/auto-title-loans.html (last
visited Mar. 3, 2016). Moneytree offers vehicle title and
installment loans in Idaho and Nevada. Idaho Products, Money Tree
Inc., https://www.moneytreeinc.com/loans/idaho (last visited Mar. 3,
2016); Nevada Products, Money Tree Inc., https://www.moneytreeinc.com/loans/nevada (last visited Mar. 3, 2016).
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Storefront Payday Loans
The market that has received the greatest attention among policy
makers, advocates, and researchers is the market for single-payment
payday loans. These payday loans are short-term small-dollar loans
generally repayable in a single payment due when the consumer is
scheduled to receive a paycheck or other inflow of income (e.g.,
government benefits).\22\ 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 36 States that
either have created a carve-out from their general usury cap for payday
loans or have no usury caps on consumer loans.\23\ The remaining 14
[[Page 47869]]
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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\22\ 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.
\23\ For a list of States see, State Payday Loan Regulation and
Usage Rates, The Pew Charitable Trusts (Jan. 14, 2014), http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates. One source lists 35 States
as authorizing payday lending. Susanna Montezemolo, Ctr. for
Responsible Lending, The State of Lending in America & Its Impact on
U.S. Households: Payday Lending Abuses and Predatory Practices, at
32-33 (2013), available at http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf. Another public
compilation lists 32 States as having authorized or allowed payday
lending. See Consumer Fed'n of Am., Legal Status of Payday Loans by
State, http://www.paydayloaninfo.org/state-information (last visited
Apr. 6, 2016).
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Product definition and regulatory environment. As noted above,
payday loans are typically repayable in a single payment on the
borrower's next payday. In order to help ensure repayment, in the
storefront environment the lender generally holds the borrower's
personal check made out to the lender--usually post-dated to the loan
due date in the amount of the loan's principal and fees--or the
borrower's authorization to electronically debit the funds from her
checking account, commonly known as an automated clearing house (ACH)
transaction.\24\ Payment methods are described in more detail below in
part II.D.
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\24\ 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 Can Anyone Get a Payday
Loan?, Speedy Cash, https://www.speedycash.com/faqs/payday-loans/can-anyone-get-a-payday-loan/ (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), available at http://www.sec.gov/Archives/edgar/data/1289505/000119312515088809/d854360d10k.htm; First Cash Fin. Servs., Inc., 2015 Annual Report
(Form 10-K), at 20 (Feb. 17, 2016), available at https://www.sec.gov/Archives/edgar/data/840489/000084048916000076/fcfs1231201510-k.htm.
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Payday loan sizes vary depending on State law limits, individual
lender credit models, and borrower demand. Many States set a limit on
payday loan size; $500 is a common loan limit although the limits range
from $300 to $1,000.\25\ In 2013, the Bureau reported that the median
loan amount for storefront payday loans was $350, based on supervisory
data.\26\ 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 \27\ and State regulatory reports.\28\
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\25\ 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, South Dakota, Tennessee, and
Virginia), and 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), S.D. Codified Laws sec.
54-4-66, 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. Sec. 28-46-
413(1), (2); 815 Ill. Comp. Stat. 122/2-5(e); Ind. Code Sec. Sec.
24-4.5-7-402, -404; Wash. Rev. Code Sec. 31.45.073(2); Wis. Stat.
Sec. 138.14(12)(b); Nev. Rev. Stat. Sec. 604A.425(1)(b), N.M.
Stat. Ann. Sec. 58-15-32(A), Utah Code Ann. Sec. 7-23-401, Wyo.
Stat. Ann. Sec. 40-14-363.
\26\ CFPB Payday Loans and Deposit Advance Products White Paper,
at 15.
\27\ Leslie Parrish & Uriah King, Ctr. for Responsible Lending,
Phantom Demand: Short-term Due Date Generates Need for Repeat Payday
Loans, Accounting for 76% of total Volume, at 21 (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 (2012) [hereinafter Pew
Payday Lending in America: Report 1], available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf) (reporting $375 as the average).
\28\ For example: $361.21 (Illinois average, see Ill. Dep't. of
Fin. & Prof. Reg., Illinois Trends Report All Consumer Loan Products
Through December 2013, at 15 (May 28, 2014), available at https://www.idfpr.com/dfi/ccd/pdfs/IL_Trends_Report%202013.pdf); $350 (Idaho
average, see Idaho Dep't. of Fin., Idaho Credit Code ``Fast Facts''
With Fiscal and Annual Report Data as of January 1, 2016, at 5,
available at https://www.finance.idaho.gov/ConsumerFinance/Documents/Idaho-Credit-Code-Fast-Facts-With-Fiscal-Annual-Report-Data-01012016.pdf); $389.50 (Washington average, see Wash. State
Dep't. of Fin. Insts., 2014 Payday Lending Report, at 6, available
at http://www.dfi.wa.gov/sites/default/files/reports/2014-payday-lending-report.pdf.
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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.\29\ 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.\30\ The annual percentage rate (APR) on a
14-day loan with these terms is 391 percent.\31\ For payday borrowers
who receive monthly income and thus receive a 30-day or monthly payday
loan--many of whom are Social Security recipients \32\--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.\33\
Fees and loan amounts are higher for online loans, described in more
detail below.
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\29\ 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 hundred for
loans under $250 and $21.95 for larger loans (up to the State
maximum of $500). Seven States do not cap fees on payday loans or
are silent on fees (Delaware, Idaho, Nevada, South Dakota, Texas (no
cap on credit access business fees), Utah, and Wisconsin). 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), S.D. Codified Laws
Sec. 54-4-44, Tex. Fin. Code Ann. Sec. 393.602(b), Utah Code Ann.
Sec. 7-23-401, Wis. Stat. Sec. 138.14(10) (a).
\30\ CFPB Payday Loans and Deposit Advance Products White Paper,
at 15-17.
\31\ Throughout the 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 1026, except where
otherwise specified.
\32\ 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).
\33\ 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.
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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 19 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.\34\ By rolling over, the loan repayment of the principal is
extended for another period of time, usually equivalent to the original
loan term, in
[[Page 47870]]
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 $390 for the loan.
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\34\ This proposal uses the term ``rollover'' but this practice
is sometimes described under State law or by lenders as a
``renewal'' or an ``extension.''
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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, seventeen of the States that authorize single-
payment payday lending prohibit lenders from rolling over loans and
twelve more States impose some rollover limitations.\35\ 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.\36\ A handful of 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.\37\
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\35\ 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. Other States such as
Iowa and Kansas restrict a loan from being repaid with the proceeds
of another loan. 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), 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, 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), South
Dakota (four if there is at least 10 percent principal reduction on
each rollover), 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), S.D. Codified Laws Sec. 54-4-65, Utah Code Ann.
Sec. 7-23-401 (4)(b), Wis. Stat. Sec. 138.14 (12)(a).
\36\ See CFPB Payday Loans and Deposit Advance Products White
Paper, at 4; Adm'r of the Colo. Unif. Consumer Credit Code, Colo.
Dep't of Law, Payday Lending Demographic and Statistical
Information: July 2000 through December 2012, at 24 (Apr. 10, 2014)
[hereinafter Colorado UCCC 2000-2012 Demographic and Statistical
Information], available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/DemoStatsInfo/ddlasummary2000-2012.pdf. Pew
Payday Lending in America: Report 1, at 7; Parrish & King, at 7.
\37\ 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);
North Dakota (three business days); Ohio (one day with a two loan
limit in 90 days, four per year); Oklahoma (two business days after
fifth consecutive loan); Oregon (seven days); South Carolina (one
business day between all loans and two business days after seventh
loan in a calendar year); Virginia (one day between all loans, 45
days after fifth loan in a 180 day period, and 90 days after
completion of an extended payment plan or extended term loan); and
Wisconsin (24 hour after renewals). Ala. Code Sec. 5-18A-12(b);
Fla. Stat. Sec. 560.404(19); 815 Ill. Comp. Stat. 122/2-5(b); Ind.
Code Sec. 24-4.5-7-401(2); N.M. Stat. Ann. Sec. 58-15-36; N.D.
Cent. Code Sec. 13-08-12(4); Ohio Rev. Code Ann. Sec. 1321.41(E),
(N), (R); Okla. Stat. tit. 59, Sec. 3110; Or. Rev. Stat. Sec.
725A.064(7); S.C. Code Ann. Sec. 34-39-270(A), (B); Va. Code Ann.
Sec. 6.2-1816(6); Wis. Stat. Sec. 138.14(12)(a).
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Twenty States require payday lenders to offer extended repayment
plans to borrowers who encounter difficulty in repaying payday
loans.\38\ Some States' laws are very general and simply provide that a
payday lender may allow additional time for repayment of a loan. Other
laws provide more detail about the plans including: When lenders must
offer repayment plans; 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. The effects of these various
restrictions are discussed further below in Market Concerns--Short-Term
Loans.
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\38\ States with statutory extended repayment plans include:
Alabama, Alaska, California, Delaware, Florida, Idaho, Illinois,
Indiana, Louisiana, Michigan (fee permitted), Nevada, New Mexico,
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), Cal. Fin. Code
Sec. 23036(b), Del. Code Ann. tit. 5, Sec. 2235A(a)(2), 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).
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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 2.4 million households (2 percent of U.S. households) used
payday loans in 2013.\39\ In another survey, 4.2 percent of households
reported taking out a payday loan.\40\ 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 and included both storefront and online
loans.\41\ See Market Concerns--Short-term Loans for additional
information on borrower characteristics.
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\39\ Fed. Deposit Ins. Corp., 2013 FDIC National Survey of
Unbanked and Underbanked Households: Appendices, at 83, 85 (2014),
available at https://www.fdic.gov/householdsurvey/2013appendix.pdf.
\40\ Jesse Bricker, et al., Changes in U.S. Family Finances from
2010 to 2013: Evidence From the Survey of Consumer Finances, 100
Fed. Reserve Bulletin no. 4, at 29 (Sept. 2014), available at http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf.
\41\ Pew Payday Lending in America: Report 1, at 4.
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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 reborrowing as a new
loan that is added to the total. By this metric, one analyst estimated
that from 2009 to 2014, storefront payday lending generated
approximately $30 billion in new loans per years and that by 2015 the
volume had declined to $23.6 billion,\42\ although these numbers may
include products other than single-payment loans. Alternatively, the
industry can be measured by calculating the dollar amount of loan
balances outstanding. Given the amount of payday loan reborrowing,
which results in the same funds of the lender being used to
[[Page 47871]]
finance multiple loan originations, 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.\43\ In 2015, industry revenue (fees paid on storefront payday
loans) was an estimated $3.6 billion, representing 15 percent of loan
originations.\44\
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\42\ John Hecht, Jefferies LLC, The State of Short-Term Credit
Amid Ambiguity, Evolution and Innovation (2016) (slide presentation)
(on file); John Hecht, Jeffries LLC, The State of Short-Term Credit
in a Constantly Changing Environment (2015) at 4 (slide
presentation) (on file).
\43\ Bureau staff estimate 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 2015, 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 in part II.C below.
\44\ Hecht, The State of Short-Term Credit Amid Ambiguity,
Evolution and Innovation.
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About ten large firms account for half of all payday storefront
locations.\45\ Several of these firms are publicly traded companies
offering a diversified range of products that also include installment
and pawn loans.\46\ Other large payday lenders are privately held,\47\
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).\48\
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\45\ See Montezemolo, Payday Lending Abuses and Predatory
Practices, at 9.
\46\ The publicly traded firms are Cash America (CSH), Community
Choice Financial Inc./Checksmart (CCFI), EZCORP (EZPW), First Cash
Financial Services (FCFS), and QC Holdings (QCCO). Cash America has
de-emphasized payday loans with the exception of stores in Ohio and
Texas, and in November 2014 it migrated its online loans to its
spin-off company, Enova. Cash America Int'l, Inc., Investor
Relations Presentation, at 6, 9, available at http://www.cashamerica.com/Files/InvestorPresentations/15_0331%20CSH%20IR%20Presentation.pdf. First Cash Financial Services
closed most of its U.S. payday and vehicle title loan credit access
business locations, leaving 42 Texas storefronts at the end of 2015.
Its primary focus is on its pawn loan locations; only 4 percent of
its revenue is from non-pawn consumer loans. (Credit access
businesses are described below.) First Cash Fin. Servs., Inc., 2015
Annual Report (Form 10-K), at 1, 7. As noted above, in April 2016,
First Cash Financial Services announced a merger agreement with Cash
America. QC Holdings delisted from Nasdaq on Feb. 16, 2016 and is
traded over-the-counter. QC Holding Companies, http://www.qcholdings.com/investor.aspx?id=1 (last visited Apr. 7, 2016).
Until July 2015, EZCORP offered payday, vehicle title, and
installment loans but now focuses domestically on pawn lending.
EZCORP, 2015 Annual Report (Form 10-K), at 3, 23.
\47\ 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
Montezemolo, Payday Lending Abuses and Predatory Practices, at 9-10;
John Hecht, Stephens, Inc., Alternative Financial Services:
Innovating to Meet Customer Needs in an Evolving Regulatory
Framework, (Feb. 27, 2014) (on file).
\48\ 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.
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There were an estimated 15,766 payday loan stores in 2014 within
the 36 States in which storefront payday lending occurs.\49\ By way of
comparison, there were 14,350 McDonald's fast food outlets in the
United States in 2014.\50\
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\49\ Bureau staff estimated the number of storefront payday
lenders using the method referenced in the immediately preceding
footnote.
\50\ McDonald's Corp., 2014 Annual Report (Form 10-K) at 22
(Feb. 24, 2015), available at http://www.sec.gov/Archives/edgar/data/63908/000006390815000016/mcd-12312014x10k.htm.
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The average number of payday loan stores in a county with a payday
loan store is 6.32.\51\ 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.\52\ 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).\53\ 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.
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\51\ James R. Barth, Jitka Hilliard, John S. Jaera Jr., & Yanfei
Sun, Do State Regulations Affect Payday Lender Concentration?, at 12
(2015), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581622.
\52\ CFPB Report on Supplemental Findings, at ch. 3.
\53\ 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 Metropolitan and Micropolitan, U.S.
Census Bureau, http://www.census.gov/population/metro/ (last visited
Apr. 7, 2016).
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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.\54\ An analysis of loan data from 29 States
found that the average store made 3,541 advances in a year.\55\ Given
rollover and reborrowing rates, a report estimated that the average
store served fewer than 500 customers per year.\56\
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\54\ Mark Flannery & Katherine Samolyk, Payday Lending: Do the
Costs Justify the Price? (FDIC Center for Fin. Research, Working
Paper No. 2005-09, 2005), available at https://www.fdic.gov/bank/analytical/cfr/2005/wp2005/cfrwp_2005-09_flannery_samolyk.pdf; IHS
Global Insight USA (Inc.), Economic Impact of the Payday Lending
Industry, at 3 (2009), available at http://cfsaa.com/Portals/0/Policymakers/20090515_Research_IHS_EconomicImpactofPayday.pdf (and
on file).
\55\ Montezemolo, at 26.
\56\ Pew Charitable Trusts, Payday Lending in America Report 3:
Policy Solutions, at 18 (2013), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/
pewpaydaypolicysolutionsoct2013pdf.pdf.
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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.'' \57\ Some
lenders offer new borrowers their initial loans at no fee (``first loan
free'') to encourage consumers to try a payday loan.\58\ Stores are
typically located in high-traffic commuting corridors and near shopping
areas where consumers obtain groceries and other staples.\59\
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\57\ Cash Advance/Short-term Loans, Cash America Int'l Inc.,
http://www.cashamerica.com/LoanOptions/CashAdvances.aspx (last
visited Apr. 7, 2016).
\58\ For example, Instant Cash Advance introductory offer of a
free (no fee) cash advance of $200, http://www.instantcashadvancecorp.com/free-loan-offer-VAL312.php
(storefront payday loans); Check N Title Loans, first loan free,
http://www.checkntitle.com/ (storefront payday and title loans);
AmeriTrust Financial LLC, first payday loan free, 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).
\59\ First Cash Fin. Servs., Inc., 2015 Annual Report (Form 10-
K), at 9; QC Holdings, Inc., 2014 Annual Report (Form 10-K), at 11;
Cmty. Choice Fin. Inc., 2015 Annual Report (Form 10-K), at 5 (Mar.
30, 2016), available at https://www.sec.gov/Archives/edgar/data/1528061/000110465916108753/a15-23332_110k.htm.
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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.\60\ Academic studies
have found that, in States with rate caps, loans are almost always made
at
[[Page 47872]]
the maximum rate permitted.\61\ Another study likewise found that in
States with rate caps, firms lent at the maximum permitted rate, but
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 additionally found 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 \62\ 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).\63\
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\60\ See QC Holdings, Inc., 2015 Annual Report (Form 10-K), at
12-13.
\61\ Robert DeYoung & Ronnie Phillips, Payday Loan Pricing (The
Fed. Reserve Bank of Kansas City, Working Paper No. RWP 09-07,
2009), at 27-28, 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, at 9-10.
\62\ 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, (2014), available at http://www.pewtrusts.org/~/
media/legacy/uploadedfiles/pcs/content-level_pages/fact_sheets/
stateratelimitsfactsheetpdf.pdf.
\63\ Id.
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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.\64\ Although a few States impose limited
requirements that lenders consider a borrower's ability to repay,\65\
storefront payday 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.\66\ 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 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. Through market
outreach and confidential information gathered in the course of
statutory functions, the Bureau is aware that many storefront payday
lenders limit their underwriting to first-time borrowers or those
returning after an absence.
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\64\ See, e.g., the process as described by one lender: In-Store
Cash Advance FAQ, Check Into Cash, https://checkintocash.com/faqs/in-store-cash-advance/ (last visited Feb. 4, 2016).
\65\ 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). 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. These States
include Idaho, Illinois, Indiana, Montana, New Mexico, Oregon,
Washington, and Wisconsin. Idaho Code Sec. 28-46-412(2), 815 Ill.
Comp. Stat Sec. 122/2-5(e), Ind. Code Sec. 24-4.5-7-402(1), Mont.
Code Ann. Sec. 31-1-723(8), N.M. Stat. Ann. Sec. 58-15-32(A), Or.
Admin. Rule Sec. 441-735-0272(d), Wash. Rev. Code Sec.
31.45.073(2), Wis. Stat. Sec. 138.14.
\66\ See, e.g., Neil Bhutta, Paige Marta Skiba, & Jeremy
Tobacman, Payday Loan Choices and Consequences (2014) at 3,
available at http://www.calcfa.com/docs/PaydayLoanChoicesandConsequences.pdf.
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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.\67\ 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.
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\67\ The States with databases are Alabama, Delaware, Florida,
Illinois Indiana, Kentucky, Michigan, New Mexico, 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).
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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,
consumers are in practice strongly encouraged and in some cases
required by lenders to return to the store when the loan is due to
``redeem'' the check.\68\ 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 . . . .'' \69\
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\68\ 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.
\69\ Advance America, 2011 Annual Report (Form 10-K) at 45 (Mar.
15, 2012), available at http://www.sec.gov/Archives/edgar/data/1299704/000104746912002758/a2208026z10-k.htm. See also In-Store Cash
Advance FAQ, Check Into Cash, 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.\70\ Another major payday
lender with a predominantly storefront loan portfolio reported that in
2014, over 90 percent of its payday and installment loans were repaid
or renewed in cash; \71\ this provides an opportunity for store
personnel to solicit borrowers to roll over or reborrow while they
visit the store to discuss their loans or make loan payments. The
Bureau is 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
[[Page 47873]]
customers' checks would clear if deposited on the loan due dates. One
storefront payday lender even 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.'' \72\
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\70\ 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.
\71\ QC Holdings, 2014 Annual Report (Form 10-K), at 7. These
statistics appear to also include QC's online payday loans, but the
online portfolio was very small in 2014 (approximately 4.6 percent
of revenue).
\72\ Instant Cash Advance introductory offer of a free (no fee)
cash advance of $200, http://www.instantcashadvancecorp.com/free-loan-offer-VAL312.php.
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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 reborrow 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. Since as discussed below, a majority of loans result from
rollovers of existing loans or reborrowing shortly after loans have
been repaid, rollovers and reborrowing contribute substantially to
employees' compensation. From confidential information gathered in the
course of statutory functions, the Bureau is aware that rollover and
reborrowing 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 even when borrowers responded that they had lost
their jobs or suffered pay reductions.
Store personnel often encourage borrowers to roll over their loans
or to reborrow, 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 reborrowing 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 their 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.\73\
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\73\ 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), http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.
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In addition, though some States require lenders to offer 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 State-mandated extended payment plans under
the previous regime or banned borrowers on plans from taking new
loans.\74\ 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 claiming
to represent 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.\75\ It also states that borrowers must request an
extended payment plan at least one day prior to the date on which the
loan is due and must return to the store where the loan was made to do
so or request the plan by using the same method used to originate the
loan.\76\ Another trade association claiming 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 available on its Web site.\77\
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\74\ State of Colo. Dep't of Law, 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 Market Concerns--Short-Term Loans below
for additional discussion of lenders' extended payment plan
practices.
\75\ About CFSA, Cmty. Fin. Servs. Ass'n of America, http://cfsaa.com/about-cfsa.aspx (last visited Jan. 15, 2016); CFSA Member
Best Practices, Cmty. Fin. Servs. Ass'n of America, http://cfsaa.com/cfsa-member-best-practices.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.
\76\ What Is an Extended Payment Plan?, Cmty. Fin. Servs. Ass'n
of America, http://cfsaa.com/cfsa-member-best-practices/what-is-an-extended-payment-plan.aspx (last visited Jan. 15, 2016).
\77\ Membership, Fin. Serv. Ctrs. of America, http://www.fisca.org/AM/Template.cfm?Section=Membership; 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);
FiSCA Best Practices, Fin. Serv. Ctrs. of America, http://www.fisca.org/Content/NavigationMenu/AboutFISCA/CodesofConduct/default.htm (last visited Jan. 15, 2016); Guidelines to Extended
Payment Plan, Fin. Serv. Ctrs. of America, http://www.fisca.org/AM/Template.cfm?Section=Guidelines_to_Extended_Payment_Plan&Template=/MembersOnly.cfm&NavMenuID=642&ContentID=2249&DirectListComboInd=D
(last visited Jan. 15, 2016).
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From confidential information gathered in the course of statutory
functions and market outreach, the Bureau is aware that if a borrower
fails to return to the store when a loan is due, the lender may attempt
to contact the consumer and urge the consumer to make a cash payment
before depositing the post-dated check that the consumer had provided
at origination or electronically debiting the account. The Bureau is
aware, from confidential information gathered in the course of its
statutory functions and market outreach, that lenders may take various
other actions 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 or through the use of software offered by
a number of vendors that attempts to model likelihood of repayment
(``predictive ACH'').\78\ If these attempts are unsuccessful, store
personnel at either the storefront level or at a centralized
[[Page 47874]]
location will then generally engage in collection activity.
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\78\ For example, Press Release, Clarity Servs., ACH Presentment
Will Help Lenders Reduce Failed ACH Pulls (Aug. 1, 2013), https://www.clarityservices.com/clear-warning-ach-presentment-will-help-lenders-reduce-failed-ach-pulls/; Products, Factor Trust, http://ws.factortrust.com/products/ (last visited Apr. 8, 2016); Bank
Account Verify Suite, Microbilt, http://www.microbilt.com/bank-account-verification.aspx (last visited Apr. 8, 2016); Sufficient
Funds, DataX, 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.\79\ 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.\80\ Or, the lender may attempt to present the payment multiple
times, a practice that the Bureau has noted in supervisory
examinations.\81\
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\79\ 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.'' 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.
\80\ Press Release, Bureau of Consumer Fin. Prot., CFPB Orders
EZCORP to Pay $10 Million for Illegal Debt Collection Tactics (Dec.
16, 2015), http://www.consumerfinance.gov/newsroom/cfpb-orders-ezcorp-to-pay-10-million-for-illegal-debt-collection-tactics/.
\81\ See Bureau of Consumer Fin. Prot., Supervisory Highlights,
at 20 (Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
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Eventually, the lender may attempt other means of collection. The
Bureau is aware of in-house collections activities, either by
storefront employees or by employees at a centralized collections
division, including calls, letters, and visits to consumers and their
workplaces,\82\ as well as the selling of debt to third-party
collectors.\83\ The Bureau observed in its consumer complaint data that
from November 2013 through December 2015 approximately 24,000 debt
collection complaints had payday loan as the underlying debt. More than
10 percent of the complaints the Bureau has received about debt
collection stem from payday loans.\84\
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\82\ Bureau of Consumer Fin. Prot., CFPB Compliance Bulletin
2015-07, In-Person Collection of Consumer Debt, (Dec. 16, 2015),
http://files.consumerfinance.gov/f/201512_cfpb_compliance-bulletin-in-person-collection-of-consumer-debt.pdf.
\83\ 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), available at https://www.sec.gov/Archives/edgar/data/876523/000087652314000102/a2014-10k9302014.htm). 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. For CFPB Consent orders, see
ACE Cash Express, Inc., CFPB No. 2014-CFPB-0008, Consent Order (July
10, 2014), available at (http://files.consumerfinance.gov/f/201407_cfpb_consent-order_ace-cash-express.pdf) and EZCorp, CFPB No.
2015-CFPB-0031, Consent Order (Dec. 16, 2015), available at (http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf).
\84\ Bureau of Consumer Fin. Prot., Monthly Complaint Report, at
12 (March 2016), http://files.consumerfinance.gov/f/201603_cfpb_monthly-complaint-report-vol-9.pdf.
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Some payday lenders sue borrowers who fail to repay their loans. A
study of small claims court cases filed in Utah from 2005 to 2010 found
that 38 percent of cases were attributable to payday loans.\85\ A
recent news report found that the majority of non-traffic civil cases
filed in 14 Utah small claims courts are payday loan collection
lawsuits and in one justice court the percentage was as high as 98.8
percent.\86\ 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.\87\
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\85\ Coalition of Religious Communities, Payday Lenders and
Small Claims Court Cases in Utah, at 2, available at http://www.consumerfed.org/pdfs/PDL-UTAH-court-doc.pdf.
\86\ Lee Davidson, Payday Lenders Sued 7,927 Utahns Last Year,
The Salt Lake City Tribune (Dec. 20, 2015), http://www.sltrib.com/home/3325528-155/payday-lenders-sued-7927-utahns-last.
\87\ Press Release, Bureau of Consumer Fin. Prot. Consumer
Financial Protection Bureau Takes Action Against Payday Lender for
Robo-Signing (Nov. 20, 2013), http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-takes-action-against-payday-lender-for-robo-signing/.
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Business model. As previously noted, the storefront payday industry
has built a distribution model that involves a large number of small
retail outlets, each serving a relatively small number of consumers.
That implies that the overhead cost on a per consumer basis is
relatively high.
Additionally, the loss rates on storefront payday loans--the
percentage or amounts of loans that are charged off by the lender as
uncollectible--are relatively high. Loss rates on payday loans often
are reported on a per-loan basis but, given the frequency of rollovers
and renewals, that metric understates the amount of principal lost to
borrower defaults. For example, if a lender makes a $100 loan that is
rolled over nine times, at which point the consumer defaults, the per-
loan default rate would be 10 percent whereas the lender would have in
fact lost 100 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 timeframe, 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.\88\ One academic study found loss rates to be even higher.\89\
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\88\ Staff estimate 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.
\89\ Mark Flannery and Katherine Samolyk, at 16 (estimating
annual charge-offs on storefront payday loans at 66.6 percent of
outstandings).
---------------------------------------------------------------------------
To sustain these significant costs, the payday lending business
model is dependent upon a large volume of reborrowing--that is,
rollovers, back-to-back loans, and reborrowing 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
ten or more times.\90\ Similarly, when the Bureau identified a cohort
of borrowers and tracked them over ten 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 ten or more
loans.\91\ The Bureau defines a sequence as an initial loan plus one or
more subsequent loans renewed within a period of time 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.\92\
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\90\ CFPB Payday Loans and Deposit Advance Products White Paper,
at 22.
\91\ CFPB Report on Supplemental Findings, at ch. 5.
\92\ CFPB Data Point: Payday Lending, at 7. The Bureau's Data
Point defined a sequence to encompass all loans made within 14 days
of a prior loan. Other reports have proposed other definitions of
sequence length including 30 days (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) and sequences based on
the borrower's pay period (nonPrime 101, Report 7B: Searching for
Harm in Storefront Payday Lending, 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 part Market Concerns--Short-Term Loans below for an additional
discussion of these alternative definitions.
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Other studies are broadly consistent. For example, a 2013 report
based on
[[Page 47875]]
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.\93\ 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.\94\ 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.\95\ Other reports have found that over
80 percent of total payday loans and loan volume is due to repeat
borrowing within thirty days of a prior loan.\96\ 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.'' \97\
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\93\ Montezemolo, Payday Lending Abuses and Predatory Practices,
at 13 tbl. 7.
\94\ Id. at 12. For additional information on Florida loan use,
see Veritec Solutions LLC, State of Florida Deferred Presentment
Program Through May 2012, (2012), available at http://geerservices.net/veritecs.com/wp-content/uploads/2013/07/2012-FL-Trend-Report1.pdf.
\95\ Brandon Coleman & Delvin Davis, Ctr. for Responsible
Lending, Perfect Storm: Payday Lenders Harm Florida Consumer Despite
State Law, at 4 (March 2016), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
\96\ Parrish & King, at 11-12.
\97\ Letter from Hilary B. Miller, Esq. on behalf of Cmty. Fin.
Servs. Ass'n. of America, to Bureau of Consumer Fin. Prot., Petition
of Community Financial Services Association of America, Ltd. For
Retraction of ``Payday Loans and Deposit Advance Products: A White
Paper of Initial Data Findings, at 5 (June 20, 2013), available at
http://files.consumerfinance.gov/f/201308_cfpb_cfsa-information-quality-act-petition-to-CFPB.pdf.
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Market Concerns--Short-Term Loans below discusses the impact of
these outcomes for consumers who are unable to repay and either default
or reborrow.
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.\98\
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\98\ 12 CFR 1026.2(a)(14)-2.
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In 2006, Congress enacted the Military Lending Act (MLA) to address
concerns that servicemembers and their families were becoming over-
indebted in high-cost forms of credit.\99\ The MLA, as 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 \100\ (MAPR) 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.\101\ 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.'' \102\
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\99\ 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.
\100\ 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.
\101\ 72 FR 50580 (Aug. 31, 2007).
\102\ 80 FR 43560, 43567 n.78 (July 22, 2015).
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As a result, effective October 2015 the Department of Defense
expanded its definition of covered credit to include open-end credit
and longer-term loans so that the MLA protections generally apply to
all credit subject to the requirements of Regulation Z of the Truth in
Lending Act, other than certain products excluded by statute.\103\ 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.\104\
---------------------------------------------------------------------------
\103\ 80 FR 43560 (July 22, 2015) (to be codified at 32 CFR Pt.
232), available at https://www.gpo.gov/fdsys/pkg/FR-2015-07-22/pdf/2015-17480.pdf.
\104\ Id.
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At the State level, the last States to enact legislation
authorizing payday lending, Alaska and Michigan, did so in 2005.\105\
At least eight States that previously had authorized payday loans have
taken steps to restrict or eliminate payday lending. In 2001, North
Carolina became the first State that had previously permitted payday
loans to adopt an effective ban by allowing the authorizing statute to
expire. In 2004, Georgia also enacted a law banning payday lending.
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\105\ Alaska Stat. Sec. Sec. 06.50.010 through 06.50.900; Mich.
Comp. Laws Sec. Sec. 487.2121 through 487.2173.
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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.\106\ 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.\107\
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 \108\ and the Mortgage Loan Act; \109\ the
latter practice was upheld by the State Supreme Court in 2014.\110\
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\106\ Ohio Rev. Code Sec. Sec. 1321.35 and 1321.40.
\107\ Ohio Neighborhood Fin., Inc. v. Scott, 139 Ohio St.3d 536,
2014-Ohio-2440, at 4-7, available at https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2014/2014-ohio-2440.pdf
(reported at 13 NE.3d 1115).
\108\ Ohio Rev. Code, Ch. Sec. 4712.01.
\109\ Ohio Rev. Code, Ch. Sec. 1321.52(C).
\110\ See generally Ohio Neighborhood Fin., Inc. v. Scott, 139
Ohio St.3d 536, 2014-Ohio-2440.
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In 2010, Colorado's legislature banned short-term single-payment
balloon loans in favor of longer-term, six-month loans. Colorado's
regulatory framework is described in more detail in the discussion of
payday installment lending below.
As of July 1, 2010, Arizona effectively prohibited payday lending
after the authorizing statute expired and a statewide referendum that
would have continued to permit payday lending failed to pass.\111\
However, small-dollar
[[Page 47876]]
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.\112\
In addition, vehicle title loans continue to be made in Arizona as
secondary motor vehicle finance transactions.\113\ 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.\114\
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\111\ 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; Arizona
Attorney General's Office, Operation Sunset FAQ, available at
https://www.azag.gov/sites/default/files/sites/all/docs/consumer/op-sunset-FAQ.pdf.
\112\ Regulatory and Consumer Alert CL/CO-13-01 from Ariz. Dep't
of Fin. Insts., to Consumers; Financial Institutions and Enterprises
Conducting Business in Arizona, Arizona Department of Financial
Institutions, Regulatory and Consumer Alert, CL/CO-13-01, Unlicensed
Consumer Lending Transactions (Feb. 7, 2013), http://www.azdfi.gov/LawsRulesPolicy/Forms/FE-AD-PO-Regulatory_and_Consumer_Alert_CL_CO_13_01%2002-06-2013.pdf
\113\ Ariz. Rev. Stat. Sec. Sec. 44-281 and 44-291; Frequently
Asked Questions from Licensees, Question #6 ``What is a Title
Loan,'' Arizona Dept. of Fin. Insts., http://www.azdfi.gov/Licensing/Licensing_FAQ.html#MVDSFC (last visited Apr. 20, 2016).
\114\ These include loans ``secured'' by borrowers'
registrations of encumbered vehicles. Jean Ann Fox, Kelly Griffith,
Tom Feltner, Consumer Fed'n of America and Ctr. for Econ. Integrity,
Wrong Way: Wrecked by Debt, at 6, 8-9 (2016), available at http://consumerfed.org/wp-content/uploads/2016/01/160126_wrongway_report_cfa-cei.pdf.
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In 2009, Virginia amended its payday lending law. It extended the
minimum loan term to the length of two income periods, added a 45-day
cooling-off period after substantial time in debt (the fifth loan in a
180-day period) and a 90-day cooling-off period after completing an
extended payment plan, and implemented a database to enforce limits on
loan amounts and frequency. The payday law applies to closed-end loans.
Virginia has no interest rate regulations or licensure requirements for
open-end credit.\115\ 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 now operate in Virginia by
offering open-end credit without a State license.\116\
---------------------------------------------------------------------------
\115\ Va. Code Ann. Sec. 6.2-312.
\116\ See, e.g., What We Offer, CashNetUSA, https://www.cashnetusa.com/what-we-offer.html (Nov. 15, 2015). CashNetUSA is
part of Enova, https://www.enova.com/brands-services/cashnetusa/
(Nov. 15, 2015); Check Into Cash, https://checkintocash.com/virginia-line-of-credit/ (Nov. 15, 2015); Allied Cash Advance (``VA:
Loans made through open-end credit account.'') https://www.alliedcash.com/ (Nov. 15, 2015); Community Choice Financial
through First Virginia Financial Services, http://www.firstvirginialoans.com/loan-options/ (Nov. 15, 2015) (First
Virginia is part of Community Choice, see ``Our Brands'' http://ccfi.com/news/ (Nov. 15, 2015). For a list of payday lender license
surrenders and dates of surrender, see https://www.scc.virginia.gov/SCC-INTERNET/bfi/reg_inst/sur/pay_sur_0112.pdf (Nov. 15, 2015).
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Washington and Delaware have restricted repeat borrowing by
imposing limits on the number of payday loans consumers may obtain. In
2009, 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 that lenders are
required to report all payday loans.\117\ 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.\118\
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.\119\
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\117\ Wash., Dep't of Fin. Insts., 2010 Payday Lending Report,
at 3, available at http://www.dfi.wa.gov/sites/default/files/reports/2010-payday-lending-report.pdf.
\118\ Del. Code Ann. 5 Sec. Sec. 2227(7), 2235A(a)(1).
\119\ See, e.g., James v. National Financial, LLC, No. C.A.
8931-VCL at 8, 65-67 (Del. Ch. Mar. 14, 2016), available at http://courts.delaware.gov/opinions/list.aspx?ag=court%20of%20chancery
(reported at 132 A.3d 799).
---------------------------------------------------------------------------
At least 35 Texas municipalities have adopted local ordinances
setting business regulations on payday lending (and vehicle title
lending).\120\ 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 for repeat loans--usually in
25 percent increments, record retention for at least three years, and a
registration requirement.\121\ 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 reborrowing rates.\122\
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\120\ A description of the municipalities is available at Texas
Municipal League. An additional 15 Texas municipalities have adopted
land use ordinances on payday or vehicle title lending. City
Regulation of Payday and Auto Title Lenders, Tex. Mun. League,
http://www.tml.org/payday-updates (last visited May 6, 2016).
\121\ 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. Portland, Or.,
Code Sec. 7.26.050, Eugene Or., Code Sec. 3.556.
\122\ 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 State of Texas, Consumer Disclosure, Payday Loan-Single Payment,
available at http://occc.texas.gov/sites/default/files/uploads/disclosures/cab-disclosure-payday-single-011012.pdf. 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, 12 e-Perspectives Issue 2
(2012), available at https://www.dallasfed.org/microsites/cd/epersp/2012/2_2.cfm. In 2004, a Federal appellate court dismissed a
putative class action related to these practices. Lovick v.
RiteMoney, Ltd., 378 F.3d 433 (5th Cir. 2004).
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Online Payday and Hybrid Payday Loans
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 payday, and what are referred to
as ``hybrid'' payday loans, exclusively 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.\123\ Hybrid loans with automatic rollovers would fall within the
category of ``covered longer-term loans'' under the proposed rule as
discussed more fully below.
---------------------------------------------------------------------------
\123\ 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.''
---------------------------------------------------------------------------
Industry size, structure, and products. The online payday market
size is difficult to measure for a number of reasons. First, many
online lenders offer a variety of products including single-
[[Page 47877]]
payment loans (what the Bureau refers to as payday loans), longer-term
installment loans, and hybrid loans; this poses challenges in sizing
the portion of these firms' business that is attributable to payday and
hybrid loans. Second, many online payday lenders are not publicly
traded, resulting in little available financial information about this
market segment. Third, many other online payday lenders claim exemption
from State lending laws and licensing requirements, stating they are
located and operated from other jurisdictions.\124\ 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.
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\124\ 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), http://www.consumerfinance.gov/newsroom/cfpb-sues-offshore-payday-lender/.
---------------------------------------------------------------------------
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 during
2015.\125\ 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 for 2015 at $3.1
billion, or 19 percent of origination volume.\126\ 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.
---------------------------------------------------------------------------
\125\ Hecht, The State of Short-Term Credit Amid Ambiguity,
Evolution and Innovation; John Hecht, Jefferies LLC, The State of
Short-Term Credit in a Constantly Changing Environment (2015);
Jessica Silver-Greenberg, The New York Times, Major Banks Aid in
Payday Loans Banned by States (Feb. 23, 2013) http://www.nytimes.com/2013/02/24/business/major-banks-aid-in-payday-loans-banned-by-states.html.
\126\ Hecht, The State of Short-Term Credit Amid Ambiguity,
Evolution and Innovation.
---------------------------------------------------------------------------
Whatever its 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
only 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 this 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 a physical location outside of the borrower's State
of residence, including from an off-shore location outside of the
United States. 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.\127\ These
lenders claim immunity from suit to enforce State or Federal consumer
protection laws on the basis of their sovereign status.\128\ 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.\129\ 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:
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\127\ According to a tribal trade association representative,
about 30 tribes are involved in the payday lending industry. Julia
Harte & Joanna Zuckerman Bernstein, AlJazeera America, Payday Nation
(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.
\128\ See Great Plains Lending, L.L.C., CFPB No. 2013-MISC-Great
Plains Lending-0001 (2013), available at http://files.consumerfinance.gov/f/201309_cfpb_decision-on-petition_great-plains-lending-to-set-aside-civil-investigative-demands.pdf (Sept.
26, 2013); First Amended Complaint, Consumer Financial Protection
Bureau v. CashCall, Inc. No. 13-cv-13167, 2014 WL 10321537 (D. Mass.
March 21, 2014), available at http://files.consumerfinance.gov/f/201403_cfpb_amended-complaint_cashcall.pdf; Order, Fed. Trade Comm'n
v. AMG Services, Inc., No. 12-cv-00536, 2014 WL 910302 (D. Nev. Mar.
07, 2014), 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 et al., 166
Cal.Rptr.3d 800 (2014).
\129\ nonPrime101, Report 1, at 9.
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Although the mean and median loan size among the payday
borrowers in this data set are only slightly higher than the
information reported above for storefront payday loans,\130\ 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 data set 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.\131\ Another study based on a
similar dataset from three online payday lenders is generally
consistent, putting the range of online payday loan fees at between $18
and $25 per $100 borrowed.\132\
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\130\ The median online payday loan size is $400, compared to a
median loan size of $350 for storefront payday loans. Id. at 10.
\131\ Id.
\132\ G. Michael Flores, Bretton Woods, Inc.: Online Short-Term
Lending: Statistical Analysis Report, at 15 (Feb. 28, 2014),
available at http://www.bretton-woods.com/media/a28fa8e9a85dce6fffff81bbffffd502.pdf.
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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.\133\ 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.\134\
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\133\ nonPrime101, Report 5: Loan Product Structures and Pricing
in Internet Installment Lending, 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 proposal.
\134\ nonPrime101, Report 5: Loan Product Structures and Pricing
in Internet Installment Lending at 6.
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Unlike storefront payday loan borrowers who generally
return to the same store to reborrow, the credit reporting data may
suggest that online borrowers tend to move from lender to
[[Page 47878]]
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.\135\
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\135\ nonPrime101, Report 7-A: How Persistent is the Borrower-
Lender Relationship in Payday Lending (2015), available at https://www.nonprime101.com/wp-content/uploads/2015/10/Report-7A-How-Persistent-Is-the-Borrow-Lender-Relationship_1023151.pdf.
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Marketing, underwriting, and collection practices. To acquire
customers, online lenders have relied heavily on direct marketing and
lead generators. Online lead generators purchase web advertising,
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). When a consumer clicks through
on a banner or search advertisement, she is usually prompted to
complete a brief form with personal information that will be used to
determine the loans for which she may qualify. If a lead generator is
involved, the consumer's information becomes a lead that is in turn
sold directly to a lender, to a reseller, or to a ``lender network''
that operates as an auction in which the lead is sold to the highest
bidder. A consumer's personal information may be offered to multiple
lenders and other vendors as a result of submitting a single form,
raising significant privacy and other concerns.\136\ In a survey of
online payday borrowers, 39 percent reported that their personal or
financial information was sold to a third party without their
knowledge.\137\
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\136\ In October 2015 the Federal Trade Commission (FTC) held a
workshop on online lead generators and how they operate in a number
of industries. The transcript from the workshop is available at:
https://www.ftc.gov/system/files/documents/videos/follow-lead-ftc-workshop-lead-generation-part-1/ftc_lead_generation_workshop_-_transcript_segment_1.pdf.
\137\ Pew Charitable Trusts, Payday Lending in America Report 4:
Fraud and Abuse Online: Harmful Practices in Internet Payday
Lending, at 11-12, (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.
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From the Bureau's market outreach activities, it is aware that
large payday and small-dollar installment lenders using lead generators
for high quality, ``first look'' or high-bid leads have paid an average
cost per new account of between $150 and $200. Indeed, the cost to a
lender simply to purchase such leads can be $100 or more.\138\ Customer
acquisition costs reflect lead purchase prices. One online lender
reported its customer acquisition costs to be $297, while in 2015
another spent 25 percent of its total marketing expenditures on
customer acquisition, including lead purchases.\139\
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\138\ The high lead cost reflects both the value lenders place
on new accounts (what they are willing to bid for the leads) and, in
turn, the advertising costs that lead sellers incur in order to
generate an actionable lead. For example, one report lists the
advertising costs of a click-through on a sponsored search
advertisement for the search phrase ``payday loan'' as ranging from
$5 to $9 at a point in time in 2014. Pew Charitable Trusts, Payday
Lending in America Report 4, at 7. These costs were captured by
market research firms SpyFu, SEMRush, and KeywordSpy on February 18,
2014. A click-through only results in a live lead when a potential
borrower has completed an applicant form. One internet advertising
executive at a recent FTC workshop on online lead generation
estimated that approximately one in 10 click-throughs result in a
live lead, though this finding is not specific to payday loans. FTC,
Lead Generation Workshop Transcript. This conversion rate brings the
lead generator's advertising cost per lead to $50-$90. A lender
seeking to directly acquire its own borrowers competes for the same
advertising space in sponsored searches or online banner
advertisements (bidding up the cost per click-through) and likely
incurs similar advertising costs for each new borrower.
\139\ Elevate Credit Inc., Registration Statement (Form S-1), at
12 (Nov. 9, 2015), available at https://www.sec.gov/Archives/edgar/data/1651094/000119312515371673/d83122ds1.htm; Enova Int'l Inc.,
2015Annual Report (Form 10-K), at 103 (Mar. 7, 2016), https://www.sec.gov/Archives/edgar/data/1529864/000156459016014129/enva-10k_20151231.htm.
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Online lenders view fraud (i.e., consumers who mispresent their
identity) as a significant risk and also express concerns about ``bad
faith'' borrowing (i.e., consumers with verified identities who borrow
without the intent to repay).\140\ Consequently, online payday and
hybrid 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
these 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 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.\141\
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\140\ 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., 2015 Annual Report (Form 10-K), at 8.
\141\ See Flores, Bretton Woods, 2014 Statistical Report, at 5;
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 to the consumer's bank account. The consumer authorizes
the lender to debit her account as payments are due. If the consumer
does not agree to authorize electronic debits, lenders generally will
not disburse electronically, but instead will require the consumer to
wait for a paper loan proceeds check to arrive in the mail.\142\
Lenders may also charge higher interest rates or fees to consumers who
do not commit to electronic debits.\143\
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\142\ For example, see 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.''
\143\ 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.
---------------------------------------------------------------------------
Unlike storefront lenders that seek to bring consumers back to the
stores to make payments, online lenders collect via electronic debits.
Online payday lenders, like their 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. Lenders
may be 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. 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
[[Page 47879]]
of the time and if that attempt fails the lender will make a third
attempt 66 percent of the time.\144\ 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.\145\
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\144\ See generally CFPB Online Payday Loan Payments, at 14.
\145\ 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. Id. 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.\146\ 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.\147\ 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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\146\ 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., 2015 Annual Report (Form, 10-K), at 9 (Mar. 7,
2016), available at https://www.sec.gov/Archives/edgar/data/1529864/000156459016014129/enva-10k_20151231.htm.
\147\ Net charge-offs over average balance based on data from
Cash America and Enova Form 10-Ks. See Cash America Int'l, Inc.,
2014 Annual Report (Form 10-K) at 102 (Mar. 13, 2015), available at
https://www.sec.gov/Archives/edgar/data/807884/000080788415000012/a201410-k.htm; Enova Int'l Inc., 2014 Annual Report (Form 10-K) at
95 (Mar. 20, 2015), available at https://www.sec.gov/Archives/edgar/data/1529864/000156459015001871/enva-10k_20141231.htm. 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
10-Ks allows for a better comparison of payday loan activity, than
the 2015 10-Ks, as Cash America's payday loan operations declined
substantially after 2014.
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Business model. While online lenders tend to have fewer costs
relating to operation of physical facilities than do storefront
lenders, as discussed above, they face high costs relating to lead
acquisition, loan origination screening to verify applicant identity,
and potentially larger losses due to fraud than their storefront
competitors.
Accordingly, it is not surprising that online lenders--like their
storefront counterparts--are dependent upon repeated reborrowing.
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
discussed above. 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 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.\148\ In a
recent survey conducted of online payday borrowers, 31 percent reported
that they had experienced loans with automatic renewals.\149\
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\148\ Press Release, Bureau of Consumer Fin. Prot., CFPB Takes
Action Against Online Lender for Deceiving Borrowers (Nov. 18,
2015), 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), https://www.ftc.gov/news-events/press-releases/2016/01/ftc-secures-44-million-online-payday-lenders-settle-deception.
\149\ The Pew Charitable Trusts, Payday Lending in America
Report 4, at 8.
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As discussed above, a number of online payday lenders claim
exemption from State laws and the 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.\150\
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\150\ nonprime101, Report 5: Loan Product Structures and Pricing
in Internet Installment Lending, at 4, 6; 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.\151\ A trade
association that represents tribal online lenders has adopted a set of
best practices but they do not address repayment plans.\152\
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\151\ Online Lenders Alliance, Best Practices at 27 (March
2016), available at http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016.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.''
\152\ Best Practices, Native American Financial Services
Association, http://www.mynafsa.org/best-practices/ (last visited
Apr. 20, 2016).
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Single-Payment Vehicle Title Loans
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.'' \153\ Unlike payday loans, there is
generally no requirement that the borrower have a bank account, and
some lenders do not require a copy of a paystub or other evidence of
income.\154\ 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.\155\
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\153\ Arizona also allows vehicle title loans to be made against
as secondary motor vehicle finance transactions. Ariz. Rev. Stat.
Sec. Sec. 44-281, 44-291G; Arizona Dept. of Fin. Inst., Frequently
Asked Questions from Licensees, Question #6 ``What is a Title
Loan,'' http://www.azdfi.gov/Licensing/Licensing_FAQ.html#MVDSFC
\154\ See FAQ, Fast Cash Title Loans, http://fastcashvirginia.com/faq/ (last visited Mar. 3, 2016) (``There is no
need to have a checking account to get a title loan.''); How Title
Loans Work, Title Max, 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).
\155\ See Speedy Cash, ``Title Loan FAQ's,'' 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 the lender files a
lien with State officials to record and perfect its interest in the
vehicle or the lender may charge 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
[[Page 47880]]
borrower's automobile registration.\156\ In Georgia, vehicle title
loans are made under the State's pawnbroker statute that specifically
permits borrowers to pawn vehicle certificates of title.\157\ Almost
all vehicle title lending is conducted at storefront locations,
although some title lending does occur online.\158\
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\156\ See, e.g., discussion about Arizona law applicable to
vehicle title lending above.
\157\ Ga. Code Sec. 44-12-131 (2015).
\158\ For example, see 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), 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 dba Sovereign Lending Solutions, LLC and other
names, purportedly organized in the Cook Islands, New Zealand, by
Oregon, Michigan and Pennsylvania. Press Release, Oregon Dep't of
Justice, AG Rosenblum and DCBS Sue Predatory Title Loan Operator
(Aug. 18, 2015), 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), 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), 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), http://ncdoj.com/News-and-Alerts/News-Releases-and-Advisories/Press-Releases/Online-car-title-lender-banned-from-NC-for-unlawfu.aspx. 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 two types
of vehicle title loans: Single-payment loans and installment loans. Of
the 25 States that permit some form of vehicle title lending, seven
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.\159\ (Installment title loans are
discussed in more detail 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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\159\ 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.
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Single-payment vehicle title loans are typically due in 30-days and
operate much like payday loans: The consumer is charged a fixed price
per $100 borrowed and when the loan is due the consumer is obligated to
repay the full amount of the loan plus the fee but is typically given
the opportunity to roll over or reborrow.\160\ 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 is $694 with a median APR of 317 percent,
and the average loan amount is $959 and the average APR is 291
percent.\161\ Two other studies contain similar findings.\162\ Vehicle
title loans are therefore for larger amounts than typical payday loans
but carry similar APRs for similar terms.
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\160\ Id. at 5; Susanna Montezemolo, Ctr. for Responsible
Lending, Car-Title Lending: The State of Lending in America & its
Impact on U.S. Households, at 6 (2013), available at http://www.responsiblelending.org/state-of-lending/reports/7-Car-Title-Loans.pdf. See also Idaho Dep't of Fin., Idaho Credit Code ``Fast
Facts'' With Fiscal and Annual Report Data as of January 1, 2015,
available at https://www.finance.idaho.gov/ConsumerFinance/Documents/Idaho-Credit-Code-Fast-Facts-With-Fiscal-Annual-Report-Data-01012016.pdf; Tennessee Dep't of Fin. Insts., Financial
Institutions, 2016 Report on the Title Pledge Industry, at 4 (2016),
available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf.
\161\ CFPB Single-Payment Vehicle Title Lending, at 7.
\162\ Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 3 (average loan is $1,000, most common APR is a one-
month title loan is 300 percent); Montezemolo, The State of Lending
in America, at 3.
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Some States that authorize vehicle title loans limit the rates
lenders may charge to a percentage or dollar amount per one hundred
dollars 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.\163\ 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 percentage of the vehicle's
value.\164\ Some States limit the initial loan term to one month, but
several States authorize rollovers, including automatic rollovers
arranged at the time of the original loan.\165\ 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.\166\ State vehicle title regulations 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.\167\ Some States have imposed limited requirements that
lenders consider a borrower's ability to repay. For example, both Utah
and South Carolina require lenders to consider borrower ability to
repay, but this may be accomplished through a
[[Page 47881]]
borrower affirming that she has provided accurate financial information
and has the ability to repay.\168\ Nevada requires lenders to consider
borrower ability to repay and obtain borrower affirmation of their
ability to repay.\169\ Missouri requires that lenders consider borrower
financial ability to reasonably repay the loan under the loan's
contract, but does not specify how lenders may satisfy this
requirement.\170\
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\163\ 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).
\164\ 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 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).
\165\ States that permit rollovers include Delaware, Georgia,
Idaho, Illinois, Mississippi, Missouri, Nevada, New Hampshire, South
Dakota, 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. 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%),
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), S.D. Codified Laws Sec. 54-4-
71, 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).
\166\ 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 Sec. Sec.
2255 & 2258 (2015).
\167\ 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).
\168\ Utah Code Ann. Sec. 7-24-202. S.C. Code Ann. Sec. 37-3-
413(3).
\169\ Nev. Rev. Stat. Sec. 640A.450(3).
\170\ Mo. Rev. Stat Sec. 367.525(4).
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Industry size and structure. Information about the vehicle title
market is more limited than with respect to the payday industry because
there are currently no publicly traded 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.\171\ One national survey conducted in
June 2013 found that 1.1 million households reported obtaining a
vehicle title loan over the preceding 12 months.\172\ Another study
extrapolating from State regulatory reports estimates that about two
million Americans use vehicle title loans annually.\173\ In 2014,
vehicle title loan originations were estimated at $2.4 billion with
revenue estimates of $3 to $5.6 billion.\174\ These estimates may not
include the full extent of vehicle title loan expansion by payday
lenders.
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\171\ 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.
\172\ FDIC, 2013 Unbanked and Underbanked Survey, at 93.
\173\ Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 1, citing among other sources the 2013 FDIC National
Survey of Unbanked and Underbanked Households. 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.
\174\ Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 1; Ctr. for Fin. Servs. Innovation, 2014 Underserved
Market Size: Financial Size: Financial Health Opportunity in Dollars
and Cents (2015) (on file and available from Center for Financial
Services Innovation Web site at no charge with registration).
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There are approximately 8,000 title loan storefront locations in
the United States, about half of which also offer payday loans.\175\
Three privately held firms dominate the vehicle title lending market
and together account for about 3,200 stores in about 20 States.\176\
These lenders are concentrated in the southeastern and southwestern
regions of the country.\177\ In addition to the large title lenders,
smaller vehicle title lenders are estimated to have about 800
storefront locations,\178\ and as noted above several companies offer
both title loans and payday loans.\179\ The Bureau understands that for
some firms for which the core business had been payday loans, the
volume of vehicle title loan originations now exceeds payday loan
originations.
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\175\ Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 1, 33 n.7.
\176\ The largest vehicle title lender is TMX Finance, LLC
formally known as Title Max Holdings, LLC with about 1,400 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),
available at, http://www.sec.gov/Archives/edgar/data/1511967/000110465913024898/a12-29657_110k.htm (year ended Dec. 31, 2012).
For TMX Finance store counts see Store Locations, TMX Finance
Careers, https://www.tmxcareers.com/store-locations/ (last visited
May 10, 2016). Community Loans of America has almost 900 stores and
Select Management Resources has about 700 stores. Fred Schulte,
Public Integrity, Lawmakers protect title loan firms while borrowers
pay sky-high interest rates (Dec. 9, 2015), http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates.
\177\ Fred Schulte, Public Integrity, Lawmakers protect title
loan firms while borrowers pay sky-high interest rates (Dec. 9,
2015).
\178\ State reports supplemented with estimates from Center for
Responsible Lending, revenue information from public filings and
from non-public sources. See Montezemolo, Car-Title Lending: The
State of Lending in America.
\179\ Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 1.
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State loan data also show vehicle title loans are growing rapidly.
The number of borrowers in Illinois taking vehicle title loans
increased 78 percent from 2009 to 2013, the most current year for which
data are available.\180\ The number of title loans taken out in
California increased 178 percent between 2011 and 2014.\181\ In
Virginia, between 2011 and 2014, the number of motor vehicle title
loans made increased by 21 percent while the number of individual
consumers taking title loans increased by 25 percent.\182\ In addition
to the growth in loans made under Virginia's vehicle title law, a
series of reports notes that some Virginia title lenders are offering
``consumer finance'' installment loans without the corresponding
consumer protections of the vehicle title lending law and, accounting
for about ``a quarter of the money loaned in Virginia using automobile
titles as collateral.'' \183\ In Tennessee, the number of licensed
vehicle title (title pledge) locations at year-end has been measured
yearly since 2006. The number of 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 since 2013, the State regulator
has reported more licensed locations than existed prior to the State's
title lending regulation, the Tennessee Title Pledge Act.\184\
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\180\ Ill. Dep't. of Fin. & Prof. Reg., Illinois Trends 2013
Report, at 6.
\181\ Compare 38,148 vehicle title loans in CY 2011 to 106,373
in CY 2014. 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 Department of
Business Oversight, 2014 Annual Report Operation of Finance
Companies Licensed Under the California Finance Lenders Law, at 13
(2014), available at http://www.dbo.ca.gov/Press/press_releases/2015/CFLL_Annual_Report_2014.pdf.
\182\ Va. State Corp. Comm'n, The 2014 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, 2014, at 71 (2014), available
at http://www.scc.virginia.gov/bfi/annual/ar04-14.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.
\183\ 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.
\184\ Tennessee Dep't of Fin. Institutions, 2014 Report on the
Title Pledge Industry, at 1 (2014), available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2014.pdf; Tennessee Dep't of Fin. Institutions,
2016 Report on the Title Pledge Industry, at 2.
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Vehicle title loan storefront locations serve a relatively small
number of customers. One study estimates that the average vehicle title
loan store made 227 loans per year, not including rollovers.\185\
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.\186\ The same report
estimated that the largest vehicle title lender had 4.2 employees per
store.\187\ 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
[[Page 47882]]
likely to have fewer employees per location than do larger title
lenders.
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\185\ Ctr. for Responsible Lending, The State of Lending in
America and its Impact on U.S. Households, at 133 (2013), available
at http://www.responsiblelending.org/state-of-lending/State-of-Lending-report-1.pdf
\186\ Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 5. 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.
\187\ Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 22. 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.
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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.'' \188\
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 flow'' problem, or for ``fast cash to deal with an
unexpected expense.'' \189\ Vehicle title lenders advertise quick loan
approval ``in as little as 15 minutes.'' \190\ Some lenders offer
promotional discounts for the initial loan and bonuses for
referrals,\191\ for example, a $100 prepaid card for referring friends
for vehicle title loans.\192\
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\188\ TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 4, 21.
\189\ See, e.g., https://www.cash1titleloans.com/apply-now/arizona.aspx?st-t=cash1titleloans_srch&gclid=Cj0KEQjwoM63BRDK_bf4_MeV3ZEBEiQAuQWqkU6O5gtz6kRjP8T3Al-BvylI-bIKksDT-r0NMPjEG4kaAqZe8P8HAQ; https://www.speedycash.com/title-loans/; http://metroloans.com/title-loans-faqs/; http://info.lendingbear.com/blog/need-money-now-2-short-term-solutions-for-your-cash-flow-problem ; http://fastcashvirginia.com/
(all sites last visited March 24, 2016).
\190\ Arizona Title Loans, Check Smart, http://www.checksmartstores.com/arizona/title-loans/ (last visited Jan. 14,
2016); Fred Schulte, Public Integrity, Lawmakers protect title loan
firms while borrowers pay sky-high interest rates (Dec. 9, 2015),
http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates.
\191\ Ctr. for Responsible Lending, Car Title Lending: Disregard
for Borrowers' Ability to Repay, at 1 (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
\192\ Special Offers, Check Smart, http://www.checksmartstores.com/arizona/special-offers/ (last visited Mar.
29, 2016).
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The underwriting policies and practices that vehicle title lenders
use vary and may depend on such factors as State law requirements and
individual lender practices. As noted above, some vehicle title lenders
do not require borrowers to provide information about their income and
instead rely on the vehicle title and the underlying collateral that
may be repossessed and sold in the event the borrower defaults--a
practice known as asset-based lending.\193\ The largest vehicle title
lender stated in 2011 that its underwriting decisions were based
entirely on the wholesale value of the vehicle.\194\ Other title
lenders' Web sites state that proof of income is required,\195\
although it is unclear whether employment information is verified or
used for underwriting, whether it is used for collections and
communication purposes upon default, or for both purposes. The Bureau
is aware, from confidential information gathered in the course of its
statutory functions, that one or more vehicle title lenders regularly
exceed their maximum loan amount guidelines and instruct employees to
consider a vehicle's sentimental or use value to the borrower when
assessing the amount of funds they will lend.
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\193\ Advance America's Web site states ``[l]oan amount will be
based on the value of your car* (*requirements may vary by state).''
Title Loans, Advance America, https://www.advanceamerica.net/services/title-loans (last visited Mar. 3, 2016); Pew, Auto Title
Loans: Market Practices and Borrowers' Experience, at 1; Fred
Schulte, Public Integrity, Lawmakers protect title loan firms while
borrowers pay sky-high interest rates (Dec. 9, 2015), http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates.
\194\ TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 5.
\195\ See, e.g., https://checkintocash.com/title-loans/ (last
visited March 3, 2016); https://www.speedycash.com/title-loans/
(last visited March 3, 2016); https://www.acecashexpress.com/title-loans (last visited March 3, 2016); http://fastcashvirginia.com/faq/
(last visited March 3, 2016).
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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.\196\ 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, with the other half charging lower
rates.\197\ 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 decreasing their prices.\198\
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\196\ TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 6.
\197\ Jim Hawkins, Credit on Wheels: The Law and Business of
Auto-Title Lending, 69 Wash. & Lee L. Rev. 535, 558-559 (2012).
\198\ Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 5.
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Loan amounts are typically for less than half the wholesale value
of the consumer's vehicle. Low loan-to-value ratios reduce lenders'
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.\199\ At one large title lender, the weighted average loan-to-
value ratio was found to be 26 percent of Black Book retail value.\200\
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.\201\
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\199\ Nathalie Martin & Ozymandias Adams, Grand Theft Auto
Loans: Repossession and Demographic Realities in Title Lending, 77
Mo. L. Rev. 41 (2012).
\200\ TMX Fin. LLC, 2011 Annual Report (Form 10-K), at 3 (Mar.
19, 2012), available at https://www.sec.gov/Archives/edgar/data/1511967/000119312512121419/d315506d10k.htm.
\201\ Id. at 5.
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When a borrower defaults on a vehicle title loan, the lender may
repossess the vehicle. The Bureau believes, based on market outreach,
that the decision whether to repossess a vehicle will depend on factors
such as the amount due, the age and resale value of the vehicle, the
costs to locate and repossess the vehicle, and State law requirements
to refund any surplus amount remaining after the sale proceeds have
been applied to the remaining loan balance.\202\ 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.\203\ In 2012, its firm-wide gross charge-offs equaled 30 percent
of its average outstanding title loan balances.\204\ 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 unlawful disclosures of debt
information to borrowers' employers, friends, and family.\205\ In
addition, approximately 20 percent of consumer complaints handled by
the Bureau about vehicle title loans
[[Page 47883]]
involved consumers reporting concerns about repossession issues.\206\
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\202\ See also Pew, Auto Title Loans: Market Practices and
Borrowers' Experience, at 13.
\203\ Missouri sales of repossessed vehicles calculated from
data linked to Walter Moskop, St. Louis Post-Dispatch, Title Max is
thriving in Missouri--and repossessing thousands of cars in the
process (Sept. 21, 2015), http://www.stltoday.com/business/local/titlemax-is-thriving-in-missouri-and-repossessing-thousands-of-cars/article_d8ea72b3-f687-5be4-8172-9d537ac94123.html.
\204\ Bureau estimates based on publicly available financial
statements by TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 22,
43.
\205\ Bureau of Consumer Fin. Prot., CFPB Orders Relief for
Illegal Debt Collection Tactics.
\206\ This represents complaints received between November 2013
and December 2015.
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Some vehicle title lenders have installed electronic devices on the
vehicles, known as starter interrupt devices, automated collection
technology, or more colloquially as ``kill switches,'' that can be
programmed to transmit audible sounds in the vehicle before or at the
payment due date. The devices may also be programmed to prevent the
vehicle from starting when the borrower is in default on the loan,
although they may allow a one-time re-start upon the borrower's call to
obtain a code.\207\ One of the starter interrupt providers states that
``[a]ssuming proper installation, the device will not shut off the
vehicle while driving.''\208\ Due to concerns about consumer harm, one
State financial regulator prohibited the devices as an unfair
collection practice in all consumer financial transactions,\209\ and a
State attorney general issued a consumer alert about the use of starter
interrupt devices specific to vehicle title loans.\210\ 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.\211\
The Bureau has received several complaints about starter interrupt
devices.
---------------------------------------------------------------------------
\207\ See, e.g., Eric L. Johnson & Corinne Kirkendall, Starter
Interrupt and GPS Devices: Best Practices, PassTime GPS (Jan. 14,
2016), http://www.passtimegps.com/index.php/2016/01/14/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.
\208\ Id.
\209\ Paul Egide, Wisconsin Dep't of Fin. Instits., Starter
Interrupter Devices, (Jan. 18, 2012), available at https://www.wdfi.org/_resources/indexed/site/wca/StarterInterrupterDevices.pdf.
\210\ The alert also noted that vehicle title loans are illegal
in Michigan. Michigan Attorney General Bill Schuette, Auto Title
Loans Consumer Alert, http://www.michigan.gov/ag/0,4534,7-164-17337-
371738_,00.html (last visited Jan. 13, 2016).
\211\ Wis. Stat. Sec. 138.16(4)(b).
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Business model. As noted above, short-term vehicle title lenders
appear to have overhead costs relatively similar to those of storefront
payday lenders. Vehicle title lenders' loss rates and reliance on
reborrowing 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 has their vehicle repossessed by the
lender.\212\
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\212\ CFPB Single-Payment Vehicle Title Lending, at 23, and CFPB
Report on Supplemental Findings, at ch. 5.
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Similarly, the rate of vehicle title reborrowing 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 ten 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.\213\
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\213\ Tennessee Dep't of Fin. Institutions, 2016 Report on the
Title Pledge Industry, at 8. In comparison, rollovers are prohibited
on payday loans in Tennessee, see Tenn. Code Ann. Sec. 45-17-
112(q).
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The impact of these outcomes for consumers who are unable to repay
and either default or reborrow is discussed in Market Concerns--Short-
Term Loans.
Bank Deposit Advance Products and Other Short-Term Lending
As noted above, within the banking system, consumers with liquidity
needs rely primarily on credit cards and overdraft services. Some
institutions have experimented with short-term payday-like products or
partnering 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.
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 reborrowing), and multiple renewals without
principal reduction.\214\ The agency subsequently took enforcement
actions against two national banks for activities relating to payday
lending partnerships.\215\
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\214\ Office of the Comptroller of the Currency, Advisory Letter
AL 2000-10, Payday Lending (Nov. 27, 2000), available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2000/advisory-letter-2000-10.pdf.
\215\ See OCC consent orders involving Peoples National Bank and
First National Bank in Brookings. Press Release, OCC, NR 2003-06,
Peoples National Bank to Pay $175,000 Civil Money Penalty And End
Payday Lending Relationship with Advance America (Jan. 31, 2003),
http://www.occ.gov/static/news-issuances/news-releases/2003/nr-occ-2003-6.pdf; First National Bank in Brookings, OCC Consent Order No.
2003-1 (Jan. 17, 2003), available at http://www.occ.gov/static/enforcement-actions/ea2003-1.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.\216\ 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
[[Page 47884]]
documentation, and to avoid excessive renewals.\217\
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\216\ FDIC Financial Institution Letters, Guidelines for Payday
Lending, Fed. Deposit Ins. Corp. (Revised Nov. 2015), https://www.fdic.gov/news/news/financial/2005/fil1405a.html.
\217\ Financial Institution Letters, Affordable Small-Dollar
Loan Products, Final Guidelines FIL 50-2007 (June 19, 2007), https://www.fdic.gov/news/news/financial/2007/fil07050.html.
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The 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. This program is
discussed in more detail in part II.C.
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 time
period.\218\
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\218\ 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.
For payday industry size, see, John Hecht, Alternative Financial
Services, at 7.
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DAP fees, like payday loan fees, did not vary with the amount of
time that the advance was outstanding but rather were set as dollars
per amount advanced. A typical fee was $2 per $20 borrowed, the
equivalent of $10 per $100. Research undertaken by the Bureau using a
supervisory dataset found that the median duration for a DAP advance
was 12 days, yielding an effective APR of 304 percent.\219\
---------------------------------------------------------------------------
\219\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 27-28.
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The Bureau further found that while the average 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.\220\
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\220\ Id. at 33 fig. 11, 37 fig. 14.
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In 2010, the Office of Thrift Supervision (OTS) issued a
supervisory directive ordering one bank to terminate its DAP program,
which the bank offered in connection with prepaid accounts, after
determining the bank engaged in unfair or deceptive acts or practices
and violated the OTS' Advertising Regulation.\221\ 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.\222\
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\221\ Meta Fin. Grp., Inc., 2010 Annual Report (Form 10-K), at
59 (Dec. 13, 2010) (FY 2010), available at https://www.sec.gov/Archives/edgar/data/907471/000110465910062243/a10-22477_110k.htm.
\222\ Meta Fin. Grp., Inc., Quarter Report (Form 10-Q) at 31
(Aug. 5, 2011), available at https://www.sec.gov/Archives/edgar/data/907471/000114036111039958/form10q.htm. The OTS was merged with
the OCC effective July 21, 2011. See OTS Integration, OCC, 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.\223\ 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 reborrowing, 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 reborrowing, 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.\224\
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\223\ OCC, Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Products, 78 FR 70624 (Nov. 26, 2013),
available at http://www.occ.treas.gov/news-issuances/federal-register/78fr70624.pdf; Fed. Deposit Ins. Corp. Guidance on
Supervisory Concerns and Expectations Regarding Deposit Advance
Products, 78 FR 70552 (Nov. 26, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-11-26/pdf/2013-28306.pdf.
\224\ Office of the Comptroller of the Currency Guidance on
Supervisory Concerns and Expectations Regarding Deposit Advance
Products, Federal Register, 78 FR 70624 (Nov. 26, 2013), available
at http://www.occ.treas.gov/news-issuances/federal-register/78fr70624.pdf; Fed. Deposit Ins. Corp. Guidance on Supervisory
Concerns and Expectations Regarding Deposit Advance Products, 78 FR
70552, 70556-70557 (Nov. 26, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-11-26/pdf/2013-28306.pdf.
---------------------------------------------------------------------------
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 Board of Governors of the Federal Reserve
System (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.\225\ Today, with the exception of some short-term lending
within the NCUA's Payday Alternative Loan program, described below in
part II.C, relatively
[[Page 47885]]
few banks or credit unions offer large-scale formal loan programs of
this type.
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\225\ Products and Services, Fifth Third Bank, https://www.53.com/site/personal-banking/account-management-services/early-access.html (last visited Apr. 27, 2016). The Federal Reserve issued
a statement to its member banks on DAP, ``Statement on Deposit
Advance Products,'' (Apr. 25, 2013), available at http://www.federalreserve.gov/bankinforeg/caletters/CALetter13-07.pdf.
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C. Longer-Term, High-Cost Loans
As discussed above, beginning in the 1990s, a number of States
created carve-outs from their usury laws to permit single-payment
payday loans at annualized rates of between 300 percent and 400
percent. Although this lending initially focused primarily on loans
lasting for a single income cycle, lenders have introduced newer,
longer forms of liquidity loans over time. These longer loan forms
include the ``hybrid payday loans'' discussed above, which are high-
cost loans where the consumer is automatically scheduled to make a
number of interest or fee only payments followed by a balloon payment
of the entire amount of the principal and any remaining fees. They also
include ``payday installment loans,'' described in more detail below.
In addition, as discussed above, a number of States have authorized
longer term vehicle title loans that extend beyond 30 days. Some
longer-term, high cost installment loans likely were developed in
response to the Department of Defense's 2007 rules implementing the
Military Lending Act. As discussed above in part II.B, those rules
applied to payday loans of 91 days or less (with an amount financed of
$2,000 or less) and to vehicle title loans of 180 days of less. The
Department of Defense recently expanded the scope of the rules due to
its belief that creditors were structuring products to avoid the MLA's
application.\226\
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\226\ 80 FR 43560, 43567 n.78 (July 22, 2015).
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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.\227\
---------------------------------------------------------------------------
\227\ Lenders described in part II.C as payday installment
lenders may not use this terminology.
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Two States, Colorado and Illinois, have authorized payday
installment loans. A number of other States have adopted usury laws
that payday lenders use to offer payday installment loans in addition
to more traditional payday loans. For example, a recent report found
that eight States have no rate or fee limits for closed-end loans of
$500 and that 11 States have no rate or fee limits for closed-end loans
of $2,000.\228\ The same report noted that for open-end credit, 14
States do not limit rates for a $500 advance and 16 States do limit
them for a $2,000 advance.\229\ 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.\230\
---------------------------------------------------------------------------
\228\ Nat'l. Consumer Law Ctr., Installment Loans, Will States
Protect Borrowers From A New Wave Of Predatory Lending?, at v-vi
(2015), available at http://www.nclc.org/images/pdf/pr-reports/report-installment-loans.pdf. Roughly half of the States with no set
limits do prohibit unconscionable interest rates.
\229\ Id., at vi.
\230\ Diane Standaert, Ctr. for Responsible Lending, Payday and
Car Title Lenders' Migration to Unsafe Installment Loans, at 7 tbl.1
(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 (dba
CashNetUSA and dba NetCredit), Axcess Financial (dba Check `N Go),
and ACE Cash Express (see Standaert 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.\231\
---------------------------------------------------------------------------
\231\ Michael Flores, Bretton-Woods, Inc., The State of Online
Short-Term Lending, Second Annual Statistical Analysis Report at 4,
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, at 9, 11.
---------------------------------------------------------------------------
There is less public information available about payday installment
loans than about single-payment payday loans. Publicly traded payday
lenders that make both single-payment and installment loans often
report all loans in aggregate and do not report separately on their
installment loan products or do not separate their domestic installment
loan products from their international installment loan product lines,
making sizing the market difficult. However, one analyst suggests that
the continuing trend is for installment loans to take market share--
both volume and revenue--away from single-payment payday loans.\232\
---------------------------------------------------------------------------
\232\ Hecht, Alternative Financial Services, at 9.
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More specifically, data on payday installment lending is available,
however, from the two States that expressly authorize it. 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.\233\ The maximum payday loan
amount remains capped at $500, 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. The average payday
installment loan amount borrowed in Colorado in 2014 was $392 and the
average contractual loan term was 189 days. The average APR on these
payday installment loans was 190 percent, which reflects the fact that
at the same time that Colorado mandated minimum six-month terms it also
imposed a new set of pricing restrictions on these loans.\234\
Borrowers may prepay without a penalty and receive a pro-rata refund of
all fees paid. According to loan data from Colorado, the average actual
loan term was 94 days, resulting in an effective APR of 121
percent.\235\
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\233\ 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)1, available at http://www.sos.state.co.us/CCR/GenerateRulePdf.do?ruleVersionId=3842; Adm'r of the Colo. Unif.
Consumer Credit Code, Colorado Payday Lending July 2000 Through
December 2012, at 15-16.
\234\ The 2010 amendments also established a complex pricing
formula with an origination fee averaging $15 per $100 borrowed, a
maximum 45 percent interest rate, and up to $30 per month as a
maintenance fee after the first month. Colo. Rev. Stat. Sec. 5-3.1-
105.
\235\ State of Colo. Dep't of Law, 2014 Deferred Deposit/Payday
Lenders Annual Report, at 2, available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/2014_ddl_ar_composite.pdf.
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In Illinois, lenders have been permitted to make payday installment
loans since 2011 for terms of 112 to 180 days and amounts up to the
lesser of $1,000 or 22.5 percent of gross monthly income.\236\ A
consumer may take out two loans concurrently (single-payment payday,
payday installment, or a combination thereof) so long as the total
amount borrowed does not exceed the cap. The maximum permitted charge
on Illinois payday installment loans is $15.50 per $100 on the initial
principal
[[Page 47886]]
balance and on the balance scheduled to be outstanding at each
installment period. For 2013, the average payday installment loan
amount was $634 to be repaid in 163 days along with total fees of $645.
The average APR on Illinois payday installment loans was 228
percent.\237\
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\236\ 815 Ill. Comp. Stat. 122/2-5.
\237\ Ill. Dep't. of Fin. & Prof. Reg., Illinois Trends Report
Through December 2013, at 4-8, 22-25.
---------------------------------------------------------------------------
In Illinois, payday installment loans have grown rapidly. In 2013,
the volume of payday installment loans made was 113 percent of the 2011
volume. From 2010 to 2013, however, the volume of single-payment payday
loans decreased by 21 percent.\238\
---------------------------------------------------------------------------
\238\ Id., at 20.
---------------------------------------------------------------------------
Beyond the data from these two States, several studies shed
additional light on payday installment lending. A research paper based
on a dataset from several payday installment lenders, consisting of
over 1.02 million loans made between January 2012 and September 2013,
provides some information on payday installment loans.\239\ It contains
data from both storefront installment loans (55 percent) and online
installment loans (45 percent). It found that the median loan amount
borrowed was $900 for six months (181 days) with 12 bi-weekly
installment payments coinciding with paydays. The median APR on these
loans was 295 percent. Online borrowers had higher median gross incomes
than storefront borrowers ($39,000 compared to $31,000). When the
researchers included additional loans they described as being made
under ``alternative business models, such as loans extended under
tribal jurisdiction,'' the median loan amount borrowed was $800 for 187
days due in 12 installments at a higher median APR of 319 percent.\240\
---------------------------------------------------------------------------
\239\ Howard Beales & Anand Goel, Small Dollar Installment
Loans: An Empirical Analysis, at 9 (2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581667.
\240\ Id., at 11, 14, 15.
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Similarly, a report using data from a specialty consumer reporting
agency that included data primarily from online payday lenders that
claim exemption from State lending laws examined the pricing and
structure of their installment loans.\241\ From 2010 to 2014, loans
that may be described as payday installment loans generally accounted
for one-third of all loans in the sample; however, this fluctuated by
quarter between approximately 10 and 50 percent.\242\ The payday
installment loans had a median APR of 335 percent, across all payment
structures. The most common payday installment loan in the sample had
12 bi-weekly payments; a median size of $500 and a median APR of 348
percent.
---------------------------------------------------------------------------
\241\ nonPrime 101, Report 5: Loan Product Structures and
Pricing in Internet Installment Lending.
\242\ The other loan types in the sample were hybrid payday
loans (described above in part II.B), which made up approximately
one-third of the loans, traditional single-payment payday loans,
also one-third of the loans, and non-amortizing payday installment
loans, which made up a negligible percentage of loans in the
dataset. Id. at 7.
---------------------------------------------------------------------------
A third study commissioned by an online lender trade association
surveyed a number of online lenders. The survey found that the average
payday installment loan was for $667 with an average term of five
months. The average fees for these loans were $690. The survey did not
provide any APRs but the Bureau estimates that the average APR for a
loan with these terms (and bi-weekly payments, the most common payment
frequency seen) is about 373 percent.\243\
---------------------------------------------------------------------------
\243\ Flores, State of Online Short-Term Lending, Second Annual
Statistical Analysis, at 3-4.
---------------------------------------------------------------------------
In a few States, such as Virginia discussed above in part II.B, and
Kansas,\244\ lenders offer loans structured as open-end payday
installment loans. The Bureau believes based on market outreach, that
lenders utilize open-end credit structures where they view State
licensing or lending provisions as more favorable for open-end
products. Some open-end products are for similar loan amounts as
single-payment payday loans, cash advances are restricted to set
increments such as $50 and must be requested in person, by calling the
lender, or visiting the lender's Web site, and payments under the open-
end line of credit are due on the borrower's scheduled paydays.
---------------------------------------------------------------------------
\244\ See, e.g., QC Holdings, Inc., 2015 Annual Report (Form 10-
K), at 9.
---------------------------------------------------------------------------
Marketing and underwriting practices. The Bureau believes based on
market outreach, that some lenders use similar underwriting practices
for both single-payment and payday installment loans (borrower
identification, and information about income and a bank account) so
long as they have access to the borrower's bank account for repayment.
Some payday installment lenders, particularly but not exclusively
online lenders, may use underwriting technology that pulls data from
nationwide consumer reporting agencies and commercial or proprietary
credit scoring models based on alternative data to assess fraud and
credit risk.\245\ In 2014, net charge-offs at two of the large licensed
online installment lenders were over 50 percent of average
balances.\246\
---------------------------------------------------------------------------
\245\ For example, use of risk assessment and national
databases. Payday Loans/Cash Advance, Advance America, https://www.advanceamerica.net/locations/details/store-4500/2828-S-17th-Ave-Unit-B/Broadview/IL/60155 (last visited March 10, 2016). For
example, obtain credit report from a national consumer reporting
agency. Check'nGo, http://checkngoloans.com/default (last visited
March 10, 2016).
\246\ Bureau staff calculation of ratio of net charged off loans
(gross charge-offs less recoveries) to average loan balances
(average of beginning and end of year receivables) of the same loan
type based on Forms 10-K (Enova) and S-1 (Elevate) public documents.
Elevate's public documents do not separate domestic from
international operations, or installment loans from lines of credit.
Enova does not separate domestic from international operations in
its public documents. Elevate Credit Inc., Registration Statement
(Form S-1), at 12 (Nov. 9, 2015), available at https://www.sec.gov/Archives/edgar/data/1651094/000119312515371673/d83122ds1.htm. This
figure includes costs for lines of credit as well and also includes
costs for its business in the United Kingdom. Enova Int'l Inc., 2014
Annual Report (Form, 10-K), at 49, 95 (Mar. 20, 2015), available at
https://www.sec.gov/Archives/edgar/data/1529864/000156459015001871/enva-10k_20141231.htm. This figure includes both domestic and
international short-term loans.
---------------------------------------------------------------------------
The Bureau likewise believes that the customer acquisition costs
for online payday installment loans are likely similar to the costs to
acquire a customer for an online single-payment payday loan. For
example, one large licensed online payday installment lender reported
that its 2014 customer acquisition cost per new loan was $297.\247\
Another large online lender with both single-payment and payday
installment loans reported that its marketing expense is 15.8 percent
of revenue in 2014.\248\
---------------------------------------------------------------------------
\247\ Elevate Credit Inc., Registration Statement (Form S-1), at
12 (Nov. 9, 2015), available at https://www.sec.gov/Archives/edgar/data/1651094/000119312515371673/d83122ds1.htm. This figure includes
costs for lines of credit as well and also includes costs for its
business in the United Kingdom.
\248\ Enova Int'l Inc., 2015 Annual Report (Form, 10-K), at 50
(Mar. 7, 2016), available at https://www.sec.gov/Archives/edgar/data/1529864/000156459016014129/enva-10k_20151231.htm.
---------------------------------------------------------------------------
Business model. In many respects, payday installment loans are
similar to single-payment payday loans. However, one obvious difference
is that the loan agreements provide for repayment in installments,
rather than single-payment loans that may be rolled over or hybrid
loans that automatically rollover, described above in part II.B above.
Regulatory reports from Colorado and Illinois provide evidence of
repeat borrowing on payday installment loans. In Colorado, in 2012, two
years after the State's amendments to its payday lending law, 36.7
percent of new loans were taken out on the same day that a previous
loan was paid off, an increase from the prior year; for larger loans,
nearly 50 percent were taken out on the same day that a previous loan
was
[[Page 47887]]
repaid.\249\ Further, despite a statutorily-required minimum loan term
of six months, on average, consumers took out 2.9 loans from the same
lender during 2012 (by prepaying before the end of the loan term and
then reborrowing).\250\ Colorado's regulatory reports demonstrate that
in 2013, the number of loan defaults on payday installment loans,
calculated as a percent of the total number of borrowers, was 38
percent but increased in 2014 to 44 percent.\251\
---------------------------------------------------------------------------
\249\ Colorado UCCC 2000-2012 Demographic and Statistical
Information, at 25.
\250\ Id. at 15, 18.
\251\ State of Colo. Dep't of Law, 2014 Deferred Deposit/Payday
Lenders Annual Report; http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/2014_ddl_ar_composite.pdf; The Pew Charitable Trusts, Trial, Error,
and Success in Colorado's Payday Lending Reforms, at 6 (2014),
available at http://www.pewtrusts.org/~/media/assets/2014/12/
pew_co_payday_law_comparison_dec2014.pdf,
---------------------------------------------------------------------------
One feature of Illinois' database is that it tracks applications
declined due to ineligibility. In 2013, of those payday installment
loan applications declined, 54 percent were declined because the
applicants would have exceeded the permissible six months of
consecutive days in debt and 29 percent were declined as they would
have violated the prohibition on more than two concurrently open
loans.\252\
---------------------------------------------------------------------------
\252\ Ill. Dep't. of Fin. & Prof. Reg., Illinois Trends 2013
Report, at 24.
---------------------------------------------------------------------------
In a study of high-cost unsecured installment loans, the Bureau has
found that 37 percent of these loans are refinanced. For a subset of
loans made at storefront locations, 94 percent of refinances involved
cash out (meaning the consumer received cash from the loan refinance);
for a subset of loans made online, nearly 100 percent of refinanced
loans involved cash out. At the loan level, for unsecured installment
loans in general, 24 percent resulted in default; for those made at
storefront locations, 17 percent defaulted, compared to a 41 percent
default rate for online loans.\253\
---------------------------------------------------------------------------
\253\ CFPB Report on Supplemental Findings, at ch. 1.
---------------------------------------------------------------------------
A report based on data from several payday installment lenders was
generally consistent. It found that nearly 34 percent of these payday
installment loans ended in charge-off. Charge-offs were more common for
loans in the sample that had been made online (42 percent) compared to
those made at storefront locations (27 percent).\254\
---------------------------------------------------------------------------
\254\ Beales & Goel, at 24-25. These figures refer to data from
the authors' main sample, which excludes loans made under
``alternative business models, such as loans extended under tribal
jurisdiction.''
---------------------------------------------------------------------------
Installment Vehicle Title Loans
Product definition and regulatory environment. Installment vehicle
title loans are vehicle title loans that are contracted to be repaid in
multiple installments rather than in a single payment. Operationally,
they are similar to single-payment vehicle title loans that are rolled
over and discussed above in part II.B. As discussed in that section,
about half of the States authorizing vehicle title loans permit the
loans to be repaid in installments rather than, or in addition to, a
single lump sum.\255\
---------------------------------------------------------------------------
\255\ Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 4.
---------------------------------------------------------------------------
As with single-payment vehicle title loans, the State laws
applicable to installment vehicle title loans vary. Illinois requires
vehicle title loans to be repaid in equal installments, limits the
maximum loan amount to the lesser of $4,000 or 50 percent of the
borrower's monthly income, has a 15-day cooling-off period except for
refinances (defined as extensions or renewals) but does not limit fees.
A refinance may be made only when the original principal of the loan is
reduced by at least 20 percent.\256\ Texas limits the loan term for
CSO-arranged title loans to 180 days but does not cap fees.\257\
Virginia has both a minimum loan term (120 days) and a maximum loan
term (12 months) and caps fees at between 15 to 22 percent of the loan
amount per month.\258\ It also prohibits rollovers. Wisconsin limits
the original loan term to six months but does not limit fees other than
default charges, which are limited to 2.75 percent per month; it caps
the maximum loan amount at $25,000.\259\ Rollovers are not permitted on
Wisconsin installment loans.
---------------------------------------------------------------------------
\256\ Ill. Admin. Code, tit. 38, Sec. 110.370.
\257\ Tex. Fin. Code Ann. Sec. 393.221 to 393.224.
\258\ VA. Code Sec. Sec. 6.2-2215, 6.2.2216. As noted above in
part II.B, Virginia has no interest rate regulations or licensure
requirements for open-end credit.
\259\ Wis. Stat. Sec. 138.16(2)(b)(2).
---------------------------------------------------------------------------
Some States do not specify loan terms for vehicle title loans,
thereby authorizing both single-payment and installment title loans.
These States include Arizona, New Mexico, and Utah. Arizona limits fees
to between 10 and 17 percent per month depending on the loan amount;
fees do not vary by loan duration.\260\ New Mexico and Utah do not
limit fees for vehicle title loans, regardless of the loan term.\261\
Delaware has no limit on fees but limits the term to 180 days,
including rollovers, likewise authorizing either 30-day loans or
installment loans.\262\
---------------------------------------------------------------------------
\260\ Ariz. Rev. Stat Sec. 44-281 and Sec. 44-291.
\261\ N.M. Stat. Sec. Sec. 58-15-1 to 30; Utah Code Sec. 7-24-
101 through 305.
\262\ Del. Code ANN. tit. 5, Sec. Sec. 2250, 2254.
---------------------------------------------------------------------------
State regulator data from two States track loan amounts, APRs, and
loan terms for installment vehicle title loans. Illinois reported that
in 2013, the average installment vehicle title loan amount was over
$950 to be repaid in 442.7 days along with total fees of $2,316.43, and
the average APR was 201 percent.\263\ Virginia data show similar
results. In 2014, the average amount borrowed on vehicle title loans
was $1,048. The average APR was 222 percent and the average loan term
was 345 days.\264\ For a $1,048 loan, a Virginia title lender could
charge interest of about $216.64 per month, or $2,491.36 for 345
days.\265\ The average installment vehicle title loan amounts borrowed
are similar to the amounts borrowed in single-payment title loan
transactions; the average APRs are generally lower due to the longer
loan term, described above in part II.B.
---------------------------------------------------------------------------
\263\ Ill. Dep't. of Fin. & Prof. Reg., Illinois Trends Report
Through December 2013, at 28.
\264\ Va. State Corp. Comm'n, The 2014 Annual Report, at 71.
\265\ A licensed vehicle title lender may charge 22 percent per
month on the principal up to $700, 18 percent per month on amounts
over $700 to $1,400, and 15 percent per month on amount that exceed
$1,400. VA Code Sec. 6.2-2216.
---------------------------------------------------------------------------
The Bureau obtained anonymized multi-year data from seven lenders
offering either or both vehicle title and payday installment loans. The
vehicle title installment loan data are from 2010 through 2013; the
payday installment data are from 2007 through 2014. The Bureau reported
that the average vehicle title installment loan amount was $1,098 and
the median loan amount was $710; the average was 14 percent higher, and
the median was two percent higher, than for single-payment vehicle
title loans. The average APR was 250 percent and the median 259 percent
compared to 291 percent and 317 percent for single-payment vehicle
title loans.
Industry size and structure. The three largest vehicle title
lenders, as defined by store count and described above in part II.B,
make both single-payment and installment vehicle title loans, depending
on the requirements and authority of State laws. As discussed above,
there are no publicly traded vehicle title lenders (though some of the
publicly-traded payday lenders also make vehicle title loans) and the
one formerly public company did not distinguish its single-payment
title loans from its installment title loans in its financial reports.
Consequently, estimates of vehicle title loan market size include both
single-payment and
[[Page 47888]]
installment vehicle title loans, including the estimates provided above
in part II.B, above.
Marketing and underwriting practices. In most respects, installment
vehicle title loans are similar to single-payment vehicle title loans
in marketing, borrower demographics, underwriting, and collections. For
example, the Bureau is aware from market outreach and market monitoring
activities that some installment vehicle title lenders require proof of
income as part of the application process for installment vehicle title
loans,\266\ while others do not. Some installment vehicle title loans
are set up to include repayment by ACH from the borrower's account, a
practice common to payday installment loans. The Bureau has reviewed
some installment vehicle title lenders' loan agreements that provide
for delinquency fees if a payment is late.
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\266\ Advance America requires proof of income for installment
title loans in Illinois. Payday Loans/Cash Advance, Advance America,
https://www.advanceamerica.net/locations/details/store-4500/2828-S-17th-Ave-Unit-B/Broadview/IL/60155 (last visited March 10, 2016).
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Business model. Installment vehicle title loans generally perform
in a manner similar to single-payment vehicle title loans. One study
has analyzed data on repeat borrowing in installment vehicle title
loans. The study found that in Q4 2014 in Texas, over 20 percent of
installment vehicle title loans were refinanced in the same quarter the
loan was made, and that during 2014 as a whole, the dollar volume of
vehicle title loans refinanced almost equaled the volume of these loans
originated.\267\ More recent Texas regulator data indicates similar
findings. Of the installment vehicle title loans originated in 2015, 39
percent were subsequently refinanced in the same year, and of all
refinances of installment vehicle title loans in 2015, regardless of
year of origination, 17 percent were refinanced five or more
times.\268\
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\267\ Diane Standaert, Ctr. for Responsible Lending, Payday and
Car Title Lenders' Migration, at 2-3.
\268\ Texas Office of Consumer Credit Commissioner, Credit
Access Business (CAB) Annual Data Report, CY 2015 (Apr. 20, 2016),
available at http://occc.texas.gov/sites/default/files/uploads/reports/cab-annual-2015.pdf
---------------------------------------------------------------------------
The Bureau has also analyzed installment vehicle lending data. The
Bureau found that 20 percent of vehicle title installment loans were
refinanced, with about 96 percent of refinances involving cash out. The
median cash-out amount was $450, about 35 percent of the new loan's
principal. At the loan level, 22 percent of installment vehicle title
loans resulted in default and 8 percent in repossession; at the loan
sequence level, 31 percent resulted in default and 11 percent in
repossession.\269\
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\269\ CFPB Report on Supplemental Findings, at ch. 1.
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Other Nonbank 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, liquidity loans--also known as ``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 the specific intended purpose,
such as automobile purchase loans, student loans, and mortgage loans.
As discussed below, these finance companies, and their newer online
counterparts (that offer similar loan products but place more reliance
on automated processes and innovative underwriting), have a different
business model than payday installment lenders and vehicle title
installment lenders. Nonetheless, some loans offered by these
installment lenders fall within the proposal's definition of ``covered
longer-term loan,'' as they are made at interest rates that exceed 36
percent or include fees that result in a total cost of credit that
exceeds 36 percent, and include repayment by access to the borrower's
account or include a non-purchase money security interest in a
consumer's vehicle. Additional information regarding the market for
these finance company loans and their online counterparts is described
below.
According to a report from a consulting firm using data derived
from a nationwide consumer reporting agency, in 2015, finance companies
originated 8.2 million personal loans (unsecured installment loans)
totaling $37.6 billion in originations, of which approximately 6.8
million loans worth $24.3 billion were made to nonprime consumers
(categorized as near prime, subprime, and deep subprime, with
VantageScores of 660 and below), with an average loan size of about
$3,593.\270\ As of the end of 2015 there were 7.1 million outstanding
loans worth $29.2 billion to nonprime consumers. These nonprime
consumers accounted for 71 percent of outstanding accounts and 59
percent of outstanding balances, with an average balance outstanding of
about $4,113. Subprime and deep subprime consumers, those with scores
between 300 and 600 represented 41 percent of the borrowers and 28
percent of outstanding balances with an average balance of
approximately $3,380.\271\
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\270\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence
Report: Personal Loans Report, at 11-13 figs. 9, 10, 12, & 13
(2016), available at http://www.marketintelligencereports.com;
Experian & Oliver Wyman, 2015 Q3 Market Intelligence Report:
Personal Loans Report, at 11-13 figs. 9, 10, 12 & 13 (2015),
available at http://www.marketintelligencereports.com; Experian &
Oliver Wyman, 2015 Q2 Market Intelligence Report: Personal Loans
Report, at 11-13 figs. 9, 10, 12, & 13 (2015), available at http://www.marketintelligencereports.com; Experian & Oliver Wyman, 2015 Q1
Market Intelligence Report: Personal Loans Report, at 11-13 figs. 9,
10, 12, & 13 (2015), available at http://www.marketintelligencereports.com. These finance company personal
loans are not segmented by cost and likely include some loans with a
total cost of credit of 36 percent APR or less that would not be
covered by the Bureau's proposed rule as described below in proposed
Sec. 1041.2(a)(18).
\271\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence
Report: Personal Loans Report at 20-22 figs. 27, 28, 30, & 31. In
contrast, 29 percent of the loans and 41 percent of the loan volume
were made to consumers with prime or superprime credit scores
(VantageScore 3.0 of 661 or above). These loans likely have a total
cost of credit of 36 percent APR or less and would not be covered by
the Bureau's proposed rule.
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APRs at storefront locations in States that do not cap rates on
installment loans can be 50 to 90 percent for subprime and deep
subprime borrowers; APRs in States with rate caps are about 36 percent
APR for near prime and subprime borrowers.\272\ 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).\273\ No average loan amount
was stated. 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.\274\ Although APR calculations under Regulation Z include
origination fees, lenders generally are not required to include within
the finance charge application fees, document preparation fees, and
add-on services such as optional credit insurance and guaranteed
automobile
[[Page 47889]]
protection.\275\ 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.
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\272\ See Hecht, Alternative Financial Services, at 11 for
listing of typical rates and credit scores for licensed installment
lenders.
\273\ Thomas A. Durkin, Gregory Elliehausen, and Min Hwang,
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.
\274\ Id. at 24 tbl. 3.
\275\ 12 CFR 1026.4(a) to (d).
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Finance companies generally hold State lending licenses in each
State in which they lend money and are subject to each State's usury
caps. Finance companies operate primarily from storefront locations,
but some of them now offer complete online loan platforms.\276\
---------------------------------------------------------------------------
\276\ For example, see iLoan offered by Springleaf, now OneMain
Holdings, https://iloan.com/ (last visited Mar. 10, 2016). These may
not necessarily be covered loans, depending on the total cost of
credit. On November 15, 2015, Springleaf Holdings acquired OneMain
Financial Holdings and became OneMain Holdings. OneMain Holdings
Inc., 2015 Annual Report (Form 10-K) at 5 (Feb. 29, 2016), available
at https://www.sec.gov/Archives/edgar/data/1584207/000158420716000065/omh-20151231x10k.htm.
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Industry size and structure. There are an estimated 8,000 to 10,000
storefront finance company locations in the United States \277\--about
half to two-thirds the number of payday loan stores--with approximately
seven million loans to nonprime borrowers outstanding at any given
point in time.\278\ Three publicly traded companies account for about
40 percent of these storefront locations.\279\ Of these, one makes the
majority of its loans to consumers with FICO Scores above 600, and
another makes a majority of loans to consumers who have either FICO
Scores below 600 or no credit scores due to an absence of credit
experience. Another considers its customer base to include borrowers
with FICO Scores as low as 500.\280\ Among the three publicly traded
finance companies in this market, one will make installment loans
starting at about $500 and another at $1,500, as well as larger
installment loans as high as $15,000 to $25,000.\281\
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\277\ Hecht, Alternative Financial Services, at 10.
\278\ Estimates of number of borrowers from Bureau staff
calculations using Form 10-Ks of publicly traded companies and other
material. For the estimate of seven million nonprime consumers, see
Experian & Oliver Wyman, 2015 Q4 Market Intelligence Report:
Personal Loans, at 20-21 figs. 27 & 31. The Bureau believes that
most consumers have only one finance company installment loan at any
given time as lenders likely consolidate multiple loans or refinance
additional needs into a single loan. Consequently, the estimate of
seven million loans outstanding is roughly equal to the number of
consumers with an outstanding installment loan.
\279\ Estimates of storefront locations from Bureau staff
calculations using Form 10-Ks of publicly traded companies and other
materials.
\280\ FICO is a producer of commercially available credit risk
scores developed using data reported by the three national consumer
reporting agencies. Base FICO Scores range from 350 to 850, and
those below 670 are generally considered below average. For a
description of FICO Scores, see myFICO, Understanding FICO Scores,
at 4-5, available at http://www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf. Prior to Springleaf's acquisition of One
Main, Springleaf reported that 45 percent of its customers had FICO
Scores below 600 and another 32 percent had scores between 601 and
660. At OneMain, a higher percentage of customers (40 percent) had
FICO Scores between 601 and 660 and a lower percentage (22 percent)
had scores below 600. One Main, ``New'' OneMain Overview, at 8 (Jan.
2016), available at http://files.shareholder.com/downloads/AMDA-28PMI5/1420156915x0x873656/635ABE19-CE94-44BB-BB27-BC1C6B78266B/New_OneMain_Overview_Jan_2016.final.pdf. World Acceptance reports
over half of its domestic borrowers have either no credit score (< 5
percent) or FICO Scores under 600 (50 percent), while approximately
20 percent have scores above 650. World Acceptance Corp., Investor
Presentation, at 16 (June 30, 2015), available at http://www.worldacceptance.com/wp-content/uploads/2015/09/Investor-Presentation-6-30-15-reduced.pdf. Regional Management's target
borrowers have FICO Scores between 500-749. See Regional Mgmt.
Corp., Investor Presentation, at 12 (Sept. 21, 2015), available at
http://www.regionalmanagement.com/phoenix.zhtml?c=246622&p=irol-irhome.
\281\ World Acceptance reports that two-thirds of its loans are
for $1,500 or less, but its larger installment loans average about
$3,400 and it will lend a maximum of about $13,500. World Acceptance
Corp., June 2015 Investor Presentation, at 14-15. Regional
Management makes loans of $500 to $2,500 but will make loans up to
$25,000 excluding auto and retail loans. Regional Mgmt., Sept. 2015
Investor Presentation, at 4. OneMain Holdings through its Springleaf
brand makes loans as small as $1,500 but will loan up to $15,000,
excluding direct auto loans. Springleaf, https://www.springleaf.com/
(last visited Apr. 29, 2016); One Main, ``New'' OneMain Overview, at
6.
---------------------------------------------------------------------------
Given the range of loan sizes of personal loans made by finance
companies, and the range of credit scores of some finance company
borrowers, it is likely that some of these loans are used to address
liquidity shortfalls while others are used either to finance new
purchases or to consolidate and pay off other debt.
Marketing and underwriting practices. Customer acquisition methods
are generally similar for finance companies and online installment
lenders. Finance companies rely on direct mail marketing and online
advertising including banner advertisements, search engine
optimization, and purchasing online leads to drive traffic to stores.
Where allowed by State law, some finance companies mail ``live'' or
``convenience checks'' that, when endorsed and cashed or deposited,
commit the consumer to repay the loan at the terms stated in the
accompanying loan disclosures.\282\ Promotional offers include 0
percent interest loans for borrowers who prepare and file their tax
returns at the lender's office or refer friends \283\ and free credit
scores and gift cards.\284\
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\282\ World Acceptance, 2015 Annual Report (Form 10-K) at Part
I, Item 1 (June 1, 2015), available at http://www.sec.gov/Archives/edgar/data/108385/000010838515000036/wrld-331201510xk.htm and
Regional Mgmt. Corp., 2015 Annual Report (Form 10-K) at 2 (Feb. 23,
2016), available at https://www.sec.gov/Archives/edgar/data/1519401/000119312516473676/d105580d10k.htm.
\283\ Loans, World Acceptance Corp., http://www.worldacceptance.com/loans/ (last visited Apr. 29, 2016).
\284\ Springleaf Rewards, Springleaf, https://www.springleaf.com/rewards (last visited Apr. 29, 2016).
---------------------------------------------------------------------------
Finance companies suggest that loans may be used for bill
consolidation, home repairs or improvements, or unexpected expenses
such as medical bills and automobile repairs.\285\ Like their
storefront counterparts, online installment lenders also offer
promotions such as offers of lower rates on installment loans after a
history of successful loan repayments.\286\
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\285\ Need a Loan?, 1st Franklin Fin. Corp., http://www.1ffc.com/loans/#.VzEGvfnR9QL (last visited May 9, 2016);
Personal Loans, Springleaf, https://www.springleaf.com/personal-loans (last visited May 9, 2016) and Personal Loans, OneMain,
https://www.onemainfinancial.com/USCFA/finser/marktn/flow.action?contentId=personalloans (last visited May 9, 2016).
\286\ Frequently Asked Questions, Why is Rise Needed, Rise,
https://www.risecredit.com/frequently-asked-questions/ (last visited
Apr. 29, 2016).
---------------------------------------------------------------------------
Finance companies secure some of their loans with vehicle titles or
with a legal security interest in borrowers' vehicles, although the
Bureau believes based on market outreach that these loans are generally
underwritten based on an assessment of the consumer's income and
expenses and are not based primarily on the value of the vehicle in
which the interest is provided as collateral. The portfolio of finance
company loans collateralized by security interests in vehicles varies
by lender and some do not separately report this data from overall
portfolio metrics that include direct larger loans, automobile purchase
loans, real estate loans, and retail sales finance loans.\287\ The
Bureau's market outreach with finance companies and their trade
associations indicates that at most, 20 to 25 percent of finance
company loans--though a higher percentage of receivables--involved a
non-purchase money security interest in a vehicle.
---------------------------------------------------------------------------
\287\ World Acceptance estimates that 13 percent of the total
number of loans and 20 percent of gross loan volume are vehicle-
secured loans. World Acceptance Corp., 2015 Annual Report (Form 10-
K), at Item 1A. OneMain Holdings reported that as of the end of
2015, $2.8 billion or 21 percent of personal loan net finance
receivables were secured by titled personal property, such as
automobiles. In contrast, the previous year, before acquiring
OneMain, the portfolio (consisting solely of Springleaf loans) had
49 percent of personal loan receivables secured by titled personal
property. OneMain Holdings Inc., 2015 Annual Report (Form 10-K), at
38.
---------------------------------------------------------------------------
Finance companies typically engage in underwriting that includes a
monthly net income and expense budget, a review of the consumer's
credit report,
[[Page 47890]]
and an assessment of monthly cash flow.\288\ One trade association
representing traditional finance companies has described the
underwriting process used by these lenders as evaluating the borrower's
``stability, ability, and willingness'' to repay the loan.\289\ In
addition to the typical underwriting described above, one finance
company has publicized that it is now utilizing alternative sources of
consumer data to assess creditworthiness, including the borrower's
history of utility payments and returned checks, as well as
nontraditional data (such as the type of personal device used when
applying for the loan).\290\ Many finance companies report loan payment
history to one or more of the nationwide consumer reporting
agencies,\291\ and the Bureau believes from market outreach that these
lenders generally furnish on a monthly basis.
---------------------------------------------------------------------------
\288\ 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; Loan FAQs, Sun Loan Company,
http://www.sunloan.com/faq/ (last visited Apr. 29, 2016) (``We
examine the borrower's stability, ability and willingness to repay
the loan, which we attempt to assess using budgets and credit
reports, among other things.'').
\289\ Best Practices, Nat'l Installment Lenders Ass'n, http://nilaonline.org/best-practices/ (last visited Apr. 29, 2016).
\290\ Bryan Yurcan, American Banker, Subprime Lender OneMain
Using New Tools to Mind Old Data, (Mar. 2, 2016), http://www.americanbanker.com/news/bank-technology/subprime-lender-onemain-using-new-tools-to-mine-old-data-1079669-1.html.
\291\ Best Practices, Nat'l Installment Lenders Ass'n, http://nilaonline.org/best-practices/ (last visited Apr. 29, 2014);
American Fin. Servs. Ass'n, Traditional Installment Loans.
---------------------------------------------------------------------------
From market monitoring activities, the Bureau is aware that there
is an emerging group of online installment lenders entering the market
with products that in some ways resemble the types of loans made by
finance companies rather than payday installment loans. Some of these
online installment lenders engage in sophisticated underwriting that
involves substantial use of analytics and technology. These lenders
utilize systems to verify application information including identity,
bank account, and contact information focused on identifying fraud and
borrowers intending to not repay. These lenders also review nationwide
credit report information as well as data sources that provide payment
and other information from wireless, cable, and utility company
payments. The Bureau is aware that some online installment lenders
obtain authorization to view borrowers' bank and credit card accounts
to validate their reported income, assess income stability, and
identify major recurring expenses.
Business model. Although traditional finance companies share a
similar storefront distribution channel with storefront payday and
vehicle title lenders, other aspects of their business model differs
markedly. The publicly traded finance companies are concentrated in
Midwestern and Southern States, with a particularly large number of
storefronts in Texas.\292\ A number of finance companies are located in
rural areas.\293\ One of the publicly traded finance companies states
it competes on price and product offerings while another states it
emphasizes customer relationships, customer service, and
reputation.\294\ Similarly, while the emerging online installment
lenders share a similar distribution approach with online payday
lenders, online hybrid payday installment lenders, and online payday
installment lenders, their business models, particularly underwriting,
are substantially different.
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\292\ World Acceptance Corp., June 2015 Investor Presentation,
at 5; Regional Mgmt., Sept. 2015 Investor Presentation, at 5.
\293\ Based on the Bureau's market outreach and World Acceptance
Corp., June 2015 Investor Presentation, at 12.
\294\ World Acceptance Corp., 2015 Annual Report (Form 10-K), at
Part I, Item 1; Regional Mgmt. Corp., 2015 Annual Report (Form 10-
K), at 16.
---------------------------------------------------------------------------
One of the indicators that underscores this contrast is default
rates. In contrast to the high double digit charge-off rates discussed
for some industry segments discussed above, reporting to a national
consumer reporting agency indicates that during each quarter of 2015,
between 2.9 and 3.4 percent of finance company loan balances were
charged off. However, these figures include loans made to prime and
superprime consumers that would likely not be covered loans under the
total cost of credit threshold in proposed Sec. 1041.2(a)(18).\295\ In
recent years, net charge-off rates at two publicly traded finance
companies have ranged from 12 to 15 percent of average balances.\296\
---------------------------------------------------------------------------
\295\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence
Report: Personal Loans, at 33, fig. 54. In contrast, the 2013 survey
of six million finance company loans conducted on behalf of a trade
association of storefront finance companies, referenced above, found
that more than 38 percent of the loans were delinquent on the survey
date, but the survey did not track whether these loans ultimately
cured or were charged-off. Durkin, at 14.
\296\ World Acceptance Corp., 2015 Annual Report (Form 10-K), at
Part II, Item 6. World Acceptance calculated net charge-offs as a
percentage of average loan receivables by averaging the month-end
gross loan receivables less unearned interest and deferred fees over
the time period under consideration. Regional Management lists net
charge-offs as a percent of average finance receivables on small
installment loans to be in this range. Regional Mgmt. Corp., 2015
Annual Report (Form 10-K), at 26. OneMain Holdings charge-off rate
is not included here as it does not separate out direct auto loans
from personal loans.
---------------------------------------------------------------------------
Reborrowing in this market is relatively common, but finance
companies refinance many existing loans before the loan maturity date,
in contrast to the payday lending practice of rolling over debt on the
loan's due date. The three publicly traded finance companies refinance
50 to 70 percent of all of their installment loans before the loan's
due date.\297\ At least one finance company states it will not
``encourage'' refinancing if the proceeds from the refinance (cash-out)
are less than 10 percent of the refinanced loan amount.\298\ In the
installment context, refinancing refers to the lender extinguishing the
existing loan and may include providing additional funds to the
borrower, having the effect of allowing the borrower to skip a payment
or reducing the total cost of credit relative to the outstanding
loan.\299\ The emerging online installment lenders also offer to
refinance loans and some notify borrowers of their refinance options
with email notifications and notices when they log in to their
accounts.\300\ Finance companies notify borrowers of refinance options
by mail, telephone, text messages, on written payment receipts, and in
stores.\301\ State laws and company policies vary with respect to
whether various loan
[[Page 47891]]
origination and add-on fees must be refunded upon refinancing and
prepayment and, if so, the refund methodology used.
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\297\ World Acceptance Corp. reports that 71.5 percent of its
loans, measured by loan volume, were refinances, that the average
loan is refinanced at month eight of a 13 month term, and that it
used text messages to notify consumers that they may refinance
existing loans, World Acceptance Corp., 2015 Annual Report (Form 10-
K), at Part I, Item 1 and Part II, Item 7; World Acceptance Corp.,
2015 Annual Report at 3, available at http://www.worldacceptance.com/wp-content/uploads/2015/07/2015-ANNUAL-REPORT_6-25-15.compressed.pdf. Regional Management reports that 58.8
percent of 2015 loan originations were renewals. Regional Mgmt.
Corp., 2015 Annual report (Form 10-K), at 15. About half of
Springleaf's customers renew their loans. Springleaf Holdings, Inc.,
Springleaf ABS Overview, ABS East Conference, at 21 (Sept. 20015),
available at http://files.shareholder.com/downloads/AMDA-28PMI5/456541976x0x850559/08A5B379-9475-4AD4-9037-B6AEC6D3EC6D/SL_2015.09_ABS_East_2015_vF.pdf.
\298\ World Acceptance Corp., 2015 Annual Report (Form 10-K), at
Part II, Item 7.
\299\ Some installment lenders use the word ``renewal'' to
describe this process, although it means satisfying the prior legal
obligation in full rather than paying only the finance charge or a
fee as occurs in the payday loan context.
\300\ For example, Rise, offered by Elevate, notifies borrowers
of refinance options that provide additional funds. Frequently Asked
Questions, Rise, https://www.risecredit.com/frequently-asked-questions (last visited Mar. 10, 2016).
\301\ World Acceptance Corp., 2015 Annual Report, at 3.
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Personal Lending by Banks and Credit Unions
Although as discussed above depository institutions over the last
several decades have increasingly emphasized credit cards and overdraft
services to meet customers short-term credit needs, they remain a major
source of installment loans. According to an industry report, in 2015
banks and credit unions originated 3.8 million unsecured installment
loans totaling $22.3 billion to nonprime consumers (defined as near
prime, subprime, and deep subprime consumers with VantageScores below
660), with an average loan size of approximately $5,867.\302\ As of the
end of 2015, there were approximately 6.1 million outstanding bank and
credit union unsecured installment loans to these nonprime consumers,
with $41.5 billion in outstanding loan balances.\303\ Approximately 29
percent of the number of outstanding bank loans (representing 21
percent of outstanding balances) and 49 percent of the credit union
loans (representing 35 percent of balances) were to these nonprime
consumers.\304\
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\302\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence
Report: Personal Loans Report, at 11-13 figs. 9, 10, 12, & 13;
Experian & Oliver Wyman, 2015 Q3 Market Intelligence Report:
Personal Loans Report, at 11-13 figs. 9, 10, 12 & 13, 2015 Q2 Market
Intelligence Report: Personal Loans Report, at 11-13 figs. 9, 10,
12, & 13; Experian & Oliver Wyman, 2015 Q1 Market Intelligence
Report: Personal Loans Report, at 11-13 figs. 9, 10, 12, 13.
\303\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence
Report: Personal Loans, at 20-22 figs. 27, 28, 30, & 31.
\304\ Id. In contrast, prime and superprime consumers accounted
for 70 percent of the number of outstanding loans and 79 percent of
outstanding loan balances at banks, and 51 percent of the number of
outstanding loans and 65 percent of outstanding balances at credit
unions.
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National banks, most State-chartered banks, and State credit unions
are permitted under existing Federal law 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).\305\ 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 must not charge more
than 18 percent interest rate, with an exception for payday alternative
loans described below.\306\ The laws applicable to Federal credit
unions are discussed below.
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\305\ 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); and 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.
\306\ Nat'l Credit Union Admin., Board Action Bulletin, Board
Meeting Results for June 18, 2015, at 2-3, available at https://www.ncua.gov/about/Documents/Board%20Actions/BAB20150618.pdf
(announcing the extension of the general 18 percent rate ceiling and
the 28 percent rate ceiling on PALs through March 10, 2017); 12
U.S.C. 1757(5)(A)(vi).
---------------------------------------------------------------------------
The Bureau believes that the vast majority of the personal loans
made by banks and credit unions have a total cost of credit of 36
percent or less, and thus would not be covered loans under the Bureau's
proposal. However, through market outreach the Bureau is also aware
that many community banks make small personal loans to existing
customers who face liquidity shortfalls, at least on an ad hoc basis at
relatively low interest rates but some with an origination fee that
would bring the total cost of credit to more than 36 percent. These
products are generally offered to existing customers as an
accommodation and are not mass marketed.
Two bank trade associations recently surveyed their members about
their personal loan programs.\307\ Although the surveys were small and
may not have been representative, both found that banks continue to
make personal loans. One survey generated 93 responses with banks
ranging in size from $37 million in assets to $48.6 billion, with a
heavy concentration of community banks (all bank survey).\308\ The
second survey was limited to community banks (community bank survey)
and generated 132 responses.\309\ The surveys, though asking different
questions and not necessarily nationally representative, found:
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\307\ One association represents small, regional and large banks
with $12 trillion in deposits and that extend more than $8 trillion
in loans. The other represents more than 6,000 community banks with
52,000 locations, holding $3.6 trillion in assets, $2.9 trillion in
deposits, and $2.5 trillion in loans to consumers, small businesses
and agricultural loans.
\308\ American Bankers Association, Small Dollar Lending Survey
(Dec. 2015) (on file); ABA Banking Journal, ABA Survey: Banks Are
Making Effective Small Dollar Loans (Dec. 8, 2015), http://bankingjournal.aba.com/2015/12/aba-survey-banks-are-making-effective-small-dollar-loans/ and Letter from Virginia O'Neill,
Senior Vice President, American Bankers Ass'n, to Richard Cordray,
Director, Bureau of Consumer Fin. Prot. (Dec. 1, 2015) (re: ABA
Small Dollar Lending Survey).
\309\ Letter from Viveca Y. Ware, Executive Vice President,
Independent Cmty. Bankers of America, to David Silberman, Associate
Director, Bureau of Consumer Fin. Prot. (Oct. 6, 2015); Ryan Hadley
[hereinafter ICBA Letter October 6, 2015], ICBA, 2015 ICBA Community
Bank Personal Small Dollar Loan Survey (Oct. 29, 2015) (on file);
Letter from Viveca Y. Ware, Executive Vice President, Independent
Cmty. Bankers of America, to David Silberman, Associate Director,
Consumer Financial Protection Bureau (Nov. 3, 2015) (on file).
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Loan size and duration. In the community bank survey, 74
percent of the respondents reported that they make loans under $1,000
for durations longer than 45 days, with an average loan amount of $872.
No average loan term was reported. Ninety-five percent reported making
personal loans larger than $1,000, with an average loan size of under
$4,000. In the all bank survey, 73 percent reported making loans of
$5,000 or less for a term of less than one year, either as an
accommodation for existing customers or as an established lending
program. Slightly more than half of the respondents reported making
more than 50 such loans in 2014.
Cost. In the community bank survey the average of the
``typical interest rate'' reported by the respondents was 12.1 percent
for smaller dollar loans and the average maximum rate for such loans
was 16.7 percent. Average interest rates for loans greater than $1,000
were about 250 basis points lower. At the same time, two-thirds of the
banks reported that they also charge loan fees for the smaller loans
and 70 percent do so for the larger loans over $1,000, with fees almost
equally divided between application fees and origination fees. For the
smaller loans, the median fee when set as a fixed dollar amount was $50
and the average fee $61.44 and when set as a percentage of the loan the
average was 3 percent; average fees for loans above $1,000 were
slightly higher and average percentage rates slightly lower. The all
bank survey did not obtain data at this granular level but 53 percent
of the respondents reported that the total cost of credit on at least
some loans was above 36 percent.
The community bank survey provided some information about the
lending practices of banks that offer small-dollar loans.
Underwriting. While the Bureau's outreach indicates that
these loans are often thought of by the banks as ``relationship loans''
underwritten based on the bank's knowledge of the customer, in the
community bank survey 93 percent reported that they also verified major
financial obligations and debt and 78 percent reported that they
verified income.
The two bank trade association surveys also provided information
relative to repeat use and losses.
Rollovers. In the community bank survey 52 percent of
respondents reported that they do not permit
[[Page 47892]]
rollovers and 26 percent reported that they allow only a single
rollover. Repayment methods vary and include manual payments as well as
automated payments. Financial institutions that make loans to account
holders retain the contractual right to set off payments due from
existing accounts in the event of nonpayment.
Charge-offs. Both bank surveys reported low charge-off
rates: in the community bank survey the average net charge-off rate for
loans under $1,000 was 1 percent and for larger loans was less than 1
percent (.86 percent). In the all bank survey, 34 percent reported no
charge-offs and 61 percent reported charge-offs of 3 percent or less.
There is little data available on the demographic characteristics
of borrowers who take liquidity loans from banks. The Bureau's market
monitoring indicates that a number of banks offering these loans are
located in small towns and rural areas. Further, market outreach with
bank trade associations indicates that it is not uncommon for borrowers
to be in non-traditional employment and have seasonal or variable
income.
As noted above, Federal credit unions may not charge more than 18
percent interest. However, as described below, they are authorized to
make some small-dollar loans at rates up to 28 percent interest plus an
applicable fee.
Through market monitoring and outreach, the Bureau is aware that a
significant number of credit unions, both Federal and State chartered,
offer liquidity loans to their members, at least on an accommodation
basis. As with banks, these are small programs and may not be widely
advertised. The credit unions generally engage in some sort of
underwriting for these loans, including verifying borrower income and
its sufficiency to cover loan payments, reviewing past borrowing
history with the institution, and verifying major financial
obligations. Many credit unions report these loans to a consumer
reporting agency. On a hypothetical $500, 6-month loan, many credit
unions would charge a 36 percent or less total cost of credit.
Some Federal credit unions offer small-dollar loans aimed at
consumers with payday loan debt to pay off these loans at interest
rates of 18 percent or less with application fees of $50 or less.\310\
Other Federal credit unions (and State credit unions) offer installment
vehicle title loans with APRs below 36 percent.\311\ The total cost of
credit, when application fees are included, may range from
approximately 36 to 70 percent on a small loan of about $500, depending
on the loan term.
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\310\ See, for example, Nix Lending's Payday Payoff Loan offered
through Kinecta Federal Credit Union at an 18 percent APR plus a
$49.95 application fee. Payday Payoff[supreg] Loan, Nix Neighborhood
Lending, http://nixlending.com/en/personal-loans/detail/payday-payoff-loan (last visited March 9, 2016). MariSol Federal Credit
Union offers a Quick Loan of $500 or less at an 18 percent APR with
a $50 application fee to be repaid over four months. Payment
includes a $20 deposit into a savings account. Personal Loans,
MariSol Federal Credit Union, https://marisolcu.org/loans_personal.html (last visited Apr. 29, 2016); Consumer Loan
Rates, MariSol Federal; Credit Union, https://marisolcu.org/rates_loan_view.html (last visited Apr. 29, 2016).
\311\ For a listing of several credit unions with rates below 25
percent, see Pew, Auto Title Loans: Market Practices and Borrowers'
Experience, at 24.
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Federal credit unions are also authorized to offer ``payday
alternative loans.'' 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 payday alternative loans 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.\312\ 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, may not be rolled over, and
borrowers are limited 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 employment by requiring at least two pay
stubs.\313\
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\312\ 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. 12 CFR 1026.4(c).
\313\ 12 CFR 701.21(c)(7)(iii).
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In 2015, over 700 Federal credit unions (nearly 20 percent of all
Federal credit unions) offered PALs, with originations at $123.3
million, representing a 7.2 percent increase from 2014.\314\ In 2014,
the average PAL amount was about $678 and carried a median interest
rate of 25 percent.\315\ The NCUA estimated that, based on the median
PAL interest rate and loan size for 2013, the APR calculated by
including all fees (total cost of credit) for a 30-day PAL was
approximately 63 percent.\316\ However, the Bureau believes based on
market outreach that the average PAL term is about 100 days, resulting
in a total cost of credit of approximately 43 percent.\317\ Based on
NCUA calculations, during 2014, annualized PAL charge-offs net of
recoveries, as a percent of average PAL balances outstanding, were 7.5
percent.\318\
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\314\ Nat'l Credit Union Admin., Dec. 2015 FCU 5300 Call Report
Aggregate Financial Performance Reports (FPRs), available at https://www.ncua.gov/analysis/Pages/call-report-data/aggregate-financial-performance-reports.aspx.
\315\ NCUA estimates based on public Call Report data, available
at https://www.ncua.gov/analysis/Pages/call-report-data.aspx.
\316\ Based on a PAL of $630 for 30 days at a rate of 24.6
percent with a $20 application fee, the 2014 terms provided in
NCUA's comment letter to the Department of Defense. Letter from
Debbie Matz, Chairman, NCUA, to Aaron Siegel, Alternate OSD Federal
Register Liaison Officer, Dep't of Defense, at 5 (Dec. 16, 2014)
[hereinafter NCUA Letter to Department of Defense (Dec. 16, 2014)]
(re: Limitations on Terms of Consumer Credit Extended to Service
Members and Dependents; Docket DOD-2013-OS-0133, RIN 0790-AJ10),
available at https://www.regulations.gov/#!documentDetail;D=DOD-
2013-OS-0133-0171.
\317\ Bureau staff calculations based on an average PAL of $678,
the 2014 average amount, at a 25 percent interest rate with a $20
application fee (figures based on NCUA calculations from call report
data, as noted above), due in 3 months with 3 monthly payments.
\318\ NCUA estimates based on public Call Report data, available
at https://www.ncua.gov/analysis/Pages/call-report-data.aspx.
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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),\319\ and electronic payments like ACH
\320\ and debit and prepaid card
[[Page 47893]]
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.\321\ 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.\322\ 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.\323\ 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.\324\ Some traditional installment lenders also obtain
an electronic payment authorization from their customers.
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\319\ A remotely created check or remotely created payment order
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(cc) (defining ``remotely created payment order'' as
a payment instrument that includes remotely created checks).
\320\ 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 that the lender or the
lender's payment processor has a relationship with. 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.
\321\ See, e.g., QC Holdings, Inc., 2014 Annual Report (Form 10-
K), at 6 (Mar. 12, 2015), available at https://www.sec.gov/Archives/edgar/data/1289505/000119312515088809/d854360d10k.htm (``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.''); see also
Advance America, 2011 Annual Report (Form 10-K) at 45 (Mar. 15,
2012), available at https://www.sec.gov/Archives/edgar/data/1299704/000104746912002758/a2208026z10-k.htm (``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),
available at https://www.sec.gov/Archives/edgar/data/1529864/000156459015001871/enva-10k_20141231.htm (``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.'').
\322\ Id.
\323\ See, e.g., Frequently Asked Questions (FAQs), Great Plains
Lending d/b/a Cash Advance Now, 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.'').
\324\ See, e.g., One Click Cash and US Fast Cash, Authorization
to Initiate ACH Debit and Credit Entries, Ex. 1 at 38, 55, Labajo v.
First International Bank & Trust, No. 14-00627 (C.D. Cal. May 23,
2014), ECF No. 26-3.
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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.\325\ Consumers usually provide
the payment authorization as part of the loan origination process.\326\
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\325\ 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 ach@castlepayday.com 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.''); Plain Green Loan Agreement,
Ex. 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); Sandpoint Capital Loan
Agreement, Ex. A, Labajo, No. 14-627 (May 23, 2014), ECF 25-1
(taking ACH and remotely created check authorization).
\326\ See, e.g., Advance America, 2011 Annual Report (Form 10-
K), at 10. (``To obtain a cash advance, a customer typically . . .
enters into an agreement governing the terms of the cash advance,
including the customer's agreement to repay the amount advanced in
full on or before a specified due date (usually the customer's next
payday), and our agreement to defer the presentment or deposit of
the customer's check or ACH authorization until the due date.'').
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For storefront payday loans, providing a post-dated check is
typically a requirement to obtain a loan. Under the Electronic Fund
Transfer Act (EFTA) lenders cannot condition credit on obtaining an
authorization from the consumer for ``preauthorized'' (recurring)
electronic fund transfers,\327\ 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).\328\ 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 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.\329\
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\327\ 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.'').
\328\ Cash Store, Installment Loans Fee Schedule, New Mexico
(last visited May 16, 2016), https://www.cashstore.com/-/media/cashstore/files/pdfs/nm%20ins%20552014.pdf.
\329\ See, e.g., Mobiloans, Line of Credit Terms and Conditions,
www.mobiloans.com/terms-and-conditions (last visited May 17, 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.'').
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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.\330\ 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
[[Page 47894]]
to complete an internal payment transfer.
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\330\ See, e.g., Fifth Third Bank, Early Access Terms &
Conditions, Important Changes to Fifth Third Early Access Terms &
Conditions, 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 would be covered under the
proposed 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.\331\ 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.\332\
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\331\ 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.
\332\ Bureau of Consumer Fin. Prot., Supervisory Highlights, at
20 (Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
---------------------------------------------------------------------------
In contrast, online lenders typically use the authorization to
collect all payments, not just those initiated after there has been
some indication of distress from the consumer. Moreover, as discussed
above, online lenders offering ``hybrid'' payday loan products
structure them so that the lender is authorized to collect a series of
interest-only payments--the functional equivalent of paying finance
charges to roll over the loan--before full payment or amortizing
payments are due.\333\ 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.\334\ The
payments processed in such cases are for the cost of the rollover
rather than the full balance due.
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\333\ See, e.g., Integrity Advance Loan Agreement, CFPB Notice
of Charges Against Integrity Advance, LLC, CFPB 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).
\334\ See, e.g., Cash Jar Loan Agreement, 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.\335\ 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 over-
third of the borrowers experienced more than one such incident.
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\335\ 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.\336\
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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\336\ 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.''); Frequently Asked Questions,
Mypaydayloan.com, 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 a 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.\337\ Some lenders attempt to collect the entire
payment 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.\338\ 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.\339\ These practices are
discussed in more detail in Market Concerns--Payments.
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\337\ See CFPB Supervisory Highlights, at 20 (Spring 2014)
(``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.''); First Cash Fin. Servs., Inc. 2014 Annual Report (Form
10-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.''); Frequently Asked Questions, Advance America, https://www.onlineapplyadvance.com/faq (last visited May 17, 2016) (``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.'').
\338\ See, e.g., CFPB Online Payday Loan Payments.
\339\ 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
[[Page 47895]]
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.\340\ 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.\341\
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\340\ 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.'').
\341\ See, e.g., Press Release, Clarity Servs., Inc, ACH
Presentment Will Help Lenders Reduce Failed ACH Pulls (Aug. 1,
2013), https://www.clarityservices.com/clear-warning-ach-presentment-will-help-lenders-reduce-failed-ach-pulls/; Service
Offerings, FactorTrust, http://ws.factortrust.com/products/ (last
visited May 4, 2016); Bank Account Verify, Microbilt, http://www.microbilt.com/bank-account-verification.aspx (last visited May
4, 2016); Sufficient Funds Assurance, DataX Lending Intelligence,
http://www.dataxltd.com/ancillary-services/successful-collections/
(last visited May 4, 2016).
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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,\342\ 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.\343\ 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.\344\
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\342\ 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.'').
\343\ Supplement I, Official Staff Interpretations, 12 CFR
1005.3(c)(1) (``The electronic re-presentment of a returned check is
not covered by Regulation E because the transaction originated by
check.'').
\344\ 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).
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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.\345\
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.
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\345\ See ACH Network Risk and Enforcement Topics, NACHA (Jan.
1, 2015), https://www.nacha.org/rules/ach-network-risk-and-enforcement-topics-january-1-2015 (providing an overview of changes
to the NACHA Rules); Operations Bulletin, NACHA, ACH Operations
Bulletin #1-2014: Questionable ACH Debit Origination: Roles and
Responsibilities of ODFIs and RDFIs (Sept. 30, 2014), https://www.nacha.org/news/ach-operations-bulletin-1-2014-questionable-ach-debit-origination-roles-and-responsibilities (``During 2013, the ACH
Network and its financial institution participants came under
scrutiny as a result of the origination practices of certain
businesses, such as online payday lenders, in using the ACH Network
to debit consumers' accounts.'').
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Stop payment rights. For preauthorized (recurring) electronic fund
transfers,\346\ EFTA grants consumers a right to stop payment by
issuing a stop payment order through their depository institution.\347\
The 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.\348\ 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.\349\ 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.'' \350\ 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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\346\ 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).
\347\ ``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).
\348\ 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.'').
\349\ NACHA Rule 3.7.1.1.
\350\ 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).\351\ 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
must describe the check ``with reasonable certainty'' and give the
[[Page 47896]]
bank enough information to find the check under the technology then
existing.\352\ The stop payment also must be given at a time that
affords the bank a reasonable opportunity to act on the stop payment
before it becomes liable for the check under U.C.C. 4-303.
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\351\ U.C.C. 4-403.
\352\ 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.\353\ 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 discussion in Market Concerns--Payments.
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\353\ 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. Informa Research
Services, Inc. (Mar. 2016), www.informars.com. 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.\354\
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.\355\ 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.\356\
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\354\ NACHA Rule 2.3.1, General Rule, Originator Must Obtain
Authorization from Receiver.
\355\ Electronic Fund Transfer Act, 15 U.S.C. 1693a(12) (``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 the term does
not include any electronic fund transfer (A) 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).
\356\ 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.\357\
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.\358\
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\357\ 12 CFR 1005.10(d)(1) (``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).
\358\ 12 CFR 1005.10(d)(2) (``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).
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Based on outreach and market research, the Bureau does not believe
that most payday and payday installment lenders making loans that would
be covered under the proposed 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.\359\
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\359\ 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.
Ex. 1 at 38, Labajo v. First International Bank & Trust, No. 14-
00627 (C.D. Cal. May 23, 2014), ECF No. 26-3 (SFS Inc, dba One Click
Cash, Authorization to Initiate ACH Debit and Credit Entries).
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Reinitiation Cap. After a payment attempt has failed, NACHA Rules
allow an originator--in this case, the lender that is trying to collect
payment--to attempt to collect that same payment no more than two
additional times through the ACH network.\360\ NACHA Rules also require
the ACH files \361\ 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 authorizations, the count
resets to zero when the next scheduled payment comes due.
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\360\ NACHA Rule 2.12.4.
\361\ 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. Research, Outreach, and Consumer Testing
A. Research and Stakeholder Outreach
The Bureau has undertaken extensive research and conducted broad
outreach with a multitude of stakeholders in the years leading up to
the release of this Notice of Proposed Rulemaking. All of the input and
feedback the Bureau received from this outreach has assisted the Bureau
in the development of this notice.
That process began in January 2012 when the Bureau 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. The
Bureau transcribed that field hearing and posted the transcript on its
Web site.\362\ Concurrently with doing this, the Bureau placed a notice
in the Federal Register inviting public comment on the issues discussed
in the field hearing.\363\ The Bureau received 664 public comments in
response to that request.
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\362\ 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.
\363\ 77 FR 16817 (March 22, 2012).
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At the Birmingham field hearing, the Bureau announced the launch of
a program to conduct supervisory examinations of payday lenders
pursuant to the Bureau's authority under Dodd-Frank Act section 1024.
As part of the initial set of supervisory exams, the Bureau obtained
loan-level records from a number of large payday lenders.
In April 2013 and March 2014, the Bureau issued two research
publications reporting on findings by Bureau staff
[[Page 47897]]
using the supervisory data. In conjunction with the second of these
reports, the Bureau held a field hearing in Nashville, Tennessee, to
gather further input from consumers, providers, and advocates alike.
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.
The Bureau has conducted extensive outreach to industry, including
national trade associations and member businesses, to gain knowledge of
small dollar lending operations, underwriting processes, State laws,
and the anticipated regulatory impact of the approaches proposed in the
Small Business Review Panel Outline. Industry meetings have included
non-depository lenders of different sizes, publicly traded and
privately held, that offer single-payment payday loans through
storefronts and online, multi-payment payday loans, vehicle title
loans, open-end credit, and installment loans. The Bureau's outreach
with depository lenders has likewise been extensive and included
meetings with retail banks, community banks, and credit unions of
varying sizes, both Federally and State-chartered. In addition, the
Bureau has held extensive outreach on multiple occasions with the trade
associations that represent these lenders. The Bureau's outreach also
extended to specialty consumer reporting agencies utilized by some of
these lenders. On other occasions, Bureau staff met to hear
recommendations on responsible lending practices from a voluntarily-
organized roundtable made up of lenders, advocates, and representatives
of a specialty consumer reporting agency and a research organization.
As part of the process under the Small Business Regulatory
Enforcement and Fairness Act (SBREFA process), which is discussed in
more detail below, the Bureau released in March 2015 a summary of the
rulemaking proposals under consideration in the Small Business Review
Panel Outline. At the same time that the Bureau published the Small
Business Review Panel Outline, the Bureau held a field hearing in
Richmond, Virginia, to begin the process of gathering feedback on the
proposals under consideration from a broad range of stakeholders.
Immediately after the Richmond field hearing, the Bureau held separate
roundtable discussions with consumer advocates and with industry
members and trade associations to hear feedback on the Small Business
Review Panel Outline. On other occasions, the Bureau met with members
of two trade associations representing storefront payday lenders to
discuss their feedback on issues presented in the Small Business Review
Panel Outline.
At the Bureau's Consumer Advisory Board meeting in June 2015 in
Omaha, Nebraska, a number of meetings and field events were held about
payday, vehicle title, and similar loans. The Consumer Advisory Board
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 Omaha events included a visit to a payday loan store
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 Consumer Advisory Board has convened six
other discussions on consumer lending. Two of the Bureau's other
advisory bodies also discussed the proposals outlined in the Small
Business Review Panel Outline: The Community Bank Advisory Council held
two subcommittee discussions in March 2015 and November 2015, and the
Credit Union Advisory Council conducted one Council discussion in March
2016 and held two subcommittee discussions in April 2015 and October
2015.
Bureau leaders, including its director, and staff have also spoken
at events and conferences throughout the country. These meetings have
provided additional opportunities to gather insight and recommendations
from both industry and consumer groups about how to formulate a
proposed rule. In addition to gathering information from meetings with
lenders and trade associations and through regular supervisory and
enforcement activities, Bureau staff has made fact-finding visits to at
least 12 non-depository payday and vehicle title lenders, including
those that offer single-payment and installment loans.
In conducting research, the Bureau has used not only the data
obtained from the supervisory examinations previously described but
also data obtained through orders issued by the Bureau 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. Using these additional data sources, the Bureau in
April and May 2016 published two research reports on how online payday
lenders use access to consumers' bank accounts to collect loan payments
and on consumer usage and default patterns on short-term vehicle title
loans.
The Bureau also has engaged in consultation with Indian tribes
regarding 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.''
\364\ To date, the Bureau has held two formal consultation sessions
related to this rulemaking. The first was held October 27, 2014, at the
National Congress of American Indians 71st Annual Convention and
Marketplace in Atlanta, Georgia, prior to the release of the SBREFA
materials. At the first consultation session, tribal leaders provided
input to the Bureau prior to the drafting of the proposals included in
what would become the Small Business Review Panel Outline. A second
consultation was held at the Bureau's headquarters on June 15, 2015, so
that tribal leaders could respond to the proposals under consideration
as set forth in the Small Business Review Panel Outline. All federally
recognized tribes were invited to attend these consultations, which
included open dialogue in which tribal leaders shared their views with
senior Bureau leadership and staff about the potential impact of the
rulemaking on tribes. The Bureau expects to engage in additional
consultation following the release of the proposed rule, and
specifically seeks comment on this Notice of Proposed Rulemaking from
tribal governments.
---------------------------------------------------------------------------
\364\ Bureau of Consumer Fin. Prot., Consumer Financial
Protection Bureau Policy for Consultation with Tribal Governments,
at 1, available at http://files.consumerfinance.gov/f/201304_cfpb_consultations.pdf.
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The Bureau's outreach also has included meetings and calls with
individual State Attorneys General, State financial regulators, and
municipal governments, and with the organizations representing the
officials charged with enforcing applicable Federal, State, and local
laws. In particular, the Bureau, in developing the proposed registered
information system requirements, consulted with State agencies from
States that require lenders to provide information about certain
covered loans to statewide databases
[[Page 47898]]
and intends to continue to do so as appropriate.
As discussed in connection with section 1022 of the Dodd-Frank Act
below, the Bureau has consulted with other Federal consumer protection
and also Federal prudential regulators about these issues. 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 proposed rule.
In addition to these various forms of outreach, the Bureau's
analysis has also been informed by supervisory examinations of a number
of payday lenders, enforcement investigations of a number of different
types of liquidity lenders, market monitoring activities, three
additional research reports drawing on extensive loan-level data, and
complaint information. Specifically, the Bureau has received, as of
January 1, 2016, 36,200 consumer complaints relating to payday loans
and approximately 10,000 more complaints relating to vehicle title and
installment loan products that, in some cases, would be covered by the
proposed rule.\365\ Of the 36,200 payday complaints, approximately
12,200 were identified by the consumer as payday complaints and 24,000
were identified as debt collection complaints related to a payday
loan.\366\ 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.
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\365\ The Bureau has received nearly 9,700 complaints on
installment loans and nearly 500 complaints on vehicle title loans.
\366\ The Bureau has taken a phased approach to accepting
complaints from consumers. The Bureau began accepting installment
loan complaints in March of 2012, payday loan complaints in November
of 2013, and vehicle title loan complaints in July of 2014.
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B. Small Business Review Panel
In April 2015, 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).\367\ As part of this process, the Bureau
prepared an outline of the proposals then under consideration and the
alternatives considered (referred to above as 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.\368\
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\367\ 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).
\368\ 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.
---------------------------------------------------------------------------
Prior to formally convening, the Panel participated in
teleconferences with small groups of the small entity representatives
(SERs) to introduce the Small Business Review Panel Outline and to
obtain feedback. The Small Business Review 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, in addition to State-licensed lenders and lenders affiliated
with Indian tribes. The Small Business Review Panel held a full-day
meeting on April 29, 2015, to discuss the proposals under
consideration. The 27 small entities also were invited to submit
written feedback, and 24 of them provided written comments. The Small
Business Review Panel made findings and recommendations regarding the
potential compliance costs and other impacts of those entities. These
findings and recommendations are set forth in the Small Business Review
Panel Report, which will be made part of the administrative record in
this rulemaking.\369\ The Bureau has carefully considered these
findings and recommendations in preparing this proposal as detailed
below in the section-by-section analysis on various provisions and in
parts VI and VII. The Bureau specifically seeks comment on this Notice
of Proposed Rulemaking from small businesses.
---------------------------------------------------------------------------
\369\ 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) (hereinafter Small Business Review Panel
Report), available at http://files.consumerfinance.gov/f/documents/3a_-_SBREFA_Panel_-_CFPB_Payday_Rulemaking_-_Report.pdf.
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As discussed above, the Bureau has continued to conduct extensive
outreach and engagement with stakeholders on all sides since the SBREFA
process concluded.
C. Consumer Testing
In developing this notice, the Bureau engaged a third-party vendor,
Fors Marsh Group (FMG), to coordinate qualitative consumer testing for
disclosures under consideration in this rulemaking. The Bureau
developed several prototype disclosure forms to test 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 proposed 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 interview lasted 60 minutes and included fourteen
participants. 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. In conjunction with the release of this
notice, the Bureau is making available a report prepared by FMG on the
consumer testing (``FMG Report'').\370\ The testing and focus groups
were conducted in accordance with OMB Control Number 3170-0022.
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\370\ For a detailed discussion of the Bureau's consumer
testing, see Fors Marsh Group, Qualitative Testing of Small Dollar
Loan Disclosures, Prepared for the Consumer Financial Protection
Bureau (April 2016) (hereinafter FMG Report), available at http://files.consumerfinance.gov/f/documents/Disclosure_Testing_Report.pdf.
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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.
Highlights from individual 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 rollover this loan 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-
[[Page 47899]]
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. 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're unable to pay the full balance
by the due date. Information about restrictions on future loans went
largely unnoticed. The edits appeared to positively impact
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 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 regarding 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
[[Page 47900]]
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.
IV. Legal Authority
The Bureau is issuing this proposed rule pursuant to its authority
under the Dodd-Frank Act. The proposed 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,
and abusive acts or practices, or UDAAPs. Specifically, Dodd-Frank Act
section 1031(b) 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 Dodd-Frank Act further provides that, ``Rules
under this section may include requirements for the purpose of
preventing such acts or practice.''
Given similarities between the Dodd-Frank Act and the Federal Trade
Commission Act (FTC Act) provisions relating to unfair and deceptive
acts or practices, case law and Federal agency rulemakings relying on
the FTC Act provisions 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.\371\ Courts
evaluating exercise of agency rulemaking authority under the FTC Act
unfairness and deception standards have held that there must be a
``reasonable relation'' between the act or practice identified as
unlawful and the remedy chosen by the agency.\372\ The Bureau agrees
with this approach and therefore believes that it is reasonable to
interpret Dodd-Frank Act section 1031(b) to permit the imposition of
requirements to prevent acts or practices that are identified by the
Bureau as unfair or deceptive so long as the preventive requirements
being imposed by the Bureau have a reasonable relation to the
identified acts or practices. The Bureau likewise believes it is
reasonable to interpret Dodd-Frank Act section 1031(b) to provide the
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 proposal, the Bureau has relied on
and applied this interpretation in proposing requirements to prevent
acts or practices identified as unfair or abusive.
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\371\ 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.
\372\ See Am. Fin. Servs. Ass'n v. FTC, 767 F.2d 957, 988 (D.C.
Cir. 1985) (AFSA) (holding that the FTC ``has wide latitude for
judgment and the courts will not interfere except where the remedy
selected has no reasonable relation to the unlawful practices found
to exist'' (citing Jacob Siegel Co. v. FTC, 327 U.S. 608, 612-13
(1946)).
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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 this section 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: ``(A) the act or practice causes or is likely
to cause substantial injury to consumers which is not reasonably
avoidable by consumers; and (B) such substantial injury is not
outweighed by countervailing benefits to consumers or to competition.''
\373\ Section 1031(c)(2) of the Dodd-Frank Act provides that, ``In
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.'' \374\
---------------------------------------------------------------------------
\373\ 12 U.S.C. 5531(c)(1).
\374\ 12 U.S.C. 5531(c)(2).
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The unfairness standard under section 1031(c) of the Dodd-Frank
Act--requiring primary consideration of the three elements of
substantial injury, not reasonably avoidable by consumers, and
countervailing benefits to consumers or to competition, and permitting
secondary consideration of public policy--reflects the unfairness
standard under the FTC Act.\375\ Section 5(n) of the FTC Act was
amended in 1994 to incorporate the principles set forth in the FTC's
December 17, 1980 ``Commission Statement of Policy on the Scope of
Consumer Unfairness Jurisdiction'' (the FTC Policy Statement on
Unfairness).\376\ The FTC Act unfairness standard, the FTC Policy
Statement on Unfairness, FTC and other Federal agency rulemakings,\377\
and related case law inform the scope and meaning of the Bureau's
authority under Dodd-Frank Act section 1031(b) to issue rules that
identify and prevent acts or practices that the Bureau determines are
unfair pursuant to Dodd-Frank Act section 1031(c).
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\375\ 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).
\376\ 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).
\377\ In addition to the FTC's rulemakings under unfairness
authority, certain Federal prudential regulators have prescribed
rules prohibiting unfair practices under section 18(f)(1) of the FTC
Act and, in doing so, they applied the statutory elements consistent
with the standards articulated by the FTC. The Federal Reserve
Board, FDIC, and the OCC also issued guidance generally adopting
these standards for purposes of enforcing the FTC Act's prohibition
on unfair and deceptive acts or practices. See 74 FR 5498, 5502
(Jan. 29, 2009) (background discussion of legal authority for
interagency Subprime Credit Card Practices rule).
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Substantial Injury
The first element 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 injury to consumers. As discussed above,
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 the elements
[[Page 47901]]
of the unfairness standard under Dodd-Frank Act section 1031(c)(1). The
FTC noted in the FTC Policy Statement on Unfairness that substantial
injury ordinarily involves monetary harm.\378\ The FTC has stated that
trivial or speculative harms are not cognizable under the test for
substantial injury.\379\ 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.\380\ The FTC has found that substantial injury also may involve a
large amount of harm experienced by a small number of individuals.\381\
The FTC has said that emotional impact and other more subjective types
of harm ordinarily will not constitute substantial injury,\382\ but the
D.C. Circuit held that psychological harm can form part of the
substantial injury along with financial harm.\383\
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\378\ See FTC Policy Statement on Unfairness, Int'l Harvester,
104 F.T.C. at 1073. 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 repayment ability 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).
\379\ See FTC Policy Statement on Unfairness, Int'l Harvester,
104 F.T.C. at 1073.
\380\ See FTC Policy Statement on Unfairness, Int'l Harvester,
104 F.T.C. at 1073 n.12.
\381\ See Int'l Harvester, 104 F.T.C. at 1064.
\382\ See FTC Policy Statement on Unfairness, Int'l Harvester,
104 F.T.C. at 1073.
\383\ See AFSA, 767 F.2d at 973-74, n.20 (discussing the
potential psychological harm resulting from lenders' taking of non-
possessory security interests in household goods and associated
threats of seizure, which was part of the FTC's rationale for
intervention in the Credit Practices Rule).
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Not Reasonably Avoidable
The second element 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. As discussed above, 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 the elements of the unfairness standard under Dodd-Frank Act
section 1031(c)(1). The FTC has provided that knowing the steps for
avoiding injury is not enough for the injury to be reasonably
avoidable; rather, the consumer must also understand and appreciate the
necessity of taking those steps.\384\ As the FTC explained in the FTC's
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
decisionmaking.'' \385\ The D.C. Circuit has noted that where such
behavior exists, there is a ``market failure'' and the agency ``may be
required to take corrective action.'' \386\ 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.\387\
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\384\ See Int'l Harvester, 104 F.T.C. at 1066.
\385\ FTC Policy Statement on Unfairness, Int'l Harvester, 104
F.T.C. at 1074.
\386\ 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.
\387\ 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 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. As discussed above, 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 the elements of the unfairness standard under Dodd-Frank Act
section 1031(c)(1). In applying the FTC Act's unfairness standard, the
FTC has stated that generally it is important to consider both the
costs of imposing a remedy and any benefits that consumers enjoy as a
result of the practice.\388\ 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, as
such an analysis may be unnecessary or, in some cases, impossible;
rather, the agency is expected to gather and consider reasonably
available evidence.\389\
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\388\ 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.'').
\389\ 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, Inc. 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 t is
important . . . is that we retain an overall sense of the
relationship between costs and benefits. We would not want to impose
compliance costs of millions of dollars in order to prevent a
bruised elbow.'').
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Public Policy
As noted above, section 1031(c)(2) of the Dodd-Frank Act provides
that, ``In 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.'' \390\
---------------------------------------------------------------------------
\390\ 12 U.S.C. 5531(c)(2).
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Section 1031(d)--Abusive Acts or Practices
The Dodd-Frank Act, in section 1031(b), authorizes the Bureau to
identify and prevent abusive acts and practices. The Bureau believes
that Congress intended for the statutory phrase ``abusive acts or
practices'' to encompass conduct by covered persons that is beyond what
would be prohibited as unfair or deceptive acts or practices, although
such conduct could overlap and thus satisfy the elements for more than
one of the standards.\391\
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\391\ See, e.g., S. Rep. 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, pmbl. (listing, in the preamble
to the Dodd-Frank Act, one of the purposes of the Act as
``protect[ing] consumers from abusive financial services
practices'').
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Under Dodd-Frank Act section 1031(d), the Bureau ``shall have no
[[Page 47902]]
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 qualifies under at least one of several enumerated
conditions. For example, under Dodd-Frank Act section 1031(d)(2)(A), 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).\392\ Under Dodd-Frank Act section
1031(d)(2)(B), 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).\393\ The Dodd-Frank
Act does not further elaborate on the meaning of these terms. Rather,
the statute left it to the Bureau to interpret and apply these
standards.
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\392\ 12 U.S.C. 5531(d)(2)(A).
\393\ 12 U.S.C. 5531(d)(2)(B). The Dodd-Frank Act 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 a consumer's ability 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 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.\394\ However, there is some indication
that Congress intended the Bureau to use the authority under Dodd-Frank
Act section 1031(d) 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.'' \395\ 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 borrowers reborrow which results in a
``perpetual debt treadmill.'' \396\
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\394\ While Congress sometimes described other products as
abusive, it frequently applied the term to unaffordable mortgages.
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'').
\395\ 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.
\396\ Id. at 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 ``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.'').
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B. Section 1032 of the Dodd-Frank Act
Dodd-Frank Act section 1032(a) 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.'' \397\ The authority granted to the
Bureau in section 1032(a) of the Dodd-Frank Act 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. Dodd-Frank Act
section 1032(c) provides that, in prescribing rules pursuant to section
1032 of the Dodd-Frank 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.'' \398\
---------------------------------------------------------------------------
\397\ 12 U.S.C. 5532(a).
\398\ 12 U.S.C. 5532(c).
---------------------------------------------------------------------------
Dodd-Frank Act section 1032(b)(1) 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.'' \399\ Dodd-Frank
Act section 1032(b)(2) provides that such 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.''
\400\ Dodd-Frank Act section 1032(b)(3) provides that any such model
form ``shall be validated through consumer testing.'' \401\ 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.'' \402\
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\399\ 12 U.S.C. 5532(b)(1).
\400\ 12 U.S.C. 5532(b)(2).
\401\ 12 U.S.C. 5532(b)(3).
\402\ 12 U.S.C. 5532(d).
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C. Other Authorities Under the Dodd-Frank Act
Section 1022(b)(1) of the Dodd-Frank Act provides that the Bureau's
director ``may prescribe rules and issue orders and guidance, as may be
necessary or appropriate to enable the Bureau to administer and carry
out the purposes and objectives of the Federal consumer financial laws,
and to prevent evasions thereof.'' \403\ ``Federal consumer financial
law'' includes rules prescribed under Title X of the Dodd-Frank
Act,\404\ including sections 1031(b) through (d) and 1032.
---------------------------------------------------------------------------
\403\ 12 U.S.C. 5512(b)(1).
\404\ 12 U.S.C. 5481(14).
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Section 1022(b)(2) of the Dodd-Frank Act prescribes certain
standards for rulemaking that the Bureau must follow in exercising its
authority under section 1022(b)(1) of the Dodd-Frank Act.\405\ See part
VI below for a discussion of the Bureau's standards for rulemaking
under Dodd-Frank Act section 1022(b)(2).
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\405\ 12 U.S.C. 5512(b)(2).
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Section 1022(b)(3)(A) of the Dodd-Frank Act authorizes the Bureau
to, by rule, ``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, ``taking into
consideration the factors'' set forth in section 1022(b)(3)(B) of the
Dodd-Frank Act.\406\ Section 1022(b)(3)(B) of the Dodd-Frank Act
specifies three factors that the
[[Page 47903]]
Bureau shall, as appropriate, take into consideration in issuing such
an exemption.\407\
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\406\ 12 U.S.C. 5512(b)(3)(A).
\407\ 12 U.S.C. 5512(b)(3)(B) (``(B) Factors.--In issuing an
exemption, as permitted under subparagraph (A), the Bureau shall, as
appropriate, take into consideration--(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.'').
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Proposed Sec. Sec. 1041.16 and 1041.17 would also be authorized by
additional Dodd-Frank Act authorities, such as Dodd-Frank Act sections
1021(c)(3),\408\ 1022(c)(7),\409\ 1024(b)(1),\410\ and 1024(b)(7).\411\
Additional description of the Dodd-Frank Act authorities on which the
Bureau is relying for proposed Sec. Sec. 1041.16 and 1041.17 is
contained in the section-by-section analysis of proposed Sec. Sec.
1041.16 and 1041.17.
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\408\ 12 U.S.C. 5511(c)(3).
\409\ 12 U.S.C. 5512(c)(7).
\410\ 12 U.S.C. 5514(b)(1).
\411\ 12 U.S.C. 5514(b)(7).
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D. Section 1041 of the Dodd-Frank Act
Section 1041(a)(1) of the Dodd-Frank Act provides that Title X of
the Dodd-Frank 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.'' \412\ Section
1041(a)(2) of the Dodd-Frank 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.\413\ Section 1041(a)(2) 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.''
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\412\ 12 U.S.C. 5551(a)(1). Dodd-Frank Act section 1002(27)
defines ``State'' to include any federally recognized Indian tribe.
See 12 U.S.C. 5481(27).
\413\ 12 U.S.C. 5551(a)(2).
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The requirements of the proposed rule would set minimum standards
at the Federal level for regulation of covered loans. The Bureau
believes that the requirements of the proposed rule would coexist with
State laws that pertain to the making of loans that the proposed rule
would treat as covered loans (hereinafter, applicable State laws).
Consequently, any person subject to the proposed rule would be required
to comply with both the requirements of the proposed rule and
applicable State laws, except to the extent the applicable State laws
are inconsistent with the requirements of the proposed rule.\414\ This
is consistent with the established framework of Federal and State laws
in many other substantive areas, such as securities law, antitrust law,
environmental law and the like.
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\414\ The Bureau also believes that the requirements of the
proposed rule would coexist with applicable laws in cities and other
localities, and the Bureau does not intend for the proposed rule to
annul, alter, or 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 or are
otherwise not inconsistent with the requirements of the proposed
rule.
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As noted above, Dodd-Frank Act section 1041(a)(2) provides that
State laws that afford greater consumer protections than provisions
under Title X are not inconsistent with the provisions under Title X.
As discussed in part II, different States have taken different
approaches to regulating loans that would be covered loans, with some
States electing to permit the making of such loans and other States
choosing not to do so. The Bureau believes that the requirements of the
proposed rule would coexist with these different approaches, which are
reflected in applicable State laws.\415\ The Bureau is aware of certain
applicable State laws that the Bureau believes would afford greater
protections to consumers than would the requirements of the proposed
rule. For example, as described in part II, certain States have fee or
interest rate caps (i.e., usury limits) that payday lenders apparently
find too low to sustain their business models. The Bureau believes that
the fee and interest rate caps in these States would provide greater
consumer protections than, and would not be inconsistent with, the
requirements of the proposed rule.
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\415\ States have 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 is proposing to identify unfair and abusive
acts or practices under the statutory definitions in sections
1031(c) and 1031(d) of the Dodd-Frank Act. This proposal and any
rule that may be finalized are 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.
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V. Section-by-Section Analysis
Subpart A--General
Section 1041.1 Authority and Purpose
Proposed Sec. 1041.1 provides that the rule is issued pursuant to
Title X of the Dodd-Frank Act (12 U.S.C. 5481, et seq.). It also
provides that the purpose of proposed part 1041 (also referred to as
``this part'' or ``this proposed 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 and to prescribe requirements to ensure that the
features of those consumer credit transactions are fully, accurately,
and effectively disclosed to consumers. It also notes the proposed part
also prescribes processes and criteria for registration of information
systems.
Section 1041.2 Definitions
Proposed Sec. 1041.2 contains definitions of terms that are used
across a number of sections in this rule. There are additional
definitions in proposed Sec. Sec. 1041.3, 1041.5, 1041.9, 1041.14, and
1041.17 of terms used in those respective individual sections.
In general, the Bureau is proposing to incorporate a number of
defined terms under other statutes or regulations and related
commentary, particularly Regulation Z and Regulation E as they
implement TILA and EFTA, respectively. The Bureau believes that basing
this proposal's definitions on previously defined terms may minimize
regulatory uncertainty and facilitate compliance, particularly where
the other regulations are likely to apply to the same transactions in
their own right. However, as discussed further below, the Bureau is in
certain definitions proposing to expand or modify the existing
definitions or the concepts enshrined in such definitions for purposes
of this proposal to ensure that the rule has its intended scope of
effect particularly as industry practices may evolve. As reflected
below with regard to individual definitions, the Bureau solicits
comment on the appropriateness of this general approach and whether
alternative definitions in statute or regulation would be more useful
for these purposes.
2(a) Definitions
2(a)(1) Account
Proposed Sec. 1041.2(a)(1) would define account by cross-
referencing the same term as defined in Regulation E, 12 CFR part 1005.
Regulation E generally defines account to include demand deposit
(checking), savings, or other
[[Page 47904]]
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.\416\ The term account is 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 is 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 believes that defining this term
consistently with an existing regulation would reduce the risk of
confusion among consumers, industry, and regulators. The Bureau
believes the Regulation E definition is appropriate because that
definition is broad enough to capture the types of transactions that
may implicate the concerns addressed by this part. The Bureau solicits
comment on whether the Regulation E definition of account is
appropriate in the context of this part and whether any additional
guidance on the definition is needed.
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\416\ Regulation E also specifically includes payroll card
accounts and certain government benefit card accounts. The Bureau
has proposed in a separate rulemaking to enumerate rules for a
broader category of prepaid accounts. See 79 FR 77101 (Dec. 23,
2014).
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2(a)(2) Affiliate
Proposed Sec. 1041.2(a)(2) would define affiliate by cross-
referencing the same term as defined 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 impose certain
limitations on lenders making loans to consumers who have outstanding
covered loans with an affiliate of the lender. The section-by-section
analyses of proposed Sec. Sec. 1041.6 and 1041.10 discuss in more
detail the particular requirements related to affiliates.
The Bureau believes that defining this term consistently with the
Dodd-Frank Act would reduce the risk of confusion among consumers,
industry, and regulators. The Bureau solicits comment on whether the
Dodd-Frank Act definition of affiliate is appropriate in the context of
this part and whether any additional guidance on the definition is
needed.
2(a)(3) Closed-End Credit
Proposed Sec. 1041.2(a)(3) would define 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 is proposing 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)
would prescribe slightly different methods of calculating the total
cost of credit of closed-end and open-end credit. Proposed Sec.
1041.16(c) also would require lenders to report whether a covered loan
is closed-end or open-end credit to registered information systems. The
Bureau solicits comment on whether this definition of closed-end credit
is appropriate in the context of proposed part 1041 and whether any
additional guidance on the definition is needed.
2(a)(4) Consumer
Proposed Sec. 1041.2(a)(4) would define consumer by cross-
referencing the same term as defined in in the Dodd-Frank Act, 12
U.S.C. 5481(4). The Dodd-Frank Act defines consumer as an individual or
an agent, trustee, or representative acting on behalf of an individual.
The term is used in numerous provisions across proposed part 1041to
refer to applicants for and borrowers of covered loans.
The Bureau believes 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 capture the types of transactions that
may implicate the concerns addressed by this proposal. In particular,
the Dodd-Frank Act definition expressly defines the term consumer to
include agents and representatives of individuals rather than just
individuals themselves. The Bureau believes that this definition may
more comprehensively foreclose possible evasion of the specific
consumer protections imposed by proposed part 1041 than would the
Regulation Z definition. The Bureau solicits comment on whether the
Dodd-Frank Act definition of consumer is appropriate in the context of
proposed part 1041 and whether any additional guidance on the
definition is needed.
2(a)(5) Consummation
Proposed Sec. 1041.2(a)(5) would define consummation as the time 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 a consumer becomes contractually obligated
on a modification of an existing loan that increases the amount of the
loan. The term is used both in defining certain categories of covered
loans and in defining the timing of certain proposed requirements. The
time of consummation is important for the purposes of several proposed
provisions. 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)(3), 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 Sec. 1041.15(f),
lenders would have to furnish certain disclosures before a loan subject
to the requirements of that section is consummated.
The Bureau believes that defining the term consistently with
Regulation Z with respect to new loans would reduce the risk of
confusion among consumers, industry, and regulators. The Bureau
believes it is also necessary to define the term, with respect to loan
modifications, in a way that would further the intent of proposed
Sec. Sec. 1041.3(b)(1), 1041.3(b)(2), 1041.5(b), and 1041.9(b), all of
which would impose requirements on lenders at the time the loan amount
increases. The Bureau believes defining these events as consummations
would improve clarity for consumers, industry, and regulators. The
above-referenced sections 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 explains the time at which certain modifications of existing
loans are consummated. Proposed comment 2(a)(5)-2 explains that a
modification is consummated if the modification increases the amount of
the loan. Proposed comment 2(a)(5)-2 also explains that a cost-free
repayment plan, or ``off-ramp'' as it is commonly
[[Page 47905]]
known in the market, does not result in a consummation under proposed
Sec. 1041.2(a)(5). The Bureau solicits comment on whether this
definition is appropriate in the context of proposed part 1041 and
whether any additional guidance on the definition is needed.
The Bureau considered expressly defining the term ``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. The Bureau solicits comment on whether this
approach would provide additional clarification, and if so, whether
this particular definition of ``new loan'' would be appropriate.
2(a)(6) Covered Short-Term Loan
Proposed Sec. 1041.3(b)(1) would describe covered short-term loans
as loans in which the consumer is required to repay substantially the
entire amount due under the loan within 45 days of consummation. Some
provisions in proposed part 1041 would apply only to covered short-term
loans described in proposed Sec. 1041.3(b)(1). For example, proposed
Sec. 1041.5 prescribes the ability-to-repay determination that lenders
are required to perform when making covered short-term loans. Proposed
Sec. 1041.6 imposes limitations on lenders making sequential covered
short-term loans to consumers. The Bureau proposes to use a defined
term for the loans described in Sec. 1041.3(b)(1) for clarity. The
Bureau solicits comment on whether this definition is appropriate in
the context of proposed part 1041 and whether any additional guidance
on the definition is needed.
2(a)(7) Covered Longer-Term Balloon-Payment Loan
Proposed Sec. 1041.2(a)(7) would define covered longer-term
balloon-payment loan as a loan described in proposed Sec. 1041.3(b)(2)
that requires the consumer to repay the loan in a single payment or
repay the loan through at least one payment that is more than twice as
large as any other payment under the loan. Proposed Sec. 1041.9(b)(2)
contains 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. The Bureau believes that
both structures pose similar risks to consumers, and is proposing to
treat both longer-term single-payment loans and multi-payment loans
with a balloon payment the same for the purposes of proposed Sec. Sec.
1041.9 and 1041.10. Accordingly, the Bureau is proposing 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 term substantially
tracks the definition of balloon payment contained in Regulation Z
Sec. 1026.32(d)(1), with one additional proviso. The Regulation Z
definition requires the larger loan payment to be compared to other
``regular periodic payments,'' whereas proposed Sec. 1041.2(a)(7)
requires 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 explain
that ``payment'' in this context means a payment of principal or
interest, and excludes certain charges such as late fees and payments
accelerated upon the consumer's default.
The Bureau solicits comment on whether this definition is
appropriate in the context of this proposal and whether any additional
guidance on the definition is needed. As discussed further in proposed
Sec. 1041.3(b)(2), the Bureau also seeks comment on whether longer-
term single-payment loans and longer-term loans with balloon payments
should be covered regardless of whether the loans are subject to a
total cost of credit exceeding a rate of 36 percent per annum, or
regardless of whether the lender or service provider obtains a
leveraged payment mechanism or vehicle security in connection with the
loan.
2(a)(8) Covered Longer-Term Loan
Some restrictions in proposed part 1041 would apply to covered
longer-term loans described in proposed Sec. 1041.3(b)(2). Proposed
Sec. 1041.3(b)(2) describes covered longer-term loans as loans with a
term of longer than 45 days, which are subject to a total cost of
credit exceeding a rate of 36 percent per annum, and in which the
lender or service provider obtains a leveraged payment mechanism or
vehicle title. Some provisions in proposed part 1041 would apply only
to covered longer-term loans described in proposed Sec. 1041.3(b)(2).
For example, proposed Sec. 1041.9 prescribes the ability to repay
determination that lenders are required to perform when making covered
longer-term loans. Proposed Sec. 1041.10 imposes 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 proposes to use a defined term for the loans
described in proposed Sec. 1041.3(b)(2) for clarity. The Bureau
solicits comment on whether this definition is appropriate in the
context of proposed part 1041 and whether any additional guidance on
the definition is needed.
2(a)(9) Credit
Proposed Sec. 1041.2(a)(9) would define credit by cross-
referencing the same term as defined 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 is used in numerous places
throughout this proposal to refer generically to the types of consumer
financial products that would be subject to the requirements of
proposed part 1041.
The Bureau believes that defining this term consistently with an
existing regulation would reduce the risk of confusion among consumers,
industry, and regulators. The Bureau also believes that the Regulation
Z definition is appropriately broad so as to capture the various types
of transaction structures that implicate the concerns addressed by
proposed part 1041. The Bureau solicits comment on whether the
Regulation Z definition of credit is appropriate in the context of
proposed part 1041 and whether any additional guidance on the
definition is needed.
2(a)(10) Electronic Fund Transfer
Proposed Sec. 1041.2(a)(10) would define electronic fund transfer
by cross-referencing the same term as defined in Regulation E, 12 CFR
part 1005. Proposed Sec. 1041.3(c) provides 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
[[Page 47906]]
limitations on lenders' use of various payment methods, including
electronic fund transfers. The Bureau believes that defining this term
consistently with an existing regulation would reduce the risk of
confusion among consumers, industry, and regulators. The Bureau
solicits comment on whether the Regulation E definition of electronic
fund transfer is appropriate in the context of proposed part 1041 and
whether any additional guidance on the definition is needed.
2(a)(11) Lender
Proposed Sec. 1041.2(a)(11) would define lender as a person who
regularly makes loans to consumers primarily for personal, family, or
household purposes. This term is used throughout this proposal to refer
to parties 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 is proposing a broader definition than in Regulation Z
for many of the same reasons discussed in the section-by-section
analyses of proposed Sec. Sec. 1041.2(a)(14) and 1041.3(b)(2)(ii) for
using the total cost of credit as a threshold for covering longer-term
loans rather than the traditional definition of APR as defined by
Regulation Z. In both cases, the Bureau is concerned that lenders might
otherwise shift their fee structures to fall outside traditional
Regulation Z concepts and thus outside the coverage of proposed part
1041. For example, the Bureau believes 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 is proposing to use a
definition that is broader than the one contained in Regulation Z to
ensure that proposed part 1041 applies as intended. The Bureau solicits
comment on whether there are any alternative approaches that might be
more appropriate given the concerns set forth above.
At the same time, the Bureau recognizes 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. Some of these
services do not require the consumer to pay any fees or finance
charges. Some rely 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 is also aware of some newly
formed companies providing financial management services to low- and
moderate-income consumers which include features to smooth income. The
Bureau solicits comments on whether such entities are, or should be,
excluded from the definition of lender, and if so, whether the
definition should be revised. For example, the Bureau solicits comment
on whether companies that impose no charge on the consumer, or
companies that charge a regular membership fee which is unrelated to
the usage of credit, should be considered lenders under the rule.
The Bureau proposes 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. As proposed
comment 2(a)(11)-1 explains, the test for determining whether a person
regularly makes loans is the same as in Regulation Z, and thus depends
on the overall number of loans originated, not just covered loans. The
Bureau believes it is appropriate to exclude from the definition of
lender 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.
Some stakeholders have suggested to the Bureau that the definition
of lender should be narrowed so as to exclude financial institutions
that predominantly make loans that would not be covered loans under the
proposed rule. These stakeholders have suggested 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 these institutions' overall business such that it
would not be practical for the institutions to develop the required
procedures for making covered loans. The Bureau solicits comment on
whether to so 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. The Bureau also solicits more general comment on whether
this definition is appropriate in the context of proposed part 1041 and
whether any additional guidance on the definition is needed.
2(a)(12) Loan Sequence or Sequence
Proposed Sec. 1041.2(a)(12) would generally define 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 after the consumer ceased to have a covered short-
term loan outstanding. Proposed Sec. 1041.2(a)(12) defines both loan
sequence and sequence the same because the terms are used
interchangeably in various places throughout this proposal. Proposed
Sec. 1041.2(a)(12) also sets forth how a lender must determine a given
loan's place within a sequence (for example, whether a loan is a first,
second, or third loan in a sequence). Proposed Sec. 1041.6 would also
impose certain presumptions that lenders must take into account when
making a second or third loan in a sequence, and would prohibit lenders
from making a loan sequence with more than three covered short-term
loans. Pursuant to proposed Sec. 1041.6, a lender's extension of a
non-covered bridge loan as defined in proposed Sec. 1041.2(a)(13)
could affect the calculation of time periods for purposes of
determining whether a loan is within a loan sequence, as discussed in
more detail in proposed comments 6(h)-1 and 6(h)-2.
The Bureau's rationale for proposing to define loan sequence in
this manner is discussed in more detail in the section-by-section
analysis of proposed Sec. Sec. 1041.4 and 1041.6. The Bureau solicits
comment on whether a definition of loan sequence or sequence based on a
30-day period is appropriate or whether longer or shorter periods would
better address the Bureau's concerns about a consumer's inability to
repay a covered loan causing the need
[[Page 47907]]
for a successive covered loan. The Bureau solicits comment on whether
this definition is appropriate in the context of proposed part 1041 and
whether any additional guidance on the definition is needed.
2(a)(13) Non-Covered Bridge Loan
Proposed Sec. 1041.2(a)(13) would define the term non-covered
bridge loan as a non-recourse pawn loan described in proposed Sec.
1041.3(e)(5) that (a) is made within 30 days of the consumer having an
outstanding covered short-term loan or outstanding covered longer-term
balloon-payment loan made by the same lender or affiliate; and (b) the
consumer is required to repay substantially the entire amount due
within 90 days of its consummation. Although non-recourse pawn loans
would be excluded from coverage under proposed Sec. 1041.3(e)(5), the
Bureau has provided rules in proposed Sec. Sec. 1041.6(h) and Sec.
1041.10(f) to prevent this from becoming a route for evading the rule.
Specifically, proposed Sec. Sec. 1041.6 and 1041.10 would impose
certain limitations on lenders making covered short-term loans and
covered longer-term balloon-payment in some circumstances. The Bureau
is concerned that if a lender made a non-covered bridge loan between
covered loans, the non-covered bridge loan could mask the fact that the
consumer's need for a covered short-term loan or covered longer-term
balloon-payment loan reflected the spillover effects of a prior such
covered loan, suggesting that the consumer did not have the ability to
repay the prior loan and that the consumer may not have the ability to
repay the new covered loan. If the consumer took out a covered short-
term loan or covered longer-term balloon-payment loan immediately
following the non-covered pawn loan, but more than 30 days after the
last such covered loan, the pawn loan effectively would have
``bridged'' the gap in what was functionally a sequence of covered
loans. The Bureau is concerned that a lender might be able to use such
a ``bridging'' arrangement to evade the requirements of proposed
Sec. Sec. 1041.6 and 1041.10. To prevent evasions of this type, the
Bureau is therefore proposing that the days on which a consumer has a
non-covered bridge loan outstanding must not be considered in
determining whether 30 days had elapsed between covered loans.
Many lenders offer both loans that would be covered and pawn loans;
thus, the Bureau believes that pawn loans are the type of non-covered
loan that most likely could be used to bridge covered short-term loans
or covered longer-term balloon-payment loans. Proposed Sec.
1041.2(a)(13) would limit the definition of non-covered bridge loan to
non-recourse pawn loans that consumers must repay within 90 days of
consummation. The Bureau believes that loans with terms of longer than
90 days are less likely to be used as a bridge between covered short-
term loans or covered longer-term balloon-payment loans.
The Bureau solicits comment on whether pawn loans can be used as a
bridge between covered loans, and further solicits comment on whether
other types of loans--including, specifically, balloon-payment loans
with terms of longer than 45 days but that do not meet the requirements
to be covered longer-term loans under proposed section 1041.3(b)(2)--
are likely to be used as bridge loans and therefore should be added to
the definition of ``non-covered bridge loan.'' The Bureau also solicits
more general comment on whether this definition is appropriate in the
context of proposed part 1041 and whether any additional guidance on
the definition is needed.
2(a)(14) Open-End Credit
Proposed Sec. 1041.2(a)(14) would define open-end credit by cross-
referencing the same term as defined 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), would be
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), would be substituted for the term creditor in the
Regulation Z definition of open-end credit; and the term consumer, as
defined in proposed Sec. 1041 2(a)(4), would be substituted for the
term consumer in the Regulation Z definition of open-end credit.
The term open-end credit is used in various parts of the rule where
the Bureau is proposing to tailor 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 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.
The Bureau believes 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 believes that, for the reasons
discussed above, it is more appropriate to incorporate the definition
from the Dodd-Frank Act rather than the arguably narrower Regulation Z
definition. Similarly, the Bureau believes that it is more appropriate
to use the broader definition of ``lender'' contained in proposed Sec.
2(a)(11) that the Regulation Z definition of ``creditor.''
The Bureau solicits comment on whether the Regulation Z definition
of account is appropriate in the context of proposed part 1041 and
whether any additional guidance on the definition is needed,
particularly as to the substitution of the definitions for ``consumer''
and ``lender'' as described above.
2(a)(15) Outstanding Loan
Proposed Sec. 1041.2(a)(15) would define outstanding loan as a
loan that the consumer is legally obligated to repay so long as the
consumer has made at least one payment on the loan within the previous
180 days. Under this proposed definition, a loan is an outstanding loan
regardless of whether the loan is delinquent or the loan is 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.
The Bureau believes that if the consumer has not made any payment
on the loan for an extended period of time
[[Page 47908]]
it may be appropriate to stop considering the loan to be outstanding
loan for the purposes of proposed Sec. Sec. 1041.2(a)(11), 1041.6,
1041.7, 1041.10, 1041.11 and 1041.12. 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 has 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 very
stale and effectively 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 is proposing a 180-day threshold as striking an
appropriate balance. The Bureau notes that this would generally align
with the policy of the Federal Financial Institutions Examination
Council, 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 believes that a uniform 180-day rule for both closed- 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)-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 has 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 is
proposing this one-way valve to ease compliance burden on lenders and
to reduce the risk of consumer confusion.
The Bureau solicits comment on whether 180 days is the most
appropriate period of time or whether a shorter or longer time period
should be used. The Bureau solicits comment on whether a loan should be
considered an outstanding loan if it has in fact been charged off by
the lender prior to 180 days of delinquency. The Bureau solicits
comment on whether a loan should be considered an outstanding loan if
there has been activity on a loan more than 180 days after the consumer
has made a payment, such as a collections lawsuit brought by the lender
or a third-party. The Bureau also solicits comment on whether a loan
should be considered an outstanding loan if there has been activity on
the loan with the previous 180 days regardless of whether the consumer
has made a payment on the loan within the previous 180 days. The Bureau
further solicits comment on whether any additional guidance on this
definition is needed.
2(a)(16) Prepayment Penalty
Proposed Sec. 1041.2(a)(16) defines prepayment penalty as any
charge imposed for paying all or part of the loan before the date on
which the loan is due in full. Proposed Sec. Sec. 1041.11(e) and
1041.12(f) would prohibit lenders from imposing prepayment penalties in
connection with certain loans that are conditionally excluded from the
ability-to-repay determination required under proposed Sec. Sec.
1041.9 and 1041.10. This definition is similar to the definition of
prepayment penalty in Regulation Z Sec. 1026.32(b)(6), which generally
defines prepayment penalty for closed-end transactions as a charge
imposed for paying all or part of the transaction's principal before
the date on which the principal is due. However, the definition of
prepayment penalty in proposed Sec. 1041.2(a)(16) does not restrict
the definition of prepayment penalty to charges for paying down the
loan principal early, but also includes charges for paying down non-
principal amounts due under the loan. The Bureau believes that this
broad definition of prepayment penalty is necessary to capture all
situations in which a lender may attempt to penalize a consumer for
repaying a loan more quickly than a lender would prefer. As proposed
comment 2(a)(16)-1 explains, whether a charge is a prepayment penalty
depends on the circumstances around the assessment of the charge. The
Bureau solicits comment on whether this definition is appropriate in
the context of proposed part 1041 and whether any additional guidance
on the definition is needed.
2(a)(17) Service Provider
Proposed Sec. 1041.2(a)(17) would define service provider by
cross-referencing the same term as defined 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. 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.
The definition of service provider and the provisions in proposed
Sec. 1041.3(c) and (d) are designed to reflect the fact that in some
States, covered short-term loans and covered longer-term 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. In
the context of covered longer-term loans, 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 believes it is
appropriate to bring loans made under these arrangements within the
scope of coverage of proposed part 1041.
The Bureau believes that defining the term service provider
consistently with the Dodd-Frank Act would reduce the risk of confusion
among consumers, industry, and regulators. The Bureau solicits comment
on whether the Dodd-Frank Act definition of service provider is
appropriate in the context of proposed part 1041 and whether any
additional guidance on the definition is needed. More broadly, and as
further discussed in proposed Sec. 1041.3(c) and
[[Page 47909]]
(d), the Bureau solicits comment on whether the definition of service
provider is sufficient to bring these loans within the coverage of
proposed part 1041, or whether loans made through this or similar
business arrangements should be covered using a different definition.
2(a)(18) Total Cost of Credit
Proposed Sec. 1041.2(a)(18) would set forth the method by which
lenders would calculate the total cost of credit for determining
whether a loan would be a covered loan under proposed Sec.
1041.3(b)(2). Proposed Sec. 1041.2(a)(18) would generally define 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 are paid to a party other than
the lender. Under proposed Sec. 1041.3(b)(2), 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 is proposing to use an all-in measure of the cost of
credit rather than the definition of APR under Regulation Z for many of
the same reasons discussed in Sec. 1041.2(a)(11) for proposing a
broader definition of lender than Regulation Z uses in defining
creditor. In both cases, the Bureau is concerned that lenders might
otherwise shift their fee structures to fall outside traditional
Regulation Z concepts and outside of this proposal. Specifically,
lenders may impose a wide range of charges in connection with a loan
that are not included in the calculation of APR under Regulation Z. If
these charges were not included in the calculation of the total cost of
credit threshold for determining coverage under proposed part 1041, a
lender would be able to avoid the threshold by shifting the costs of a
loan by lowering the interest rate and imposing (or increasing) one or
more fees that are not included in the calculation of APR under
Regulation Z. To prevent this result, and more accurately capture the
full financial impact of the credit on the consumer's finances, the
Bureau proposes to include any application fee, any participation fee,
any charge imposed in connection with credit insurance, and any fee for
a credit-related ancillary product as charges that lenders must include
in the total cost of credit.
Specifically, proposed Sec. 1041.2(a)(18) would define the total
cost of credit as the total amount of charges associated with a loan
expressed as a per annum rate, determined as specified in the
regulation. Proposed Sec. 1041.2(a)(18)(i) and related commentary
describes each of the charges that must be included in the total cost
of credit calculation. Proposed Sec. 1041.2(a)(18)(ii) provides that,
even if a charge set forth in proposed Sec. 1041.2(a)(18)(i)(A)
through (E) would be excluded from the finance charge under Regulation
Z, that charge must nonetheless be included in the total cost of credit
calculation.
Proposed Sec. 1041.2(a)(18)(i)(A) and (B) provide that charges the
consumer pays in connection with credit insurance and credit-related
ancillary products and services must be included in the total cost of
credit calculation to the extent the charges are incurred (regardless
of when the charge is actually paid) at the same time as the consumer
receives the entire amount of funds that the consumer is entitled to
receive under the loan or within 72 hours thereafter. Proposed Sec.
1041.2(a)(18)(i)(A) and (B) would impose the 72-hour provision to
ensure that lenders could not evade coverage under proposed Sec.
1041.3(b)(2)(ii) conditioning the timing of loan proceeds disbursement
on whether the consumer purchases credit insurance or other credit
related ancillary products or services after consummation. The Bureau
believes that the lender's leverage will have diminished by 72 hours
after the consumer receives the entirety of the funds available under
the loan, and thus it is less likely that any charge for credit
insurance or other credit-related ancillary products and services that
the consumer agrees to assume after that date is an attempt to avoid
coverage under proposed Sec. 1041.3(b)(2)(ii).
Proposed Sec. 1041.2(a)(18)(iii) and related commentary would
prescribe the rules for computing the total cost of credit based on
those charges. Proposed Sec. 1041.2(a)(18)(iii) contains two
provisions for computing the total cost of credit, both of which track
the methods already established in Regulation Z. First, for closed-end
credit, proposed Sec. 1041.2(a)(18)(iii)(A) would require a lender to
follow the rules for calculating and disclosing the APR under
Regulation Z, based on the charges required for the total cost of
credit, as set forth in proposed Sec. 1041.2(a)(18)(i). In general,
the requirements for calculating the APR for closed-end credit under
Regulation Z are found in Sec. 1026.22(a)(1), and include the
explanations and instructions for computing the APR set forth in
appendix J to 12 CFR part 1026.
Second, for open-end credit, proposed Sec. 1041.2(a)(18)(iii)(B)
generally would require a lender to calculate the total cost of credit
using the methods prescribed in Sec. 1026.14(c) and (d) of Regulation
Z, which describe an ``optional effective annual percentage rate'' for
certain open-end credit products. While Regulation Z provides that
these calculation methods are optional, these calculation methods would
be required to determine coverage of loans under proposed Sec.
1041.3(b)(2) (though a lender may still choose not to disclose the
optional effective annual percentage rate in accordance with Regulation
Z). Section 1026.14(c) of Regulation Z provides for the methods of
computing the APR under three scenarios: (1) When the finance charge is
determined solely by applying one or more periodic rates; (2) when the
finance charge is or includes a minimum, fixed, or other charge that is
not due to application of a periodic rate, other than a charge with
respect to a specific transaction; and (3) when the finance charge is
or includes a charge relating to a specific transaction during the
billing cycle.
This approach mirrors the approach taken by the Department of
Defense in defining the MAPR in 32 CFR 232.4(c). The Bureau believes
this measure both includes the necessary types of charges that reflect
the actual cost of the loan to the consumer and is familiar to many
lenders that must make the MAPR calculation, thus reducing the
compliance challenges that would result from a new computation.
At the same time, the Bureau recognizes that the total cost of
credit or MAPR is a relatively unfamiliar concept for many lenders
compared to the APR, which is built into many State laws and which is
the cost that will be disclosed to consumers under Regulation Z. The
Bureau solicits comment on whether the trigger for coverage should be
based upon the total cost of credit rather than the APR. If so, the
Bureau solicits comment on whether the elements listed in proposed
Sec. 1041.2(a)(18) capture the total cost of credit to the consumer
and should be included in the calculation required by proposed Sec.
1041.2(a)(18) and whether there are any additional elements that should
be included or any listed elements that should be excluded. For
example, some stakeholders have suggested that the amounts paid for
voluntary products purchased prior to consummation, or the portion of
that amount paid to unaffiliated third parties, should be excluded from
the definition of total cost of credit. The Bureau solicits comments on
those suggestions.
The Bureau also solicits comment on whether there are operational
issues with the use of the total cost of credit
[[Page 47910]]
calculation methodology for closed- or open-end loans that the Bureau
should consider, and if so, whether there are any alternative methods
for calculating the total cost of credit for these products that would
address the operational issues. The Bureau further solicits comment on
whether any additional guidance on this definition is needed.
Section 1041.3 Scope of Coverage; Exclusions
The primary purpose of proposed part 1041 is 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 is proposing to identify such practices with
respect to two categories of loans to which the Bureau proposes to
apply this rule: (1) Consumer loans that have a duration of 45 days or
less; and (2) consumer loans that have a duration of more than 45 days
that have a total cost of credit above a certain threshold and that are
either secured by the consumer's motor vehicle, as set forth in
proposed Sec. 1041.3(d), or are repayable directly from the consumer's
income stream, as set forth in proposed Sec. 1041.3(c).
As described below in the section-by-section analysis of proposed
Sec. 1041.4, the Bureau tentatively concludes that it is an unfair and
abusive practice for a lender to make a covered short-term loan without
making a reasonable determination that the consumer has the ability to
repay the loan. The Bureau likewise tentatively concludes that it is an
unfair and abusive practice for a lender to make a covered longer-term
loan without making a reasonable determination of the consumer's
ability to repay the loan. Accordingly, the Bureau proposes to apply
the protections of proposed part 1041 to both categories of loans.
Proposed Sec. Sec. 1041.5 and 1041.9 would require 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 impose certain limitations on repeat borrowing, depending on the
type of covered loan. Proposed Sec. Sec. 1041.7, 1041.11, and 1041.12
would provide 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 impose consumer protections related to
repeated lender-initiated attempts to withdraw payments from consumers'
accounts in connection with covered loans. Proposed Sec. 1041.15 would
require 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 require 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 require lenders to keep certain records on the covered loans that
they make. Finally, proposed Sec. 1041.19 would prohibit actions taken
to evade the requirements of proposed part 1041.
The Bureau is not proposing to extend coverage to several other
types of loans and is specifically proposing to exclude, 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 proposes
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
loans that have a total cost of credit below a rate of 36 percent per
annum.
By focusing this proposed rule on the types of loans described
above, and by proposing to exclude certain types of loans that might
otherwise meet the definition of a covered loan from the reach of the
proposed rule, the Bureau does not mean to signal any conclusions as to
whether it is an unfair or abusive practice to make any other types of
loans, such as loans that are not covered by proposed part 1041,
without assessing a consumer's ability to repay. Moreover, the proposed
rule is not intended to supersede or limit protections imposed by other
laws, such as the Military Lending Act and implementing regulations.
The coverage limits in this proposal 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 this proposal. Indeed, the Bureau
is issuing concurrently with this proposal a Request for Information
(the Accompanying RFI) which solicits 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 is also seeking comment in response to the
Accompanying RFI as to whether there are additional lender practices
with regard to covered loans that may warrant further action by the
Bureau.
The Bureau notes that all ``covered persons'' within the meaning of
the Dodd-Frank Act have a duty not to engage in unfair, deceptive, or
abusive acts or practices. The Bureau may 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 this proposal. The
Bureau also may engage in future rulemaking with respect to other types
of loans or practices on covered loans at a later date.
3(a) General
Proposed Sec. 1041.3(a) would provide that proposed part 1041
applies to a lender that makes covered loans.
3(b) Covered Loans
Section 1031(b) of the Dodd-Frank Act empowers the Bureau 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
a consumer financial product or service. Proposed Sec. 1041.3(b) would
provide 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 specifying that the rule would apply only to loans that are
extended to consumers primarily for personal, family, or household
purposes, the Bureau intends to exclude loans that are made primarily
for a business, commercial, or agricultural purpose. But 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 if the loan in fact is primarily for personal, family, or
household purposes. See the section-by-section analysis of proposed
Sec. 1041.19 for further discussion of evasion issues.
Proposed comment 3(b)-1 would clarify that whether a loan is
covered is generally based on the loan terms at the time of
consummation. Proposed comment 3(b)-2 clarifies 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 explains that the test for
determining the primary purpose of a loan is the same as the test
prescribed
[[Page 47911]]
by Regulation Z Sec. 1026.3(a) and clarified by the related commentary
in supplement I to part 1026. The Bureau believes 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. Nevertheless, the related
commentary in supplement I to part 1026, on which lenders are permitted
to rely in interpreting proposed Sec. 1041.3(b), does not discuss
particular situations that may arise in the markets that would be
covered by proposed part 1041. The Bureau solicits comment on whether
the test for determining the primary purpose of a loan presents a risk
of lender evasion, and whether additional clarification is needed on
how to determine the primary purpose of a covered loan.
3(b)(1)
Proposed Sec. 1041.3(b)(1) would bring within the scope of
proposed part 1041 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) would not be limited to single-payment products, but
rather would include 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.\417\ Under proposed Sec. 1041.2(a)(6), this
type of covered loan would be defined as a covered short-term loan.
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\417\ 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 uses the phrase ``within 45
days of consummation'' throughout this proposal as a short-hand way
of referring to coverage criteria of both types of loans.
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Specifically, proposed Sec. 1041.3(b)(1) prescribes 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 closed-end credit that does not
provide for multiple advances to consumers, 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 not 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 under the loan. As proposed
comments 3(b)(1)-1 explains, 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 believes 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 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 believes it is appropriate to treat
the loans the same for the purposes of proposed Sec. 1041.3(b)(1). The
Bureau solicits comment on whether these differential coverage criteria
for single-advance and multiple-advance loans are appropriate,
particularly in light of unique or emerging loan structures that may
pose special challenges or risks.
As described in part II, 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 is proposing 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 nonetheless pose
similar risks of harm to consumers as loans with a duration of a month
or less.
The Bureau also considered proposing to define these 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 is not proposing 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, and
yet still essentially constitute a one-pay-cycle, one-expense-cycle
loan. The Bureau is not proposing 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 be covered longer-term loans if they meet the
criteria set forth in proposed Sec. 1041.3(b)(2). The Bureau solicits
comment on whether covered short-term loans should be defined to
include all loans in which the consumer is required to repay
substantially the entire amount due under the loan within 45 days of
consummation or advance, or whether another loan term is more
appropriate.
As discussed further below, the Bureau proposes 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 is not proposing similar limitations with respect
to the definition of covered short-term loans because the evidence
available to the Bureau suggests 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)-3 would explain 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 provides guidance on determining whether
loans that have alternative, ambiguous, or unusual payment schedules
would fall within the definition. 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. The Bureau solicits comment on whether
the approach explained in proposed comment 3(b)(1)-3 appropriately
delineates the distinction between the types of covered loans.
3(b)(2)
Proposed Sec. 1041.3(b)(2) would bring 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) would extend coverage to
[[Page 47912]]
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. Proposed
Sec. 1041.2(a)(7) would specifically define covered longer-term
balloon-payment loan for purposes of certain provisions in proposed
Sec. Sec. 1041.6, 1041.9, and 1041.10.
As described in more detail in proposed Sec. 1041.8, it appears to
the Bureau to be an unfair and abusive practice for a lender to make
covered longer-term loans without determining that the consumer has the
ability to repay the loan. The Bureau discusses the thresholds that
would trigger the definition of covered longer-term loan and seeks
related comment below. The Bureau recognizes that the criteria set
forth in proposed Sec. 1041.3(b)(2) may encompass some loans that are
not used for the same types of liquidity needs that have been the
primary focus of the Bureau's study. For example, some lenders make
unsecured loans to finance purchases of household durable goods or to
enable consumers to consolidate preexisting debt. Such loans are
typically for larger amounts or longer terms than, for example, a
typical payday loan. On the other hand, larger and longer-term loans
that have a higher cost, if secured by a leveraged payment mechanism or
vehicle security, may pose enhanced risk to consumers in their own
right, and an exclusion for larger or longer-term loans could provide
an avenue for lender evasion of the consumer protections imposed by
proposed part 1041. The Bureau also solicits comment on whether
coverage under proposed Sec. 1041.3(b)(2) should be limited by a
maximum loan amount and, if so, what the appropriate amount would be.
The Bureau further solicits comment on whether any such limitation
should apply only with respect to fully amortizing loans in which
payments are not timed to coincide with the consumer's paycheck or
other expected receipt of income, and whether any other protective
conditions, such as the absence of a prepayment penalty or restrictions
on methods of collection in the event of a default, should accompany
and such limitation.
As noted above, the Bureau is publishing an Accompanying RFI
concurrent with this notice of proposed rulemaking soliciting
information and evidence to help assess whether there are other
categories of loans that are generally made without underwriting and as
to which the failure to assess the consumer's ability to repay is
unfair or abusive. Further, as the Accompanying RFI indicates, the
Bureau may, in an individual supervisory or enforcement action, assess
whether a lender's failure to make such an assessment is unfair or
abusive. As reflected in the Accompanying RFI, the Bureau is
particularly interested to seek information to determine whether loans
involving a non-purchase money security in personal property or holding
consumers' personal identification documents create the same lender
incentives and increased risk of consumer harms as described below with
regard to leveraged payment mechanisms and vehicle security.
3(b)(2)(i)
Proposed Sec. 1041.3(b)(2)(i) would bring within the scope of
proposed part 1041 the above-described longer-term loans only to the
extent that they are subject to a total cost of credit, as defined in
proposed Sec. 1041.2(a)(18), exceeding a rate of 36 percent per annum.
This total cost of credit demarcation would apply only to those types
of loans listed in Sec. 1041.3(b)(2); the types of loans listed in
proposed Sec. 1041.3(b)(1) would be covered even if their total cost
of credit is below 36 percent per annum. The total cost of credit
measure set forth in proposed Sec. 1041.2(a)(18) includes a number of
charges that are not included in the APR measure set forth in
Regulation Z, 12 CFR 1026.4 in order to more fully reflect the true
cost of the loan to the consumer.
Proposed Sec. 1041.3(b)(2)(i) would bring within the scope of
proposed part 1041 only longer-term loans with a total cost of credit
exceeding a rate of 36 percent per annum in order to focus regulatory
treatment on the segment of the longer-term credit market on which the
Bureau has significant evidence of consumer harm. As explained in
proposed comment 3(b)(2)-1, using a cost threshold excludes certain
loans with a term of longer than 45 days and for which lenders may
obtain a leveraged payment mechanism or vehicle security, but which the
Bureau is not proposing to cover in this rulemaking. For example, the
cost threshold would exclude from the scope of coverage low-cost
signature loans even if they are repaid through the lender's access to
the consumer's deposit account.
The Bureau's research has focused on loans that are typically
priced with a total cost of credit exceeding a rate of 36 percent per
annum. Further, the Bureau believes that as the cost of a loan
increases, the risk to the consumer increases, especially where the
lender obtains a leveraged payment mechanism or vehicle security. When
higher-priced loans are coupled with the preferred payment position
derived from a leveraged payment mechanism or vehicle security, the
Bureau believes that lenders have a reduced incentive to underwrite
carefully since the lender will have the ability to extract payments
even from some consumers who cannot afford to repay and will in some
instances be able to profit from the loan even if the consumer
ultimately defaults. As discussed above in connection with proposed
Sec. 1041.2(a)(18), the Bureau believes that it may be more
appropriate to use a total cost of credit threshold rather than
traditional APR.
The Bureau recognizes that numerous State laws impose a 36 percent
APR usury limit, meaning that it is illegal under those laws to charge
an APR higher than 36 percent. That 36 percent APR ceiling reflects the
judgment of those States that loans with rates above that limit are per
se harmful to consumers and should be prohibited. Congress made a
similar judgment in the Military Lending Act in creating a 36 percent
all-in APR usury limit with respect to credit extended to
servicemembers and their families. Congress, in section 1027(o) of the
Dodd-Frank Act,\418\ has determined that the Bureau is not to
``establish a usury limit,'' and the Bureau respects that
determination. The Bureau is not proposing to prohibit lenders from
charging interest rates, APRs, or all-in costs above the demarcation.
Rather, the Bureau is proposing to require that lenders make a
reasonable assessment of consumers' ability to repay certain loans
above the 36 percent demarcation, in light of evidence of consumer
harms in the market for loans with this characteristic.
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\418\ Section 1027(o) of the Dodd-Frank Act provides that ``No
provision of this title shall be construed as conferring authority
on the Bureau to establish a usury limit applicable to an extension
of credit offered or made by a covered person to a consumer, unless
explicitly authorized by law.'' 12 U.S.C. 5517(o).
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The Bureau believes for the reasons set forth above and in the
section-by-section analysis of proposed Sec. 1041.9, that it is
appropriate to focus regulatory attention on the segment of longer-term
lending that poses the greatest risk of causing the types of harms to
consumers
[[Page 47913]]
that this proposal is meant to address, and that price is an element in
defining that segment. The Bureau also believes that setting the line
of demarcation at 36 percent would facilitate compliance given its use
in other contexts, such as the Military Lending Act. Such differential
regulation does not implicate section 1027(o) of the Dodd-Frank Act.
The Bureau believes that the prohibition on the Bureau ``establish[ing]
a usury limit'' is reasonably interpreted not to prohibit such
differential regulation given that the Bureau is not proposing to
prohibit lenders from charging interest rates above a specified limit.
The Bureau recognizes that a number of States impose a usury
threshold lower than 36 percent per annum for various types of covered
loans. Like all State usury limits, and, indeed, like all State laws
and regulations that provide additional protections to consumers over
and above those contained in the proposed rule, those limits would not
be affected by this rule. At the same time, the Bureau is conscious
that other States have set other limits and notes that the total cost
of credit threshold is not meant to restrict the ability of lenders to
offer higher-cost loans. The total cost of credit threshold is intended
solely to demarcate loans that--when they include certain other
features such as a leveraged payment mechanism or vehicle security--
pose an increased risk of causing the type of harms to consumers that
this proposal is meant to address. The protections imposed by this
proposal would operate as a floor across the country, while leaving
State and local jurisdictions to adopt additional regulatory
requirements (whether a usury limit or another form of protection)
above that floor as they judge appropriate to protect consumers in
their respective jurisdictions.
Thus, the Bureau believes that a total cost of credit exceeding 36
percent per annum provides a useful line of demarcation. The Bureau
solicits comment on whether a total cost of credit of 36 percent per
annum is an appropriate measurement for the purposes of proposed Sec.
1041.3(b)(2)(i) or whether a lower or higher measure would be more
appropriate. In the discussion of proposed Sec. 1041.2(a)(18), the
Bureau has solicited comment on the components of the total cost of
credit metric and the tradeoffs involved in using this metric relative
to annual percentage rate.
3(b)(2)(ii)
Proposed Sec. 1041.3(b)(2)(ii) would bring within the scope of
proposed part 1041 loans in which the lender or a service provider
obtains a leveraged payment mechanism, as defined by proposed Sec.
1041.3(c), or vehicle security, as defined by proposed Sec. 1041.3(d),
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 the loan. A leveraged payment mechanism gives a lender
the right to initiate a transfer of money from a consumer's account to
satisfy an obligation. The Bureau believes that loans in which the
lender obtains a leveraged payment mechanism may pose an increased risk
of harm to consumers, especially where payment schedules are structured
so that payments are timed to coincide with expected income flows into
the consumer's account. As detailed in the section-by-section analyses
of proposed Sec. Sec. 1041.9 and 1041.13, the Bureau believes that the
practice of extending higher-cost credit that has a leveraged payment
mechanism or vehicle security without reasonably determining the
consumer's ability to repay the loan appears to constitute an unfair
and abusive act or practice.
The loans that would be covered under the proposal vary widely as
to the basis for leveraged payment mechanism as well as cost,
structure, and level of underwriting. Through its outreach, the Bureau
is aware that some stakeholders have expressed concern that certain
loans that might be considered less risky for consumers would be swept
into coverage by virtue of a lien against the consumer's account
granted to the depository lender by Federal statute. The Bureau is not
proposing an exemption for select bases for leveraged payment mechanism
but is proposing, as is set forth in Sec. Sec. 1041.11 and 1041.12,
conditional exemptions from certain requirements for covered loans made
by any lender, including depositories, with certain features that would
present less risk to consumers.
The proposed rule would not prevent a lender from obtaining a
leveraged payment mechanism or vehicle security when originating a
loan. The Bureau recognizes that consumers may find it a convenient or
a useful form of financial management to authorize a lender to deduct
loan payments automatically from a consumer's account or paycheck. The
proposal would not prevent a consumer from doing so. The Bureau also
recognizes that obtaining a leveraged payment mechanism or vehicle
security generally reduces the lender's risk. The proposal would not
prohibit a lender from doing so. Rather, the proposal would impose a
duty on lenders to determine the consumer's ability to repay when a
lender obtains a leveraged payment mechanism or vehicle security. As
discussed above with regard to proposed Sec. 1041.2(a)(17), the
requirement would apply where either the lender or its service provider
obtains a leveraged payment mechanism or vehicle security in order to
assure comprehensive coverage.
The Bureau is not proposing to cover longer-term loans made without
a leveraged payment mechanism or vehicle security in part because if a
lender is not assured of obtaining a leveraged payment mechanism or
vehicle security as of the time the lender makes the loan, the Bureau
believes the lender has a greater incentive to determine the consumer's
ability to repay. If, however, the lender is essentially assured of
obtaining a leveraged payment mechanism or vehicle security as of the
time the lender makes the loan, the Bureau believes the lender has less
of an incentive to determine the consumer's ability to repay.
For this reason, as proposed comment 3(b)(2)(ii)-1 explains, a
lender or service provider obtaining a leveraged payment mechanism or
vehicle security would trigger coverage under proposed part 1041 only
if the lender or service provider obtains the leveraged payment
mechanism or 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. A loan would not be
covered under proposed Sec. 1041.3(b)(2)(ii) if the lender or service
provider obtains a leveraged payment mechanism or vehicle security more
than 72 hours after the consumer receives the entire amount of funds
that the consumer is entitled to receive under the loan.
The Bureau is proposing this 72-hour timeframe rather than focusing
solely on obtaining leveraged payment mechanisms or vehicle security
taken at consummation because the Bureau is concerned that lenders
could otherwise consummate loans in reliance on the lenders' ability to
exert influence over the customer and extract a leveraged payment
mechanism or vehicle security while the funds are being disbursed and
shortly thereafter. As discussed below, the Bureau is concerned that if
the lender is confident it can obtain a leveraged payment mechanism or
a vehicle security interest, the lender is less likely to evaluate
carefully whether the consumer can afford the loan. The Bureau believes
that the lender's leverage will ordinarily have diminished by 72 hours
after the consumer receives the entirety of the
[[Page 47914]]
funds available under the loan and that the proposed 72-hour rule would
help to ensure that the lender will engage in appropriate consideration
of the consumer's ability to repay the loan. Accordingly, the Bureau
believes that it is generally appropriate to use the relative timing of
disbursement and leveraged payment mechanism or vehicle security
authorization to determine whether a loan should be subject to the
consumer protections imposed by proposed part 1041.
However, even with this general approach, the Bureau is concerned
that lenders might seek to evade the intended scope of the rule if they
were free to offer incentives or impose penalties on consumers after
the 72-hour period in an effort to secure a leveraged payment mechanism
or vehicle security. Accordingly, as described below in connection with
the anti-evasion provisions proposed in Sec. 1041.19, the Bureau is
proposing comment 19(a)-2.i.B to state that it is potentially an
evasion of proposed part 1041 for a lender to offer an incentive to a
consumer or create a detriment for a consumer in order to induce the
consumer to grant the lender a leveraged payment mechanism or vehicle
title in connection with a longer-term loan with total cost of credit
exceeding a rate of 36 percent per annum unless the lender determines
that the consumer has the ability to repay.
Proposed comment 3(b)(2)(ii)-2 further explains how to determine
whether a consumer has received the entirety of the loan proceeds. For
closed-end loans, a consumer receives the entirety of the loan proceeds
if the consumer can receive no further funds without consummating
another loan. For open-end loans, a consumer receives the entirety of
the loan proceeds if the consumer fully draws down the entire credit
plan and can receive no further funds without replenishing the credit
plan, increasing the amount of the credit plan, repaying the balance,
or consummating another loan. Proposed comment 3(b)(2)(ii)-3 explains
that a contract provision granting the lender or service provider a
leveraged payment mechanism or vehicle security contingent on some
future event is sufficient to bring the loan within the scope of
coverage.
The approach taken in proposed Sec. 1041.3(b)(2)(ii) differs from
the approach considered in the Small Business Review Panel Outline.
Under the approach in the Small Business Review Panel Outline, a loan
with a term of more than 45 days would be covered if a lender obtained
a leveraged payment mechanism or vehicle security before the first
payment was due on the loan. Upon further consideration, however, the
Bureau believes that the approach in proposed Sec. 1041.3(b)(2)(ii) is
appropriate to ensure coverage of situations in which lenders obtain a
leveraged payment mechanism or vehicle security in connection with a
new extension on an open-end credit plan that was not a covered loan at
original consummation, or prior to a modification or refinancing of an
existing open- or closed-end credit plan that was not a covered loan at
original consummation. The Bureau believes that this approach has the
benefit of ensuring adequate consumer protections in origination
situations in which lenders may not have an incentive to determine the
consumer's ability to repay, while at the same time allowing for
consumers to set up automatic repayment as a matter of convenience at a
later date.
The Bureau solicits comment on the criteria for coverage set forth
in proposed Sec. 1041.3(b)(2)(ii), including whether the criteria
should be limited to cover loans where the scheduled payments are timed
to coincide with the consumer's expected inflow of income. In addition,
the Bureau seeks comment on the basis on which, and the timing at
which, a determination should be made as to whether a lender has
secured a leveraged payment mechanism or vehicle security. For example,
in outreach, some consumer advocates have suggested that a loan should
be treated as a covered loan if the lender reasonably anticipates that
it will obtain a leveraged payment mechanism or vehicle security at any
time while the loan is outstanding based on the lender's experience
with similar loans. The Bureau invites comments on the workability of
such a test and, if adopted, where to draw the line to define the point
at which the lender's prior success in obtaining a leveraged payment
mechanism or vehicle security would trigger coverage for future loans.
The Bureau also notes that while consumers may elect to provide a
leveraged payment mechanism post-consummation for their own
convenience, it is more difficult to envision circumstances in which a
consumer would choose to grant vehicle security post-consummation. One
possible scenario would be that a consumer is having trouble repaying
the loan and provides a security interest in the consumer's vehicle in
exchange for a concession by the lender. The Bureau is concerned that a
consumer who provides a vehicle security under such circumstances may
face a significant risk of harm. The Bureau therefore solicits comment
on whether a loan with an all-in cost of credit above 36 percent should
be deemed a covered loan if, at any time, the lender obtains vehicle
security. However, given the limited circumstances in which a consumer
would grant vehicle security after consummation, the Bureau also seeks
comment on whether, for a loan with an all-in cost of credit above 36
percent, lenders should be prohibited from taking a security interest
in a vehicle after consummation.
3(c) Leveraged Payment Mechanism
Proposed Sec. 1041.3(c) would set forth three ways that a lender
or a service provider could obtain a leveraged payment mechanism that
would bring the loan within the proposed coverage of proposed part
1041. A lender would obtain a leveraged payment mechanism if the lender
has the right to initiate a transfer of money from the consumer's
account to repay the loan, if the lender has the contractual right to
obtain payment from the consumer's employer or other payor of expected
income, or if the lender requires the consumer to repay the loan
through payroll deduction or deduction from another source of income.
In all three cases, the consumer is required, under the terms of an
agreement with the lender, to cede autonomy over the consumer's account
or income stream in a way that the Bureau believes changes that
lender's 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 major financial obligations and basic living expenses. As
explained in the section-by-section analysis of proposed Sec. Sec.
1041.8 and 1041.9, the Bureau believes 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.
3(c)(1)
Proposed Sec. 1041.3(c)(1) would generally provide 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 would not define leveraged
payment mechanism to include situations in which the lender or service
provider initiates a one-time electronic fund
[[Page 47915]]
transfer immediately after the consumer authorizes such transfer.
As proposed comment 3(c)(1)-1 explains, 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 payments from the consumer's account gives
the lender the ability to time and initiate payments 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, 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 provides 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)-3 explains 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. The Bureau solicits comment on
whether this definition of leveraged payment mechanism appropriately
captures payment methods that are likely to produce the risks to
consumers identified by the Bureau in the section-by-section analysis
of proposed Sec. 1041.8.
As noted above, proposed Sec. 1041.3(c)(1) would provide 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 is proposing in Sec. 1041.15(b), which exempts
lender from providing the payment notice when initiating a single
immediate payment transfer at the consumer's request, as that term is
defined in Sec. 1041.14(a)(2), and is also similar to what the Bureau
is proposing 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 would clarify 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 clarifies that the phrase ``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.
The Bureau anticipates that scenarios involving authorizations for
immediate one-time transfers will only arise in certain discrete
situations. For closed-end loans, a lender is 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 situation may be more likely to occur with open-
end credit. Longer-term open-end can be covered loans if the lender
obtains 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 believes it is
appropriate for these transfers not to trigger coverage because there
is a reduced risk that such transfers will re-align lender incentives
in a similar manner as other types of leveraged payment mechanisms.
The Bureau solicits comment on whether this exclusion from the
definition of leveraged payment mechanism is appropriate and whether
additional guidance is needed. The Bureau also solicits comment on
whether any additional exceptions to the general principle of proposed
Sec. 1041.3(c)(1) are appropriate.
3(c)(2)
Proposed Sec. 1041.3(c)(2) would provide that a lender or a
service provider obtains a leveraged payment mechanism if it has the
contractual right to obtain payment directly from the consumer's
employer or other payor of income. This scenario typically involves a
wage assignment, which, as described by the FTC, is ``a contractual
transfer by a debtor to a creditor of the right to receive wages
directly from the debtor's employer. To activate the assignment, the
creditor simply submits it to the debtor's employer, who then pays all
or a percentage of debtor's wages to the creditor.'' \419\ These
arrangements are creatures of State law and can take various forms. For
example, they can be used either as a method of making regular payments
during the term of the loan or as a collections tool when borrowers
default. Such arrangements are legal in some jurisdictions, but illegal
in others.
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\419\ 49 FR 7740, 7755 (Mar. 1, 1984).
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As discussed further in Market Concerns--Short-Term Loans, the
Bureau is concerned that where loan agreements provide for assignments
of income, the lender incentives and potential consumer risks can be
very similar to those presented by other forms of leveraged payment
mechanism defined in proposed Sec. 1041.3(c). In particular, a
lender--as when it has the right to initiate transfers from a
consumer's account--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. And--as when a lender has the right to
initiate transfers from a consumer's account--an assignment of income
can change the 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. Thus, the
Bureau believes that loan agreements that provide for assignments of
income may present the same risk of harm to consumers as other types of
leveraged payment mechanisms. The Bureau seeks comment on the proposed
definition and whether additional guidance is needed.
The Bureau recognizes that some consumers may find it a convenient
or useful form of financial management to
[[Page 47916]]
repay a loan through a revocable wage assignment. The proposed rule
would not prevent a consumer from doing so. Rather, the proposed rule
would impose a duty on lenders to determine the consumer's ability to
repay when the lender or service provider has the right to obtain
payment directly from the consumer's employer or other payor of income.
3(c)(3)
Proposed Sec. 1041.3(c)(3) would provide that a lender or a
service provider obtains a leveraged payment mechanism if the loan
requires the consumer to repay through a payroll deduction or deduction
from another source of income. As proposed comment 3(c)(3)-1 explains,
a payroll deduction involves a direction by the consumer to the
consumer's employer (or other payor of income) to pay a portion of the
consumer's wages or other income to the lender or service provider,
rather than a direction by the lender to the consumer's employer as in
a wage assignment. The Bureau is concerned that if an agreement between
the lender and consumer requires the consumer to have his or her
employer or other payor of income pay the lender directly, the consumer
would be in the same situation and face the same risk of harm as if the
lender had the ability to initiate a transfer from the consumer's
account or had a right to a wage assignment.
The Bureau recognizes that just as some consumers may find it a
convenient or useful form of financial management to authorize a lender
to deduct loan payments automatically from a consumer's account, so,
too, may some consumers find it a convenient or useful form of
financial management to authorize their employer to deduct loan
payments automatically from the consumer's paycheck and remit the money
to the lender. The proposed rule would not prevent a consumer from
doing so. Rather, the proposed rule would impose a duty on lenders to
determine the consumer's ability to repay only when a lender requires
the consumer to authorize such payroll deduction as a condition of the
loan thereby imposing a contractual obligation on the consumer to
continue such payroll deduction during the term of the loan. The Bureau
solicits comment on whether a lender should have a duty to determine
the consumer's ability to repay only when the lender requires payroll
deduction, or whether such a duty should also apply when the lender
incentivizes payroll deduction.
3(d) Vehicle Security
Proposed Sec. 1041.3(d) would provide that a lender or service
provider obtains vehicle security if the lender or service provider
obtains an interest in a consumer's motor vehicle, regardless of how
the transaction is characterized under State law. Under proposed Sec.
1041.3(d), a lender or service provider could obtain vehicle security
regardless of whether the lender or service provider has perfected or
recorded the interest. A lender or service provider also would obtain
vehicle security under proposed Sec. 1041.3(d) if the consumer pledges
the vehicle to the lender or service provider in a pawn transaction and
the consumer retains possession of the vehicle during the loan. In each
case, a lender or service provider would obtain vehicle security under
proposed Sec. 1041.3(d) 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.
However, as noted above and discussed further below, proposed Sec.
1041.3(e) would exclude 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 clarifies 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 believes that when a lender obtains vehicle security in
connection with the consummation of a loan, the lender effectively
achieves a preferred payment position similar to the position that a
lender obtains with a leveraged payment mechanism. If the loan is
unaffordable, the consumer will face the difficult choice of either
defaulting on the loan and putting the consumer's automobile (and
potentially the consumer's livelihood) at risk or repaying the loan
even if doing so means defaulting on major financial obligations or
foregoing basic living needs. As a result, the lender has limited
incentive to assure that the consumer has the ability to repay the
loan. For these reasons, the Bureau believes that it is appropriate to
include within the definition of covered longer-term loans those loans
for which the lender or service provider obtains vehicle security
before, at the same time as, or within 72 hours after the consumer
receives all the funds the consumer is entitled to receive under the
loan. However, as noted above, the Bureau solicits comment on whether a
longer-term loan with an all-in cost of credit above 36% should be
deemed a covered loan if, at any time, the lender obtains vehicle
security.
3(d)(1)
Proposed Sec. 1041.3(d)(1) would provide that any security
interest that the lender or service provider obtains as a condition of
the loan would constitute vehicle security for the purpose of
determining coverage under proposed part 1041. The term security
interest would include any security interest that the lender or service
provider has in the consumer's vehicle, vehicle title, or vehicle
registration. As proposed comment 3(d)(1)-1 clarifies, a party would
not obtain vehicle security if that person obtains a security interest
in the consumer's vehicle for a reason unrelated to the loan.
The security interest would not need to be perfected or recorded in
order to trigger coverage under proposed Sec. 1041.3(d)(1). The
consumer 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.
3(d)(2)
Proposed Sec. 1041.3(d)(2) would provide that pawn transactions
generally would constitute vehicle security for the purpose of
determining coverage under proposed part 1041 if the consumer pledges
the vehicle in connection with the transaction and the consumer retains
use of the vehicle during the term of the pawn agreement. However, pawn
transactions would not trigger coverage if they fell within the scope
of proposed Sec. 1041.3(e)(5), which would exclude bona fide non-
recourse pawn transactions where the lender obtains custody of the
vehicle and there is no recourse against the consumer for
[[Page 47917]]
the balance due if the consumer is unable to repay the loan.
The proposed language is designed to account for the fact that, in
response to laws in several jurisdictions, lenders have structured
higher-cost, vehicle-secured loans as pawn agreements,\420\ though
these ``vehicle pawn'' or ``title pawn'' loans are the functional
equivalent of loans covered by proposed Sec. 1041.3(d) in which the
lender has vehicle security because the terms on which the loans are
offered are similar. Further, the ramifications for both the lender and
the consumer are similar in the event the consumer does not have the
ability to repay the loan--the lender can repossess the consumer's
vehicle and sell it. And, as also discussed in the section-by-section
analysis for proposed Sec. 1041.3(e)(5), vehicle pawn and title pawn
loans often do not require the consumer to relinquish physical control
of the motor vehicle while the loan is outstanding, which is likely to
make the threat of repossession a more powerful form of leverage should
the consumer not repay the covered loan. Accordingly, the Bureau
proposes to treat vehicle title pawn loans the same as vehicle security
loans for the purposes of proposed part 1041.
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\420\ See, e.g., Ala. Code Sec. 5-19A-1 through 5-19A-20; Ga.
Code Sec. 44-12-130 through 44-12-138.
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3(e) Exclusions
Proposed Sec. 1041.3(e) would exclude 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 lines of credit. The Bureau believes that
notwithstanding the potential term, cost of credit, repayment
structure, or security of these loans, they arise in distinct markets
that the Bureau believes may pose a somewhat different set of concerns
for consumers. At the same time, as discussed further below, the Bureau
is concerned that there may be a risk that these exclusions would
create avenues for evasion of the proposed rule.
The Bureau solicits comment on whether any of these excluded types
of loans should also be covered under proposed part 1041. The Bureau
further solicits comment on whether there are reasons for excluding
other types of products from coverage under proposed part 1041. As
noted above, the Bureau is also soliciting in the Accompanying RFI
information and additional evidence to support in further assessment of
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 emphasizes that it may determine in a particular
supervisory or enforcement matter or in a subsequent 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.
3(e)(1) Certain Purchase Money Security Interest Loans
Proposed Sec. 1041.3(e)(1) would exclude 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
explains 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 explains 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.\421\ The Federal
Bankruptcy Code, the UCC, and some other State laws 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. At this time, the Bureau has not
determined that purchase money loans pose similar risks to consumers as
the loans covered by proposed part 1041. Accordingly, the Bureau is
proposing not to cover such loans at this time. The Bureau solicits
comment on this exclusion and whether there are particular types of
purchase money loans that pose sufficient risk to consumers to warrant
coverage under this proposed rule.
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\421\ 16 CFR 444.2(a)(4).
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3(e)(2) Real Estate Secured Credit
Proposed Sec. 1041.3(e)(2) would exclude 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 believes that even
without this exemption, very few real estate secured loans would meet
the coverage criteria set forth in proposed Sec. 1041.3(b).
Nonetheless, the Bureau believes a categorical exclusion is
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 explains, 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
solicits comment on this exclusion and whether there are particular
types of real-estate secured loans that pose sufficient risk to
consumers to warrant coverage under the proposed rule.
3(e)(3) Credit Cards
Proposed Sec. 1041.3(e)(3) would exclude 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 exemption would apply only to credit card accounts that
are subject to the Credit CARD Act of 2009, Public Law 111-24, 123
Stat. 1734 (2009) (CARD Act), 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 considers the ability of
the consumer to make the required payments under the terms of the
[[Page 47918]]
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.\422\
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\422\ 15 U.S.C. 1665e; see also 12 CFR 1026.51(a); Supplement I
to 12 CFR part 1026.
---------------------------------------------------------------------------
The Bureau believes that, even without this exemption, few
traditional credit card accounts would meet the coverage criteria set
forth in proposed Sec. 1041.3(b) other than some secured credit card
accounts which may have a total cost of credit above 36 percent and
provide for a leveraged payment mechanism in the form of a right of
set-off. These credit card accounts are subject to the CARD Act
protections discussed above. The Bureau believes that potential
consumer harms related to credit card accounts are more appropriately
addressed by the CARD Act, implementing regulations, and other
applicable law. At the same time, if the Bureau were to craft a broad
general exemption 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 designed to take advantage of this exclusion.
The Bureau has therefore proposed a narrower definition focusing
only on those credit cards 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 believes that the combined consumer protections
governing credit card accounts subject to the CARD Act are sufficient
for that type of credit. To further mitigate potential consumer risk,
the Bureau considered adding a requirement that to be eligible for this
exclusion, a credit card would have to be either (i) accepted upon
presentation by multiple unaffiliated merchants that participate in a
widely-accepted payment network, or (ii) accepted upon presentation
solely for the bona fide purchase of goods or services at a particular
retail merchant or group of merchants. The Bureau solicits comments on
whether to exclude credit cards and, if so, whether the criteria
proposed to define the exclusion are appropriate, or whether additional
criteria should be added to limit the potential evasion risk identified
above.
3(e)(4) Student Loans
Proposed Sec. 1041.3(e)(4) would exclude from coverage under
proposed part 1041 loans made, insured, or guaranteed pursuant to a
Federal student loan program, and private education loans. The Bureau
believes that even without this exemption, very few student loans would
meet the coverage criteria set forth in proposed Sec. 1041.3(b).
Nonetheless, the Bureau believes a categorical exclusion is
appropriate. Federal student loans are provided to students or parents
meeting eligibility criteria established by Federal law and regulation
such that the protections afforded by this proposed rule would be
unnecessary. Private student loans are sometimes made to students based
upon their future potential ability to repay (as distinguished from
their current ability), but are typically co-signed by a party with
financial capacity. These loans raise discrete issues that may warrant
Bureau attention at a future time, but the Bureau believes that they
are not appropriately considered along with the types of loans at issue
in this rulemaking. The Bureau continues to monitor the student loan
servicing market for trends and developments, unfair, deceptive, or
abusive practices, and to evaluate possible policy responses, including
potential rulemaking. The Bureau solicits comment on whether this
exclusion is appropriate.
3(e)(5) Non-Recourse Pawn Loans
Proposed Sec. 1041.3(e)(5) generally would exclude 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 explains 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, the loan does not fall under this exclusion and
may be subject to the requirements of proposed part 1041. As discussed
above in connection with proposed Sec. 1041.2(a)(13) and below in
connection with proposed Sec. Sec. 1041.6, 1041.7, and 1041.10,
however, a non-recourse pawn loan can, in certain circumstances, be a
non-covered bridge loan that could impact restrictions on the lender
with regard to a later covered short-term loans.
The Bureau believes 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
securing the loan during the term of the loan. The Bureau believes 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 transportation to work or
to pay other obligations. Otherwise, the consumer likely would not have
pawned the item under these 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 collections activity on any remaining debt obligation.
In all of these ways, pawn transactions appear to differ
significantly from the secured loans that would be covered under
proposed part 1041. While the loans described in proposed Sec.
1041.3(e)(5) would not be covered loans, lenders may, as described in
proposed Sec. Sec. 1041.6, 1041.7, and 1041.10 be subject to
restrictions on making covered loans shortly following certain non-
recourse pawn loans that meet certain conditions. The Bureau solicits
comment on this exclusion and whether these types of pawn loans should
be subject to the consumer protections imposed by proposed part 1041.
3(e)(6) Overdraft Services and Overdraft Lines of Credit
Proposed Sec. 1041.3(e)(6) would exclude 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. 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
[[Page 47919]]
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 exempted from
regulation under Regulation Z under certain circumstances, and are
subject to specific rules under EFTA \423\ and the Truth in Savings
Act, and their respective implementing regulations.\424\ 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 there are not sufficient funds in the deposit account.
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\423\ 74 FR 59033 (Nov. 17, 2009).
\424\ 70 FR 29582 (May 24, 2005).
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As discussed above in part II, the Bureau is engaged in research
and other activity in anticipation of a separate rulemaking regarding
overdraft products and practices.\425\ Given that overdraft services
and overdraft lines of credit involve complex overlays with rules
regarding payment processing, deposit accounts, set-off rights, and
other forms of depository account access, the Bureau believes that any
discussion of whether additional regulatory protections are warranted
for those two products should be reserved for that rulemaking.
Accordingly, the Bureau is proposing to exempt both types of overdraft
products from the scope of this rule, using definitional language in
Regulation E to distinguish both overdraft services and overdraft lines
of credit from other types of depository credit products. The Bureau
solicits comment on whether additional guidance would be helpful to
distinguish overdraft services and overdraft lines of credit from other
products, whether that distinction is appropriate for purposes of this
rulemaking, and whether the Bureau should factor particular product
features or safeguards into the way it differentiates between
depository credit products.
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\425\ CFPB Study of Overdraft Programs White Paper; CFPB Data
Point: Checking Account Overdraft.
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Subpart B--Short-Term Loans
In proposed Sec. 1041.4, the Bureau proposes to identify an unfair
and abusive act or 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.'' \426\ In the Bureau's view, it appears to be both unfair
and abusive for a lender to make such a loan without reasonably
determining that the consumer has the ability to repay the loan. To
avoid committing this unfair and abusive practice, a lender would have
to reasonably determine that the consumer has the ability to repay the
loan. Proposed Sec. Sec. 1041.5 and 1041.6 would establish a set of
requirements to prevent the unlawful practice by reasonably determining
that the consumer has the ability to repay the loan. The Bureau is
proposing the ability-to-repay requirements under its authority to
prescribe rules for ``the purpose of preventing [unfair and abusive]
acts or practices.'' \427\ Proposed Sec. 1041.7 would rely on section
1022(b)(3) of the Dodd-Frank Act to exempt from the ability-to-repay
requirements in proposed Sec. Sec. 1041.5 and 1041.6, as well as from
the prohibition in Sec. 1041.4 certain covered short-term loans which
satisfy a set of conditions designed to avoid the harms that can result
from unaffordable loans. Accordingly, lenders seeking to make covered
short-term loans would have the choice, on a case by case basis, either
to follow proposed Sec. Sec. 1041.5 and 1041.6, or proposed Sec.
1041.7.
---------------------------------------------------------------------------
\426\ 12 U.S.C. 5531(b).
\427\ Id.
---------------------------------------------------------------------------
The predicate for the proposed identification of an unfair and
abusive act or practice in proposed Sec. 1041.4--and thus for the
prevention requirements contained in proposed Sec. Sec. 1041.5 and
1041.6--is a set of preliminary findings with respect to the consumers
who use storefront and online payday loans, single-payment auto title
loans, and other short-term loans, and the impact on those consumers of
the practice of making such loans without assessing the consumers'
ability to repay.\428\ Those preliminary findings are set forth in the
discussion below, hereinafter referred to as Market Concerns--Short-
Term Loans. After laying out these preliminary findings, the Bureau
sets forth, in the section-by-section analysis of proposed Sec.
1041.4, its reasons for proposing to identify as unfair and abusive the
practice described in proposed Sec. 1041.4. The Bureau seeks comment
on all aspects of this subpart, including the intersection of the
proposed interventions with existing State, tribal, and local laws and
whether additional or alternative protections should be considered to
address the core harms discussed below.
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\428\ The Bureau's analysis of this market is based primarily on
research regarding payday loans, single-payment auto title loans,
and deposit advance products. The Bureau is not aware of other
substantial product offerings that would meet the definition of
covered short-term loans, but as discussed below, believes any
product structure involving a similarly short repayment term may
pose similar risks to consumers.
.
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Market Concerns--Short-Term Loans
The Bureau is concerned that lending practices in the markets for
storefront and online payday lending, single-payment vehicle title, and
other short-term loans are causing harm to many consumers who use these
products, including extended sequences of reborrowing, delinquency and
defaults, and certain collateral harms from making unaffordable
payments. This section reviews the available evidence with respect to
the consumers who use payday and short-term auto title loans, their
reasons for doing so, and the outcomes they experience. It also reviews
the lender practices that cause these outcomes. The Bureau
preliminarily finds:
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.
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 any terms offered.
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 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 returning to reborrow in the days after repaying
the loan). Indeed, lenders are dependent upon such
[[Page 47920]]
reborrowing for a substantial portion of their revenue and would lose
money if each borrower repaid the loan when due without reborrowing.
Very high reborrowing rates. Not surprisingly, most
borrowers find it necessary to reborrow when their loan comes due or
shortly after repaying their loan, as other expenses come due. This
reborrowing occurs both with payday loans and single-payment vehicle
title loans. Fifty percent of all new storefront payday loans are
followed by at least three more loans and 33 percent are followed by
six more loans. For single-payment vehicle title loans over half (56
percent) of all new loans are followed by at least three more loans,
and more than a third (36 percent) are followed by six or more loans.
Twenty-one percent of payday loans made to borrowers paid weekly, bi-
weekly, or semi-monthly are in loan sequences of 20 loans or more and
over forty percent of loans made to borrowers paid monthly are in loan
sequences of comparable durations (i.e., 10 or more monthly loans).
Consumers do not expect lengthy loan sequences. Consumers
who take out a payday loan do not expect to reborrow to the extent that
they do. This is especially true of those consumers who end up in
extended cycles of indebtedness. Research shows that when taking out
loans consumers are unable accurately to predict how long it will take
them to get out of debt, and that this is even truer of consumers who
have borrowed heavily in the recent past. Consumers' difficulty in this
regard is based, in part, on the fact that such loans involve a basic
mismatch between how they appear to function as short-term credit and
how they are actually designed to function in long sequences of
reborrowing. This disparity 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.
Research regarding consumer decision-making also helps explain why
consumers end up reborrowing more than they expect. 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.
Very high default rates. Some consumers do succeed in
repaying short-term loans without reborrowing, and others eventually
repay the loan after reborrowing 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 are delinquent or who default can become
subject to often aggressive and psychologically harmful debt collection
efforts. In addition, 20 percent of single-payment vehicle title loan
sequences end with borrowers losing their cars or trucks to
repossession. Even borrowers who eventually pay off their loans may
incur penalty fees, late fees, or overdraft fees along the way, and
after repaying may find themselves struggling to pay other bills or
meet their basic living expenses.
Harms occur despite existing regulation. The research
indicates that these harms from payday loans and other short-term loans
persist despite existing regulatory frameworks. In particular, the
Bureau is concerned that 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 reborrowing, default, and collateral harms from making
unaffordable payments.
The following discussion reviews the evidence underlying each of
these preliminary findings.
a. Borrower Characteristics and Circumstances of Borrowing
Borrowers who take out payday and single-payment vehicle title
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. The desire for immediate cash may be the result of an emergency
expense or an unanticipated drop in income, but many who take out
payday or vehicle title loans are consumers whose living expenses
routinely exceed their income.
1. Borrower Characteristics
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 most recent available data come from 2013.\429\
The CPS supplement found that 46 percent of payday borrowers (including
storefront and online borrowers) have a family income of under
$30,000.\430\ A study covering a mix of storefront and online payday
borrowers similarly found that 49 percent had income of $25,000 or
less.\431\ Other analyses of administrative data that include the
income that borrowers reported to lenders are broadly consistent.\432\
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.\433\ The FDIC study further found that payday borrowers are
disproportionately Hispanic or African-American (with borrowing rates
two to three times higher respectively than for non-Hispanic whites).
Female-headed households are more than twice as likely as married
couples to be payday borrowers.\434\
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\429\ 2013 FDIC National Survey of Unbanked and Underbanked
Households: Appendices, at 83.
\430\ Id., at Appx. D-12a.
\431\ Pew Charitable Trusts, Payday Lending in America: Who
Borrows, Where They Borrow, and Why, at 35 (2012), http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf; see also Gregory Elliehausen, An
Analysis of Consumers' Use of Payday Loans, at 27 (2009), available
at http://www.cfsaa.com/portals/0/RelatedContent/Attachments/GWUAnalysis_01-2009.pdf (61 percent of borrowers have household
income under $40,000); Jonathan Zinman, Restricting Consumer Credit
Access: Household Survey Evidence on Effects Around the Oregon Rate
Cap, at 5 (2008), available at http://www.dartmouth.edu/~jzinman/
Papers/Zinman_RestrictingAccess_oct08.pdf.
\432\ Bureau of Consumer Fin. Prot., Payday Loans and Deposit
Advance Products: A White Paper of Initial Data Findings, at 18
(2013) [hereinafter CFPB Payday Loans and Deposit Advance Products
White Paper], http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf (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). For
Washington, see 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; for Delaware,
see 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 (2015), available at http://banking.delaware.gov/pdfs/annual/Short_Term_Consumer_Loan_Database_2014_Operations_Report.pdf.
Research by nonPrime 101 found the median income for online payday
borrowers to be $30,000. nonPrime101, Profiling Internet Small-
Dollar Lending, at 7 (2014), https://www.nonprime101.com/wp-content/uploads/2013/10/Clarity-Services-Profiling-Internet-Small-Dollar-Lending.pdf.
\433\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 18.
\434\ 2013 FDIC National Survey of Unbanked and Underbanked
Households: Appendices, at Appx. D-12a.
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The demographic profiles of vehicle title loan borrowers appear to
be roughly comparable to the
[[Page 47921]]
demographics of payday borrowers.\435\ Calculations from the CPS
Supplement indicate that 40 percent of vehicle title borrowers have
annual family incomes under $30,000.\436\ Another survey likewise found
that 56 percent of title borrowers reported incomes below $30,000,
compared with 60 percent for payday borrowers.\437\ 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 female-headed households.
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\435\ None of the sources of information on the characteristics
of vehicle title borrowers that the Bureau is aware of distinguish
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.
\436\ FDIC National Survey of Unbanked and Underbanked
Households: Appendices, at Appx. D-16a.
\437\ Pew Charitable Trusts, Auto Title Loans: Market Practices
and Borrowers' Experiences, at 1 (2015), http://www.pewtrusts.org/~/
media/assets/2015/03/autotitleloansreport.pdf.
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Similarly, a survey of borrowers in three States conducted by
academic researchers found that vehicle 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 the States' population at large.
Hispanic borrowers were over-represented in two of the three states;
however, these borrowers were underrepresented in Texas, the State with
the highest proportion of Hispanic residents in the study.\438\
---------------------------------------------------------------------------
\438\ Kathryn Fritzdixon, Jim Hawkins, & Paige Marta Skiba,
Dude, Where's My Car Title?: The Law, Behavior, and Economics of
Title Lending Markets, 2014 U. Ill. L. Rev. 1013, 1029-1030 (2014),
available at https://illinoislawreview.org/wp-content/ilr-content/articles/2014/4/Hawkins,Skiba,&Fritzdixon.pdf.
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Studies of payday borrowers' credit histories show both poor credit
histories and recent credit-seeking activity. An 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.\439\ 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 first, and sought the payday loan as a ``last resort.'' 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.\440\ 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 \441\ score of 532 and that over 85
percent of borrowers had a score below 600, indicating high credit
risk.\442\ By way of comparison, the national average Vantage Score is
669 and only 30 percent of consumers have a Vantage Score below
600.\443\
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\439\ Bhutta, Skiba, & Tobacman, at 231-33. 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/.
\440\ Bhutta, Skiba, & Tobacman, at 231-33.
\441\ 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.
\442\ nonprime 101, Can Storefront Payday Borrowers Become
Installment loan Borrowers?, at 5 (2015), https://www.nonprime101.com/blog/can-storefront-payday-borrowers-become-installment-loan-borrowers/.
\443\ Experian, State of Credit (2015), http://www.experian.com/live-credit-smart/state-of-credit-2015.html.
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Reports using data from a specialty consumer reporting agency
indicate that online borrowers have comparable credit scores to
storefront borrowers (a mean VantageScore 3.0 score of 525 versus 532
for storefront).\444\ Another study based on the data from the same
specialty consumer reporting agency and an accompanying survey of
online small-dollar credit borrowers reports 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.\445\ Moreover,
heavy use of online payday loans correlated with more strenuous credit-
seeking: Compared to light (bottom quartile) users of online loans,
heavy (top quartile) users were more likely to have been denied credit
in the past year (87 percent of heavy users compared to 68 percent of
light users).\446\
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\444\ nonPrime101, Can Storefront Payday Borrowers Become
Installment Loan Borrowers?, at 6. 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.
\445\ Richard Hendra & Stephen Nunez, MDRC, The Subprime Lending
Database Exploration Study: Initial Findings, at table 11 (2015)
(pre-publication copy on file with authors and available upon
request; final version anticipated to be published and posted on
MDRC Web site in June 2016 at http://www.mdrc.org/publication/online-payday-and-installment-loans).
\446\ Id. at tables 5-7.
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Other surveys of payday borrowers add 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. 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.\447\
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\447\ Elliehausen, An Analysis of Consumers' Use of Payday
Loans, at 29-32.
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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.\448\
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\448\ Zinman, Restricting Consumer Credit Access: Household
Survey Evidence on Effects Around the Oregon Rate Cap, at 550.
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Likewise, 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 any terms
offered. This figure rises to 46 percent when the respondent rated his
or her financial situation as particularly poor.\449\
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\449\ See Pew Charitable Trusts, Payday Lending in America: How
Borrowers Choose and Repay Payday Loans, at 20 (2013), http://www.pewtrusts.org/en/research-and-analysis/reports/2013/02/19/how-borrowers-choose-and-repay-payday-loans.
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2. Circumstances of Borrowing
Several surveys have asked borrowers why they took out their loans
or for what purpose they used the loan proceeds. These are challenging
questions to study. Any survey that asks about past behavior or events
runs some risk of recall errors. In addition, the fungibility of money
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 the receipt of income. In that circumstance, a borrower
may say either that she took
[[Page 47922]]
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.
In 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.\450\
---------------------------------------------------------------------------
\450\ Elliehausen, An Analysis of Consumers' Use of Payday
Loans, at 35.
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A 2012 survey of payday loan borrowers, on the other hand, 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.\451\
---------------------------------------------------------------------------
\451\ Pew Charitable Trusts, Payday Lending in America: Who
Borrows, Where They Borrow, and Why, at 14-16 (2012), http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf.
---------------------------------------------------------------------------
Another 2012 survey of over 1,100 users of alternative small-dollar
credit products, including pawn, payday, auto title, deposit advance
products, and non-bank installment loans, asked separate questions
about what borrowers used the loan proceeds for and what precipitated
the loan. 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 interpret 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 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 over 40
percent reporting the funds were used to ``pay utility bills,'' over 40
percent reporting the funds were used to pay ``general living
expenses,'' and over 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 reporting repeated usage or rollovers.\452\
---------------------------------------------------------------------------
\452\ Id. at 18-20.
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A recent survey of 768 online payday users 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.\453\ Based on borrowers' self-reported borrowing history,
borrowers 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 gave as their primary
reason for seeking a payday loan online that they ``had a storefront
loan, needed another [loan]'' as compared to just over 1 percent of
light users.
---------------------------------------------------------------------------
\453\ Hendra & Nunez.
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b. Lender Practices
The business model of lenders who make payday and single-payment
vehicle title loans is predicated on the lenders' ability to secure
extensive reborrowing. As described 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. That
means that if a consumer takes out such a loan and repays the loan when
it is due without reborrowing, 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 reborrow, lenders have
built a model in which the typical store has, as discussed in part II,
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 because of their ability to secure more than a
single fee from their borrowers.
The Bureau uses the term ``reborrow'' 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. Reborrowing can occur concurrently with repayment in back-to-back
transactions or can occur shortly thereafter. The Bureau believes that
reborrowing often indicates that the previous loan was beyond the
consumer's ability to repay and meet the consumer's other major
financial obligations and basic living expenses. As discussed in more
detail in the section-by-section analysis of proposed Sec. 1041.6, the
Bureau believes it is appropriate to consider loans to be reborrowings
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 is using a 30-day period in this proposal to align
with consumer expense cycles, which 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. Unless
otherwise noted, this section, Market Concerns--Short-Term Loans, uses
a 30-day period to determine whether a loan is part of a loan sequence.
The majority of lending revenue earned by storefront payday lenders
and lenders that make single-payment vehicle title loans comes from
borrowers who reborrow multiple times and become enmeshed in long loan
sequences. Based on the Bureau's data analysis, more than half of
payday loans are in sequences that contain 10 loans or more.\454\
Looking just at loans made to borrowers who are paid weekly, bi-weekly,
or semi-monthly, approximately 21 percent of loans are in sequences
that are 20 loans or longer.
---------------------------------------------------------------------------
\454\ 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.
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As discussed below, the Bureau believes that both the short term
and the single-payment structure of these loans contributes to the long
sequences the
[[Page 47923]]
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 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 roll
over or reborrow.
1. Loan Structure
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.\455\ The focus of the Bureau's research has been on
payday and vehicle title loans, so the discussion in Market Concerns--
Short-Term Loans centers on those types of products.
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\455\ 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.\456\
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\456\ The data used for this calculation is described in CFPB
Data Point: Payday Lending, at 10-15 and in CFPB Report on
Supplemental Findings.
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2. Marketing
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.\457\ These types of product
characterizations encourage unrealistic, overly optimistic thinking
that repaying the loan will be easy, that the cash short-fall will not
recur at the time the loan is due or shortly thereafter, and that the
typical payday loan is experienced by consumers as 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.'' \458\
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\457\ See, e.g., Speedy Cash, Can Anyone Get a Payday Loan?,
https://www.speedycash.com/faqs/payday-loans/can-anyone-get-a-payday-loan/ (last visited May 18, 2016) (``Payday loans may be able
to help you bridge the gap to your next pay day.''); Check Into
Cash, FAQs & Policies, https://checkintocash.com/faqs/in-store-cash-advance/ (last visited May 18, 2016) (``A cash advance is a short-
term, small dollar advance that covers unexpected expenses until
your next payday.''); 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.'').
\458\ Pew Charitable Trusts, Payday Lending in America: How
Borrowers Choose and Repay Payday Loans, at 22 (2013), 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.'').
---------------------------------------------------------------------------
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. A recent
academic paper reviewing the advertisements of Texas storefront and
online payday and vehicle title lenders found that speed of getting a
loan is the most frequently advertised feature in both online (100
percent) and storefront (50 percent) payday and title loans.\459\
Advertising that focuses on immediacy and speed may exploit borrowers'
sense of urgency. Indeed, the names of many payday and vehicle title
lenders include the words (in different spellings) ``speedy,''
``cash,'' ``easy,'' and ``quick,'' emphasizing their rapid and simple
loan funding.
---------------------------------------------------------------------------
\459\ Jim Hawkins, Using Advertisements to Diagnose Behavioral
Market Failure in Payday Lending Markets, 51 Wake Forest L. Rev. 57,
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.
---------------------------------------------------------------------------
3. Failure To Assess Ability To Repay
As discussed in part II, storefront payday, online payday, and
vehicle title lenders generally gather some basic information about
borrowers before making a loan. They normally collect income
information, although that may just be self-reported or ``stated''
income. Payday lenders collect information to ensure the borrower has a
checking account, and vehicle 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 ensure that
borrowers will be able to repay the loan without reborrowing. These
lenders generally do not obtain information about the borrower's
existing obligations or living expenses and do not prevent those with
expenses chronically exceeding income, or those
[[Page 47924]]
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 have the least ability to repay
the loans, and consequently are the most likely to reborrow, 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 reborrowing turn the traditional model on its head by
creating incentives for lenders to actually want borrowers who cannot
afford to repay and instead reborrow 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
reborrowing 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 evidences that
lenders do not see reborrowing as a sign of borrowers' financial
distress or as an outcome to be avoided.
4. Encouraging Long Loan Sequences
After 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,
lenders then actively encourage borrowers to reborrow 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.\460\ When the borrowers return, they are typically
presented by lender employees with two salient options: Repay the loan
in full, or pay a fee to roll over the loan (where permitted under
State law). If the consumer does not return, 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
prompt reborrowing. 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 and to encourage them to
choose the less immediately painful option of paying just the finance
charge. Based on its experience from supervising payday lenders, the
Bureau believes that store employees are generally incentivized to
maximize a store's loan volume and understand that reborrowing is
crucial to achieving that goal.\461\
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\460\ 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 cash payment. 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.
\461\ Most storefront lenders examined by the Bureau employ
simple incentives that reward employees and store managers for loan
volumes.
---------------------------------------------------------------------------
The Bureau's research shows that payday borrowers rarely reborrow a
smaller amount than the initial loan, which would effectively amortize
their loans by reducing the principal amount owed over time, thereby
reducing their costs and the likelihood that they will need to take
seven or ten loans out in a loan sequence. Lenders contribute to this
outcome when they encourage borrowers to pay the minimum amount and
roll over or reborrow the full amount of the earlier loan. In fact, as
discussed in part II, some online payday loans automatically roll over
at the end of the loan term unless the consumer takes affirmative
action in advance of the due date such as notifying the lender in
writing at least 3 days before the due date. Single-payment vehicle
title borrowers, or at least those who ultimately repay rather than
default, are more likely than payday borrowers to reduce the size of
loans taken out in quick succession.\462\ This may reflect the effects
of State laws regulating vehicle title loans that require some
reduction in loan size across a loan sequence. It may also be
influenced by the larger median size of vehicle title loans, which is
$694, as compared to $350 median loan size of payday loans.
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\462\ See CFPB Single-Payment Vehicle Title Lending, at 18.
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Lenders also actively encourage borrowers who they know are
struggling to repay their loans to roll over and continue to borrow. In
supervisory examinations and in an enforcement action, the Bureau has
found evidence that lenders maintain training materials that promote
borrowing by struggling borrowers.\463\ In the enforcement matter, 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 ``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 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.
---------------------------------------------------------------------------
\463\ 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), http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.
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It also appears that lenders do little to affirmatively promote the
use of ``off ramps'' or other alternative repayment options, when those
are required by law to be available. Such alternative repayment plans
could help at least some borrowers avoid lengthy cycles of reborrowing.
By discouraging the use of repayment plans, lenders can make it more
likely that such consumers will instead reborrow. Lenders that are
members of 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.\464\ (The second national
[[Page 47925]]
trade association reports that its members provide an extended payment
plan option but details on that option are not available.) In addition,
about 20 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 is
relatively low.\465\ One explanation for the low take-up rate on these
repayment plans may be lender disparagement of the plans or lenders'
failure to promote their availability.\466\ The Bureau's supervisory
examinations uncovered evidence that one or more payday lenders train
employees not to mention repayment plans until after the employees have
offered renewals, and only then to mention repayment plans if borrowers
specifically ask about them.
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\464\ 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).
\465\ 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'l Regulation, Illinois Trends Report All
Consumer Loan Products Through December 2013, at 19, available at
https://www.idfpr.com/dfi/ccd/pdfs/IL_Trends_Report%202013.pdf. In
Colorado, in 2009, 21 percent of eligible loans were converted to
repayment plans before statutory changes repealed the repayment
plan. State of Colorado, 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 (last visited May 25, 2016). In Utah, six
percent of borrowers entered into an extended payment plan. Utah
Dep't of Fin. Insts., Report of the Commissioner of Financial
Institutions, at 135, (2015) 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
Consumers Despite State Law, Center for Responsible Lending, at 4
(2016), http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
\466\ Colorado's 2009 annual report of payday loan activity
noted lenders' self-reporting of practices to restrict borrowers
from obtaining the number of loans needed to be eligible for a
repayment plan or imposing cooling-off periods on borrowers who
elect to take a repayment plan. Colorado 2009 Deferred Deposit
Lenders Annual Report. This evidence was from Colorado under the
state's 2007 statute which required lenders to offer borrowers a no-
cost repayment plan after the third balloon loan. The law was
changed in 2010 to prohibit balloon loans, as discussed in part II.
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5. Payment Mechanisms and Vehicle Title
Where lenders collect payments through post-dated checks, ACH
authorizations, and/or obtain security interests in borrowers'
vehicles, these mechanisms also can be used to encourage borrowers to
reborrow to avoid negative consequences for their transportation or
bank account. 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 rather than risk suffering
vehicle repossession or fees in connection with an attempt to deposit
the consumer's post-dated check, such as an overdraft fee or an NSF
fees from the bank and returned item fee from the lender if the check
were to bounce. The pressure can be especially acute when the lender
obtains vehicle security.
And in cases in which consumers do ultimately default on their
loans, these mechanisms often increase the degree of harm suffered due
to consumers losing their transportation, from account and lender fees,
and sometimes from closure of their bank accounts. As discussed in more
detail below in Market Concerns--Payments, in its research the Bureau
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.\467\
---------------------------------------------------------------------------
\467\ CFPB Online Payday Loan Payments, at 12.
---------------------------------------------------------------------------
c. Patterns of Lending and Extended Loan Sequences
The characteristics of the borrowers, 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 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.\468\
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\468\ 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) (Bureau's response to the challenge).
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Long loan sequences lead to very high total costs of borrowing.
Each single-payment loan carries the same cost as the initial loan that
the borrower took out. For a storefront borrower who takes out the
average-sized payday loan of $350 with a typical fee of $15 per $100,
each reborrowing means paying fees of $45. After just three
reborrowings, the borrower will have paid $140 simply to defer payment
of the original principal amount by an additional six weeks to three
months.
The cost of reborrowing for auto 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 APR
charged on the typical 30-day title loan is 300 percent, which equates
to a rate $25 per $100 borrowed, which is a common State limit.\469\ A
typical reborrowing thus means that the consumer pays a fee of around
$175. After just three reborrowings, a consumer will typically have
paid about $525 simply to defer payment of the original principal
amount by three additional months.
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\469\ Pew Charitable Trusts, Auto Title Loans: Market Practices
and Borrower Experiences (2015), at 3, http://www.pewtrusts.org/~/
media/assets/2015/03/autotitleloansreport.pdf.
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Evidence for the prevalence of long sequences of payday and auto
title loans 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.\470\ 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
[[Page 47926]]
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. That
data has 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.\471\ 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 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.\472\ A borrower who takes out a fourth loan
in a sequence has a 66 percent likelihood of taking out at least three
more loans, of a total sequence length of seven loans, a 48 percent
likelihood of taking out at least 6 more loans, for a total sequence
length of 10 loans.\473\
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\470\ See generally CFPB Data Point: Payday Lending; CFPB Payday
Loans and Deposit Advance Products White Paper.
\471\ Bureau of Consumer Fin. Prot., Supplemental Findings on
Payday Loans, Deposit Advance Products, and Vehicle Title Loans
(2016) (hereinafter CFPB Report on Supplemental Findings), available
at http://files.consumerfinance.gov/f/documents/Supplemental_Report_060116.pdf.
\472\ Id. In proposed Sec. 1041.6 the Bureau is proposing some
limitations on loans made within a sequence, and in proposed Sec.
1041.2(a)(12), the Bureau is proposing 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.
\473\ These figures are calculated simply by taking the share of
sequences that are at least seven (or ten) loans long and diving by
the share of sequences that are at least four loans long.
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These findings are mirrored in other analyses. During the SBREFA
process, a SER submitted an analysis prepared by Charles River
Associates (CRA) of loan data from several small storefront payday
lenders.\474\ Using a 60-day sequence definition, CRA found patterns of
borrowing very similar to those the Bureau found. Compared to the
Bureau's results using a 60-day sequence definition, in the CRA
analysis there were more loans where the borrower defaulted on the
first loan or repaid without reborrowing (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.\475\
---------------------------------------------------------------------------
\474\ Charles River Associates, Economic Impact on Small Lenders
of the Payday Lending Rules Under Consideration by the CFPB (2015),
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.
\475\ 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.\476\ This is slightly
higher than the mean 30-day sequence length in the Bureau's analysis
(5.9 loans).
---------------------------------------------------------------------------
\476\ Marc Anthony Fusaro & Patricia J. Cirillo, Do Payday Loans
Trap Consumers in a Cycle of Debt?, at 23 (2011), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776.
---------------------------------------------------------------------------
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 9 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.\477\ 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 7 loans,
and that 10 percent of borrowers had a sequence of at least 12
loans.\478\ This research group also identified a core of users with
extremely persistent borrowing. They 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.\479\ The median time in debt for
this group of extremely persistent borrowers was over 1,000 days, 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 (nearly two years for borrowers paid monthly).
Perhaps most alarming, nine percent of this group borrowed continuously
for the entire period.\480\
---------------------------------------------------------------------------
\477\ nonPrime 101, Report 7B: Searching for Harm in Storefront
Payday Lending, at 22 (2016), 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.
\478\ Id. 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 Table C-2 with
id. at Table 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.
\479\ nonprime 101, Report 7C: A Balanced View of Storefront
Payday Lending (2016), https://www.nonprime101.com/data-findings/.
\480\ Id. at Table 2. A study of borrowers in Florida claims
that almost 80 percent of borrowers use payday loans longer than a
year, and 50 percent use payday loans longer than two years.
Floridians for Financial Choice, The Florida Model: Baseless and
Biased Attacks are Dangerously Wrong on Florida Payday Lending, at 5
(2016), http://financialchoicefl.com/wp-content/uploads/2016/05/FloridaModelReport.pdf (last visited May 29, 2016).
---------------------------------------------------------------------------
The Bureau has also analyzed single-payment vehicle title loans
using the same basic methodology.\481\ Using a 30-day definition of
loan sequences, the Bureau found that short-term (30-day) single-
payment vehicle title loans had loan sequences that were similar to
payday loans. More than half, 56 percent, of single-payment vehicle
title sequences contained at least four loans; 36 percent contained
seven or more loans; and 23 percent had 10 or more loans. Other sources
on vehicle 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 49 percent of
borrowers taking out four or more loans in row, 35 percent taking out
more than seven loans in a row, and 25 percent taking out more than 10
loans in a row.\482\
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\481\ See generally CFPB Single-Payment Vehicle Title Report.
\482\ Tenn. Dep't of Fin. Insts., 2016 Report on the Title
Pledge Industry, at (2016), at 8, http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf.
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In addition to direct measures of the length of loan sequences,
there is ample indirect evidence from the cumulative number of loans
that borrowers take out that borrowers 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
[[Page 47927]]
study 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.\483\ 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) time
period.\484\ 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.\485\
---------------------------------------------------------------------------
\483\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 23.
\484\ CFPB Data Point: Payday Lending, at 10-15.
\485\ Paige Marta Skiba & Jeremy Tobacman, Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default, at 6 (Vanderbilt University Law School, Law
and Economics Working Paper #08-33, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1319751&download=yes
(finding an average of six loans per year for payday borrowers). A
study of Oklahoma payday borrowing found an average of nine loans
per year. Uriah King and Leslie Parrish, Payday Loans, Inc.: Short
on Credit, Long on Debt, at 1 (2011), http://www.responsiblelending.org/payday-lending/research-analysis/payday-loan-inc.pdf. Another study cites a median of nine loans per year.
See also Elliehausen, An Analysis of Consumers' Use of Payday Loans,
at 43 (finding a median of 9-13 loans in the last year); Michael A.
Stegman, Payday Lending, 21 J. of Econ. Perspectives 169, 176
(2007), available at http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.21.1.169.
---------------------------------------------------------------------------
Given differences in the regulatory context and the overall nature
of the market, less information is available on online lending than
storefront lending. Borrowers who take out payday loans online are
likely to change lenders more frequently than storefront borrowers,
which makes measuring the duration of loan sequences 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 average days in debt per year of 73
days.\486\ The report combines medians of each statistic across the
three lenders, making interpretation difficult, but these findings
suggest that borrowers take out three to four loans per year at these
lenders.
---------------------------------------------------------------------------
\486\ G. Michael Flores, The State of Online Short-term Lending,
Statistical Analysis, Second Annual, at 5 (2015), http://onlinelendersalliance.org/wp-content/uploads/2015/07/2015-Bretton-Woods-Online-Lending-Study-FINAL.pdf (last visited May 18, 2016)
(commissioned by the Online Lenders Alliance).
---------------------------------------------------------------------------
Additional analysis is available based on the records of a
specialty consumer reporting agency. These show similar loans per
borrower, 2.9, but over a multi-year period.\487\ These loans, however,
are not primarily single-payment payday loans. A small number are
installment loans, while most are ``hybrid'' loans that typically have
a 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 many lenders do not report to the specialty consumer
reporting agency that provided the data for the analysis, so that when
borrowers change lenders it may often be the case that their subsequent
loans are not in the data analyzed.
---------------------------------------------------------------------------
\487\ nonPrime 101, Report 7-A, ``How Persistent in the
Borrower-Lender Relationship in Payday Lending?'', at Table 1
(September 2015).
---------------------------------------------------------------------------
d. Consumer Expectations and Understanding of Loan Sequences
Extended sequences of loans raise concerns about the market for
short-term loans. This concern is exacerbated by the available
empirical evidence regarding consumer understanding of such loans,
which strongly indicates that borrowers who take out long sequences of
payday loans and vehicle title loans do not anticipate those long
sequences.
Measuring consumers' expectations about reborrowing 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 saying that they 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. Asking the question
may cause people to think about it more than they otherwise would have.
Two studies have asked payday and vehicle title borrowers at the
time they took out their loans about their expectations about
reborrowing, either the behavior of the average borrower or their own
borrowing, and compared their responses with actual repayment behavior
of the overall borrower population. 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. Another 25
percent responded with four weeks. Translating weeks into loans, the
four-week response likely reflects borrowers who believe the average
number of loans a borrower take out before repaying is one loan or two
loans, depending on the mix of respondents paid bi-weekly or monthly.
The report did not provide data on actual reborrowing, but based on
analysis by the Bureau and others, this suggests that respondents were,
on average, somewhat optimistic about reborrowing behavior.\488\
However, it is difficult to be certain that some survey respondents did
not conflate the time loans are outstanding with the contract term of
individual loans, 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?'', which some borrowers may have interpreted
to refer to the specific loan being taken out, and not subsequent
rollovers. Borrowers' beliefs about their own reborrowing behavior
could also vary from their beliefs about average borrowing behavior by
others.
---------------------------------------------------------------------------
\488\ Marianne Bertrand & Adair Morse, Information Disclosure,
Cognitive Biases and Payday Borrowing and Payday Borrowing, 66 J.
Fin. 1865, 1866 (2011), available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2011.01698.x/full. 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 ch.
5. Using a relatively short reborrowing 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.
---------------------------------------------------------------------------
In a study of vehicle title borrowers, researchers surveyed
borrowers about their expectations about how long it would take to
repay the loan.\489\ 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 and
found that
[[Page 47928]]
borrowers were slightly optimistic, on average, in their
predictions.\490\
---------------------------------------------------------------------------
\489\ Fritzdixon, et al., at 1029-1030.
\490\ 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 on average. A
2014 study by Columbia University Professor Ronald Mann \491\ surveyed
borrowers at the point at which they were borrowing 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 in
Mann's report, combined with subsequent analysis that Professor Mann
shared with Bureau staff, show the following.\492\
---------------------------------------------------------------------------
\491\ Ronald Mann, Assessing the Optimism of Payday Loan
Borrowers, 21 Supreme Court Econ. Rev. 105 (2014).
\492\ 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 that ``about 60 percent of
borrowers accurately predict how long it will take them finally to
repay their payday loans.'' Id. at 105. 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 was accurate for many borrowers.
---------------------------------------------------------------------------
First, borrowers are very poor at predicting long sequences of
loans. Fewer borrowers expected to experience long sequences of loans
than actually did experience long sequences. Only 10 percent of
borrowers expected to be in debt for more than 70 days (five two-week
loans), and only five percent expected to be in debt for more than 110
days (roughly eight two-week) loan, yet the actual numbers were
substantially higher. Indeed, approximately 12 percent of borrowers
remained in debt after 200 days (14 two-week loans).\493\ Borrowers who
experienced long sequences of loans had not expected those long
sequences when they made their initial borrowing decision; in fact they
had not predicted that their sequences would be longer than borrowers
overall. And while some borrowers did expect long sequences, those
borrowers did not in fact actually have unusually long sequences; as
Mann notes, ``it appears that those who predict long borrowing periods
are those most likely to err substantially in their predictions.''
\494\
---------------------------------------------------------------------------
\493\ Id. at 119; Email from Ronald Mann, Professor, Columbia
Law School, to Jialan Wang & Jesse Leary, Bureau of Consumer Fin.
Prot. (Sept. 24, 2013, 1:32 EDT).
\494\ Mann, at 127.
---------------------------------------------------------------------------
Second, Mann's analysis shows that many borrowers do not appear to
learn from their past borrowing experience. 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.'' \495\
---------------------------------------------------------------------------
\495\ Id.
---------------------------------------------------------------------------
Finally, Mann found that borrowers' predictions about the need to
reborrow at least once versus not at all were optimistic, with 60
percent of borrowers predicting they would not roll over or reborrow
within one pay cycle and only 40 percent actually not doing so.
A trade association commissioned two surveys which suggest that
consumers are able to predict their borrowing patterns.\496\ These
surveys, which were very similar to each other, were of storefront
payday borrowers who had recently repaid a loan and had not taken
another loan within a specified period of time, and were conducted in
2013 and 2016. 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 suffers 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. It is also unclear what the borrowers understood the phrase
``completely repay'' to mean--whether they took it to mean the specific
loan they had recently repaid or the original loan that ultimately led
to the loan they repaid. For these reasons, the Bureau does not believe
that these studies undermine the evidence above indicating that
consumers are generally not able to predict accurately the number of
times that they will need to reborrow, particularly with respect to
long-term reborrowing.
---------------------------------------------------------------------------
\496\ Tarrance Group, et al., Borrower and Voter Views of Payday
Loans (2016), http://www.tarrance.com/docs/CFSA-BorrowerandVoterSurvey-AnalysisF03.03.16.pdf (last visited May 29,
2016); Harris Interactive, Payday Loans and the Borrower Experience
(2013), http://cfsaa.com/Portals/0/Harris_Interactive/CFSA_HarrisPoll_SurveyResults.pdf (last visted May 29, 2016). The
trade association and SERs have cited this survey in support of
their critiques of the Bureau's Small Business Review Panel Outline.
---------------------------------------------------------------------------
There are several factors that may contribute to consumers' lack of
understanding of the risk of reborrowing 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 operate in practice. Although
lenders present the loans as a temporary bridge option, only a minority
of payday loans are repaid without any reborrowing. These loans often
produce lengthy cycles of rollovers or new loans taken out shortly
after the prior loans are repaid. Not surprisingly, many borrowers 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
reborrowing--are generally unable to predict accurately how many times
they will reborrow and at what cost. As noted above, this is especially
true for borrowers who reborrow many times.
Moreover, research suggests that financial distress could also be a
factor in borrowers' decision making. As discussed above, payday and
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 poor 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.\497\ 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
that there is no time to comparison shop when facing an imminent
liquidity crisis.
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\497\ See Bhutta, Skiba, & Tobacman, at 16; CFPB Online Payday
Loan Payments, at 3-4; Brian Baugh, What Happens When Payday
Borrowers Are Cut Off From Payday Lending? A Natural Experiment
(Aug. 2015) (Ph.D. dissertation, Ohio State University), available
at http://fisher.osu.edu/supplements/10/16174/Baugh.pdf;
nonPrime101, Profiling Internet Small-Dollar Lending, at 7 (2014),
https://www.nonprime101.com/wp-content/uploads/2013/10/Clarity-Services-Profiling-Internet-Small-Dollar-Lending.pdf.
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Research has shown that when people are under pressure they tend to
focus on
[[Page 47929]]
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 people can
engage in. Consumers experiencing a financial crisis deciding on
whether to take out a loan are a prime example of this behavior.\498\
Even when consumers are not facing a crisis, research shows that they
tend to underestimate their near-term expenditures,\499\ and, when
estimating how much financial ``slack'' they will have in the future,
discount even the expenditures they do expect to incur.\500\ Finally,
regardless of their financial situation, research suggests consumers
may generally have unrealistic expectations about their future
earnings, their future expenses, and their ability to save money to
repay future obligations. Research documents that consumers in many
contexts demonstrate ``optimism bias'' about future events and their
own future performance.\501\
---------------------------------------------------------------------------
\498\ See generally Sendhil Mullainathan & Eldar Shafir,
Scarcity: The New Science of Having Less and How It Defines Our
Lives (2014).
\499\ 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, Manoj Thomas, & Vicki G. Morwitz,
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, 249 (2008).
\500\ Jonathan Z. Berman, Expense Neglect in Forecasting
Personal Finances, at 5 (2014) (forthcoming publication in J.
Marketing Research), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2542805.
\501\ The original work in the area of optimistic predictions
about the future is in the area of predicting how long it will to
complete certain tasks in the future. See, e.g., Daniel Kahneman &
Amos Tversky, Intuitive Prediction: Biases and Corrective
Procedures, 12 TIMS Studies in Mgmt. Science 313 (1979); Roger
Buehler, Dale Griffin, & Michael Ross, Exploring the ``Planning
Fallacy'': Why People Underestimate their Task Completion Times, 67
J. Personality & Soc. Psychol. 366 (1994); Roger Buehler, Dale
Griffin, & Michael Ross, 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).
---------------------------------------------------------------------------
Each of these behavioral biases, which are exacerbated when facing
a financial crisis, contribute to consumers who are considering taking
out a payday loan or single-payment vehicle title loan failing to
assess accurately the likely duration of indebtedness, and,
consequently, the total costs they will pay as a result of taking out
the loan. Tunneling may cause consumers not to focus sufficiently on
the future implications of taking out a loan. To the extent that
consumers do comprehend what will happen when the loan comes due,
underestimation of future expenditures and optimism bias will cause
them to misunderstand the likelihood of repeated reborrowing due to
their belief that they are more likely to be able to repay the loan
without defaulting or reborrowing 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 reborrow may
still underestimate the likelihood that they will wind up rolling over
or reborrowing multiple times and the high cost of doing so.
Regardless of the underlying explanation, the empirical evidence
indicates that borrowers do not expect to be in very long sequences and
are overly optimistic about the likelihood that they will avoid rolling
over or reborrowing their loans at all.
e. Delinquency and Default
In addition to the harm caused by unanticipated loan sequences, the
Bureau is concerned that many borrowers suffer other harms from
unaffordable loans in the form of the 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.\502\ They may take out multiple loans before defaulting--69
percent of payday loan sequences that end in default are multi-loan
sequences in which the borrower has rolled over or reborrowed at least
once 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 reborrowing fees.
---------------------------------------------------------------------------
\502\ 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 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 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.\503\ Looking at the borrower level, the study
found that half of all borrowers had a check deposited and bounce over
the course of the year following their first payday loan.\504\ An
analysis of data collected in North Dakota showed a lower, but still
high, rate of lenders depositing checks that subsequently bounced or
attempting 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 in the year following their first payday
loans, and 46 percent did so in the first two years following their
first payday loan.\505\ 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.\506\ In
Bureau analysis of ACH payments initiated by online payday and payday
installment lenders, 50 percent of online borrowers had at least one
overdraft or non-sufficient funds transaction in connection with their
loans over an 18 month period. These borrowers' depository accounts
incurred an average total of $185 in fees.\507\
---------------------------------------------------------------------------
\503\ Skiba & Tobacman, at 6. The study did not separately
report the percentage of loans on which the checks that were
deposited were paid.
\504\ These results are limited to borrowers paid on a bi-weekly
schedule.
\505\ Susanna Montezemolo & Sarah Wolff, Payday Mayday: Visible
and Invisible Payday Defaults, at 4 (2015), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/finalpaydaymayday_defaults.pdf.
\506\ ``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.
\507\ CFPB Online Payday Loan Payments, at 10-11.
---------------------------------------------------------------------------
Bounced checks and failed ACH payments can be quite costly for
borrowers. The median bank NSF fee is $34,\508\ which is equivalent to
the cost of a rollover on a $300 storefront loan. If the lender makes
repeated attempts to collect using these methods, this leads to
repeated fees. 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
[[Page 47930]]
those cases. The failure rate increases with each subsequent
attempt.\509\
---------------------------------------------------------------------------
\508\ Bureau of Consumer Fin. Prot., CFPB Study of Overdraft
Programs, at 52 (2013), http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf
\509\ CFPB Online Payday Loan Payments, at 3; 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; late fees are restricted in some but not all States.\510\
---------------------------------------------------------------------------
\510\ 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.
---------------------------------------------------------------------------
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 noted, default may come after a lender has made
repeated attempts to collect from the borrower's deposit account, such
that a borrower may ultimately find it necessary to close the account,
or 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
vehicle title loans stand to suffer the greatest harm from default, as
it may lead to the repossession of their vehicle. In addition to the
direct costs of the loss of an asset, this can seriously disrupt
people's lives and put at risk their ability to remain employed.
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.\511\ But because so many borrowers respond to the
unaffordability of these loans by reborrowing 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 sequence definition, 20 percent
of loan sequences end in default. A recent report based on a multi-
lender dataset showed similar results, with a 3 percent loan-level
default rate and a 16 percent sequence-level default rate.\512\
---------------------------------------------------------------------------
\511\ 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.
\512\ nonprime101, Measure of Reduced Form Relationship between
the Payment-Income Ratio and the Default Probability, at 6 (2015),
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 at
the borrower level. 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.\513\
---------------------------------------------------------------------------
\513\ Skiba & Tobacman, at Table 2. Again, these results are
limited to borrowers paid bi-weekly.
---------------------------------------------------------------------------
Default rates on single-payment vehicle title loans are higher than
those on storefront payday loans. In the data analyzed by the Bureau,
the default rate on all vehicle title loans is 6 percent, and the
sequence-level default rate is 33 percent.\514\ 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 with repossession. In other words, one in five borrowers
is unable to escape debt without losing their car.
---------------------------------------------------------------------------
\514\ CFPB Single-Payment Vehicle Title Lending, at 23.
---------------------------------------------------------------------------
Borrowers of all types of covered loans are also likely to be
subject to collection efforts. The Bureau observed in its consumer
complaint data that from November 2013 through December 2015
approximately 24,000 debt collection complaints had payday loan as the
underlying debt. More than 10 percent of the complaints the Bureau has
received about debt collection stem from payday loans.\515\ 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, as well as in-person visits to consumers' homes and worksites.
Some of this conduct, depending on 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 in borrowers who
are already under financial pressure. In addition, the Bureau's
enforcement and supervisory examination processes have uncovered
evidence of numerous illegal collection practices by payday lenders.
These include: Illegal third-party calls; 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.\516\
---------------------------------------------------------------------------
\515\ Bureau of Consumer Fin. Prot., Monthly Complaint Report,
at 12 (March 2016), http://files.consumerfinance.gov/f/201603_cfpb_monthly-complaint-report-vol-9.pdf.
\516\ See Bureau of Consumer Fin. Prot., Supervisory Highlight,
at 17-19 (Spring 2014), http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
---------------------------------------------------------------------------
Even if a vehicle title borrower does not have her vehicle
repossessed, the threat of repossession in itself may cause harm to
borrowers. It may cause them to forgo other essential expenditures in
order to make the payment and avoid repossession.\517\ 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 in
part II, one or more lenders exceed their maximum loan amount
guidelines and consider the vehicle's sentimental or use value to the
consumer when assessing the amount of funds they will lend.
---------------------------------------------------------------------------
\517\ 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 (internal citation omitted).
---------------------------------------------------------------------------
The potential impacts 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 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.\518\ More than one-third (35 percent) of borrowers pledge
the title to the only working vehicle in the household (Pew 2015). 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.
---------------------------------------------------------------------------
\518\ 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.
---------------------------------------------------------------------------
The Bureau analyzed online payday and payday installments lenders'
attempts to withdraw payments from borrowers' deposit accounts, and
found that six percent of payment attempts
[[Page 47931]]
that were not preceded by a failed payment attempt themselves
fail.\519\ An additional six percent succeed despite a lack of
sufficient available funds in the borrower's account because the
borrower's depository institution makes the payment as an overdraft, in
which case the borrower was also likely charged a similar fee. Default
rates are more difficult to determine, but 36 percent of checking
accounts with failed online loan payments are subsequently closed. This
provides a rough measure of default on these loans, but more
importantly demonstrates the harm borrowers suffer in the process of
defaulting on these loans.
---------------------------------------------------------------------------
\519\ 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.
---------------------------------------------------------------------------
The risk that they will default and the costs associated with
default are likely to be under-appreciated by borrowers when obtaining
a payday or vehicle title loan. Consumers are unlikely, when deciding
whether to take out a loan, to be thinking about what will happen if
they were to default or what it will 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 until their
next paycheck. Some of the remedies a lender might take, such as
repeatedly attempting to collect from a borrower's checking account or
using remotely created checks, may be unfamiliar to borrowers.
Realizing that this is even a possibility would depend on the borrower
investigating what would happen in the case of an event they do not
expect to occur, such as a default.
f. Collateral Harms From Making Unaffordable Payments
In addition to the harms associated with delinquency and default,
borrowers who take out these loans may experience other financial
hardships as a result of making payments on unaffordable loans. These
may arise if the borrower feels compelled to prioritize payment on the
loan and does not wish to reborrow. This course 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, the borrower is likely to feel compelled to prioritize
payments on the title loan over other bills or crucial expenditures
because of the 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, especially when the lender is able to time the withdrawal to
align with the borrower's payday or the day the borrower receives
periodic income, 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.
The Bureau is not able to directly observe the harms borrowers
suffer from making unaffordable payments. The rates of reborrowing and
default on these loans indicate that many borrowers do struggle to
repay these loans, and it is therefore reasonable to infer that many
borrowers are suffering harms from making unaffordable payments
particularly where a leveraged payment mechanism and vehicle security
strongly incentivize consumers to prioritize short-term loans over
other expenses.
g. Harms Remain Under Existing Regulatory Approaches
Based on Bureau analysis and outreach, the harms the Bureau
perceives from payday loans, single-payment vehicle title loans, and
other short-term loans persist in these markets despite existing
regulatory frameworks. In particular, the Bureau believes that existing
regulatory frameworks in those States that have authorized payday and/
or vehicle title lending have still left many consumers vulnerable to
the specific harms discussed above relating to reborrowing, default,
and collateral harms from making unaffordable payments.
Several different factors have complicated State efforts to
effectively apply their regulatory frameworks to payday loans and other
short-term loans. For example, lenders may adjust their product
offerings or their licensing status to 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.\520\ States also have faced challenges in applying their
laws to certain online lenders, including lenders claiming tribal
affiliation or offshore lenders.\521\
---------------------------------------------------------------------------
\520\ 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.
\521\ For example, a number of States have taken action against
Western Sky Financial, a South Dakota-based online lender based on
an Indian reservation and owned by a tribal member, online loan
servicer CashCall, Inc., and related entities for evading State
payday lending laws. 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 payday loans and other short-term
loans. For example, fourteen States and the District of Columbia have
interest rate caps or other restrictions that, in effect, prohibit
payday lending. 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 from payday loans.
The 36 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 reborrowing. 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 vehicle title lending statutes require that the lender
consider a consumer's ability to repay the loan, though none of them
specify 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. Additionally,
some jurisdictions require lenders to provide specific disclosures to
alert borrowers of potential risks.
While these provisions may have been designed to target some of the
same or
[[Page 47932]]
similar potential harms identified above, these provisions do not
appear to have had a significant impact on reducing reborrowing and
other harms that confront consumers of short-term loans. In particular,
as discussed above, the Bureau's primary concern for payday loans and
other short-term loans is that many consumers end up reborrowing over
and over again, turning what was ostensibly a short-term loan into a
long-term cycle of debt. The Bureau's analysis of borrowing patterns in
different States that permit payday loans indicates that most States
have very similar rates of reborrowing, with about 80 percent of loans
followed by another loan within 30 days, regardless of the restrictions
that are in place.\522\ In particular, laws that prevent direct
rollovers of loans, as well as laws that impose short cooling-off
periods between loans, such as Florida's prohibition on same-day
reborrowing, have very little impact on reborrowing rates measured over
periods longer than one day. The 30-day reborrowing rate in all States
that prohibit rollovers is 80 percent, and in Florida the rate is 89
percent. Several States, however, do stand out as having substantially
lower reborrowing rates than other States. These include Washington,
which limits borrowers to no more than eight loans in a rolling 12-
month period and has a 30-day reborrowing 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 reborrowing rate
of 61 percent.
---------------------------------------------------------------------------
\522\ CFPB Report on Supplemental Findings, at ch. 4.
---------------------------------------------------------------------------
Likewise, the Bureau believes that disclosures are insufficient to
adequately reduce the harm that consumers suffer when lenders do not
determine consumers' ability to repay, for two primary reasons.\523\
First, disclosures do not address the underlying incentives in this
market for lenders to encourage borrowers to reborrow and take out long
sequences of loans. As discussed above, the prevailing business model
in the short-term loan market involves lenders deriving a very high
percentage of their revenues from long loan sequences. While enhanced
disclosures would provide additional information to consumers, the
Bureau believes that the loans would remain unaffordable for most
consumers, lenders would have no greater incentive to underwrite more
rigorously, and lenders would remain dependent on long-term loan
sequences for revenues.
---------------------------------------------------------------------------
\523\ See also section-by-section analysis of proposed Sec.
1041.7.
---------------------------------------------------------------------------
Second, empirical evidence suggests that disclosures have only
modest impacts on consumer borrowing patterns for short-term loans
generally and negligible impacts on whether consumers reborrow.
Evidence from a field trial of several disclosures designed
specifically to warn of the risks of reborrowing and the costs of
reborrowing showed that these disclosures had a marginal effect on the
total volume of payday borrowing.\524\ Analysis by the Bureau 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.\525\ The Bureau believes these findings
confirm the limited magnitude of the impacts from the field trial. In
addition, analysis by the Bureau of the impacts of the disclosures in
Texas shows that the probability of reborrowing on a payday loan
declined by only approximately 2 percent once the disclosure was put in
place. Together, these findings indicate that high levels of
reborrowing and long sequences of payday loans remain a significant
source of consumer harm even after a disclosure regime is put into
place. Further, as discussed above in Market Concerns--Short-Term
Loans, the Bureau has observed that consumers have a very high
probability of winding up in a very long sequence once they have taken
out only a few loans in a row.\526\ 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 near negligible impact of a
disclosure on consumer reborrowing patterns provides further evidence
of the insufficiency of disclosures to address what the Bureau believes
are the core harms to consumers in this credit market.
---------------------------------------------------------------------------
\524\ 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.
\525\ See CFPB Report on Supplemental Findings, at 73.
\526\ As discussed above in this Market Concerns--Short-Term
Loans, 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.
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During the SBREFA process, many of the SERs urged the Bureau to
reconsider the proposals under consideration and defer to existing
regulation of these credit markets by the States or to model Federal
regulation 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 and
that the Bureau consider whether existing State laws and regulations
could provide a model for elements of the Federal regulation. The
Bureau has examined State laws closely in connection with preparing the
proposed rule, as discussed in part II. Moreover, based on the Bureau's
data analysis as noted above, the regulatory frameworks in most States
do not appear to have had a significant impact on reducing reborrowing
and other harms that confront consumers of short-term loans. For these
and the other reasons discussed in Market Concerns--Short-Term Loans,
the Bureau believes that Federal intervention in these markets is
warranted at this time.
Section 1041.4 Identification of Abusive and Unfair Practice--Short-
Term Loans
In most consumer lending markets, it is standard practice 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.\527\ The Bureau has not determined whether, as a general rule, it
is an unfair or abusive practice for any lender to make a loan without
making such a determination. Nor is the Bureau proposing to resolve
that question in this rulemaking. Rather, the focus of Subpart B of
this proposed rule is on a specific set of loans which the Bureau has
carefully studied, as discussed in more detail in part II and Market
Concerns--Short-Term Loans. Based on the evidence described in part II
and Market Concerns--Short-Term Loans, and pursuant to its authority
under section 1031(b) of the Dodd-Frank Act,
[[Page 47933]]
the Bureau is proposing in Sec. 1041.4 to identify it as both an
abusive and an unfair act or practice for a lender to make a covered
short-term loan without reasonably determining that the consumer has
the ability to repay the loan. ``Ability to repay'' in this context
means that the consumer has the ability to repay the loan without
reborrowing and while meeting the consumer's major financial
obligations and basic living expenses. The Bureau's preliminary
findings with regard to abusiveness and unfairness are discussed
separately below. The Bureau is making these preliminary findings based
on the specific evidence cited below in the section-by-section analysis
of proposed Sec. 1041.4, as well as the evidence discussed in part II
and Market Concerns--Short-Term Loans.
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\527\ 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, at 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).
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Abusiveness
Under Sec. 1031(d)(2)(A) and (B) of the Dodd-Frank Act, 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.
It appears to the Bureau that consumers generally do not understand the
material risks and costs of taking out a payday, vehicle title, or
other short-term loan, and further lack the ability to protect their
interests in selecting or using such loans. It also appears to the
Bureau that lenders take unreasonable advantage of these consumer
vulnerabilities by making loans of this type without reasonably
determining that the consumer has the ability to repay the loan.
Consumers Lack an Understanding of Material Risks and Costs
As discussed in Market Concerns--Short-Term Loans, short-term
payday and vehicle title loans can and frequently do lead to a number
of negative consequences for consumers, which range from extensive
reborrowing to defaulting to being unable to pay other obligations or
basic living expenses as a result of making an unaffordable payment.
All of these--including the direct costs that may be payable to lenders
and the collateral consequences that may flow from the loans--are risks
or costs of these loans, as the Bureau understands and reasonably
interprets that phrase.
The Bureau recognizes that consumers who take out a payday, vehicle
title, or other short-term loan 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 does not
believe, however, that such a generalized understanding suffices to
establish that consumers understand the material costs and risks of
these products. Rather, the Bureau believes that it is reasonable to
interpret ``understanding'' in this context to mean more than a mere
awareness that it is within the realm of possibility that a particular
negative consequence may follow or cost may be incurred as a result of
using the product. For example, consumers may not understand that a
risk is very likely to materialize or that--though relatively rare--the
impact of a particular risk would be severe.
As discussed above in Market Concerns--Short-Term Loans, the single
largest risk to a consumer of taking out a payday, vehicle title, or
similar short-term loan is that the initial loan will lead to an
extended cycle of indebtedness. This occurs in large part because the
structure of the loan usually requires the consumer to make a lump-sum
payment within a short period of time, typically two weeks, or a month,
which would absorb such a large share of the consumer's disposable
income as to leave the consumer unable to pay the consumer's major
financial obligations and basic living expenses. Additionally, in
States where it is permitted, lenders often offer borrowers the
enticing, but ultimately costly, alternative of paying a smaller fee
(such as 15 percent of the principal) and rolling over the loan or
making back-to-back repayment and reborrowing transactions rather than
repaying the loan in full--and many borrowers choose this option.
Alternatively, borrowers may repay the loan in full when due but find
it necessary to take out another loan a short time later because the
large amount of cash needed to repay the first loan relative to their
income leaves them without sufficient funds to meet their other
obligations and expenses. This cycle of indebtedness affects a large
segment of borrowers: As described in Market Concerns--Short-Term
Loans, 50 percent of storefront payday loan sequences contain at least
four loans. One-third contain seven loans or more, by which point
consumers will have paid charges equal to 100 percent of the amount
borrowed and still owe the full amount of the principal. 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, 21 percent of loans are in sequences consisting of at
least 20 loans. For loans made to borrowers who are paid monthly, 46
percent of loans are in sequences consisting of at least 10 loans.
The evidence summarized in Market Concerns--Short-Term Loans also
shows that consumers who take out these loans typically appear not to
understand when they first take out a loan how long they are likely to
remain in debt and how costly that will be for them. Payday borrowers
tend to overestimate their likelihood of repaying without reborrowing
and underestimate the likelihood that they will end up in an extended
loan sequence. For example, one study found that while 60 percent of
borrowers predict they would not roll over or reborrow their payday
loan, only 40 percent actually did not roll over or reborrow. The same
study found that consumers who end up reborrowing numerous times--i.e.,
the consumers who suffer the most harm--are particularly bad at
predicting the number of times they will need to reborrow. Thus, many
consumers who expected to be in debt only a short amount of time can
find themselves in a months-long cycle of indebtedness, paying hundreds
of dollars in fees above what they expected while struggling to repay
the original loan amount.
The Bureau has observed similar outcomes for borrowers of single-
payment vehicle title loans. For example, 83 percent of vehicle title
loans being reborrowed on the same day that a previous loan was due,
and 85 percent of vehicle title loans are reborrowed within 30 days of
a previous vehicle title loan. 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. While there is no comparable research on the
expectations of vehicle title borrowers, the Bureau believes that the
research in the payday context can be extrapolated to these other
products given the significant similarities in the product structures,
the characteristics of the borrowers, and the outcomes borrowers
experience, as detailed in part II and Market Concerns--Short-Term
Loans.
Consumers are also exposed to other material risks and costs in
connection with covered short-term loans. As discussed in more detail
in Market Concerns--Short-Term Loans, the unaffordability of the
payments for
[[Page 47934]]
many consumers creates a substantial risk of default. Indeed, 20
percent of payday loan sequences and 33 percent of title loan sequences
end in default. And 69 percent of payday loan defaults occur in loan
sequences in which the consumer reborrows at least once. 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. NSFs are
associated with a high rate of bank account closures. Defaults also
often expose consumers to aggressive debt collection activities by the
lender or a third-party debt collector. The consequences of default can
be even more dire for a vehicle title borrower, including the loss of
the consumer's vehicle--which is the result in 20 percent of single-
payment vehicle title loan sequences.
The Bureau does not believe that many consumers who take out
payday, vehicle title, or other short-term loans understand the
magnitude of these additional risks--for example, that they have at
least a one in five (or for auto title borrowers a one in three) chance
of defaulting. Nor are payday borrowers likely to factor into their
decision on whether to take out the loan the many collateral
consequences of default, including expensive bank fees, aggressive
collections, or the costs of having to get to work or otherwise from
place to place if their vehicle is repossessed.
As discussed in Market Concerns--Short-Term Loans, several factors
can impede consumers' understanding of the material risks and costs of
payday, vehicle title, and other short-term loans. To begin with, there
is a mismatch between how these loans are structured and how they
operate in practice. Although the loans are presented as standalone
short-term products, only a minority of payday loans are repaid without
any reborrowing. These loans often instead produce lengthy cycles of
rollovers or new loans taken out shortly after the prior loans are
repaid. Empirical evidence shows that consumers are not able to
accurately predict how many times they will reborrow, and thus 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 loan proceeds. Even consumers who believe they will be
unable to repay the loan immediately and therefore expect some amount
of reborrowing are generally unable to predict accurately how many
times they will reborrow and at what cost. This is especially true for
consumers who reborrow many times.
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 particularly susceptible to lender marketing,
and payday and vehicle title lenders often emphasize the speed with
which the lender will provide funds to the consumer.\528\ In fact,
numerous lenders select company names that emphasize rapid loan
funding. But there is a substantial disparity between how these loans
are marketed by lenders and how they are actually experienced by many
consumers. While covered short-term loans are marketed as short-
duration loans intended for short-term or emergency use only,\529\ a
substantial percentage of consumers do not repay the loan quickly and
thus either default, or, in a majority of the cases, reborrow--often
many times. Moreover, consumers who take out covered short-term loans
may be overly optimistic about their future cash flow. Such incorrect
expectations may lead consumers to misunderstand whether they will have
the ability to repay the loan, or to expect that they will be able to
repay it after reborrowing only a few times. These consumers may find
themselves caught in a cycle of reborrowing that is both very costly
and very difficult to escape.
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\528\ 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.
\529\ For example, as noted in Market Concerns--Short-Term
Loans, 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.''
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Consumer Inability to Protect Interests
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. 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 consumer financial product or
service. For instance, as discussed above, the Bureau believes that
consumers are unlikely to be able to protect their interests in
selecting or using payday, vehicle title, and other short-term loans
because they do not understand the material risks and costs associated
with these products.
But it is reasonable to also conclude from the structure of section
1031(d), which separately declares it abusive to take unreasonable
advantage of consumer lack of understanding or of consumers' inability
to protect their interests in using or selecting a product or service
that, in some circumstances, consumers may understand the risks and
costs of a product, but nonetheless be unable to protect their
interests in selecting or using the product. The Bureau believes that
consumers who take out an initial payday loan, vehicle title loan, or
other short-term loan 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 either enable them to avoid the need to borrow or to borrow
on terms that are within their ability to repay.
As discussed in Market Concerns--Short-Term Loans, consumers who
take out payday or short-term vehicle title loans typically have
exhausted other sources of credit such as their credit card(s). In the
months leading up to their liquidity shortfall, they typically have
tried and failed to obtain other forms of credit. Their need is
immediate. Moreover, consumers facing an immediate liquidity shortfall
may believe that a short-term loan is their only choice; one 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 any
terms offered.\530\ They may not have the time or other resources to
seek out, develop, or take advantage of alternatives. These factors may
place consumers in such a vulnerable position when seeking out and
taking these loans that they are potentially unable to protect their
interests.
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\530\ 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.
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The Bureau also believes that once consumers have commenced a loan
sequence they may be unable to protect their interests in the selection
or use of subsequent loans. After the initial loan in a sequence has
been consummated, the consumer is legally obligated to repay the debt.
Consumers who do not have the ability to repay that initial loan are
faced with making a choice among three bad options: They can either
default on the loan, skip or delay payments on major financial
obligations or living expenses in order to repay the
[[Page 47935]]
loan, or, as is most often the case, take out another loan and soon
face the same predicament again. At that point, at least some consumers
may gain a fuller awareness of the risks and costs of this type of
loan,\531\ but by then it may be too late for the consumer to be able
to protect her interests. Each of these choices results in increased
costs to consumers--often very high and unexpected costs--which harm
consumers' interests. An unaffordable first loan can thus ensnare
consumers in a cycle of debt from which consumers have no reasonable
means to extricate themselves, rendering them unable to protect their
interests in selecting or using covered short-term loans.
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\531\ However, the Mann study discussed in more detail in Market
Concerns--Short-Term Loans suggests that consumers do not, in fact,
gain a fuller awareness of the risks and costs of this type of loan
the more they use the product. Mann, at 127.
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Practice Takes Unreasonable Advantage of Consumer Vulnerabilities
Under section 1031(d)(2) of the Dodd-Frank Act, a practice is
abusive if it takes unreasonable advantage of consumers' lack of
understanding or inability to protect their interests. The Bureau
believes that the lender practice of making covered short-term loans
without determining that the consumer has the ability to repay may take
unreasonable advantage both of consumers' lack of understanding of the
material risks, costs, and conditions of such loans, and consumers'
inability to protect their interests in selecting or using the loans.
The Bureau recognizes 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.\532\
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\532\ 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 an abusive act or practice.
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The Dodd-Frank Act delegates to the Bureau the responsibility for
determining when that line has been crossed. The Bureau believes that
such determinations are best made with respect to any particular act or
practice by taking into account all of the facts and circumstances that
are relevant to assessing whether such an act or practice takes
unreasonable advantage of consumers' lack of understanding or of
consumers' inability to protect their interests. Several interrelated
considerations lead the Bureau to believe that the practice of making
payday, vehicle title, and other short-term loans without regard to the
consumer's ability to repay may cross the line and take unreasonable
advantage of consumers' lack of understanding and inability to protect
their interests.
The Bureau first notes that the practice of making loans without
regard to the consumer's ability to repay 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.\533\ The
general presupposition 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 their 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.
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\533\ 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).
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In the markets for payday, vehicle title, and similar short-term
loans, however, lenders have built a business model that--unbeknownst
to borrowers--depends upon the consumer's lack of capacity to repay
such loans without needing to reborrow. As explained 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 are repaid
without reborrowing. Thus, lenders' business model depends upon a
substantial percentage of consumers not being able to repay their loans
when 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 ten loans or more.
This dependency on revenue from long-term debt cycles has been
acknowledged by industry stakeholders. For example, as noted in Market
Concerns--Short-Term Loans, 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.''
Also relevant in assessing whether the practice at issue here
involves unreasonable advantage-taking is the vulnerability of the
consumers seeking these types of loans. As discussed in Market
Concerns--Short-Term Loans, payday and vehicle title borrowers--and by
extension borrowers of similar 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 income, their situation becomes, if
anything, even more desperate.
In addition, the evidence described in Market Concerns--Short-Term
Loans suggests that lenders engage in practices that further exacerbate
the risks and costs to the interests of consumers. 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 likely to use the product. Lender
advertising also focuses on immediacy and speed, which may increase
consumers' existing sense of urgency. Lenders make an initial short-
term loan and then roll over or make new loans to consumers in close
proximity to the prior loan, compounding the consumer's initial
inability to repay. Lenders make this reborrowing option easy and
salient to consumers in comparison to repayment
[[Page 47936]]
of the full loan principal. Moreover, lenders do not appear to
encourage borrowers to 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
reborrowing. Storefront lenders in particular encourage loan sequences
because they encourage or require consumers to repay in person in an
effort to frame the consumer's experience in a way to encourage
reborrowing. Lenders often give financial incentives to employees to
reward maximizing loan volume.
By not determining that consumers have the ability to repay their
loans, lenders potentially take unreasonable advantage of a lack of
understanding on the part of the consumer of the material risks of
those loans and of the inability of the consumer to protect the
interests of the consumer in selecting or using those loans.
Unfairness
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 avoidably 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 Bureau believes that it may be an unfair act or practice for a
lender to make a covered short-term loan without reasonably determining
that the consumer has the ability to repay the loan.
Practice Causes or Is Likely To Cause Substantial Injury
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.\534\ Under these authorities, as
discussed in part IV, 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. In this case, the practice at issue
causes or is likely to cause both--a substantial number of consumers
suffer a high degree of harm, and a large number of consumers suffer a
lower but still meaningful degree of harm.
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\534\ 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 (Mar. 1, 1984)
(codified at 16 CFR 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 the Home Ownership and Equity
Protection Act (HOEPA). The Federal Reserve Board interpreted the
HOEPA unfairness standard to be informed by the FTC Act unfairness
standard. See 73 FR 44522, 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).
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The Bureau believes that the practice of making a covered short-
term loan without assessing the consumer's ability to repay may cause
or be likely to cause substantial injury. When a loan is structured to
require repayment within a short period of time, 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, then it appears
the lender's conduct causes or is likely to cause the injuries
described below.
In the aggregate, the consumers who suffer the greatest injury are
those consumers who have exceedingly long loan sequences. As discussed
above in Market Concerns--Short-Term Loans, consumers who become
trapped in long loan sequences pay substantial fees for reborrowing,
and they usually do not reduce the principal amount owed when they
reborrow. For example, roughly half of payday loan sequences consist of
at least three rollovers, 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 borrowed. Roughly one-third of consumers roll over
or renew their loan 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 in repaying the principal. Almost one-quarter of loan
sequences 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. In
many instances, such consumers also incur bank penalty fees (such as
NSF fees) and lender penalty fees (such as late fees and/or returned
check fees) before rolling over a loan. Similarly, for vehicle title
loans, the Bureau found that more than half, 56 percent, of single-
payment vehicle title 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 23 percent had 10 or more loans.
Moreover, consumers whose loan sequences are shorter may still
suffer meaningful injury from reborrowing beyond expected levels,
albeit to a lesser degree than those in longer sequences. Even a
consumer who reborrows only once or twice--and, as described in Market
Concerns--Short-Term Loans, 22 percent of payday and 23 percent of
vehicle title loan sequences show this pattern--will still incur
substantial costs related to reborrowing or rolling over the loans.
The injuries resulting from default on these loans also appear to
be significant in magnitude. As described in section Market Concerns--
Short-Term Loans, 20 percent of payday loan sequences end in default,
while 33 percent of vehicle title sequences end in default. Because
short-term loans (other than vehicle title loans) are usually
accompanied by some 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 that a default is preceded by failed
payment withdrawal attempts 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) which add to the consumer's
[[Page 47937]]
indebtedness. Additionally, as discussed in Market Concerns--Short-Term
Loans, where lenders' attempts to extract money directly from the
consumer's account fails, 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.\535\
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\535\ 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.
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For consumers with a short-term 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 above, almost one in
five vehicle title loan sequences end with the consumer's vehicle being
repossessed. Consumers whose vehicles are repossessed 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, or in many areas
of the country without any effective means of transportation at all.
Moreover, the Bureau believes that many consumers, 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 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 by the lender's exercise of its
leveraged payment mechanism.
Injury Not Reasonably Avoidable
As previously noted in part IV, under the FTC Act unfairness
standard, the FTC Policy Statement on Unfairness, FTC and other Federal
agency rulemakings, and related case law, which 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,'' \536\ or, put another way,
unless consumers have reason to anticipate the injury and the means to
avoid it. It appears that, in a significant proportion of cases,
consumers are unable to reasonably avoid the substantial injuries
caused or likely to be caused by the identified practice. Prior to
entering into a payday, vehicle title, or other short-term loan,
consumers are unable to reasonably anticipate the likelihood and
severity of injuries that frequently results from such loans, and after
entering into the loan, consumers do not have the means to avoid the
injuries that may result should the loan prove unaffordable.
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\536\ FTC Policy Statement on Unfairness, 104 FTC at 1074.
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As discussed above in Market Concerns--Short-Term Loans, a
confluence of factors creates obstacles to the free exercise of
consumers' decision-making, preventing them from reasonably avoiding
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 to function in long sequences of
reborrowing. Lenders present short-term loans as short-term, liquidity-
enhancing products that consumers can use to bridge an income shortfall
until their next paycheck. But in practice, these loans often do not
operate that way. 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. Consumer predictions are often overly optimistic, and consumers
who experience long sequences of loans often do not expect those long
sequences when they make their initial borrowing decision. As detailed
in Market Concerns--Short-Term Loans, empirical evidence demonstrates
that consumer predictions of how long the loan sequence will last tend
to be inaccurate, with many consumers underestimating the length of
their loan sequence. Consumers are particularly poor at predicting long
sequences of loans, and many do not appear to improve the accuracy of
their predictions as a result of past borrowing experience.\537\
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\537\ As noted in Market Concerns--Short-Term Loans, it appears
that some consumers are able to accurately predict that they will
need to reborrow one or two times, but decide to take the loan out
regardless of the additional cost of one or two additional loans.
Accordingly, such costs do not count as substantial injury that is
not reasonably avoidable.
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Likewise, consumers are unable to reasonably anticipate the
likelihood and severity of the consequences of being unable to repay
the loan. The consequences include, for example, the risk of
accumulating numerous penalty fees on their bank account and on their
loan, and the risk that their vehicle will be repossessed, leading to
numerous direct and indirect costs. The typical consumer does not have
the information to understand the frequency with which these adverse
consequences do occur or the likelihood of such consequences befalling
a typical consumer of such a loan.
In analyzing reasonable avoidability under the FTC Act unfairness
standard, the Bureau notes that the FTC and other agencies have at
times focused on factors such as the vulnerability of affected
consumers,\538\ as well as those consumers' perception of the
availability of alternative products.\539\ Likewise, the Bureau
believes that the substantial injury from short-term loans may not be
reasonably avoidable in part because of the consumers' precarious
financial situation at the time they borrow and their reasonable belief
that searching for alternatives will be fruitless and costly. As
discussed in part Market Concerns--Short-Term Loans, consumers who take
out payday or short-term vehicle title loans typically have tried and
failed to obtain other forms of credit before turning to these
[[Page 47938]]
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.
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\538\ 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).
\539\ 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).
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Not only are consumers unable to reasonably anticipate potential
harms before entering into a payday, vehicle title, or other short-term
loan, once they have entered into a loan, they do not have the means to
avoid the injuries should the loan prove unaffordable. Consumers who
obtain a covered short-term loan beyond their ability to repay face
three options: Either reborrow, default, or repay the loan but defer or
skip payments on their major financial obligations and for basic living
expenses. In other words, for a consumer facing an unaffordable
payment, some form of substantial injury is almost inevitable
regardless of what actions are taken by the consumer. And as discussed
above, lenders engage in a variety of practices that further increase
the degree of harm, for instance by encouraging additional reborrowing
even among consumers who are already experiencing substantial
difficulties and engaging in payment collection practices that are
likely to cause consumers to incur substantial additional fees beyond
what they already owe.
Injury Not Outweighed by Countervailing Benefits to Consumers or to
Competition
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, it generally
is 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
benefits and costs.
It appears to the Bureau that the current practice of making
payday, vehicle title, and other short-term loans without determining
that the consumer has the ability to repay does not result in benefits
to consumers or competition that outweigh the substantial injury that
consumers cannot reasonably avoid. As discussed above, the amount of
injury that is caused by the unfair practice, in the aggregate, appears
to be extremely high. Although some individual 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 extremely severe financial
injuries that were not reasonably avoidable. Moreover, some consumers
whose short-term loans become 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 reborrow, and the
extent to which the consumer incurred collateral harms from making
unaffordable payments). In addition, many borrowers also experience
substantial injury that is not reasonably avoidable as a result of
defaulting on a loan or repaying a loan but not being able to meet
other obligations and expenses.
Against this very significant amount of harm, the Bureau must weigh
several potential countervailing benefits to consumers or competition
of the practice in assessing whether it is unfair. The Bureau believes
it is helpful to divide consumers into several groups of different
borrowing experiences when analyzing whether the practice of extending
covered short-term loans without determining that the consumer has the
ability to repay yields countervailing benefits to consumers.
The first group consists of borrowers who repay their loan without
reborrowing. The Bureau refers to these borrowers as ``repayers'' for
purposes of this countervailing benefits analysis. As discussed in
Market Concerns--Short-Term Loans, 22 percent of payday loan sequences
and 12 percent of vehicle title loan sequences end with the consumer
repaying the initial loan in a sequence without reborrowing. 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 proposed Sec. 1041.5 would not have a significant
impact on their eligibility for this type of credit. At most, it would
reduce somewhat the speed and convenience of applying for a loan under
the current practice. 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
paystub and evidence of a checking account; online payday lenders may
require even less. For vehicle title loans, all that is generally
required is that the consumer owns their vehicle outright without any
encumbrance.
As discussed in more detail in part VI, there could be a
significant contraction in the number of payday stores if lenders were
required to assess consumers' ability to pay in the manner required by
the proposal, but the Bureau projects that 93 to 95 percent of
borrowers would not have to travel more than five additional miles.
Lenders likely would require more information and documentation from
the consumer. Indeed, under the proposed rule consumers may be required
in certain circumstances to provide documentation of their income for a
longer period of time than their last paystub and may be required to
document their rental expenses. Consumers would also be required to
complete a written statement with respect to their expected future
income and major financial obligations.
Additionally, when a lender makes a loan without determining a
consumer's ability to repay, the lender can make the loan
instantaneously upon obtaining a consumer's paystub or vehicle title.
In contrast, if lenders assessed consumers' ability to repay, they
might secure extrinsic data, such as a consumer report from a national
consumer reporting agency, which could slow the process down. 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 national credit reporting
agency. Using this information, along with verified income, lenders
would have to project the consumer's residual income.
As discussed below in the section-by-section analysis of proposed
Sec. 1041.5, the proposed rule has been 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. If the
proposed ability-to-repay requirements are finalized, the Bureau
anticipates that consumers who are able to demonstrate the ability to
repay under proposed Sec. 1041.5 would be able to obtain credit to a
similar extent as they do in the current market. While the speed and
convenience fostered by the current practice may be reduced for these
consumers under the proposed rule's requirements, the Bureau does not
believe that the proposed requirements will be overly burdensome in
this respect. As described in part VI, the Bureau estimates that the
required ability-to-repay determination would
[[Page 47939]]
take essentially no time for a fully automated electronic system and
between 15 and 20 minutes for a fully manual system.
While the Bureau believes that most repayers would be able to
demonstrate the ability to repay under proposed Sec. 1041.5, the
Bureau recognizes that there is 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 enables these consumers to obtain
credit that, by hypothesis, may actually be within their ability to
repay. The Bureau acknowledges that for this group of ``false
negatives'' there may be significant benefits of being able to obtain
covered loans without having to demonstrate their ability to repay in
the way prescribed by proposed Sec. 1041.5.
However, the Bureau believes that under the proposed rule lenders
will generally be able to identify consumers who are able to repay and
that the size of any residual ``false negative'' population will be
small. This is especially true to the extent that this class of
consumers is disproportionately drawn from the ranks of those whose
need to borrow is driven by a temporary mismatch in the timing between
their income and expenses rather than those who have experienced an
income or expense shock or those with a chronic cash shortfall. It is
very much in the interest of these borrowers to attempt to demonstrate
their ability to repay in order to receive the loan and for the same
reason lenders will have every incentive to err on the side of finding
such an ability. Moreover, even if these consumers could not qualify
for the loan they would have obtained absent an ability-to-pay
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.\540\ For these reasons, the Bureau does not believe
that there would be a large false negative population if lenders made
loans only to those with the ability to repay.
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\540\ Moreover, consumers who cannot or do not want to attempt
to demonstrate and ability to repay may be able to take out a loan
under proposed Sec. 1041.7. For the purpose of this countervailing
benefits analysis, however, the Bureau is not relying on the fact
that consumers who cannot demonstrate an ability to repay may be
able to take out a loan under proposed Sec. 1041.7.
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Finally, some of the repayers may not actually be able to afford
the loan, but choose to repay it nonetheless, rather than reborrow or
default--which may result in their incurring costs in connection with
another obligation, such as a late fee on a utility bill. Such repayers
would not be able to obtain under proposed Sec. 1041.5 the same loan
that they would have obtained absent an ability-to-repay requirement,
but any benefit they receive under the current practice would appear to
be small, at most.
The second group consists of borrowers who eventually default on
their loan, either on the first loan or later in a loan sequence after
having reborrowed. The Bureau refers to these borrowers as
``defaulters'' for purposes of this countervailing benefits analysis.
As discussed in Market Concerns--Short-Term Loans, borrowers of 20
percent of payday and 33 percent of 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 may enable them
to obtain what amounts to a temporary ``reprieve'' from their current
situation. They can obtain some cash which may enable them to pay a
current bill or current expense. However, 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). Twenty-nine 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.
These consumers thus are merely substituting a payday lender or
vehicle title lender for a preexisting creditor, and in doing so, end
up in a deeper hole by accruing finance charges, late fees, or other
charges at a high rate. Vehicle title loans can have an even more dire
consequence for defaulters: 20 percent have their vehicle repossessed.
The Bureau thus does not believe that defaulters obtain benefits from
the current lender practice of not determining ability to repay.\541\
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\541\ The Bureau recognizes that defaulters may not default
because they lack the ability to repay, but the Bureau believes 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 proposed Sec.
1041.5 precisely because they have the ability to repay the loans.
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The final and largest group of consumers consists of those who
neither default nor repay their loans without reborrowing but who,
instead, reborrow before eventually repaying. The Bureau refers to
consumers with such loan sequences as ``reborrowers'' for purposes of
this countervailing benefits discussion. These consumers represent 58
percent of payday loan sequences and 56 percent of auto title loan
sequences. For these consumers, as for the defaulters, the practice of
making loans without regard to their ability to repay enables them to
obtain a temporary reprieve from their current situation. But for this
group, that reprieve can come at a greater cost than initially
expected, sometimes substantially greater.
Some reborrowers 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 vehicle title loan sequences
are repaid after the initial loan is reborrowed once or twice. But even
among this group, many consumers do not anticipate before taking out a
loan that they will need to reborrow. These consumers cannot reasonably
avoid their injuries, and while their injuries may be somewhat 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 reborrow and may accurately predict how
many times they will have to reborrow. For consumers who accurately
predict their reborrowing, the Bureau is not counting their reborrowing
costs as substantial injury that should be placed on the ``injury''
side of the countervailing benefits scale.
While some reborrowers end their borrowing after a relatively small
number of additional loans, a large percentage of reborrowers end up in
significantly longer loan sequences. Of storefront payday loan
sequences, for instance, one-third percent 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 percent of loan
sequences contain 10 or more loans in succession. For vehicle title
borrowers, the picture is similarly dramatic: Only 23 percent of loan
sequences taken out by vehicle title reborrowers are repaid after two
or three successive loans whereas 23 percent of sequences are for 10 or
more loans in succession. The Bureau does not believe any significant
number of consumers anticipate such lengthy sequences.
Thus, the Bureau believes that the substantial injury suffered by
the defaulters and reborrowers--the categories that represent the vast
majority of overall short-term payday and vehicle title borrowers--
dwarfs any benefits these groups of borrowers may
[[Page 47940]]
receive in terms of a temporary reprieve and also dwarfs the speed and
convenience benefits that the repayers may experience. The Bureau
acknowledges that any benefits derived by the aforementioned ``false
negatives'' may be reduced under the proposed rule, but the Bureau
believes that the benefits this relatively small group receives is
outweighed by the substantial injuries to the defaulters and
reborrowers as discussed above. Further, the Bureau believes that under
the proposed intervention, many of these borrowers may find more
sustainable options, such as underwritten credit on terms that are
tailored to their budget and more affordable.
Turning to benefits of the practice for competition, the Bureau
acknowledges, as discussed further in part II, that the current
practice of lending without regard to consumers' ability to repay has
enabled the payday industry to build a business model in which 50
percent or more of the revenue 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. As discussed in part II, the Bureau estimates
that the top ten storefront payday lenders control only about half of
the market, and that there are 3,300 storefront payday lenders that are
small entities as defined by the SBA. The Bureau also acknowledges
that, as discussed above and further in part VI, the anticipated effect
of limiting lenders to loans that consumers can afford to repay will be
to substantially shrink the number of loans per consumer which may, in
turn, result in a more highly concentrated markets in some geographic
areas. Moreover, the current practice enables to lenders to avoid the
procedural costs that the proposed rule would impose.
However, the Bureau does not believe the proposed rule will reduce
the competitiveness of the payday or vehicle title markets. As
discussed in part II, 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, typically
in close proximity to one another, research has shown that there is
generally no meaningful price competition among these firms. Rather, in
general, the firms currently charge the maximum price allowed in any
given State. Lenders who operate in multiple States generally vary
their prices from State to State to take advantage of whatever local
law allows. Thus, for example, lenders operating in Florida are
permitted to charge $10 per $100 loaned,\542\ and those same lenders,
when lending in South Carolina, charge $15 per $100.\543\
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\542\ Fla. Stat. Ann. Sec. 560.404(6).
\543\ S.C. Code Sec. 34-39-180(E).
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In sum, it appears that the benefits of the identified unfair
practice for consumers and competition do not outweigh the substantial,
not reasonably avoidable injury caused or likely to be cause by the
practice. On the contrary, it appears that the very significant injury
caused by the practice outweighs the relatively modest benefits of the
practice to consumers.
Consideration of Public Policy
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 addition to the evidence described above and
in Market Concerns--Short-Term Loans, established public policy
supports the proposed finding that it is an unfair act or practice for
lenders to make covered short-term loans without determining that the
consumer has the ability to repay.
Specifically, as noted above, several consumer financial statutes,
regulations, and guidance documents require or recommend that covered
lenders assess their customers' ability to repay before extending
credit. These include the Dodd-Frank Act with regard to closed-end
mortgage loans,\544\ the CARD Act with regard to credit cards,\545\
guidance from the OCC on abusive lending practices,\546\ guidance from
the FDIC on small dollar lending,\547\ and guidance from the OCC \548\
and FDIC \549\ on deposit advance products. In addition, the Federal
Reserve Board promulgated a rule requiring an ability-to-repay
determination regarding higher priced mortgages, although that rule has
since been superseded by the Dodd-Frank Act's ability-to-repay
requirement and its implementation regulations which apply generally to
mortgages regardless of price.\550\ In short, Congress, State
legislatures,\551\ and other agencies have found consumer harm to
result from lenders failing to determine that consumer have the ability
to repay credit. These established policies support a finding that it
is unfair for a lender to make covered short-term loans without
determining that the consumer has the ability to repay, and evince
public policy that supports the Bureau's proposed imposition of the
consumer protections in proposed part 1041. The Bureau gives weight to
this policy and bases its proposed finding that the identified practice
is unfair, in part, on this significant body of public policy.
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\544\ Dodd-Frank Act section 1411, codified at 15 U.S.C.
1639c(a)(1) (``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.'').
\545\ 15 U.S.C. 1665e (credit card issuer must ``consider[ ] the
ability of the consumer to make the required payments'').
\546\ 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).
\547\ FDIC Financial Institution Letter FIL-50-2007, Affordable
Small-Dollar Loan Guidelines (June 19, 2007).
\548\ 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.'').
\549\ FDIC, Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Products, 78 FR 70552 (Nov. 26, 2013)
(same as OCC guidance).
\550\ 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.'').
\551\ 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).
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The Bureau seeks comment on the evidence and proposed findings and
conclusions in proposed Sec. 1041.4 and Market Concerns--Short-Term
Loans above. As discussed further below in connection with proposed
Sec. 1041.7, the Bureau also seeks comment on whether making loans
with the types of consumer protections contained in proposed Sec.
1041.7(b) through (e) should not be included in the practice identified
in proposed Sec. 1041.4.
Section 1041.5 Ability-To-Repay Determination Required
As discussed in the section-by-section analysis of Sec. 1041.4
above, the Bureau has tentatively concluded that it is an unfair and
abusive act or practice to
[[Page 47941]]
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 is proposing to prevent the abusive and unfair
practice by including in proposed Sec. Sec. 1041.5 and 1041.6 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 sets 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 according to its terms. It also, in
combination with proposed Sec. 1041.6, specifies 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 crafting the
baseline ability-to-repay methodology established in proposed
Sec. Sec. 1041.5 and 1041.6, the Bureau is attempting to balance
carefully several considerations, including the need for consumer
protection, industry interests in regulatory certainty and manageable
compliance burden, and preservation of access to credit.
Proposed Sec. 1041.5 would generally require the lender to make a
reasonable determination that a consumer will have sufficient income,
after meeting major financial obligations, to make payments under a
prospective covered short-term loan and to continue meeting basic
living expenses. However, based on feedback from a wide range of
stakeholders and its own internal analysis, as well as the Bureau's
belief that consumer harm has resulted despite more general standards
in State law, the Bureau believes that merely establishing such a
general requirement would provide insufficient protection for consumers
and insufficient certainty for lenders.
Many lenders have informed the Bureau that they conduct some type
of underwriting on covered short-term loans and assert that it should
be sufficient to meet the Bureau's standards. However, as discussed
above, such underwriting often is designed to screen primarily for
fraud and to assess whether the lender will be able to extract payments
from the consumer. It typically makes no attempt to assess whether the
consumer might be forced to forgo basic necessities or to default on
other obligations in order to repay the covered loan. Moreover, such
underwriting essentially treats reborrowing as a neutral or positive
outcome, rather than as a sign of the consumer's distress, because
reborrowing does not present a risk of loss or decreased profitability
to the lender. On the contrary, new fees from each reborrowing
contribute to the lender's profitability. In the Bureau's experience,
industry underwriting typically goes no further than to predict the
consumer's propensity to repay rather than the consumer's financial
capacity (i.e., ability) to repay consistent with the consumer's other
obligations and need to cover basic living expenses. Such underwriting
ignores the fact that repayment may force the consumer to miss other
obligations or to be unable to cover basic living expenses.
The Bureau believes that to prevent the abusive and unfair
practices that appear to be occurring in the market, it would be
appropriate not only to require lenders to make a reasonable
determination of a consumer's ability to repay before making a covered
short term loan but also to specify minimum elements of a baseline
methodology for evaluating consumers' individual financial situations,
including their borrowing history. The baseline methodology is not
intended to be a substitute for lender screening and underwriting
methods, such as those designed to screen out fraud or predict and
avoid other types of lender losses. Accordingly, lenders would be
permitted to supplement the baseline methodology with other
underwriting and screening methods.
The baseline methodology in proposed Sec. 1041.5 rests on a
residual income analysis--that is, an analysis of whether, given the
consumer's projected income and major 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 Bureau
recognizes that in other markets and under other regulatory regimes
financial capacity is more typically measured by establishing a maximum
debt-to-income (DTI) ratio.\552\ DTI tests generally rest on the
assumption that so 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 meet non-
debt obligations and other expenses. However, for low- and moderate-
income consumers, the Bureau believes that assumption is less likely to
be true: A DTI ratio that might seem quite reasonable for the
``average'' consumer can be quite unmanageable for a consumer at the
lower end of the income spectrum and the higher end of the debt burden
range.\553\ Ultimately, whether a particular loan is affordable will
depend upon how much money the consumer will have left after paying
existing obligations and whether that amount is sufficient to cover the
proposed new obligation while still meeting basic living expenses.
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\552\ For example, DTI is an important component of the Bureau's
ability to repay regulation 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 a component of the standards that a
residential mortgage loan must meet to be a qualified mortgage under
that regulation.
\553\ 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. That is especially true if the low income consumer
also faces significant non-debt expenses, such as high rent
payments, that consume significant portions of the remaining 57
percent of her income.
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In addition, in contrast with other markets in which there are
long-established norms for DTI levels that are consistent with
sustainable indebtedness, the Bureau does not believe that there exist
analogous norms for sustainable DTI levels for consumers taking covered
short-term loans. Thus, the Bureau believes that residual income is 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 has designed the residual income methodology
requirements specified in proposed Sec. Sec. 1041.5 and 1041.6 in an
effort to ensure that ability-to-repay determinations can be made
through scalable underwriting models. The Bureau is proposing that the
most critical inputs into the determination rest on documentation but
the Bureau's proposed methodology would allow for various means of
documenting major financial obligations and also establishes
alternatives to documentation where appropriate. It recognizes that
rent, in particular, often cannot be readily documented and therefore
would allow for estimation of rental expense. See the section-by-
section analysis of Sec. 1041.5(c)(3)(ii)(D), below. The Bureau's
proposed
[[Page 47942]]
methodology also would not mandate verification or detailed analysis of
every individual consumer expenditure. The Bureau believes that such
detailed analysis may not be the only method to prevent unaffordable
loans and is concerned that it would substantially increase costs to
lenders and borrowers. See the discussion of basic living expenses,
below.
Finally, the Bureau's 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.
Instead, the proposed methodology would allow lenders to exercise
discretion in arriving at a reasonable determination with respect to
that question. Because this type of underwriting is so different from
what many lenders currently engage in, the Bureau is particularly
conscious of the need to leave room for lenders to innovate and refine
their methods over time, including by building automated systems to
assess a consumer's ability to repay so long as the basic elements are
taken into account.
Proposed Sec. 1041.5 outlines the methodology for assessing the
consumer's residual income as part of the assessment of ability to
repay. Proposed Sec. 1041.5(a) would set forth definitions used
throughout proposed Sec. Sec. 1041.5 and 1041.6. Proposed Sec.
1041.5(b) would establish the requirement for a lender to determine
that a consumer will have the ability to repay a covered short-term
loan and would set forth minimum standards for a reasonable
determination that a consumer will have the ability to repay such a
covered loan. The standards in proposed Sec. 1041.5(b) would generally
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 major financial
obligations and the consumer's basic living expenses. Proposed Sec.
1041.5(c) would establish 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 impose certain additional
presumptions, prohibitions, and requirements where the consumer's
reborrowing during the term of the loan or shortly after having a prior
loan outstanding suggests that the prior loan was not affordable for
the consumer, so that the consumer may have particular difficulty in
repaying a new covered short-term loan with similar repayment terms.
In explaining the requirements of the various provisions of
proposed Sec. 1041.5, the Bureau is mindful that substantially all of
the loans being made today which would fall within the definition of
covered short-term loans are single-payment loans, either payday loans
or single-payment vehicle title loans. The Bureau recognizes, however,
that the definition of covered short-term loan could encompass loans
with multiple payments and a term of 45 days or less, for example, a
30-day loan payable in two installments. Accordingly, in the discussion
that follows, the Bureau generally refers to payments in the plural and
uses phrases such as the ``highest payment due.'' For most covered
short-term loans the highest payment would be the only payment and the
determinations required by proposed Sec. 1041.5 would be made only for
a single payment and the 30 days following such payment.
As an alternative to the proposed ability-to-repay requirement, the
Bureau considered whether lenders should be required to provide
disclosures to borrowers warning them of the costs and risks of
reborrowing, default, and collateral harms from unaffordable payments
associated with taking out covered short-term loans. However, the
Bureau believes that such a disclosure remedy would be significantly
less effective in preventing the consumer harms described above, for
three reasons.
First, disclosures do not address the underlying incentives in this
market for lenders to encourage borrowers to reborrow and take out long
sequences of loans. As discussed in Market Concerns--Short-Term Loans,
the prevailing business model involves lenders deriving a very high
percentage of their revenues from long loan sequences. While enhanced
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 on long-term loan sequences for revenues.
Second, empirical evidence suggests that disclosures have only
modest impacts on consumer borrowing patterns for short-term loans
generally and negligible impacts on whether consumers reborrow.
Evidence from a field trial of several disclosures designed
specifically to warn of the risks of reborrowing and the costs of
reborrowing showed that these disclosures had a marginal effect on the
total volume of payday borrowing.\554\ Further, the Bureau has analyzed
the impacts of the change in law in Texas (effective January 1, 2012)
requiring payday lenders and short-term vehicle title lenders to
provide a new disclosure to prospective borrowers before each payday
loan transaction.\555\ The Bureau observed that with respect to payday
loan transactions, using the Bureau's supervisory data, 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.\556\ The Bureau's analysis of
the impacts of the Texas disclosures also shows that the probability of
reborrowing on a payday loan declined by approximately 2 percent once
the disclosure was put in place.\557\ This finding indicates that high
levels of reborrowing and long sequences of payday loans remain a
significant source of consumer harm even with a disclosure regime in
place.\558\ Further, as discussed in Market Concerns--Short-Term Loans,
the Bureau has observed that borrowers have a very high probability of
winding up in a very long sequence once they have taken out only a few
loans in a row. The contrast of the extremely high likelihood that a
consumer will wind up in a long-term debt cycle after taking out only a
few loans with the near negligible impact of a disclosure on consumer
reborrowing patterns provides further evidence of the insufficiency of
disclosures to address what the Bureau believes are the core harms to
consumers in this credit market.
---------------------------------------------------------------------------
\554\ Marianne Bertrand & Adair Morse, Information Disclosure,
Cognitive Biases and Payday Borrowing and Payday Borrowing, 66 J.
Fin. 1865, 1866 (2011), available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2011.01698.x/full.
\555\ See chapter 3 of the CFPB Report on Supplemental Findings.
\556\ See CFPB Report on Supplemental Findings, at 73.
\557\ See CFPB Report on Supplemental Findings, at 78-79.
\558\ The empirical data suggests that the modest loan volume
reductions are primarily attributable to reductions in originations;
once a borrower has taken out the initial loan, the disclosure has
very little impact.
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Third, as discussed in part VI, the Bureau believes that behavioral
factors make it 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 seeks to address with the
proposal. Due to the potential for tunneling in their decision-making
and general optimism bias, as discussed in more detail in Market
Concerns--Short-Term Loans,
[[Page 47943]]
consumers 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 outcomes--reborrowing and default--that
they do not anticipate experiencing themselves. To the extent the
borrowers have thought about the likelihood that they themselves will
reborrow or default (or both) on a loan, a general warning about how
often people reborrow or default (or both) is unlikely to cause them to
revise their own expectations about the chances they themselves will
reborrow or default (or both).
The Bureau requests comment on the appropriateness of all aspects
of the proposed approach. For example, the Bureau requests comment on
whether a simple prohibition on making covered short-term loans without
determining ability to repay, without specifying the elements of a
minimum baseline methodology, would provide adequate protection to
consumers and clarity to industry about what would constitute
compliance. Similarly, the Bureau requests comment on the adequacy of a
less prescriptive requirement for lenders to ``consider'' specified
factors, such as payment amount under a covered short-term loan,
income, debt service payments, and borrowing history, rather than a
requirement to determine that residual income is sufficient. (Such an
approach could be similar to that of the Bureau's ability-to-repay
requirements for residential mortgage loans.) Specifically, the Bureau
requests comment on whether there currently exist sufficient norms
around the levels of such factors that are and are not consistent with
a consumer's ability to repay, such that a requirement for a lender to
``consider'' such factors would provide adequate consumer protection,
as well as adequate certainty for lenders regarding what determinations
of ability to repay would and would not reflect sufficient
consideration of those factors.
Also during outreach, some stakeholders suggested that the Bureau
should adopt underwriting rules of thumb--for example, a maximum
payment-to-income (PTI) ratio--to either presumptively or conclusively
demonstrate compliance with the rule. The Bureau solicits comment on
whether the Bureau should define such rules of thumb and, if so, what
metrics should be included in a final rule and what significance should
be given to such metrics.
5(a) Definitions
Proposed Sec. 1041.5(a) would provide definitions of several terms
used in proposed Sec. 1041.5 in assessing the consumer's financial
situation and proposed Sec. 1041.6 in assessing consumers' borrowing
history before determining whether a consumer has the ability to repay
a new covered short-term loan. In particular, proposed Sec. 1041.5(a)
includes definitions for various categories of income and expenses that
are used in proposed Sec. 1041.5(b), which would establish the
methodology that would generally be required for assessing consumers'
ability to repay covered short-term loans. The substantive requirements
for making the calculations for each category of income and expenses,
as well as the overall determination of a consumer's ability to repay,
are provided in proposed Sec. 1041.5(b) and (c), and in their
respective commentary. These proposed definitions are discussed in
detail below.
5(a)(1) Basic Living Expenses
Proposed Sec. 1041.5(a)(1) would define the basic living expenses
component of the ability-to-repay determination that would be required
in proposed Sec. 1041.5(b). It would define basic living expenses as
expenditures, other than payments for major financial obligations, that
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. Proposed Sec. 1041.5(b) would
require the lender to reasonably determine a dollar amount that is
sufficiently large so that the consumer would likely be able to make
the loan payments and meet basic living expenses without having to
default on major financial obligations or having to rely on new
consumer credit during the applicable period.
Accordingly, the proposed definition of basic living expenses is a
principle-based definition and does not provide a comprehensive list of
the expenses for which a lender must account. Proposed comment 5(a)(1)-
1 provides illustrative examples of expenses that would be covered by
the definition. It provides that food and utilities are examples of
goods and services that are necessary for maintaining health and
welfare, and that transportation to and from a place of employment and
daycare for dependent children, if applicable, are examples of goods
and services that are necessary for maintaining the ability to produce
income.
The Bureau recognizes that provision of a principle-based
definition leaves some ambiguity about, for example, what types and
amounts of goods and services are ``necessary'' for the stated
purposes. Lenders would have flexibility in how they determine dollar
amounts that meet the proposed definition, provided that they do not
rely on amounts that are so low that they are not reasonable for
consumers to pay for the types and level of expenses in the definition.
The Bureau's proposed methodology also would not mandate
verification or detailed analysis of every individual consumer
expenditure. In contrast to major financial obligations (see below), a
consumer's recent expenditures may not necessarily reflect the amounts
a consumer needs for basic living expenses during the term of a
prospective loan, and the Bureau is concerned that such a requirement
could substantially increase costs for lenders and consumers while
adding little protection for consumers.
The Bureau solicits comment on its principle-based approach to
defining basic living expenses, including whether limitation of the
definition to ``necessary'' expenses is appropriate, and whether an
alternative, more prescriptive approach would be preferable. For
example, the Bureau solicits comment on whether the definition should
include, rather than expenses of the types and in amounts that are
``necessary'' for the purposes specified in the proposed definition,
expenses 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. The Bureau also solicits comment on whether there are standards
used in other contexts that could be relied upon by the Bureau. For
example, the Bureau is aware that the Internal Revenue Service and
bankruptcy courts have their own respective standards for calculating
amounts an individual needs for expenses while making payments toward a
delinquent tax liability or under a bankruptcy-related repayment plan.
5(a)(2) Major Financial Obligations
Proposed Sec. 1041.5(a)(2) would define the major financial
obligations component of the ability-to-repay determination specified
in proposed Sec. 1041.5(b). Proposed Sec. 1041.5(b) would generally
require a lender to determine that a consumer will have sufficient
residual income, which is net income after subtracting amounts already
committed for making payments for major financial obligations, to make
payments under a prospective covered short term loan and to meet basic
living expenses. Payments for major financial obligations would be
subject to the consumer statement and verification
[[Page 47944]]
evidence provisions under proposed Sec. 1041.5(c)(3).
Specifically, proposed Sec. 1041.5(a)(2) would define 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. Comment 5(a)(2)-1 would 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
provide 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.
Expenses that the Bureau has included in the proposed definition
are expenses 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 loan. The Bureau believes that the extent to which a
particular consumer's net income is already committed to making such
payments is 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 believes 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 consumer income
already committed to such payments in determining a consumer's ability
to repay. Expenses 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. (See 12 CFR 1026.43(c)(7)(i)(A).)
The Bureau has adjusted its approach to major financial obligations
based on feedback from SERs and other industry stakeholders on 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 that the Bureau had considered an alternative approach
that would have included utility payments and regular medical expenses.
However, the Bureau now believes 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
believes 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 is not including a category of ``other legally required payments''
because the Bureau believes that category, which was included in the
Small Business Review Panel Outline, would leave too much ambiguity
about what other payments are covered. For further discussion of burden
on small businesses associated with verification requirements, see the
section-by-section analysis of proposed Sec. 1041.5(c)(3), below.
The Bureau invites comment on whether the items included in the
proposed definition of major financial obligations are appropriate,
whether other items should be included and, if so, whether and how the
items should be subject to verification. For example, the Bureau
invites comment on whether there are other obligations that are
typically recurring, significant, and not changeable by the consumer,
such as, for example, alimony, daycare commitments, health insurance
premiums (other than premiums deducted from a consumer's paycheck,
which are already excluded from the proposed definition of net income),
or unavoidable medical expenses. The Bureau likewise invites comment on
whether there are types of payments to which a consumer may be
contractually obligated, such as payments or portions of payments under
contracts for telecommunication services, that a consumer is unable to
reduce from their amounts as of consummation, such that the payments
should be included in the definition of major financial obligations.
The Bureau also invites comment on the inclusion in the proposed
definition of delinquent amounts due, such as on the practicality of
asking consumers about delinquent amounts due on major financial
obligations, of comparing stated amounts to any delinquent amounts that
may be included in verification evidence (e.g., in a national consumer
report), and of accounting for such amounts in projecting a consumer's
residual income during the term of the prospective loan. The Bureau
also invites comment on whether the Bureau should specify additional
rules for addressing major financial obligations that are joint
obligations of a consumer applying for a covered short-term loan (and
of a consumer who is not applying for the loan), or whether the
provision in proposed Sec. 1041.5(c)(1) allowing lenders to consider
consumer explanations and other evidence is sufficient.
5(a)(3) National Consumer Report
Proposed Sec. 1041.5(a)(3) would define 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
Fair Credit Reporting Act, 15 U.S.C. 1681a(p). Proposed Sec.
1041.5(c)(3)(ii) would require a lender to obtain a national consumer
report as verification evidence for a consumer's required payments
under debt obligations and required payments 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 credit reporting agencies
or bureaus. A national consumer report may be furnished to a lender
from a consumer reporting agency that is not a nationwide consumer
reporting agency, such as a consumer reporting agency that is a
reseller.
5(a)(4) Net Income
Proposed Sec. 1041.5(a)(4) would define the net income component
of the ability-to-repay determination calculation specified in proposed
Sec. 1041.5(b). Specifically, it would define the term as the total
amount that a consumer receives after the payer deducts amounts for
taxes, other obligations, and voluntary contributions that the consumer
has directed the payer to deduct, but before deductions of any amounts
for payments under a prospective covered short term loan or for any
major financial obligation. Proposed Sec. 1041.5(b) would generally
require a lender to determine that a consumer will have sufficient
residual income to make payments under a prospective covered short-term
loan and to meet basic living expenses. Proposed Sec. 1041.5(a)(6),
discussed below, would define residual income as the sum of net income
that the lender projects the consumer 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 the period. Net
income would be
[[Page 47945]]
subject to the consumer statement and verification evidence provisions
under proposed Sec. 1041.5(c)(3).
The proposed definition is 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 believes 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. Other deductions may not be revocable,
at least for a significant period of time, as a result of contractual
obligations to 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, between consummation of a loan and
the time when payments under the loan would fall due. The Bureau also
believes 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
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
obligation. The Bureau proposes the clarification to prevent double
counting any such amounts when making the ability-to-repay
determination.
The Bureau invites comment on the proposed definition of net income
and whether further guidance would be helpful.
5(a)(5) Payment Under the Covered Short-Term Loan
Proposed Sec. 1041.5(a)(5) would define payment under the covered
short-term loan, which is a component of the ability-to-repay
determination calculation specified in proposed Sec. 1041.5(b).
Proposed Sec. 1041.5(b) would generally require 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.
Specifically, the definition of payment under the covered short-term
loan in proposed Sec. 1041.5(a)(5)(i) and (ii) would include 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) provides special rules for projecting payments under
the covered short-term loan on lines of credit 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 apply to all covered short-
term loans. It would define 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. Under proposed Sec. 1041.5(b), the lender
would be required to reasonably determine the payment amount under this
proposed definition as of the time of consummation. The proposed
definition would further provide 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 preceding required
payments and that the consumer 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) would
similarly apply to all covered short-term loans and would clarify that
payment under the covered loan includes all principal, interest,
charges, and fees.
The Bureau believes that a broad definition, such as the one
proposed, is 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. 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 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. The Bureau recognizes,
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 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 includes three
examples applying the proposed definition to scenarios in which the
payment under the covered short-term loan includes several components,
including 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) would include 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, such rules
are 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 would prescribe assumptions that a lender must make in
calculating the payment under the covered short-term loan. It would
require 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.
The Bureau believes these assumptions about a consumer's
utilization and repayment are important to ensure that the lender makes
its ability-to-repay determination based on the most challenging loan
payment that a consumer may face under the covered loan. They also
reflect what the Bureau believes to be the likely borrowing and
repayment behavior of many consumers who obtain covered loans with a
line of credit. Such consumers are typically
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facing an immediate liquidity need and, in light of the relatively high
cost of credit, would normally seek a line of credit approximating the
amount of the need. Assuming the lender does not provide a line of
credit well in excess of the consumer's need, the consumer is then
likely to draw down the full amount of the line of credit shortly after
consummation. Liquidity-constrained consumers may make only minimum
required payments under a line of credit and, if the terms of the
covered loan provide for an end date, may then face having to repay the
outstanding balance in one payment at a time specified under the terms
of the covered short-term loan. It is such a payment that is likely to
be the highest payment possible under the terms of the covered short-
term loan and therefore the payment for which a consumer is least
likely to have the ability to repay.
The Bureau invites comment on the proposed definition of payment
under the covered short-term loan. Specifically, the Bureau invites
comment on whether the provisions of proposed Sec. 1041.5(a)(5) are
sufficiently comprehensive and clear to allow for determination of
payment amounts under covered short-term loans, especially for lines of
credit.
5(a)(6) Residual Income
Proposed Sec. 1041.5(a)(6) would define the residual income
component of the ability-to-repay determination calculation specified
in proposed Sec. 1041.5(b). Specifically, it would 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 the period, all of which projected amounts
must be based on verification evidence, as provided under proposed
Sec. 1041.5(c). Proposed Sec. 1041.5(b) would generally require 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 proposed definition would ensure that a lender's ability-to-
repay determination cannot rely on the amount of a consumer's net
income that, as of the time a prospective loan would be consummated, is
already committed to pay for major financial obligations during the
applicable period. For example, a consumer's net income may be greater
than the amount of a loan payment, so that the lender successfully
obtains the loan payment from a consumer's deposit account once the
consumer's income is deposited into the account. But if the consumer is
then left with insufficient funds to make payments for major financial
obligations, such as a rent payment, then the consumer may be forced to
choose between failing to pay rent when due, forgoing basic needs, or
reborrowing.
5(b) Reasonable Determination Required
Proposed Sec. 1041.5(b) would 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 are made in accordance with proposed Sec.
1041.7. Specifically, proposed Sec. 1041.5(b)(1) would require 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) specifies 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 require
the assessment to be based on projections of the consumer's net income,
major financial obligations, and basic living expenses that are made in
accordance with proposed Sec. 1041.5(c). It would require 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 term of the loan. It would further require that a lender must
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 and meet basic living
expenses for a period of 30 additional days. Finally, proposed Sec.
1041.5(b)(2) would require 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.
5(b)(1)
Proposed Sec. 1041.5(b)(1) would provide generally that, except as
provided in 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 ability to
repay for the covered short-term loan. The provision would also impose
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 previous required determination.
Proposed Sec. 1041.5(b)(1)(i) would provide that a lender is not
required to make the determination when it makes a covered short-term
loan under the conditions set forth in Sec. 1041.7. The conditions
that apply under Sec. 1041.7 provide alternative protections from the
harms caused by covered short-term loan payments that exceed a
consumer's ability to repay, such that the Bureau is proposing to allow
lenders to make such loans in accordance with the regulation without
engaging in an ability-to-repay determination under Sec. Sec. 1041.5
and 1041.6. (See the discussions of Sec. 1041.7, below.)
The Bureau notes that proposed Sec. 1041.5(b)(1) would require the
ability-to-repay determination before a lender actually takes one of
the triggering actions. The Bureau recognizes 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 Sec.
1041.5(b)(1) would not require a lender to make the ability-to-repay
determination 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, nothing in
proposed Sec. 1041.5(b)(1) would prohibit 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 provide 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
will have the ability to repay the covered short-term loan. 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
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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. 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 believes 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 balances the burden on lenders and the
protective benefit for consumers.
Reasonable Determination
Proposed Sec. 1041.5(b) would require a lender to make a
reasonable determination that a consumer will be able to repay a
covered short-term loan according to its terms. As discussed above and
as reflected in the provisions of proposed Sec. 1041.5(b), a consumer
has the ability to repay a covered short-term loan according to its
terms 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 without, as a result of making payments
under the covered loan, having to reborrow.
Proposed comment 5(b)-1 provides 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 1041.6.
Proposed comment 5(b)-2 would identify standards for evaluating
whether a lender's ability-to-repay determinations under proposed Sec.
1041.5 are reasonable. It would clarify minimum requirements of a
reasonable ability-to-repay determination; identify assumptions that,
if relied upon by the lender, render a determination not reasonable;
and establish that the overall performance of a lender's covered short-
term loans is evidence of whether the lender's determinations for those
covered loans are reasonable.
The proposed standards would not impose bright line rules
prohibiting covered short-term loans based on fixed mathematical ratios
or similar distinctions. Moreover, the Bureau does 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, 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. A lender would then
apply its own policies and procedures to its underwriting decisions,
which the Bureau anticipates could be largely automated for the
majority of consumers and covered loans.
Minimum requirements. Proposed comment 5(b)-2.i would describe some
of the specific respects in which a lender's determination must be
reasonable. For example, it would note 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), be based on reasonable estimates of a consumer's basic
living expenses under proposed Sec. 1041.5(b), and appropriately
account for the possibility of volatility in a consumer's income and
basic living expenses during the term of the loan under proposed Sec.
1041.5(b)(2)(i). It would also have to be consistent with the lender's
written policies and procedures required under proposed Sec.
1041.18(b).
Proposed comment 5(b)-2.i would also provide that to be reasonable,
a lender's ability-to-repay determination must be grounded in
reasonable inferences and conclusions in light of information the
lender is required to obtain or consider. As discussed above, each
lender would be required under proposed Sec. 1041.18 to develop
policies and procedures for approving and making covered loans in
compliance with the proposal. The policies and procedures would specify
the conclusions that the lender makes based on information it obtains,
and lenders would then be able to largely automate application of those
policies and procedures for most consumers. For example, proposed Sec.
1041.5(c) would require a lender to obtain verification evidence for a
consumer's net income and payments for major financial obligations, but
it would provide for lender discretion in resolving any ambiguities in
the verification evidence to project what the consumer's net income and
payments for major financial obligations will be following consummation
of the covered short-term loan.
Finally, proposed comment 5(b)-2.i would provide 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. The
provision would not require a lender to obtain information other than
information specified in proposed Sec. 1041.5. However, a lender might
become aware of information that casts doubt on whether a particular
consumer would have the ability to repay a particular prospective
covered short-term loan. For example, proposed Sec. 1041.5 would not
require a lender to inquire about a consumer's individual
transportation or medical expenses, and the lender's ability-to-repay
method might comply with the proposed requirement to estimate
consumers' basic living expenses by factoring into the estimate of
basic living expenses a normal allowance for expenses of this type. But
if the lender learned that a particular consumer had a transportation
or recurring medical expense dramatically in excess of an amount the
lender used in estimating basic living expenses for consumers
generally, proposed comment 5(b)-2.i would clarify that the lender
could not simply ignore that fact. Instead, it would have to consider
the transportation or medical expense and then reach a reasonable
determination that the expense does not negate the lender's otherwise
reasonable ability-to-repay determination.
Similarly, in reviewing borrowing history records a lender might
learn that the consumer completed a three-loan sequence of covered
short-term loans made either under proposed Sec. Sec. 1041.5 and
1041.6 or under proposed Sec. 1041.7, waited for 30 days before
seeking to reborrow as required by proposed Sec. 1041.6 or proposed
Sec. 1041.7 and then sought to borrow on the first permissible day
under those sections, and that this has been a recurring pattern for
the consumer in the past. While the fact that the consumer on more than
one occasion has sought a loan on the first possible day that the
consumer is free to do so may be attributable to new needs that arose
following the conclusion of each prior sequence, an alternative--and
perhaps more likely explanation--is that the consumer's consistent need
to borrow as soon as possible is attributable to spillover effects from
having repaid the last loan sequence. In these circumstances, a
lender's decision
[[Page 47948]]
that the consumer has the ability to repay a new loan of the same
amount and on the same terms as the prior loans might not be reasonable
if the lender did not take into account these circumstances.
The Bureau invites comments on the minimum requirements for making
a reasonable determination of ability to repay, including whether
additional specificity should be provided in the regulation text or in
the commentary with respect to circumstances in which a lender is
required to take into account information known by the lender.
Determinations that are not reasonable. Proposed comment 5(b)-2.ii
would provide an example of an ability-to-repay determination that is
not reasonable. The example is 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 believes 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. Although the Bureau believes this
reasoning is clear, it is proposing the commentary example because some
lenders have argued that the mere fact that a lender successfully
secures repayment of the full amount due from a consumer's deposit
account shows that the consumer had the ability to repay the loan, even
if the consumer then immediately has to reborrow to meet the consumer's
other obligations and expenses. Inclusion of the example in commentary
would confirm that an ability-to-repay determination is not reasonable
if it relies on an implicit assumption that a consumer will have the
ability to repay a covered short-term loan for the reason that the
consumer will obtain further consumer credit to make payments under
major financial obligations or to meet basic living expenses.
The Bureau invites comment on whether it would be useful to
articulate additional specific examples of ability-to-repay
determinations that are not reasonable, and if so which specific
examples should be listed. In this regard, the Bureau has considered
whether there are any circumstances under which basing an ability-to-
repay determination for a covered short-term loan on assumed future
borrowing or assumed future accumulation of savings would be
reasonable, particularly in light of the nature of consumer
circumstances when they take out such loans. The Bureau seeks comment
on this question.
Performance of a lender's short-term covered loans as evidence. 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.
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 a
consumer needs amounts to meet basic living expenses that are clearly
insufficient for that purpose.
In other cases the reasonableness or unreasonableness of a lender's
determinations might be less clear. Accordingly, proposed comment 5(b)-
2.iii would provide that evidence of whether a lender's determinations
of ability to repay are reasonable may include the extent to which the
lender's determinations subject to proposed Sec. 1041.5 result in
rates of delinquency, default, and reborrowing for covered short-term
loans that are low, equal to, or high, including in comparison to the
rates of other lenders making similar covered loans to similarly
situated consumers.
As discussed above, the Bureau recognizes that the affordability of
loan payments is not the only factor that affects whether a consumer
repays a covered loan according to its terms without reborrowing. A
particular consumer may obtain a covered loan with payments that are
within the consumer's ability to repay at the time of consummation, but
factors such as the consumer's continual opportunity to work,
willingness to repay, and financial management may affect the
performance of that consumer's loan. Similarly, a particular consumer
may obtain a covered loan with payments that exceed the consumer's
ability to repay at the time of consummation, but factors such as a
lender's use of a leveraged payment mechanism, taking of vehicle
security, and collection tactics, as well as the consumer's ability to
access informal credit from friends or relatives, might result in
repayment of the loan without indicia of harm that are visible through
observations of loan performance and reborrowing. However, if a
lender's determinations subject to proposed Sec. 1041.5 regularly
result in rates of delinquency, default, or reborrowing that are
significantly higher than those of other lenders making similar short-
term covered loans to similarly situated consumers, that fact is
evidence that the lender may be systematically underestimating amounts
that consumers generally need for basic living expenses, or is in some
other way overestimating consumers' ability to repay.
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 on the performance of that
loan. Nor would proposed comment 5(b)-2.iii mean that comparison of the
performance of a lender's covered short-term loans with the performance
of covered short-term loans of other lenders could be the sole basis
for determining whether that lender's determinations of ability to
repay comply or do not comply with the requirements of proposed Sec.
1041.5. 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. Similarly, the fact that one lender's
default rates are similar to the default rates of other lenders does
not necessarily indicate that the lenders' determinations of ability to
repay are reasonable; the similar rates could also result from the fact
that the lenders' respective determinations of ability to repay are
similarly unreasonable. The Bureau believes, however, that such
comparisons will provide important evidence that, considered along with
other evidence, would facilitate evaluation of whether a lender's
ability-to-repay determinations are reasonable.
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 reasonable. Similarly, an online lender might
experience default rates significantly in excess of those of peer
lenders, but other
[[Page 47949]]
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. On the other
hand, if consumers experience systematically worse rates of
delinquency, default, and reborrowing on covered short-term loans made
by lender A, 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.
The Bureau invites comment on whether and, if so, how the
performance of a lender's portfolio of covered short-term loans should
be factored in to an assessment of whether the lender has complied with
its obligations under the rule, including whether the Bureau should
specify thresholds which presumptively or conclusively establish
compliance or non-compliance and, if so, how such thresholds should be
determined.
Payments Under the Covered Short-Term Loan
Proposed comment 5(b)-3 notes that a lender is responsible for
calculating the timing and amount of all payments under the covered
short-term loan. The timing and amount of all loan payments under the
covered short-term loan are an essential component 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 is 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 5(b)-3 cross references the
definition of payment under a covered short-term loan in proposed Sec.
1041.5(a)(5), which includes requirements and assumptions that apply to
a lender's calculation of the amount and timing of all payments under a
covered short-term loan.
Basic Living Expenses
A lender's ability-to-repay determination under proposed Sec.
1041.5(b) would be 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. As discussed above, proposed Sec. 1041.5(a)(1) would
define basic living expenses as expenditures, other than payments for
major financial obligations, that the consumer must make 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 members of
the consumer's household who are financially dependent on the consumer.
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 determination would greatly overestimate a consumer's ability to
repay a covered short-term loan and would be unreasonable. 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 believes
there would be nearly universal consensus that such a determination
would be unreasonable.
However, the Bureau recognizes that in contrast with payments under
most major financial obligations, which the Bureau 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, a consumer may have somewhat greater ability to reduce in the
short-run some expenditures that do not meet the Bureau's proposed
definition of major financial obligations. For example, a consumer may
be able for a period of time to reduce commuting expenses by ride
sharing.
Accordingly, the Bureau is not proposing to prescribe a particular
method that a lender would be required to use for estimating an amount
of funds that a consumer requires to meet basic living expenses for an
applicable period. Instead, proposed comment 5(b)-4 would provide 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 would provide a non-exhaustive list of
methods that may be reasonable ways to estimate basic living expenses.
The first method is 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. This example is based on a method that
several lenders have told the Bureau they currently 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 notes that the Bureau of Labor Statistics conducts a periodic
survey of consumer expenditures which may be useful for this purpose.
The Bureau invites comment on whether the example should identify
consideration of a consumer's income, location, and household size as
an important aspect of the method.
The second method is 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 example
would not mean that a lender is required to obtain this information but
would clarify that doing so may be one effective method of estimating a
consumer's basic living expenses. 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 is any method that reliably predicts basic living
expenses. The Bureau is 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 would expect 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 would provide a non-exhaustive list of
unreasonable methods of determining basic living expenses. The first
example is 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
[[Page 47950]]
financial obligations is available for loan payments. The second
example is 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 reborrowing,
in absolute terms or relative to rates of default and reborrowing of
other lenders making covered short-term loans to similarly situated
consumers.
The Bureau solicits comment on all aspects of the proposed
requirements for estimating basic living expenses, including the
methods identified as reasonable or unreasonable, whether additional
methods should be specified, or whether the Bureau should provide
either a more prescriptive method for estimating basic living expenses
or a safe harbor methodology (and, if so, what that methodology should
be). The Bureau also solicits comment on whether lenders should be
required to ask consumers to identify, on a written questionnaire that
lists common types of basic living expenses, how much they typically
spend on each type of expense. The Bureau further solicits comment on
whether and how lenders should be required to verify the completeness
and correctness of the amounts the consumer lists and how a lender
should be required to determine how much of the identified or verified
expenditures is necessary or, under the alternative approach to
defining basic living expenses discussed above, is recurring and not
realistically reducible during the term of the prospective loan.
5(b)(2)
Proposed Sec. 1041.5(b)(2) would set forth the Bureau's specific
proposed methodology for making a reasonable determination of a
consumer's ability to pay a covered short-term loan. Specifically, it
would provide 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. Sec. 1041.5(b)(2)(i), (ii),
and (iii). Proposed Sec. 1041.5(b)(2)(i) would require 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 require assessment
of an additional period in light of the special harms associated with
loans with short-term structures. Proposed Sec. 1041.5(b)(2)(iii)
would require compliance with additional requirements in proposed Sec.
1041.6 in situations in which the consumer's borrowing history suggests
that he or she may have difficulty repaying additional credit.
5(b)(2)(i)
Proposed Sec. 1041.5(b)(2)(i) would provide 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 will be sufficient for the consumer to make all
payments under the covered short-term loan and to meet basic living
expenses during the term of covered short-term loan. As defined in
proposed Sec. 1041.5(a)(6), residual income is the amount of a
consumer's net income during a period that is not already committed to
payments under major financial obligations during the period. 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 reborrowing, or suffer collateral harms from
unaffordable payments.
In proposing Sec. 1041.5(b)(2)(i) the Bureau recognizes 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 under covered short-term loans
because of changes that occur after consummation. 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 make a reasonable assessment of the
consumer's ability to repay ex ante. Rather, proposed Sec.
1041.5(b)(2)(i) looks to the facts as reasonably knowable prior to
consummation and would mean that a lender is prohibited from making a
covered short-term loan subject to proposed Sec. 1041.5 if there is
not a reasonable basis at consummation for concluding that the consumer
will be able to make payments under the covered loan while also meeting
the consumer's major financial obligations and meeting basic living
expenses.
While some consumers may have so little (or no) residual income as
to be unable to afford any loan, for other consumers the ability to
repay will depend on the amount and timing of the required repayments.
Thus, even if a lender concludes that there is not a reasonable basis
for believing that a consumer can pay a particular prospective loan,
proposed Sec. 1041.5(b)(2)(i) would not prevent a lender from making a
different covered loan with more affordable payments to such a
consumer, provided that the more affordable payments would not consume
so much of a consumer's residual income that the consumer would be
unable to meet basic living expenses and provided further that the
alternative loan is consistent with applicable State law.
Applicable Period for Residual Income
As discussed above, under proposed Sec. 1041.5(b)(2)(i) a lender
must reasonably conclude that the consumer's residual income will be
sufficient for the consumer to make all payments under the covered
short-term loan and to meet basic living expenses during the term of
the covered short-term loan. To provide greater certainty, facilitate
compliance, and reduce burden, the Bureau is proposing a comment to
explain how lenders could comply with proposed Sec. 1041.5(b)(2)(i).
Proposed comment 5(b)(2)(i)-1 would provide 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 method of compliance would allow 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-term
loan provide for multiple payments. However, the lender would have 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 believes 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 covered short-term loan, rather than, for example, based on
a monthly period that may or may not coincide with the loan term.
[[Page 47951]]
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 the term of the
loan.
The Bureau is proposing to clarify that the determination must be
based on residual income ``during the shorter of the term of the loan
or the period ending 45 days after consummation of the loan'' because
the definition of a covered short-term loan includes a loan under which
the consumer is required to repay ``substantially'' the entire amount
of the loan within 45 days of consummation. The clarification would
ensure that, if an unsubstantial amount were due after 45 days
following consummation, the lender could not rely on residual income
projected to accrue after the forty-fifth day to determine that the
consumer would have sufficient residual income as required under
proposed Sec. 1041.5(b)(2)(i). Proposed comment 5(b)(2)(i)-1.i
includes an example applying the method of compliance to a covered
short-term loan payable in one payment 16 days after the lender makes
the covered short-term loan.
The Bureau invites comment on its proposed applicable time period
for assessing residual income.
Sufficiency of Residual Income
As discussed above, under proposed Sec. 1041.5(b)(2)(i) a lender
must reasonably conclude that the consumer's residual income will 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 the period ending 45 days after consummation of
the loan. Proposed comment 5(b)(2)(i)-2 would clarify what constitutes
``sufficient'' residual income for a covered short-term loan. For a
covered short-term loans, comment 5(b)(2)(i)-2.i would provide that
residual income is sufficient so 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.
5(b)(2)(ii)
Proposed Sec. 1041.5(b)(2)(ii) would provide that for a covered
short-term loan subject to the ability-to-repay requirement of proposed
Sec. 1041.5, a lender must reasonably conclude that the consumer will
be able to make payments required for major financial obligations as
they fall due, to make any remaining payments under the covered short-
term loan, and to meet basic living expenses for 30 days after having
made the highest payment under the covered short-term loan on its due
date. Proposed comment 5(b)(2)(ii)-1 notes 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
includes an example of a covered short-term loan for which a lender
could not make a reasonable determination that the consumer will have
the ability to repay under proposed Sec. 1041.5(b)(2)(ii).
The Bureau proposes to include the requirement in Sec.
1041.5(b)(2)(ii) for covered short-term loans because the Bureau's
research has found that these loan structures are particularly likely
to result in reborrowing shortly after the consumer repays an earlier
loan. As discussed above in Market Concerns--Short-Term Loans, 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 of time makes it especially likely that
the consumer will be left with insufficient funds to make subsequent
payments under major financial obligations and to meet basic living
expenses. The consumer may then end up falling behind on payments under
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.
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. However, depending
on 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 until a consumer has attempted to meet all expenses in the
consumer's monthly expense cycle, or even longer. Indeed, many payday
loan borrowers who repay a first loan and do not reborrow during the
ensuing pay cycle (i.e., within 14 days) nonetheless do find it
necessary to reborrow before the end of the expense cycle (i.e., within
30 days).
In the Small Business Review Panel Outline, the Bureau described a
proposal to require lenders to determine that a consumer will have the
ability to repay a covered short-term loan without needing to reborrow
for 60 days, consistent with the proposal in the same document to treat
a loan taken within 60 days of having a prior covered short-term loan
outstanding as part of the same sequence. Several consumer advocates
have argued that consumers may be able to juggle expenses and financial
obligations for a time, so that an unaffordable loan may not result in
reborrowing until after a 30-day period. For the reasons discussed
further below in the section-by-section analyses of Sec. 1041.6, the
Bureau is now proposing a 30-day period for both purposes.
The Bureau believes that the incidence of reborrowing caused by
such loan structures would be somewhat ameliorated simply by
determining that a consumer will 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 a consumer's residual income during
the period beyond the amount needed to meet basic living expenses
during the period, then the consumer will be left with 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. 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 dates of the consumer's receipts of income. This practice
maximizes the probability that the lender will timely receive the
payment under the covered 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.
[[Page 47952]]
Thus, 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 reborrow or
suffer collateral harms from unaffordable payments. The example
included in proposed comment 5(b)(2)(ii)-1 illustrates just such a
result.
The Bureau invites comment on the necessity of the requirement in
proposed Sec. 1041.5(b)(2)(ii) to prevent consumer harms and on any
alternatives that would adequately prevent consumer harm while reducing
burden for lenders. The Bureau also invites comment on whether the 30-
day period in proposed Sec. 1041.5(b)(2)(ii) is the appropriate period
of time to use or whether a shorter or longer period of time, such as
the 60-day period described in the Small Business Review Panel Outline,
would be appropriate. The Bureau also invites comment on whether the
time period chosen should run from the date of the final payment,
rather than the highest payment, in cases where the highest payment is
other than the final payment.
5(b)(2)(iii)
Proposed Sec. 1041.5(b)(2)(iii) would provide that for a covered
short-term loan for which a presumption of unaffordability applies
under proposed Sec. 1041.6, the lender determine that the requirements
of proposed Sec. 1041.6 are satisfied. As discussed below, proposed
Sec. 1041.6 would apply certain presumptions, requirements, and
prohibitions when the consumer's borrowing history indicates that he or
she may have particular difficulty in repaying a new covered loan with
certain payment amounts or structures.
5(c) Projecting Consumer Net Income and Payments for Major Financial
Obligations
Proposed Sec. 1041.5(c) provides requirements that would apply to
a lender's projections of net income and major financial obligations,
which in turn serve as the basis for the lender's reasonable
determination of ability to repay. Specifically, it would establish
requirements for obtaining information directly from a consumer as well
as specified types of verification evidence. It would also provide
requirements for reconciling ambiguities and inconsistencies in the
information and verification evidence.
5(c)(1) General
As discussed above, proposed Sec. 1041.5(b)(2) would provide that
a lender's determination of a consumer's ability to repay is reasonable
only if the lender determines that the consumer will have sufficient
residual income during the term of the loan and for a period thereafter
to repay the loan and still meet basic living expenses. Proposed Sec.
1041.5(b)(2) thus carries with it the requirement for a lender to make
projections with respect to the consumer's net income and major
financial obligations--the components of residual income--during the
relevant period of time. And, proposed Sec. 1041.5(b)(2) further
provides that to be reasonable such projections must be made in
accordance with proposed Sec. 1041.5(c).
Proposed Sec. 1041.5(c)(1) would provide 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), each of which are discussed below. Proposed
Sec. 1041.5(c)(1) further provides 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.
The Bureau believes verification of consumers' net income and
payments for major financial obligations is 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 under 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 reborrow. This result is especially likely if a consumer
perceives that, for any given loan amount, lenders offer only one-size-
fits-all loan repayment structure and will not offer an alternative
loan with payments that are within the consumer's ability to repay. An
ability-to-repay determination that is based on unrealistic factual
assumptions will yield unrealistic and unreliable results, leading to
the consumer harms that the Bureau's proposal is intended to prevent.
Accordingly, proposed Sec. 1041.5(c)(1) would permit a lender to
base its projection of the amount and timing of a consumer's net income
or payments under 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) would further provide
that in determining whether and the extent to which such 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. The Bureau believes 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.
However, the proposed approach also recognizes 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 their
more typical levels. Accordingly, the proposed approach would not
require a lender to base its projections exclusively on the consumer's
most recent net income receipt shown in the verification evidence.
Instead, it allows 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 allow 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.
[[Page 47953]]
In this regard, the proposed approach recognizes that a consumer's
own statements, explanations, and other evidence are important
components of a reliable projection of future net income and payments
for major financial obligations. Proposed comment 5(c)(1)-1 includes
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 includes 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 anticipates 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 believes that many
lenders and vendors would develop methods of automating projections, so
that for a typical consumer, relatively little labor would be required.
The Bureau invites comments on the proposed approach to
verification and to making projections based upon verified evidence,
including whether the Bureau should permit projections that vary from
the most recent verification evidence and, if so, whether the Bureau
should be more prescriptive with respect to the permissible range of
such variances.
5(c)(2) Changes Not Supported by Verification Evidence
Proposed Sec. 1041.5(c)(2) would provide 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 1041.5(c)(3)(ii). As discussed below,
the required verification evidence will normally consist of third-party
documentation or other reliable records of recent transactions or of
payment amounts. Proposed Sec. 1041.5(c)(2) would permit 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 under 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.
The exception would accommodate situations in which 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 generally required under proposed
Sec. 1041.5(c)(3)(ii)(A). Proposed Sec. 1041.5(c)(2) would permit 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 be required to retain
the statement in accordance with proposed Sec. 1041.18.
The Bureau invites comments as to whether lenders should be
permitted to rely on such evidence in projecting residual income.
5(c)(3) Evidence of Net Income and Payments for Major Financial
Obligations
5(c)(3)(i) Consumer Statements
Proposed Sec. 1041.5(c)(3)(i) would require a lender to obtain a
consumer's written statement of the amount and timing of the consumer's
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, etc.). 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 be required to retain the statements in
accordance with proposed Sec. 1041.18. As discussed above, the Bureau
believes it is important to require lenders to obtain this information
directly from consumers in addition to obtaining reasonably available
verification evidence under proposed Sec. 1041.5(c)(3)(ii) because the
latter sources of information may sometimes contain ambiguous, out-of-
date, or missing information. Accordingly, the Bureau believes that
projections based on both sources of information will be more reliable
than either one standing alone.
Proposed comment 5(c)(3)(i)-1 clarifies that 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 and retains. It further clarifies 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 paid through the period required under proposed Sec.
1041.5(b)(2). Proposed comment 5(c)(3)(i)-1 includes 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) would not specify any
particular form or even particular questions or particular words that a
lender must use to obtain the required consumer statements.
The Bureau invites comments on whether to require a lender to
obtain a written statement from the consumer with respect to the
consumer's income and major financial obligations, including whether
the Bureau should establish any procedural requirements with respect to
securing such a statement and the weight that should be given to such a
statement. The Bureau also invites comments on whether a written
memorialization by the lender of a consumer's oral statement should not
be considered sufficient.
5(c)(3)(ii) Verification Evidence
Proposed Sec. 1041.5(c)(3)(ii) would require 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 period of
time prior to consummation. It would specify the type of verification
evidence required for net income and each component of major financial
obligations. The proposed requirements are intended to provide
reasonable assurance that the lender's projections of a consumer's net
income and payments for major financial obligations are based on
accurate and objective information, while also allowing lenders to
adopt innovative, automated, and less burdensome methods of compliance.
5(c)(3)(ii)(A)
Proposed Sec. 1041.5(c)(3)(ii)(A) would specify that for a
consumer's net
[[Page 47954]]
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 would not specify a minimum look-back period or number
of net income payments for which the lender must obtain verification
evidence. The Bureau does not believe it is necessary or appropriate to
require verification evidence covering a lookback period of a
prescribed length. Rather, sufficiency of the history for which a
lender obtains verification evidence may depend upon 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 the
lender initially obtains, if applicable. Lenders would be required to
develop and maintain policies and procedures for establishing the
sufficient history of net income payments in verification evidence, in
accordance with proposed Sec. 1041.18.
Proposed comment 5(c)(3)(ii)(A)-1 would clarify 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
would further clarify that 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.
The Bureau believes that the proposed requirement would be
sufficiently flexible to provide lenders with multiple options for
obtaining verification evidence for a consumer's net income. For
example, a paper paystub would generally satisfy the requirement, as
would a photograph of the paystub uploaded from a mobile phone to an
online lender. In addition, 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
allow 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.
Several SERs expressed concern during the SBREFA process that the
Bureau's approach to income verification described in the Small
Business Review Panel Outline was too burdensome and inflexible.
Several other lender representatives expressed similar concerns during
the Bureau's outreach to industry. Many perceived that the Bureau would
require outmoded or burdensome methods of obtaining verification
evidence, such as always requiring a consumer to submit a paper paystub
or transmit it by facsimile (fax) to a lender. Others expressed concern
about the Bureau requiring income verification at all, stating that
many consumers are paid in cash and therefore have no employer-
generated records of income.
The Bureau's proposed approach is intended to respond to many of
these concerns by providing for a wide range of methods for obtaining
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. In developing this 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 is
proposing--to verify consumers' income as a condition of making a
covered loan. The Bureau's proposed approach thus would accommodate
most of the methods they described and that the Bureau is aware of from
other research and outreach. It is 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
may be 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. Lenders often require consumers
to have deposit accounts as a condition of obtaining a covered loan, so
the Bureau believes that lenders would be able to obtain verification
evidence for many consumers who are paid in cash in this manner.
The Bureau recognizes that there are some consumers who receive a
portion of their income in cash and also do not deposit their cash
income 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 that
portion of such consumers' income. The Bureau, however, does not
believe it is appropriate to make an ability-to-repay determination for
a covered loan based on income that cannot be reasonably substantiated
through any verification evidence. When there is no verification
evidence for a consumer's net income, the Bureau believes the risk is
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 the harms targeted by this
proposal.
For similar reasons, the Bureau is not proposing 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.
Given the risks associated with unaffordable short-term loans, the
Bureau believes that such models--which the Bureau believes typically
are used to estimate annual income--lack the precision required to
reasonably project an individual consumer's net income for a short
period of time.
The Bureau notes that it has received recommendations from the
Small Dollar Roundtable, comprised of a number of lenders making loans
the Bureau proposes to cover in this rulemaking and a number of
consumer advocates, recommending that the Bureau require income
verification.
The Bureau invites comment on the types of verification evidence
permitted by the proposed rule and what, if any, other types of
verification evidence should be permitted, especially types of
verification evidence that would be at least as objective and reliable
as the types provided for in proposed Sec. 1041.5(c)(3)(ii)(A) and
comment 5(c)(3)(ii)(A)-1. For example, the Bureau is aware of service
providers who are seeking to develop methods to verify a consumer's
stated income based upon extrinsic data about the consumer or the area
in which the consumer lives. The Bureau invites comment on the
reliability of such methods, their ability to provide information that
is sufficiently current and granular to
[[Page 47955]]
address a consumer's stated income for a particular and short period of
time, and, if they are able to do so, whether income amounts determined
under such methods should be a permissible as a form of verification
evidence. The Bureau also invites comments on whether the requirements
for verification evidence should be relaxed for a consumer whose
principal income is documented but who reports some amount of
supplemental cash income and, if so, what approach would be appropriate
to guard against the risk of consumers' overstating their income and
obtaining an unaffordable loan.
5(c)(3)(ii)(B)
Proposed Sec. 1041.5(c)(3)(ii)(B) would specify 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 Sec. 1041.17(d)(2), if available. The Bureau believes
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 national consumer reporting
agencies, so the lender would also be required to obtain, as
verification evidence, a consumer report from a currently registered
information system. As discussed above, proposed Sec. 1041.5(c)(1)
would permit 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
includes examples applying that proposed requirement in scenarios when
a major financial obligation shown in the verification evidence 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
verification evidence at all.
Proposed comment 5(c)(3)(ii)(B)-1 would clarify 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. The Bureau anticipates that in some cases, the
national consumer report the lender obtains will not include a
particular debt obligation stated by the consumer, or that the national
consumer report may include, for example, the payment amount under the
debt obligation but not the timing of the payment. Similar anomalies
could occur with covered loans and a consumer report obtained from a
registered information system. To the extent the national consumer
report and consumer report from a registered information system omit
information for a payment under a debt obligation stated by the
consumer, the lender would simply base its projections on the amount
and timing stated by the consumer.
The Bureau notes that proposed Sec. 1041.5(c)(3)(ii)(B) does not
require a lender to obtain a credit report unless the lender is
otherwise prepared to make a loan to a particular consumer, Because
obtaining a credit report will add some cost, the Bureau expects that
lenders will order such reports only after determining that the
consumer otherwise satisfies the ability-to-repay test so as to avoid
incurring these costs for applicants who would be declined without
regard to the contents of the credit report. For the reasons previously
discussed, the Bureau believes that verification evidence is critical
to ensuring that consumers in fact have the ability to repay a loan,
and that therefore the costs are justified to achieve the objectives of
the proposal.
The Bureau invites comment on whether to require lenders to obtain
credit reports from a national credit reporting agency and from a
registered information system. In particular, and in accordance with
the recommendation of the Small Business Review Panel, the Bureau
invites comments on ways of reducing the operational burden for small
businesses of verifying consumers' payments under major financial
obligations.
5(c)(3)(ii)(C)
Proposed Sec. 1041.5(c)(3)(ii)(C) would specify that for a
consumer's required payments under court- or government agency-ordered
child support obligations, the applicable verification evidence would
be a national consumer report, which also serves as verification
evidence for a consumer's required payments under debt obligations, in
accordance with proposed Sec. 1041.5(c)(3)(ii)(B). The Bureau
anticipates that some required payments under court- or government
agency-ordered child support obligations will not appear in a national
consumer report. To the extent the national consumer report omits
information for a required payment, the lender could simply base its
projections on the amount and timing stated by the consumer, if any.
The Bureau intends this clarification to address concerns from some
lenders, including from SERs, that a requirement to obtain verification
evidence for payments under court- or government agency-ordered child
support obligations from sources other than a national consumer report
would be onerous and create great uncertainty.
5(c)(3)(ii)(D)
Proposed Sec. 1041.5(c)(3)(ii)(D) would specify 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), 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 with
households in the locality of the consumer.
Proposed comment 5(c)(3)(ii)(D)-1 explains that the proposed
provision means a lender would have three methods that it could choose
from for complying with the requirement to obtain verification evidence
for a consumer's housing expense. Proposed comment 5(c)(3)(ii)(D)-1.i
explains that under the first method, which could be used for a
consumer whose housing expense is a mortgage payment, the lender may
obtain a national consumer report that includes the mortgage payment. A
lender would be required to obtain a national consumer report as
verification evidence of a consumer's payments under debt obligations
generally, pursuant to proposed Sec. 1041.5(c)(3)(ii)(B). A lender's
compliance with that requirement would satisfy the requirement in
proposed Sec. 1041.5(c)(3)(ii)(D), provided the consumer's housing
expense is a mortgage payment and that mortgage payment appears in the
national consumer report the lender obtains.
Proposed comment 5(c)(3)(ii)(D)-1.ii explains that the second
method is for the lender to obtain a reliable transaction record (or
records) of recent housing expense payments or a rental or lease
agreement. It clarifies that for purposes of this method, reliable
transaction records include a facially genuine original, photocopy or
image of a receipt, cancelled check, or money order, or an electronic
or paper record of depository account transactions or prepaid account
transactions (including transactions on a general purpose reloadable
prepaid card account, a payroll card account, or a government
[[Page 47956]]
benefits card account), from which the lender can reasonably determine
that a payment was for housing expense as well as the date and amount
paid by the consumer. This method mirrors options a lender would have
for obtaining verification evidence for net income. Accordingly, data
derived from a record of depository account transactions or of prepaid
account transactions, such as data from account data aggregator
services that obtain and categorize consumer deposit account and other
account transaction data, would also generally satisfy the requirement.
Bureau staff have met with service providers that state that they
currently provide services to lenders and are typically able to
identify, for example, how much a particular consumer expends on
housing expense as well as other categories of expenses.
Proposed comment 5(c)(3)(ii)(D)-1.iii explains that the third
method is for a lender to use 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 locality of the consumer seeking a
covered loan. Proposed comment 5(c)(3)(ii)(D)-1.iii provides, as an
example, that a lender may use data from a statistical survey, such as
the American Community Survey of the United States Census Bureau, to
estimate individual or household housing expense in the locality (e.g.,
in the same census tract) where the consumer resides. It provides that,
alternatively, 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
explains that a lender may estimate a consumer's share of household
expense based on estimated household housing expense by reasonably
apportioning the estimated household housing expense by the number of
persons sharing housing expense as stated by the consumer, or by
another reasonable method.
Several SERs expressed concern during the SBREFA process that the
Bureau's approach to housing expense verification described in the
Small Business Review Panel Outline was burdensome and impracticable
for many consumers and lenders. Several lender representatives
expressed similar concerns during the Bureau's outreach to industry.
The Small Business Review Panel Outline 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. But some
SERs and other lender representatives stated 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 subsequently locating and transmitting or delivering a copy
of the lease to a lender would be unduly burdensome, if not
impracticable, for both consumers and lenders.
The Bureau believes that many consumers would have paper or
electronic records that they could provide to a lender to establish
their housing expense. In addition, as discussed above, information
presented to the Bureau during outreach suggests that data aggregator
services may be able to electronically and securely obtain and
categorize, with a consumer's consent, the consumer's deposit account
or other account transaction data to reliably identify housing expenses
payments and other categories of expenses.
Nonetheless, the Bureau intends its proposal to be responsive to
these concerns by providing lenders with multiple options for obtaining
verification evidence for a consumer's housing expense, including by
using estimates based on the housing expenses of similarly situated
consumers with households in the locality of the consumer seeking a
covered loans. The Bureau's proposal also is intended to facilitate
automation of the methods of obtaining the verification evidence,
making projections of a consumer's housing expense, and calculating the
amounts for an ability-to-repay determination, such as residual income.
A related concern raised by SERs is that a consumer may be the
person legally obligated to make a rent or mortgage payment but may
receive contributions toward it from other household members, so that
the payment the consumer makes, even if the consumer can produce a
record of it, is much greater than the consumer's own housing expense.
Similarly, a consumer may make payments in cash to another person, who
then makes the payment to a landlord or mortgage servicer covering the
housing expenses of several residents. During outreach with industry,
one lender stated that many of its consumers would find requests for
documentation of housing expense to be especially intrusive or
offensive, especially consumers with informal arrangements to pay rent
for a room in someone else's home.
To address these concerns, the Bureau is proposing the option of
estimating a consumer's housing expense based on the individual or
apportioned household housing expenses of similarly situated consumers
with households in the locality. The Bureau believes the proposed
approach would address the concerns raised by SERs and other lenders
while also reasonably accounting for the portion of a consumer's net
income that is consumed by housing expenses and, therefore, not
available for payments under a prospective loan. The Bureau notes that
if the method the lender uses to obtain verification evidence of
housing expense for a consumer--including the estimated method--
indicates a higher housing expense amount than the amount in the
consumer's statement under proposed Sec. 1041.5(c)(3)(i), then
proposed Sec. 1041.5(c)(1) would generally require a lender to rely on
the higher amount indicated by the verification evidence. Accordingly,
a lender may prefer use one of the other two methods for obtaining
verification evidence, especially if doing so would result in
verification evidence indicating a housing expense equal to that in the
consumer's written statement of housing expense.
The Bureau recognizes that in some cases the consumer's actual
housing expense may be lower than the estimation methodology would
suggest but may not be verifiable through documentation. For example,
some consumers may live for a period of time rent-free with a friend or
relative. However, the Bureau does not believe it is possible to
accommodate such situations without permitting lenders to rely solely
on the consumer's statement of housing expenses, and for the reasons
previously discussed the Bureau believes that doing so would jeopardize
the objectives of the proposal. The Bureau notes that the approach it
is proposing is consistent with the recommendation of the Small Dollar
Roundtable which recommended that the Bureau permit rent to be verified
[[Page 47957]]
through a ``geographic market-specific . . . valid, reliable proxy.''
The Bureau invites comment on whether the proposed methods of
obtaining verification evidence for housing expense are appropriate and
adequate.
Sec. 1041.6 Additional Limitations on Lending--Covered Short-Term
Loans
Background
Proposed Sec. 1041.6 would augment 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
repaying an outstanding loan provides important evidence with respect
to the consumer's financial capacity to afford a new covered short-term
loan. In these circumstances, proposed Sec. 1041.6 would require the
lender to factor this evidence into the ability-to-repay determination
and, in certain instances, would prohibit a lender from making a new
covered short-term loan under proposed Sec. 1041.5 to the consumer for
30 days. The Bureau proposes the additional requirements in Sec.
1041.6 for the same basic reason that it proposes 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
believes that these additional requirements may be needed in
circumstances in which proposed Sec. 1041.5 alone may not be
sufficient to prevent a lender from making a covered short-term loan
that the consumer might not have the ability to repay.
Proposed Sec. 1041.6 would generally impose a presumption of
unaffordability on continued lending where evidence suggests that the
prior loan was not affordable for the consumer such that the consumer
may have particular difficulty repaying a new covered short-term loan.
Specifically, such a presumption would apply when a consumer seeks a
covered short-term loan during the term of 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 and for 30 days
thereafter, or seeks to take out a covered short-term loan when there
are indicia that an outstanding loan with the same lender or its
affiliate is unaffordable for the consumer. Proposed Sec. 1041.6 would
also impose a mandatory cooling-off period prior to a lender making a
fourth loan covered short-term loan in a sequence and would prohibit
lenders from making a covered short-term loan under proposed Sec.
1041.5 during the term of and for 30 days thereafter a covered short-
term loan made under proposed Sec. 1041.7.
A central component of the preventive requirements in proposed
Sec. 1041.6 is the concept of a reborrowing 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 reborrow shortly after
repaying the loan. As discussed in Market Concerns--Short-Term Loans,
however, the Bureau believes that the fact that covered short-term
loans require repayment so quickly after consummation makes such loans
more difficult for consumers to repay the loan consistent with their
other major financial obligations and basic living expenses without
needing to reborrow. Moreover, most covered short-term loans--including
payday loans and short-term vehicle title loans--also require payment
in a single lump sum, thus exacerbating the challenge of repaying the
loan without needing to reborrow.
For these loans, the Bureau believes 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 other major financial obligations and
basic living expenses. This also may provide strong evidence that the
consumer will not be able to afford a new covered short-term loan. 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.
Frequently, reborrowing occurs on the same day that a loan is due,
either in the form of a rollover (where permitted by State law) or a
new loan taken out on the same day that the prior loan was repaid. Some
States require a cooling-off period between loans, typically 24 hours,
and the Bureau has found that in those States, if consumers take out
successive loans, they generally do so at the earliest time that is
legally permitted.\559\ The Bureau interprets these data to indicate
that these consumers could not afford to repay the full amount of the
loan when due and still meet their financial obligations and basic
living expenses.
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\559\ CFPB Report on Supplemental Findings, at ch. 4.
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Whether a particular loan taken after a consumer has repaid a prior
loan (and after the expiration of any mandated cooling-off period) is a
reborrowing prompted by unaffordability of the prior payment is less
facially evident. 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. On
balance, the Bureau believes that for new loans taken within a short
period of time 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.
To provide a structured process that accounts for the likelihood
that the unaffordability of an existing or prior loan is driving
reborrowing and that ensures a rigorous analysis of consumers'
individual circumstances, the Bureau believes that the most appropriate
approach may be a presumptions framework rather than an open-ended
inquiry. The Bureau is thus proposing to delineate a specific
reborrowing period--i.e., a period during which a new loan will be
presumed to be a reborrowing.\560\
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\560\ Reborrowing takes several forms in the market for covered
short-term loans. As used throughout this proposal, reborrowing and
the reborrowing period include any rollovers or renewals of a loan,
as well as new extensions of credit. 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. Similarly, the laws of some States permit a lender to
``renew'' a consumer's outstanding loan with the payment of a
finance charge. More generally, a consumer may repay a loan and then
return to take out a new loan within a fairly short period of time.
The Bureau thus considers rollovers, renewals, and reborrowing
within a short period of time after repaying the prior loan to be
functionally the same sort of transaction with regard to the
presumptions of unaffordability--and other lending restrictions in
proposed Sec. 1041.6--and generally uses the term reborrowing 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.
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In determining the appropriate length of the reborrowing period,
the Bureau considered several time periods. In particular, in addition
to the 30-day period being proposed, the Bureau considered periods of
14, 45, 60, or 90 days in length. The Bureau also considered an option
that would tie the length of the reborrowing period to the term of the
preceding loan. In evaluating the alternative options for defining the
reborrowing period (and in turn the loan
[[Page 47958]]
sequence definition), the Bureau sought to strike a balance between a
reborrowing period that would be 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, and a reborrowing period that
would be too long, thereby covering substantial numbers of subsequent
loans that are the result of a new need for credit, independent of such
effects. This concept of a reborrowing period is intertwined with the
definition of loan sequence. Under proposed Sec. 1041.2(a)(12), loan
sequence is defined 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 a covered short-term loan
outstanding.
The Bureau's 2014 Data Point analyzed repeated borrowing on payday
loans using a 14-day reborrowing period reflecting a bi-weekly pay
cycle, the most common pay cycle for consumers in this market.\561\ 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
adopted this approach in the Bureau's early research in order to obtain
a relatively conservative measure of reborrowing 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 slightly
different reborrowing patterns.
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\561\ CFPB Data Point: Payday Lending, at 7.
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Upon further consideration of what benchmarks would sufficiently
protect consumers from reborrowing harm, the Bureau turned to the
typical consumer expense cycle, rather than the typical income cycle,
as the most appropriate metric.\562\ Consumer expense cycles are
typically a month in length with housing expenses, utility payments,
and other debt obligations generally paid on a monthly basis. Thus,
where repaying a loan causes a shortfall, the consumer may seek to
return during the same expense cycle to get funds to cover downstream
expenses.
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\562\ 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,
(November 16, 2011), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776.
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The proposals under consideration in the Small Business Review
Panel Outline relied on a 60-day reborrowing period based upon the
premise that consumers for whom repayment of a loan was unaffordable
may nonetheless be able to juggle their expenses for a period of time
so that the spillover effects of the loan may not manifest until the
second expense cycle following repayment. Upon additional analysis and
extensive feedback from a broad range of stakeholders, the Bureau has
now tentatively concluded that the 30-day definition incorporated into
the Bureau's proposal may strike a more appropriate balance between
competing considerations.
Because so many expenses are paid on a monthly basis, the Bureau
believes 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. Additionally, in analysis of supervisory
data, the Bureau has found that a considerable segment of consumers who
repay a loan without an immediate rollover or reborrowing nonetheless
return within the ensuing 30 days to reborrow.\563\ Accordingly, if the
consumer returns to take out another covered short-term loan--or, as
described with regard to proposed Sec. 1041.10, certain types of
covered longer-term loans--within the same 30-day period, the Bureau
believes that this pattern of reborrowing indicates that the prior loan
was unaffordable and that the following loan may likewise be
unaffordable.
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\563\ CFPB Report on Supplemental Findings, at ch. 5.
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On the other hand, the Bureau believes that for loans obtained more
than 30 days after a prior loan, there is an increased possibility that
the loan is prompted by a new need on the part of the borrower, not
directly related to potential financial strain from repaying the prior
loan. While a previous 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 believes that the effects of the previous loan are
more likely to dissipate once the consumer has completed a full expense
cycle following the previous loan's conclusion. Accordingly, the Bureau
believes that a 45-day or 60-day definition may be too broad. A
reborrowing period which varies with the length of the preceding loan
term would be operationally complex for lenders to implement and, for
consumers paid weekly or bi-weekly, may also be too narrow.
Accordingly, using this 30-day reborrowing window, the Bureau is
proposing a presumption of unaffordability in situations in which the
Bureau believes that the fact that the consumer is seeking to take out
a new covered short-term loan during the term of, or shortly after
repaying, a prior loan generally suggests that the new loan, like the
prior loan, will exceed the consumer's ability to repay. The
presumption is based on concerns that the prior loan may have triggered
the need for the new loan because it exceeded the consumer's ability to
repay, and that, absent a sufficient improvement of the consumer's
financial capacity, the new loan will also be unaffordable for the
consumer.
The presumption can be overcome, however, in circumstances that
suggest that there is sufficient reason to believe that the consumer
would, in fact, be able to afford the new loan even though he or she is
seeking to reborrow during the term of or shortly after a prior loan.
The Bureau recognizes, 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 recognizes 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--for example, if the consumer has obtained a second job
that will increase the consumer's residual income going forward or the
consumer has moved since obtaining the prior loan and will have lower
housing expenses going forward.
Proposed Sec. 1041.6(b) through (d) define a set of circumstances
in which the Bureau believes that a consumer's recent borrowing history
makes it unlikely that the consumer can afford a new covered short-term
loan, including concurrent loans.\564\ In such
[[Page 47959]]
circumstances, a consumer would be presumed to not have the ability to
repay a covered short-term loan under proposed Sec. 1041.5. Proposed
Sec. 1041.6(e) would define the additional determinations that a
lender would be required to make in cases where the presumption applies
in order for the lender's determination under proposed Sec. 1041.5
that the consumer will have the ability to repay a new covered short-
term loan to be reasonable despite the unaffordability of the prior
loan.
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\564\ The Bureau notes that the proposed ability-to-repay
requirements do not prohibit a consumer from taking out a covered
short-term loan when the consumer has one or more covered short-term
loans outstanding, but instead account for the presence of
concurrent loans in two ways: (1) A lender would be required to
obtain verification evidence about required payments on debt
obligations, which are defined under proposed Sec. 1041.5(a)(2) to
include outstanding covered loans, and (2) any concurrent loans
would be counted as part of the loan sequence for purposes of
applying the presumptions and prohibitions under proposed Sec.
1041.6. This approach differs from the conditional exemption for
covered short-term loans under proposed Sec. 1041.7 (i.e., the
alternative to the ability-to-repay requirements), which generally
prohibits a Section 7 loan if the consumer has an outstanding
covered loan. See the section-by-section analysis of proposed Sec.
1041.7(c)(1) for further discussion, including explanation of the
different approaches and notation of third party data regarding the
prevalence of concurrent borrowing in this market.
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The Bureau believes that it is extremely unlikely that a consumer
who twice in succession returned to reborrow during the reborrowing
period and who seeks to reborrow 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 reborrowing that is beyond the consumer's ability to
repay, the Bureau believes it is 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 would 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 encouraging the consumer
to take on additional unaffordable debt. Additionally, proposed Sec.
1041.6(g) would prohibit a lender from combining sequences of covered
short-term loans made under proposed Sec. 1041.5 with loans made under
the conditional exemption in proposed Sec. 1041.7, as discussed
further below.
The Bureau notes that this overall proposed approach is fairly
similar to the framework included in the Small Business Review Panel
Outline. There, the Bureau included a presumption of inability to repay
for the second and third covered short-term loan and covered longer-
term balloon-payment loan in a loan sequence and a mandatory cooling-
off period following the third loan in a sequence. The Bureau
considered a ``changed circumstances'' standard for overcoming the
presumption that would have required lenders to obtain and verify
evidence of a change in consumer circumstances indicating that the
consumer had the ability to repay the new loan according to its terms.
The Bureau also, as noted above, included a 60-day reborrowing period
(and corresponding definition of loan sequence) in the Small Business
Review Panel Outline.
SERs and other stakeholders that offered feedback on the Outline
urged the Bureau to provide greater flexibility with regard to using a
presumptions framework to address concerns about repeated borrowing
despite the contemplated requirement to determine ability to repay. The
SERs and other stakeholders also urged the Bureau to provide greater
clarity and flexibility in defining the circumstances that would permit
a lender to overcome the presumption of unaffordability.
The Small Business Review Panel Report recommended that the Bureau
request comment on whether a loan sequence could be defined with
reference to a period shorter than the 60 days under consideration
during the SBREFA process. The Small Business Review Panel Report
further recommended that the Bureau consider additional approaches to
regulation, including whether existing State laws and regulations could
provide a model for elements of the Bureau's proposed interventions. In
this regard, the Bureau notes that some States have cooling-off periods
of one to seven days, as well as longer periods that apply after a
longer sequence of loans. The Bureau's prior research has examined the
effectiveness of these cooling-off periods \565\ and, in the CFPB
Report on Supplemental Findings, the Bureau is publishing research
showing how different definitions of loan sequence affect the number of
loan sequences and the number of loans deemed to be part of a
sequence.\566\ In the CFPB Report on Supplemental Findings, the Bureau
is publishing additional analysis on the impacts of State cooling-off
periods.\567\ The latter analysis is also discussed in Market
Concerns--Short-Term Loans.
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\565\ See CFPB Data Point: Payday Lending, at 8.
\566\ CFPB Report on Supplemental Findings, at ch. 5.
\567\ CFPB Report on Supplemental Findings, at ch. 4.
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The Bureau has made a number of adjustments to the presumptions
framework in response to this feedback. For instance, the Bureau is
proposing a 30-day definition of loan sequence and 30-day cooling-off
period rather than a 60-day definition of loan sequence and 60-day
cooling-off period. The Bureau has also provided greater specificity
and flexibility about when a presumption of unaffordability would
apply, for example, by proposing certain exceptions to the presumption
of unaffordability for a sequence of covered short-term loans. The
proposal also would provide somewhat more flexibility about when a
presumption of unaffordability could be overcome by permitting lenders
to determine that there would be sufficient improvement in financial
capacity for the new loan because of a one-time drop in income since
obtaining the prior loan (or during the prior 30 days, as applicable).
The Bureau has also continued to assess potential alternative
approaches to the presumptions framework, discussed below.
The Bureau solicits comment on all aspects of the proposed
presumptions of unaffordability and mandatory cooling-off periods, and
other aspects of proposed Sec. 1041.6, including the circumstances in
which the presumptions apply (e.g., the appropriate length of the
reborrowing period and the appropriateness of other circumstances
giving rise to the presumptions), the requirements for overcoming a
presumption of unaffordability, and the circumstances in which a lender
would be prohibited from making a covered short-term loan under
proposed Sec. 1041.5 during a 30-day cooling-off period or cooling-off
period of a different length. In addition, and consistent with the
recommendations of the Small Business Review Panel Report, the Bureau
solicits comment on whether the 30-day reborrowing period is
appropriate for the presumptions and prohibitions, or whether a longer
or shorter period would better address the Bureau's concerns about
repeat borrowing. The Bureau also seeks comment on whether lenders
should be required to provide disclosures as part of the origination
process for covered loans and, if so, whether an associated model form
would be appropriate; on the specific elements of such disclosures; and
on the burden and benefits to consumers and lenders of providing
disclosures as described above.
Alternatives Considered
The Bureau has considered a number of alternative approaches to
address reborrowing on covered short-term loans in circumstances
indicating the consumer was unable to afford the prior loan.\568\ One
possible approach would
[[Page 47960]]
be to limit the overall number of covered short-term loans that a
consumer could take within a specified period of time, rather than
using the loan sequence and presumption concepts as part of the
determination of consumers' ability to repay subsequent loans in a
sequence and when and if a mandatory cooling-off period should apply.
By imposing limits on reborrowing while avoiding the complexity of the
presumptions, this approach could provide a more flexible way to
protect consumers whose borrowing patterns suggest that they may not
have the ability to repay their loans. This approach could, for
example, limit the number of covered short-term loans to three within a
120-day period when the loan has a duration of 15 days or less. For
loans with a longer duration, the applicable period of time
correspondingly could be longer. However, depending on individual
consumers' usage patterns, such an approach could also result in much
longer cooling-off periods for individuals who borrow several times
early in the designated period. Alternatively, a similar approach could
impose a cooling-off period of varying lengths depending on the
consumer's time in debt during a specified period.
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\568\ In addition to the alternatives discussed, the Bureau
tested draft disclosure forms in preparing for the rulemaking. These
are discussed in the FMG report and in part III above. Among other
forms, the consumer testing obtained feedback on disclosure forms
that provided information about certain restrictions on reborrowing
covered short-term loans made under proposed Sec. 1041.5. In
particular, the forms explained to consumers that they might not be
able to roll over or take out a new loan shortly after paying off
the loan for which the consumer was applying. The forms also
provided the loan payment date and amount due, along with a warning
that consumers should not take out the loan if they could not pay it
back by the payment date. During testing, participants were asked
about the purpose of the form and whether they believed that their
future ability to roll over or take out another loan would be
limited. A few participants understood that borrowing would be
restricted, but others had further questions about the restrictions
and appeared to have difficulty understanding the restrictions.
Based on these results, the Bureau is not proposing disclosures
regarding the origination of loans under proposed Sec. 1041.5 and
the reborrowing restrictions under proposed Sec. 1041.6.
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The Bureau has also considered an alternative approach under which,
instead of defining the circumstances in which a formal presumption of
unaffordability applies and the determinations that a lender must make
when such a presumption applies to a transaction, the Bureau would
identify circumstances indicative of a consumer's inability to repay
that would be relevant to whether a lender's determination under
proposed Sec. 1041.5 is reasonable. This approach would likely involve
a number of examples of indicia requiring greater caution in
underwriting and examples of countervailing factors that might support
the reasonableness of a lender's determination that the consumer could
repay a subsequent loan despite the presence of such indicia. This
alternative approach would be less prescriptive than the proposed
framework, and thus leave more discretion to lenders to make such a
determination. However, it would also provide less certainty as to when
a lender's particular ability-to-repay determination is reasonable.
In addition, the Bureau has considered whether there is a way to
account for unusual expenses within the presumptions framework without
creating an exception that would swallow the rule. In particular, the
Bureau considered permitting lenders to overcome the presumptions of
unaffordability in the event that the consumer provided evidence that
the reason the consumer was struggling to repay the outstanding loan or
was seeking to reborrow was due to a recent unusual and non-recurring
expense. For example, under such an approach, a lender could overcome
the presumption of unaffordability by finding that the reason the
consumer was seeking a new covered short-term loan was as a result of
an emergency car repair or furnace replacement or an unusual medical
expense during the term of the prior loan or the reborrowing period, so
long as the expense is not reasonably likely to recur during the period
of the new loan. The Bureau considered including such circumstances as
an additional example of sufficient improvement in financial capacity,
as described with regard to proposed Sec. 1041.6(e) below.
While such an addition could provide more flexibility to lenders
and to consumers to overcome the presumptions of unaffordability, an
unusual and non-recurring expense test would also present several
challenges. To effectuate this test, the Bureau would need to define,
in ways that lenders could implement, what would be a qualifying
``unusual and non-recurring expense,'' a means of assessing whether a
new loan was attributable to such an expense rather than to the
unaffordability of the prior loan, and standards for how such an
unusual and non-recurring expense could by documented (e.g., through
transaction records). Such a test would have substantial implications
for the way in which the ability-to-repay requirements in proposed
Sec. 1041.5 (and proposed Sec. 1041.9 for covered longer-term loans)
address the standards for basic living expenses and accounting for
potential volatility over the term of a loan. Most significantly, the
Bureau is concerned that if a lender were permitted to overcome the
presumption of unaffordability by finding that the consumer faced an
unusual and non-recurring expense during repayment of the prior or
outstanding loan, this justification would be invoked in cases in which
the earlier loan had, in fact, been unaffordable. As discussed above,
the fact that a consumer may cite a particular expense shock when
seeking to reborrow does not necessarily mean that a recent prior loan
was affordable; if a consumer, in fact, lacked the ability to repay the
prior loan, it would be a substantial factor in why the consumer could
not absorb the expense. Accordingly, the Bureau believes that it may be
difficult to parse out causation and to differentiate between types of
expense shocks and the reasonableness of lenders' ability-to-repay
determinations where such shocks are asserted to have occurred.
In light of these competing considerations, the Bureau has chosen
to propose the approach of supplementing the proposed Sec. 1041.5
determination with formal presumptions. The Bureau is, however, broadly
seeking 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. The Bureau specifically seeks comment on whether to apply a
presumption of unaffordability or mandatory cooling-off period based on
the total number of loans that a consumer has obtained or the total
amount of time in which a consumer has been in debt during a specified
period of time. The Bureau also solicits comment on the alternative of
defining indicia of unaffordability, as described above. For such
alternatives, the Bureau solicits comment on the appropriate time
periods and on the manner in which such frameworks would address
reborrowing on loans of different lengths. In addition, the Bureau
specifically seeks comment on whether to permit lenders to overcome a
presumption of unaffordability by finding that the consumer had
experienced an unusual and non-recurring expense and, if so, on
measures to address the challenges described above.
Legal Authority
As discussed in the section-by-section analysis of proposed Sec.
1041.4 above, the Bureau believes that it may be an unfair and abusive
practice to make a covered
[[Page 47961]]
short-term loan without determining that the consumer will have the
ability to repay the loan. Accordingly, in order to prevent that unfair
and abusive practice, proposed Sec. 1041.5 would require lenders prior
to making a covered short-term loan--other than a loan made under the
conditional exemption to the ability-to-repay requirements in proposed
Sec. 1041.7--to make a reasonable determination that the consumer has
sufficient income after meeting major financial obligations, to make
payments under a prospective covered short-term loan and to continue
meeting basic living expenses. Proposed Sec. 1041.6 would augment 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 repaying an outstanding loan provides important
evidence with respect to the consumer's financial capacity to afford a
new covered short-term loan. The Bureau is proposing Sec. 1041.6 based
on the same source of authority that serves as the basis for proposed
Sec. 1041.5: The Bureau's authority under section 1031(b) of the Dodd-
Frank Act, which provides that the Bureau's rules may include
requirements for the purposes of preventing unfair, deceptive, or
abusive acts or practices.\569\
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\569\ 12 U.S.C. 5531(b).
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As with proposed Sec. 1041.5, the Bureau proposes the requirements
in Sec. 1041.6 to prevent the unfair and abusive practice identified
in proposed Sec. 1041.4, and the consumer injury that results from it.
The Bureau believes that the additional requirements of proposed Sec.
1041.6 may be needed in circumstances in which proposed Sec. 1041.5
alone may not be sufficient to prevent a lender from making a covered
short-term loan that would exacerbate the impact of an initial
unaffordable loan. Accordingly, the Bureau believes that the
requirements set forth in proposed Sec. 1041.6 bear a reasonable
relation to preventing the unfair and abusive practice identified in
proposed Sec. 1041.4. In addition, as further discussed in the
section-by-section analysis of proposed Sec. 1041.6(h), the Bureau
proposes that provision pursuant to both the Bureau's authority under
section 1031(b) of the Dodd-Frank Act and the Bureau's authority under
section 1022(b)(1) of the Dodd-Frank Act to prevent evasions of the
purposes and objectives of Federal consumer financial laws, including
Bureau rules issued pursuant to rulemaking authority provided by Title
X of the Dodd-Frank Act.\570\
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\570\ 12 U.S.C. 5512(b)(1).
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6(a) Additional Limitations on Making a Covered Short-Term Loan Under
Sec. 1041.5
Proposed Sec. 1041.6(a) would set forth the general additional
limitations on making a covered short-term loan under proposed Sec.
1041.5. Proposed Sec. 1041.6(a) would provide that when a consumer is
presumed not to have the ability to repay a covered short-term loan
under proposed Sec. 1041.6(b), (c), or (d), a lender's determination
that the consumer will have the ability to repay the loan is not
reasonable, unless the lender can overcome the presumption of
unaffordability. Proposed Sec. 1041.6(a) would further provide that a
lender is prohibited from making a covered short-term loan to a
consumer if the mandatory cooling-off periods in proposed Sec.
1041.6(f) or (g) apply. In order to determine whether the presumptions
and prohibitions in proposed Sec. 1041.6 apply to a particular
transaction, proposed Sec. 1041.6(a)(2) would require a lender to
obtain and review information about the consumer's borrowing history
from its own records, the records of its affiliates, and a consumer
report from an information system currently registered under proposed
Sec. 1041.17(c)(2) or (d)(2), if one is available.
The Bureau notes that, as drafted, the proposed presumptions and
prohibitions in Sec. 1041.6 would apply only to making specific
additional covered short-term loans. The Bureau solicits comment on
whether a presumption of unaffordability, mandatory cooling-off
periods, or other additional limitations on lending also would be
appropriate for transactions involving an increase in the credit
available under an existing covered loan, making an advance on a line
of credit under a covered short-term loan, or other circumstances that
may evidence repeated borrowing. If such limitations would be
appropriate, the Bureau requests comment on how they should be tailored
in light of relevant considerations.
In this regard, the Bureau further notes that the presumptions of
unaffordability depend on the definition of outstanding loan in
proposed Sec. 1041.2(a)(15) and therefore would not cover
circumstances in which the consumer is more than 180 days delinquent on
the prior loan. The Bureau solicits comment on whether additional
requirements should apply to the ability-to-repay determination for a
covered short-term loan in these circumstances; for instance, whether
to generally prohibit lenders from making a new covered short-term loan
to a consumer for the purposes of satisfying a delinquent obligation on
an existing loan with the same lender or its affiliate. In addition,
the Bureau solicits comment on whether additional requirements should
apply to covered short-term loans that are lines of credit; for
instance, whether a presumption of unaffordability should apply at the
time of the ability-to-repay determination required under Sec.
1041.5(b)(1)(ii) for a consumer to obtain an advance under a line of
credit more than 180 days after the date of a prior ability-to-repay
determination.
The Bureau also solicits comment on the proposed standard in Sec.
1041.6(a) and on any alternative approaches to the relationship between
proposed Sec. 1041.5 and proposed Sec. 1041.6 that would prevent
consumer harm while reducing the burden on lenders. In particular, the
Bureau solicits comment on whether the formal presumption and
prohibition approach in Sec. 1041.6 is an appropriate supplement to
the Sec. 1041.5 determination.
6(a)(1) General
Proposed Sec. 1041.6(a)(1) would provide that if a presumption of
unaffordability applies, a lender's determination that the consumer
will have the ability to repay a covered short-term loan is not
reasonable unless the lender makes the additional determination set
forth in proposed Sec. 1041.6(e), and discussed in detail below, and
the requirements set forth in proposed Sec. 1041.5 are satisfied.
Under proposed Sec. 1041.6(e), a lender can make a covered short-term
loan notwithstanding the presumption of unaffordability if the lender
reasonably determines, based on reliable evidence, that there will be
sufficient improvement in the consumer's financial capacity such that
the consumer would have the ability to repay the new loan according to
its terms despite the unaffordability of the prior loan. Proposed Sec.
1041.6(a)(1) would further provide that a lender must not make a
covered short-term loan under proposed Sec. 1041.5 to a consumer
during the mandatory cooling-off periods specified in proposed Sec.
1041.6(f) and (g).
Proposed comment 6(a)(1)-1 clarifies that the presumptions and
prohibitions would apply to making a covered short-term loan and are
triggered, if applicable, at the time of consummation of the new
covered short-term loan. Proposed comment 6(a)(1)-2 clarifies that the
presumptions and prohibitions would apply to rollovers and renewals of
a covered short-term loan when such transactions are permitted under
State
[[Page 47962]]
law. Proposed comment 6(a)(1)-3 clarifies that a lender's determination
that a consumer will have the ability to repay a covered short-term
loan is not reasonable within the meaning of proposed Sec. 1041.5 if
under proposed Sec. 1041.6 the consumer is presumed to not have the
ability to repay the loan and that presumption of unaffordability has
not been overcome in the manner set forth in proposed Sec. 1041.6(e).
Thus, if proposed Sec. 1041.6 prohibits a lender from making a covered
short-term loan, then the lender must not make the loan, regardless of
the lender's determination under proposed Sec. 1041.5. Nothing in
proposed Sec. 1041.6 would displace the requirements of Sec. 1041.5;
on the contrary, the determination under proposed Sec. 1041.6 would
be, in effect, an additional component of the proposed Sec. 1041.5
determination of ability to repay in situations in which the basic
requirements of proposed Sec. 1041.5 alone would be insufficient to
prevent the unfair and abusive practice.
6(a)(2) Borrowing History Review
Proposed Sec. 1041.6(a)(2) would require a lender 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
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 comment 6(a)(2)-1
clarifies that a lender satisfies its obligation under Sec.
1041.6(a)(2) to obtain a consumer report obtained from an information
system currently registered pursuant to Sec. 1041.17(c)(2) or (d)(2),
if available, when it complies with the requirement in Sec.
1041.5(c)(3)(ii)(B) to obtain this same consumer report. Proposed
comment 6(a)(2)-2 clarifies that if no information systems currently
registered pursuant to Sec. 1041.17(c)(2) or (d)(2) are currently
available, the lender is nonetheless required to obtain information
about a consumer's borrowing history from the records of the lender and
its affiliates.
Based on outreach to lenders, including feedback from SERs, the
Bureau believes that lenders already generally review their own records
for information about a consumer's history with the lender prior to
making a new loan to the consumer. The Bureau understands that some
lenders in the market for covered short-term loans also pull a consumer
report from a specialty consumer reporting agency as part of
standardized application screening, though practices in this regard
vary widely across the market.
As detailed below in the section-by-section analysis of proposed
Sec. Sec. 1041.16 and 1041.17, the Bureau believes that information
regarding the consumer's borrowing history is important to facilitate
reliable ability-to-repay determinations. If the consumer already has a
relationship with a lender or its affiliates, the lender can obtain
some historical information regarding borrowing history from its own
records. However, without obtaining a report from an information system
currently registered pursuant to Sec. 1041.17(c)(2) or (d)(2), the
lender will not know if its existing customers or new customers have
obtained covered short-term loans or a prior covered longer-term
balloon-payment loan from other lenders, as such information generally
is not available in national consumer reports. Accordingly, the Bureau
is proposing in Sec. 1041.6(a)(2) to require lenders to obtain a
report from an information system currently registered pursuant to
Sec. 1041.17(c)(2) or (d)(2), if one is available.
The section-by-section analysis of proposed Sec. 1041.16 and
1041.17, and part VI below explain the Bureau's attempts to minimize
burden in connection with furnishing information to and obtaining a
consumer report from an information system currently registered
pursuant to proposed Sec. 1041.17(c)(2) or (d)(2). Specifically, the
Bureau estimates that each report would cost approximately $0.50.
Consistent with the recommendations of the Small Business Review Panel
Report, the Bureau requests comment on the cost to small entities of
obtaining information about consumer borrowing history and on potential
ways to further reduce the operational burden of obtaining this
information.
6(b) Presumption of Unaffordability for Sequence of Covered Short-Term
Loans Made Under Sec. 1041.5
6(b)(1) Presumption
Proposed Sec. 1041.6(b)(1) would provide 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 short-term loan made under proposed Sec. 1041.5
outstanding and for 30 days thereafter. Proposed comment 6(b)(1)-1
clarifies that a lender cannot make a covered short-term loan under
Sec. 1041.5 during the time period in which the consumer has a covered
short-term loan made under Sec. 1041.5 outstanding and for 30 days
thereafter unless the exception to the presumption applies or the
lender can overcome the presumption. A lender would be permitted to
overcome the presumption of unaffordability in accordance with proposed
Sec. 1041.6(e) for the second and third loan in a sequence, as defined
in proposed Sec. 1041.2(a)(12); as noted in proposed comment 6(b)(1)-
1, prior to the fourth covered short-term loan in a sequence, proposed
Sec. 1041.6(f) would impose a mandatory cooling-off period, as
discussed further below.
Proposed Sec. 1041.6(b)(1) would apply to situations in which,
notwithstanding a lender's determination prior to consummating an
earlier covered short-term loan that the consumer would have the
ability to repay the loan according to its terms, the consumer seeks to
take out a new covered short-term loan during the term of the prior
loan or within 30 days thereafter.
As discussed above in the background to the section-by-section
analysis of Sec. 1041.6, the Bureau believes that when a consumer
seeks to take out a new covered short-term loan during the term of or
within 30 days of having a prior covered short-term loan outstanding,
there is substantial reason for concern that the need to reborrow is
caused by the unaffordability of the prior loan. The Bureau proposes to
use the 30-day reborrowing period discussed above to define the
circumstances in which a new loan would be considered a reborrowing.
The Bureau believes that even in cases where the determination of
ability to repay was reasonable based upon what was known at the time
that the prior loan was originated, the fact that the consumer is
seeking to reborrow in these circumstances is relevant in assessing
whether a new and similar loan--or rollover or renewal of the existing
loan--would be affordable for the consumer. For example, the
reborrowing may indicate that the consumer's actual basic living
expenses exceed what the lender projected for the purposes of Sec.
1041.5 for the prior loan. In short, the Bureau believes 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 to conduct a
particularly careful review to determine whether the consumer can
afford to repay the new covered short-term loan.
In addition, the fact that the consumer is seeking to reborrow in
these circumstances may indicate that the initial determination of
affordability was unreasonable when made. Indeed, the Bureau believes
that if, with respect to a particular lender making covered short-term
loans pursuant to proposed Sec. 1041.5, a substantial percentage of
[[Page 47963]]
consumers returned within 30 days to obtain a second loan, that fact
would provide evidence that the lender's determinations under proposed
Sec. 1041.5 were not reasonable. And this would be even more so the
case where a substantial percentage of consumers returned within 30
days of the second loan to obtain a third loan.
Given these considerations, to prevent the unfair and abusive
practice identified in proposed Sec. 1041.4, proposed Sec. 1041.6(b)
would create a presumption of unaffordability for a covered short-term
loan during the time period in which the consumer has a covered short-
term loan made under Sec. 1041.5 outstanding and for 30 days
thereafter unless the exception in proposed Sec. 1041.6(b)(2) applies.
As a result of this presumption, it would not be reasonable for a
lender to determine that the consumer will have the ability to repay
the new covered short-term loan without taking into account the fact
that the consumer did need to reborrow after obtaining a prior loan and
making a reasonable determination that the consumer will be able to
repay the new covered short-term loan without reborrowing. Proposed
Sec. 1041.6(e), discussed below, defines the elements for such a
determination.
The Bureau solicits comment on the appropriateness of the proposed
presumption to prevent the unfair and abusive practice and on any
alternatives that would adequately prevent consumer harm while reducing
the burden on lenders. In particular, the Bureau solicits comment on
alternative approaches to preventing consumer harm from repeat
borrowing on covered short-term loans, including other methods of
supplementing the basic ability-to-repay determination required for a
covered short-term loan shortly following a prior covered short-term
loan.
The Bureau also solicits comment on whether there are other
circumstances--such as a pattern of heavy usage of covered short-term
loans that would not meet the proposed definition of a loan sequence or
the overall length of time in which a consumer is in debt on covered
short-term loans over a specified period of time--that would also
warrant a presumption of unaffordability.
6(b)(2) Exception
Proposed Sec. 1041.6(b)(2) would provide an exception to the
presumption in proposed Sec. 1041.6(b)(1) where the subsequent covered
short-term loan would meet specific conditions. The conditions under
either proposed Sec. 1041.6(b)(2)(i)(A) or (B) must be met, along with
the condition under proposed Sec. 1041.6(b)(2)(ii). First, under
proposed Sec. 1041.6(b)(2)(i)(A), the consumer must have paid the
prior covered short-term loan in full and the amount that would be owed
by the consumer for the new covered short-term loan could not exceed 50
percent of the amount that the consumer paid on the prior loan. Second,
under proposed Sec. 1041.6(b)(2)(i)(B), in the event of a rollover the
consumer would not owe more on the new covered short-term loan (i.e.,
the rollover) than the consumer paid on the prior covered short-term
loan (i.e., the outstanding loan that is being rolled over). Third,
under proposed Sec. 1041.6(b)(2)(ii), the new covered short-term loan
would have to be repayable over a period that is at least as long as
the period over which the consumer made payment or payments on the
prior loan. Proposed comment 6(b)(2)-1 provides general clarification
for the proposed provision.
The rationale for the presumption defined in proposed Sec.
1041.6(b)(1) is generally that the consumer's need to reborrow in the
specified circumstances evidences the unaffordability of the prior loan
and thus warrants a presumption that the new loan will likewise be
unaffordable for the consumer.
But when a consumer is seeking to reborrow no more than half of the
amount that the consumer has already paid on the prior loan, including
situations in which the consumer is seeking to roll over no more than
the amount the consumer repays, the Bureau believes that the predicate
for the presumption may no longer apply. For example, if a consumer
paid off a prior $400, 45-day duration loan and later returns within 30
days to request a new $100, 45-day duration loan, the lender may be
able to reasonably infer that such second $100 loan would be affordable
for the consumer, even if a second $400 loan would not be. Given that
result, assuming that the lender satisfies the requirements of proposed
Sec. 1041.5, the lender may be able to reasonably infer that the
consumer will have the ability to repay the new loan for $100. Thus,
the Bureau believes that an exception to the presumption of
unaffordability may be appropriate in this situation.
However, this is not the case when the amount owed on the new loan
would be greater than 50 percent of the amount paid on the prior loan,
the consumer would roll over an amount greater than he or she repays,
or the term of the new loan would be shorter than the term of the prior
loan. For example, if the consumer owes $450 on a covered short-term
loan, pays only $100 and seeks to roll over the remaining $350, this
result would not support an inference that the consumer will have the
ability to repay $350 for the new loan. Accordingly, the new loan would
be subject to the presumption of unaffordability. Similarly, with the
earlier example, the lender could not infer based on the payment of
$400 over 45 days that a consumer could afford $200 in one week.
Rather, the Bureau believes that it would be appropriate in such
circumstances for the lender to go through the process to overcome the
presumption in the manner set forth in proposed Sec. 1041.6(e).
On the basis of the preceding considerations, the Bureau is
proposing this exception to the presumption in proposed Sec.
1041.6(b). The Bureau's rationale is the same for the circumstances in
both proposed Sec. 1041.6(b)(2)(i)(A) and (B); as explained below, the
formula is slightly modified in order to account for the particular
nature of the rollover transaction when permitted under applicable
State law (termed a renewal in some States).
The Bureau solicits comment on the appropriateness of the proposed
exception to the presumption of unaffordability and on any other
circumstances that would also warrant an exception to the presumption.
In particular, the Bureau solicits comment on the specific thresholds
in proposed Sec. 1041.6(b)(2)(i)(A) and (B). In addition, the Bureau
solicits comment on the timing requirement in proposed Sec.
1041.6(b)(2)(ii) and whether alternative formulations of the timing
requirement would be appropriate; for instance, whether an exception
should be available if the new covered short-term loan would be
repayable over a period that is proportional to the prior payment
history.
6(b)(2)(i)(A)
Proposed Sec. 1041.6(b)(2)(i)(A) would set out the formula for
transactions in which the consumer has paid off the prior loan in full
and is then returning for a new covered short-term loan during the
reborrowing period. Proposed Sec. 1041.6(b)(2)(i)(A) would define paid
in full to include the amount financed, charges included in the total
cost of credit, and charges excluded from the total cost of credit such
as late fees. Proposed Sec. 1041.6(b)(2)(i)(A) would further specify
that to be eligible for the exception, the consumer would not owe, in
connection with the new covered short-term loan, more than 50 percent
of the amount that the consumer paid on the prior covered short-term
loan (including the amount financed
[[Page 47964]]
and charges included in the total cost of credit, but excluding any
charges excluded from the total cost of credit such as late fees).
Proposed comment 6(b)(2)(i)(A)-1 clarifies that a loan is considered
paid in full whether or not the consumer's obligations were satisfied
timely under the loan contract and also clarifies how late fees are
treated for purposes of the exception requirements. Proposed comment
6(b)(2)(i)(A)-2 provides illustrative examples. The Bureau solicits
comment on whether a consumer should be eligible for the exception
under proposed Sec. 1041.6(b)(2)(i)(A) when the prior loan was paid in
full but the consumer had previously triggered late fees or otherwise
was delinquent on payments for the prior loan, as such history of late
payments could be a relevant consideration toward whether the consumer
has the ability to repay a similarly-structured loan.
6(b)(2)(i)(B)
Proposed Sec. 1041.6(b)(2)(i)(B) would set out the formula for
transactions in which the consumer provides partial payment on a
covered short-term loan and is seeking to roll over the remaining
balance into a new covered short-term loan. Proposed Sec.
1041.6(b)(2)(i)(B) would specify that to be eligible for the exception,
the consumer would not owe more on the new covered short-term loan than
the consumer paid on the prior covered short-term loan that is being
rolled over (including the amount financed and charges included in the
total cost of credit, but excluding any charges that are excluded from
the total cost of credit such as late fees). Proposed comment
6(b)(2)(i)(B)-1 clarifies that rollovers are subject to applicable
State law (sometimes called renewals) and cross-references proposed
comment 6(a)(1)-2. Proposed comment 6(b)(2)(i)(B)-1 also clarifies that
the prior covered short-term loan is the outstanding loan being rolled
over, the new covered short-term loan is the rollover, and that for the
conditions of Sec. 1041.6(b)(2)(i)(B) to be satisfied, the consumer
will repay at least 50 percent of the amount owed on the loan being
rolled over. Proposed comment 6(b)(2)(i)(B)-2 provides an illustrative
example.
As discussed above with regard to the reborrowing period, the
Bureau considers rollovers and other forms of reborrowing within 30
days of the prior loan outstanding to be the same. Given the particular
nature of the rollover transaction when permitted by State law,
slightly different calculations are needed for the exception to
effectuate this equal treatment.
6(b)(2)(ii)
Proposed Sec. 1041.6(b)(2)(ii) would set forth the condition that
the new covered short-term loan be repayable over a period that is at
least as long as the period over which the consumer made payment or
payments on the prior covered short-term loan. The Bureau believes that
both the amount of the new loan and the duration of the new loan
relative to the prior loan are important to determining whether there
is a risk that the second loan would be unaffordable and thus whether a
presumption should be applied. Absent this condition, situations could
arise in which the 50 percent condition were satisfied but where the
Bureau would still have concern about not applying the presumption. As
noted above, from the fact that the consumer paid in full a $450 loan
with a term of 45 days, it does not follow that the consumer can afford
a $200 loan with a term of one week, even though $200 is less than 50
percent of $450. In that instance, the consumer would owe $200 in only
a week, which may be very difficult to repay.
6(c) Presumption of Unaffordability for a Covered Short-Term Loan
Following a Covered Longer-Term Balloon-Payment Loan Made Under Sec.
1041.9
Proposed Sec. 1041.6(c) would provide 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 presumption in
proposed Sec. 1041.6(c) uses the same 30-day reborrowing period used
in proposed Sec. 1041.6(b) and discussed in the background to the
section-by-section analysis of Sec. 1041.6 to define when there is
sufficient risk that the need for the new loan was triggered by the
unaffordability of the prior loan and, as a result, warrants a
presumption that the new loan would be unaffordable.
The Bureau believes 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 reborrow 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. As discussed below in
Market Concerns--Longer-Term Loans, the Bureau's research suggests 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 found that the approach of the balloon payment coming due is
associated with significant reborrowing.\571\ However, the need to
reborrow caused by an unaffordable covered longer-term balloon is not
necessarily limited to taking out a new loan of the same type. If the
borrower takes out a new covered short-term loan in such circumstances,
it also is a reborrowing. Accordingly, in order to prevent the unfair
and abusive practice identified in proposed Sec. 1041.4, the Bureau
proposes 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.
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\571\ CFPB Report on Supplemental Findings, at ch. 1. The
findings in the CFPB Report on Supplemental Findings refer to both
``refinancing'' and ``reborrowing.'' Consistent with the Bureau's
approach to defining reborrowing for the purposes of this proposal,
both refinancing and reborrowing, as reported in the CFPB Report on
Supplemental Findings, are considered reborrowing.
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Unlike the presumption in Sec. 1041.6(b), the Bureau does not
propose an exception to the presumption based on the amount to be
repaid on each loan. The rationale for that exception relies on the
consumer repaying the new covered short-term loan over a period of time
that is at least as long as the time that the consumer repaid the prior
covered short-term loan. By definition, a covered longer-term balloon-
payment loan has a longer duration than a covered short-term loan, so
the circumstances for which the Bureau believes an exception is
appropriate in Sec. 1041.6(b)(2) would not be applicable to the
transactions governed by proposed Sec. 1041.6(c).
The Bureau solicits comment on the appropriateness of the proposed
presumption to prevent the unfair and abusive practice and on any
alternatives that would adequately prevent consumer harm while reducing
the burden on lenders. The Bureau also solicits comment on whether
proposed Sec. 1041.6(c) and the provisions of proposed Sec. 1041.6
more generally would adequately protect against the potential for
lenders to make covered loans of different lengths (e.g., a covered
short-term loan immediately followed by a 46-day covered longer-term
balloon-payment loan) in order to avoid operation of the presumptions
and prohibitions in proposed Sec. 1041.6, and
[[Page 47965]]
whether the Bureau should impose any additional lending restrictions to
address this concern. Relatedly, the Bureau seeks comment on whether to
impose a tolling requirement similar to that under proposed Sec.
1041.6(h) that would apply where the lender or its affiliate are
making, in close proximity, covered short-term loans and covered
longer-term balloon-payment loans with a duration of 90 days or fewer.
Further, the Bureau requests comment on whether additional provisions
or commentary examples should be added to proposed Sec. 1041.19, which
would prohibit lender actions taken with the intent of evading the
proposed rule, to address such concerns.
6(d) Presumption of Unaffordability for a Covered Short-Term Loan
During an Unaffordable Outstanding Loan
While the Bureau's research suggests that reborrowing harms are
most acute when consumers take out a series of covered short-term loans
or covered longer-term balloon-payment loans, the Bureau also has
concerns about other reborrowing scenarios. In particular, no matter
the loan types involved, the Bureau is concerned about the potential
for abuse when a lender or its affiliate offers to make a new loan to
an existing customer in circumstances that suggest that the consumer
may lack the ability to repay an outstanding loan. The Bureau believes
that in addition to the robust residual income analysis that would be
required by proposed Sec. 1041.5, applying a presumption may be
appropriate in order to specify in more detail how lenders should
evaluate whether such consumers have the ability to repay a new loan in
certain situations.
Accordingly, the Bureau is proposing to apply a presumption of
unaffordability when a lender or its affiliate seeks 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. If the outstanding loan does not trigger the presumption
of unaffordability in proposed Sec. 1041.6(b) or (c) and is not
subject to the prohibitions in Sec. 1041.6(f) or (g), the presumption
in proposed Sec. 1041.6(d) would apply to a new covered short-term
loan if, at the time of the lender's determination under Sec. 1041.5,
one or more of the indicia of unaffordability are present.
The triggering conditions would include 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 circumstances indicating that the new loan is solely
to obtain cash to cover upcoming payment or payments on the outstanding
loan.
Unlike the presumptions applicable to covered longer-term loans in
proposed Sec. 1041.10(c), proposed Sec. 1041.6(d) would not provide
an exception to the presumption for cases in which the new loan would
result in substantially smaller payments or would substantially lower
the total cost of credit for the consumer relative to the outstanding
loan. This distinction reflects the Bureau's concerns discussed in
Market Concerns--Short-Term Loans about the unique risk of consumer
injury posed by covered short-term loans because of the requirement
that a covered short-term loan be repaid shortly after consummation.
The proposed regulatory text and commentary are very similar for
Sec. 1041.6(d) and for Sec. 1041.10(c)(1): The main difference is
that proposed Sec. 1041.6(d) would apply where the new loan would be a
covered short-term loan, whereas proposed Sec. 1041.10(c)(1) would
apply where the new loan would be a covered longer-term loan. A
detailed explanation of each element of the presumption and of related
commentary is provided below in the section-by-section analysis of
proposed Sec. 1041.10(c)(1); because of the similarity between the
sections, the discussion is not repeated in this section-by-section
analysis.
The Bureau believes that the analysis required by proposed Sec.
1041.6(d) may provide greater protection to consumers and certainty to
lenders than simply requiring that such transactions be analyzed under
proposed Sec. 1041.5 alone. Proposed Sec. 1041.5 would require
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. 1041.6(d) would
provide a more detailed roadmap as to when a new covered short-term
loan would not meet the reasonable determination test.
The Bureau solicits comment on the appropriateness of the proposed
presumption to prevent the unfair and abusive practice, on each of the
particular circumstances indicating unaffordability as proposed in
Sec. 1041.6(d)(1) through (4), and on any alternatives that would
adequately prevent consumer harm while reducing the burden on lenders.
The Bureau also solicits comment on whether the specified conditions
sufficiently capture circumstances in which consumers indicate distress
in repaying an outstanding loan and on whether there are additional
circumstances in which it may be appropriate to trigger the presumption
of unaffordability. In particular, the Bureau solicits comment on
whether to include a specific presumption of unaffordability in the
event that the lender or its affiliate has recently contacted the
consumer for collections purposes, received a returned check or payment
attempt, or has an indication that the consumer's account lacks funds
prior to making an attempt to collect payment. The Bureau also solicits
comment on the timing elements of the proposed indications of
unaffordability, such as whether to trigger the presumption after seven
days of delinquency and whether to consider the prior 30 days, and on
whether alternative timing conditions, such as considering the
consumer's performance over the prior 60 days, would better prevent
consumer harm. In addition, the Bureau solicits comment on whether the
presumption should be modified in particular ways with regard to
covered short-term loans that would not be appropriate for covered
longer-term loans.
6(e) Overcoming the Presumption of Unaffordability
Proposed Sec. 1041.6(e) would set forth the elements required for
a lender to overcome the presumptions of unaffordability in proposed
Sec. 1041.6(b), (c), or (d). Proposed Sec. 1041.6(e) would provide
that a lender can overcome the presumption of unaffordability only if
the lender reasonably determines, based on reliable evidence, that the
consumer will have sufficient improvement in financial capacity such
that the consumer will have the ability to repay the new loan according
to its terms despite the unaffordability of the prior loan. Proposed
Sec. 1041.6(e) would require lenders to assess sufficient improvement
in financial capacity by comparing the consumer's financial capacity
during the period for which the lender is required to make an ability-
to-repay determination for the new loan pursuant to Sec. 1041.5(b)(2)
to the consumer's financial capacity since obtaining the prior loan or,
if the prior loan was not a covered short-term loan or covered longer-
term balloon-payment loan, during the 30 days prior to the lender's
determination.
[[Page 47966]]
The Bureau proposes several comments to clarify the requirements
for a lender to overcome a presumption of unaffordability. Proposed
comment 6(e)-1 clarifies that proposed Sec. 1041.6(e) would permit the
lender to overcome the presumption in limited circumstances evidencing
a sufficient improvement in the consumer's financial capacity for the
new loan relative to the prior loan or, in some circumstances, during
the prior 30 days. Proposed comments 6(e)-2 and -3 provide illustrative
examples of these circumstances. Proposed comment 6(e)-2 clarifies that
a lender may overcome a presumption of unaffordability where there is
reliable evidence that the need to reborrow is prompted by a decline in
income since obtaining the prior loan (or, if the prior loan was not a
covered short-term loan or covered longer-term balloon-payment loan,
during the 30 days prior to the lender's determination) that is not
reasonably expected to recur for the period during which the lender is
underwriting the new covered short-term loan. Proposed comment 6(e)-3
clarifies that a lender may overcome a presumption of unaffordability
where there is reliable evidence that the consumer's financial capacity
has sufficiently improved since the prior loan (or, if the prior loan
was not a covered short-term loan or covered longer-term balloon-
payment loan, during the 30 days prior to the lender's determination)
because of an increase in net income or a decrease in major financial
obligations for the period during which the lender is underwriting the
new covered short-term loan. Proposed comment 6(e)-4 clarifies that
reliable evidence consists of verification evidence regarding the
consumer's net income and major financial obligations sufficient to
make the comparison required under Sec. 1041.6(e). Proposed comment
6(e)-4 further clarifies that a self-certification by the consumer does
not constitute reliable evidence unless the lender verifies the facts
certified by the consumer through other reliable means.
With respect to comment 6(e)-2, the Bureau believes that if the
reborrowing is prompted by a decline in income since obtaining the
prior loan (or during the prior 30 days, as applicable) that is not
reasonably expected to recur during the period for which the lender is
underwriting the new covered short-term loan, the unaffordability of
the prior loan, including difficulty repaying an outstanding loan, may
not be probative as to the consumer's ability to repay a new covered
short-term loan. Similarly, with respect to comment 6(e)-3, the Bureau
believes that permitting a lender to overcome the presumption of
unaffordability in these circumstances would be appropriate because an
increase in the consumer's expected net income or decrease in the
consumer's expected payments on major financial obligations since
obtaining the prior loan may materially impact the consumer's financial
capacity such that a prior unaffordable loan, including difficulty
repaying an outstanding loan, may not be probative as to the consumer's
ability to repay a new covered short-term loan. The Bureau notes,
however, that if, with respect to any given lender, a substantial
percentage of consumers who obtain a loan pursuant to proposed Sec.
1041.5 return for a new loan during the reborrowing period, that
pattern may provide persuasive evidence that the lender's
determinations to make initial loans were not consistent with the
ability-to-repay determinations under proposed Sec. 1041.5. As
discussed above, the presumptions in proposed Sec. 1041.6 supplement
the basic ability-to-repay requirements in proposed Sec. 1041.5 in
certain circumstances where a consumer's recent borrowing indicates
that a consumer would not have the ability to repay a new covered
short-term loan. Accordingly, the procedure in proposed Sec. 1041.6(e)
for overcoming the presumption of unaffordability would address only
the presumption; lenders would still need to determine ability to repay
in accordance with proposed Sec. 1041.5 before making the new covered
short-term loan.
Under proposed Sec. 1041.6(e), the same requirement would apply
with respect to both the second and third covered short-term loan in a
sequence subject to the presumption in proposed Sec. 1041.6(b).
However, the Bureau expects that if, with respect to any given lender,
a substantial percentage of consumers who obtain a second loan in a
sequence return for a third loan, that pattern may provide persuasive
evidence that the lender's determinations to make second loans
notwithstanding the presumption were not consistent with proposed Sec.
1041.6(e) and the ability-to-repay determinations were not reasonable
under proposed Sec. 1041.5. The Bureau further expects that even when
a lender determines that the presumption of unaffordability can be
overcome pursuant to proposed Sec. 1041.6(e) for the second loan in a
sequence, it will be a relatively unusual case in which the consumer
will encounter multiple rounds of unexpected income or major financial
obligation disruptions such that the lender will be able to reasonably
determine that the consumer will have the ability to repay a third
covered short-term loan notwithstanding the consumer's need to reborrow
after each of the prior loans.
The Bureau recognizes that the standard in proposed Sec. 1041.6(e)
would permit a lender to overcome a presumption of unaffordability only
in a narrow set of circumstances that are reflected in certain aspects
of a consumer's financial capacity and can be verified through reliable
evidence. As discussed above with regard to alternatives considered for
proposed Sec. 1041.6, the Bureau considered including an additional
set of circumstances permitting lenders to overcome the presumptions of
unaffordability in the event that the lender determined that the need
to reborrow was prompted by an unusual and non-recurring expense rather
than by the unaffordability of the prior loan. In light of the
challenges with such an approach, described above, the Bureau elected
instead to propose Sec. 1041.6(e) without permitting an unusual and
non-recurring expense to satisfy the conditions of the test. However,
the Bureau solicits comment on including an unusual and non-recurring
expense as a third circumstance in which lenders could overcome the
presumptions of unaffordability.
The Bureau solicits comment on all aspects of the proposed standard
for overcoming the presumptions of unaffordability. In particular, the
Bureau solicits comment on the circumstances that would permit a lender
to overcome a presumption of unaffordability; on whether other or
additional circumstances should be included in the standard; and, if
so, how to define such circumstances. In addition, the Bureau solicits
comment on the appropriate time period for comparison of the consumer's
financial capacity between the prior and prospective loans, including,
specifically, the different requirements for prior loans of different
types. The Bureau solicits comment on the types of information that
lenders would be permitted to use as reliable evidence to make the
determination in proposed Sec. 1041.6(e).
The Bureau also solicits comment on any alternatives that would
adequately prevent consumer injury while reducing the burden on
lenders, including any additional circumstances that should be deemed
sufficient to overcome a presumption of unaffordability. The Bureau
also solicits comment on how to address unexpected and non-recurring
increases in expenses, such as major
[[Page 47967]]
vehicle repairs or emergency appliance replacements, including on the
alternative discussed above with regard to alternatives considered for
proposed Sec. 1041.6.
6(f) Prohibition on Loan Sequences of More Than Three Covered Short-
Term Loans Made Under Sec. 1041.5
Proposed Sec. 1041.6(f) would prohibit lenders from making a
covered short-term loan under proposed Sec. 1041.5 to a consumer
during the time period in which the consumer has a covered short-term
loan made under proposed Sec. 1041.5 outstanding and for 30 days
thereafter if the new covered short-term loan would be the fourth loan
in a sequence of covered short-term loans made under proposed Sec.
1041.5.\572\ Proposed comment 6(f)-1 clarifies that the prohibition in
proposed Sec. 1041.6(f) does not limit a lender's ability to make a
covered longer-term loan under proposed Sec. 1041.9, Sec. 1041.11, or
Sec. 1041.12.
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\572\ Proposed Sec. 1041.6(f) provides that it applies
notwithstanding the presumption of unaffordability under proposed
Sec. 1041.6(b). If a covered short-term loan would be the fourth
covered short-term loan in a sequence, then the prohibition in
proposed Sec. 1041.6(f) would apply, rather than the presumption
under proposed Sec. 1041.6(b).
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As discussed above, 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
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.
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.\573\ 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.\574\ 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.\575\
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\573\ Results calculated using data described in Chapter 5 of
the CFPB Report on Supplemental Findings.
\574\ Results calculated using data described in Chapter 5 of
the CFPB Report on Supplemental Findings.
\575\ CFPB Report on Supplemental Findings, at 32.
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Further, 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, including two determinations that the
consumer had overcome the presumption of unaffordability. If the
consumer continues reborrowing 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 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 believes this is particularly
the case because the presumption of unaffordability under proposed
Sec. 1041.6(b) would escalate the scrutiny for each subsequent loan in
a three-loan sequence. The consumer keeps returning to reborrow in
spite of a lender or lenders having determined on two prior occasions
that the consumer's financial capacity had sufficiently improved to
overcome the presumption of unaffordability, further evidencing a
pattern of reborrowing that could spiral into a debt cycle.
In light of the data described above, the Bureau believes 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 believes 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. Accordingly, proposed
Sec. 1041.6(f) would prohibit lenders from making a covered short-term
loan under Sec. 1041.5 during the time period in which the consumer
has a covered short-term loan made under Sec. 1041.5 outstanding and
for 30 days thereafter if the new covered short-term loan would be the
fourth loan in a sequence of covered short-term loans made under Sec.
1041.5.
The Bureau believes that given the requirements set forth in
proposed Sec. 1041.5 to determine ability to repay before making an
initial covered short-term loan (other than a loan made under the
conditional exemption in proposed Sec. 1041.7), and given the further
requirements set forth in proposed Sec. 1041.6(b) with respect to
additional covered short-term loans in a sequence, few consumers will
actually reach the point where they have obtained three covered short-
term loans in a sequence and even fewer will reach that point and still
need to reborrow. Such a three-loan sequence can occur only if the
consumer turned out to not be able to afford a first loan, despite a
lender's determination of ability to repay, and that the same occurred
for the second and third loans as well, despite a second and third
determination of ability to repay, including a determination that the
presumption of unaffordability for the second loan and then the third
loan could be overcome. However, to provide a backstop in the event
that the consumer does obtain three covered short-term loans made under
Sec. 1041.5 within a short period of time proposed Sec. 1041.6(f)
would impose a prohibition on continued lending to protect consumers
from further unaffordable loans. For consumers who reach that point,
the Bureau believes that terminating a loan sequence after three loans
may enable the consumer to escape from the cycle of indebtedness. At
the same time, if any such consumers needed to continue to borrow, they
could obtain a covered longer-term loan, provided that a lender
reasonably determined that such a loan was within the consumer's
ability to repay, pursuant to Sec. Sec. 1041.9 and 1041.10, or a
covered longer-term loan under either of the conditional exemptions in
proposed Sec. Sec. 1041.11 and 1041.12.
During the SBREFA process, the Bureau received substantial feedback
about the proposal under consideration to impose a conclusive
presumption of unaffordability following the third covered short-term
loan in a sequence.
[[Page 47968]]
Most notably, many SERs provided feedback to the Bureau indicating that
they rely heavily on consumers who regularly take out a chain of short-
term loans and that the limit of three loans would cause a significant
decrease in revenue and profit for their businesses. A study submitted
by several of the SERs provides evidence to substantiate their claim.
Similarly, as discussed further at Market Concerns--Short-Term Loans,
the Bureau's examination of data obtained from larger lenders likewise
indicates that a large percentage of the loan volume of payday lenders
comes from consumers trapped in prolonged loan sequences.\576\
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\576\ CFPB Report on Supplemental Findings, at ch. 5.
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As explained with regard to proposed Sec. 1041.6(b)(1) above, the
Bureau believes that, even without the mandatory cooling-off period
under proposed Sec. 1041.6(f), there would be relatively few instances
in which lenders could reasonably determine that a consumer had the
ability to repay successive loans in a sequence. As discussed in part
VI, the Bureau believes that the primary impact on loan volume and
lender revenue from the ability-to-repay requirements would be the
decline in initial covered short-term loans made under the ability-to-
repay requirements. Moreover, the fact that the proposal would have
such a disruptive impact on these lenders' current source of revenue
does not, in the Bureau's view, detract from the appropriateness of
these provisions to prevent the unfair and abusive practice that the
Bureau has preliminarily identified. Indeed, the Bureau believes that
the lenders' concern about the revenue impact of limiting extended
cycles of reborrowing confirms the Bureau's reasons for believing that
these provisions may be appropriate to prevent the unfair and abusive
practice. The proposed cooling-off period would last 30 days for the
same reason that the Bureau is using that time frame to draw the line
as to when a new loan is likely the result of the unaffordability of
the prior loan.
The Small Business Review Panel Report recommended that the Bureau
request comment on whether permitting a sequence of more than three
covered short-term loans would enable the Bureau to fulfill its stated
objectives for the rulemaking while reducing the revenue impact on
small entities. Conversely, during the SBREFA process and associated
outreach following publication of the Small Business Review Panel
Report, other stakeholders suggested that the mandatory cooling-off
period should apply in additional circumstances, such as based on a
pattern of sustained usage of covered short-term loans or covered
longer-term balloon-payment loans over a period of time, even if the
usage pattern did not involve three-loan sequences.
The Bureau solicits comment on the necessity of the proposed
prohibition and on any alternatives that would adequately prevent
consumer harm while reducing the burden on lenders. In particular, the
Bureau solicits comment on whether a presumption of unaffordability
rather than a mandatory cooling-off period would be sufficient to
prevent the targeted harms and, if so, whether such presumptions should
be structured to match proposed Sec. 1041.6(b) and (e), or should be
tailored in some other way. Additionally, consistent with the Small
Business Review Panel Report, the Bureau solicits comment on whether
three loans is the appropriate threshold for the prohibition or whether
permitting lenders to overcome the presumption of unaffordability for a
greater number of loans before the mandatory cooling-off period would
provide the intended consumer protection while mitigating the burden on
lenders. The Bureau also solicits comment on whether the mandatory
cooling-off period should extend for a period greater than 30 days or
should apply in any other circumstances, such as based on the total
number of covered short-term loans a consumer has obtained during a
specified period of time or the number of days the consumer has been in
debt during a specified period of time. Additionally, the Bureau
solicits comment on whether there is a pattern of reborrowing on a mix
of covered short-term loans and covered longer-term balloon-payment
loans for which a mandatory cooling-off period would be appropriate
and, if so, what refinements to the prohibition in proposed Sec.
1041.6(f) would be appropriate for such an approach.
6(g) Prohibition on Making a Covered Short-Term Loan Under Sec. 1041.5
Following a Covered Short-Term Loan Made Under Sec. 1041.7
Proposed Sec. 1041.6(g) would prohibit a lender from making a
covered short-term loan under proposed Sec. 1041.5 during the time
period in which the consumer has a covered short-term loan made under
proposed Sec. 1041.7 outstanding and for 30 days thereafter. The
proposed prohibition corresponds to the condition in proposed Sec.
1041.7(c)(2) that would prohibit making a covered short-term loan under
proposed Sec. 1041.7 during the time period in which the consumer has
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) outstanding and for 30 days thereafter. The Bureau is including
this provision in proposed Sec. 1041.6 for ease of reference for
lenders so that they can look to a single provision of the rule for a
list of prohibitions and presumptions that affect the making of covered
short-term loans under proposed Sec. 1041.5, but discusses the
underlying rationale in additional detail in the section-by-section
analysis for proposed Sec. 1041.7(c)(2) below.
Proposed Sec. 1041.7 sets forth numerous protective conditions for
a covered short-term loan conditionally exempt from the ability-to-
repay requirements of proposed Sec. Sec. 1041.5 and 1041.6; these
conditions are discussed in depth in connection with that section. As a
parallel provision to proposed Sec. 1041.7(c)(2), the Bureau proposes
the prohibition in proposed Sec. 1041.6(g) in order to prevent
undermining the protections of proposed Sec. 1041.7, most
significantly, the principal reduction requirements of proposed Sec.
1041.7(b)(1). As discussed with regard to that provision, the Bureau
believes that the principal reduction requirements of proposed Sec.
1041.7(b)(3) are an essential component of the proposed conditional
exemption. Additionally, as discussed in the section-by-section
analysis of proposed Sec. 1041.7(c)(2), the Bureau believes that
providing separate ``paths'' for making covered short-term loans under
proposed Sec. 1041.5 and proposed Sec. 1041.7 would facilitate a more
consistent framework for regulation in this market and make the rule
simpler for both consumers and lenders.
The Bureau solicits comment on the necessity of the proposed
prohibition and on any alternatives that would achieve the Bureau's
objectives here while reducing the burden on lenders.
6(h) Determining Period Between Consecutive Covered Loans
Proposed Sec. 1041.6(h) would define how a lender must determine
the number of days between covered loans for the purposes of proposed
Sec. 1041.6(b), (c), (f), and (g). In particular, proposed Sec.
1041.6(h) would specify that days on which a consumer had a non-covered
bridge loan outstanding do not count toward the determination of time
periods specified by proposed Sec. 1041.6(b), (c), (f), and (g).
Proposed comment 6(h)-1 clarifies that Sec. 1041.6(h) would apply if
the lender or its affiliate makes a non-covered bridge loan to a
[[Page 47969]]
consumer during the time period in which any covered short-term loan or
covered longer-term balloon-payment loan made by a lender or its
affiliate is outstanding and for 30 days thereafter. Proposed comment
6(h)-2 provides an example.
As discussed in more detail in the section-by-section of proposed
Sec. 1041.2(a)(13), defining non-covered bridge loan, the Bureau is
concerned that there is some risk that lenders might seek to evade the
proposed rule designed to prevent unfair and abusive practices by
making certain types of loans that fall outside the scope of the
proposed rule during the 30-day period following repayment of a covered
short-term loan or covered longer-term balloon-payment loan. Since the
due date of such a loan would be beyond that 30-day period, the lender
would be free to make another covered short-term loan subsequent to the
non-covered bridge loan without having to comply with proposed Sec.
1041.6. Proposed Sec. 1041.2(a)(13) would define non-covered bridge
loan as a non-recourse pawn loan made within 30 days of an outstanding
covered short-term loan and that the consumer is required to repay
within 90 days of its consummation. The Bureau is seeking comment under
that provision as to whether additional non-covered loans should be
added to the definition.
As with all of the provisions of proposed Sec. 1041.6, in
proposing Sec. 1041.6(g) and its accompanying commentary, the Bureau
is relying on its authority to prevent unfair, deceptive, and abusive
acts and practices under the Dodd-Frank Act.\577\ For purposes of
proposed Sec. 1041.6(g) in particular, the Bureau is also relying on
its anti-evasion authority under section 1022(b)(1) of the Dodd-Frank
Act. As discussed at part IV, Dodd-Frank Act section 1022(b)(1)
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.'' \578\ The Bureau believes that the
requirements of proposed Sec. 1041.6(g) would prevent evasions of the
reborrowing restrictions under proposed Sec. 1041.6 by not counting
the days on which a non-covered bridge loan is outstanding toward the
determination of whether a subsequent covered short-term loan made by
the lender or its affiliate is part of the same loan sequence as the
prior covered short-term loan, or is made within 30 days of the prior
loan outstanding, as applicable. This would prevent evasion insofar as,
in the absence of this proposed restriction, a lender or its affiliate
could make a non-covered bridge loan to keep a consumer in debt on a
non-covered bridge loan during the reborrowing period and so wait to
make the new covered short-term loan more than 30 calendar days, but
with fewer days without non-covered bridge loan, after the prior loan,
which would evade the reborrowing restrictions in proposed Sec.
1041.6. The Bureau is concerned that this type of circumvention of the
reborrowing restrictions could lead to lenders making covered short-
term loans that consumers do not have the ability to repay.
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\577\ 12 U.S.C. 5531(b).
\578\ 12 U.S.C. 5512(b)(1).
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Accordingly, the Bureau proposes to exclude from the period of time
between affected loans, those days on which a consumer has a non-
covered bridge loan outstanding. The Bureau believes that defining the
period of time between covered loans in this manner may be appropriate
to prevent lenders from making covered short-term loans for which the
consumer does not have the ability to repay.
The Bureau solicits comment on the appropriateness of the standard
in proposed Sec. 1041.6(h) and on any alternatives that would
adequately prevent consumer harm while reducing burden on lenders.
Section 1041.7 Conditional Exemption for Certain Covered Short-Term
Loans
For the reasons discussed below, the Bureau is proposing to exempt
covered short-term loans under proposed Sec. 1041.7 (also referred to
herein as a Section 7 loan) from proposed Sec. Sec. 1041.4, 1041.5,
and 1041.6. Proposed Sec. 1041.7 includes a number of screening and
structural protections for consumers who are receiving loans not
subject to the proposed ability-to-repay determination. These
provisions would reduce the likelihood and magnitude of consumer harms
from unaffordable payments on covered short-term loans, including
addressing the common occurrence that such loans lead to sequences of
reborrowing by consumers.
Background
Based on its own and outside research, the Bureau recognizes that,
even without ability-to-repay assessments, some consumers repay a
short-term loan when due without further reborrowing. These consumers
avoid some, if not all, of the 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 reborrowing within the ensuing 30 days.\579\ While the
Bureau believes that most of these consumers would be able to
demonstrate their ability to repay and thus continue to obtain loans
under the Bureau's proposal, the Bureau recognizes that there may be a
sub-segment of consumers for whom this is not true and who would be
denied loans even though they could, in fact, afford the payment. These
consumers, for example, may be paid, in whole or in part, in cash and
may not deposit their wages into a transaction account, preventing
verification of their income.
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\579\ CFPB Report on Supplemental Findings. The Bureau's finding
may overstate the extent to which payday borrowers are able to avoid
re-borrowing since the Bureau's study looks at borrowing from a
single lender. A recent study which tracks borrowers across five
large lenders who together make up 20 percent of the storefront
payday market finds that 21 percent of borrowers switch lenders and
that of those 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: Consumer Behavior and Borrowing
Capacity in the New Payday Market], available at https://www.nonprime101.com/wp-content/uploads/2015/10/FISCA-10-15.pdf.
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Some of these consumers may take out a payday loan, repay it on the
contractual due date, and never again use a payday loan. Others may
return on another occasion, when a new need arises, likely for another
short sequence.\580\ Further, even among those who do reborrow, the
Bureau's research indicates that about 16 percent of payday sequences
ended with repayment within three loans, without either reborrowing
within 30 days after the last payment or defaulting.\581\
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\580\ The study described in the previous footnote, using data
over a four-year time frame, 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
borrower had 2 sequences over four years; and that the average
borrower had 3.37 sequences. (This study defined sequence, as did
the Bureau's 2014 Data Point, by using a 14-day time period.)
Finding the Silver Lining in Regulatory Storm Clouds: Consumer
Behavior and Borrowing Capacity in the New Payday Market, at 8, 14.
\581\ CFPB Report on Supplemental Findings, at 125.
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In addition, the Bureau's research suggests that even consumers who
reborrow many times might have shorter loan sequences if they were
offered the option of taking out smaller loans each time they returned
to reborrow--instead of being presented only with the option of rolling
over the loan (in States where it is permitted) or repaying the full
amount of the loan plus the finance
[[Page 47970]]
charge, which often leads to taking out another loan in the same
amount.\582\
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\582\ Id. at 133.
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Finally, the Bureau recognizes that the verification and ability-
to-repay requirements in proposed Sec. Sec. 1041.5 and 1041.6 would
impose compliance costs that some lenders, especially smaller lenders,
may find difficult to absorb for covered short-term loans, particularly
those relatively small in amount.
In light of these considerations, the Bureau believes that it would
further the purposes and objectives of the Dodd-Frank Act, to provide a
simpler alternative to the ability-to-repay requirements in proposed
Sec. Sec. 1041.5 and 1041.6 for covered short-term loans, but with
robust alternative protections against the harms from loans with
unaffordable payments. As described in more detail below, proposed
Sec. 1041.7 would permit lenders to extend 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
ability-to-repay requirements specified in proposed Sec. Sec. 1041.5
and 1041.6.
The Bureau recognizes that this alternative approach for covered
short-term loans in proposed Sec. 1041.7 has drawn criticism from a
variety of stakeholders. During the SBREFA process and the Bureau's
general outreach following the Bureau's release of the Small Business
Review Panel Outline, many lenders and other industry stakeholders
argued that the alternative requirements for covered short-term loans
presented in the Small Business Review Panel Outline would not provide
sufficient flexibility.\583\ Several SERs whose companies make covered
short-term loans expressed the view that, despite the reduction in
burdens associated with the ability-to-repay requirements, the
alternative requirements discussed in the Small Business Review Panel
Outline would not provide for sufficient loan volume to sustain their
profitability.\584\ A group of SERs submitted a report by third party
consultants that projected significant revenue loss and reductions in
profitability for small lenders if they made covered short-term loans
solely under the alternative approach.\585\
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\583\ 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 is now
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.
\584\ See Small Business Panel Report, at 22.
\585\ See id. (``Five of the SERs submitted to the Panel the
findings of a report commissioned by a trade association
representing six of the SERs. Examining store-level data from these
small businesses that make payday loans, the report found that the
alternative requirements for covered short-term loans would cause
lender revenues to decline by 82 percent. The report found that five
of the six lenders considered would become unprofitable and that the
sixth lender would experience a 70-percent decline in
profitability.'').
---------------------------------------------------------------------------
In contrast, consumer advocates, during the Bureau's outreach
following its release of the Small Business Review Panel Outline, have
argued that permitting covered short-term loans to be made without an
ability-to-repay determination would weaken the overall rule framework.
A letter signed by several hundred national and State consumer
advocates urged the Bureau, before the release of the Small Business
Review Panel Outline, not to create any alternatives to the ability-to-
repay requirement that would sanction a series of repeat loans.\586\
---------------------------------------------------------------------------
\586\ Letter from Americans for Financial Reform, to Richard
Cordray, Director, Consumer Fin. Protection Bureau (Oct. 23, 2014),
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 has carefully considered this feedback in developing the
proposed rule. With regard to the industry argument that the proposal
considered in the Small Business Review Panel Outline would not allow
for lenders to remain profitable, the Bureau believes that this concern
is the product of many lenders' reliance on long sequences of covered
short-term loans to consumers. Since the Bureau began studying the
market for payday, vehicle title, and similar loans several years ago,
the Bureau has noted its significant concern with the amount of long-
term reborrowing observed in the market and on the apparent dependence
of many lenders on such reborrowing for a significant portion of their
revenues.\587\ Proposed Sec. 1041.7 would permit consumers with
emergencies or occasional financial shortfalls to receive a limited
number of covered short-term loans without the protection of an
ability-to-repay determination under proposed Sec. Sec. 1041.5 and
1041.6. For this very reason, proposed Sec. 1041.7 would provide these
consumers with an alternative set of protective requirements.
---------------------------------------------------------------------------
\587\ See Market Concerns--Short-Term Loans. See also, e.g.,
Richard Cordray, Director, Consumer Fin. Protection Bureau, 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/.
---------------------------------------------------------------------------
The Bureau notes that, as discussed in Market Concerns--Short-Term
Loans, covered short-term loans are frequently marketed to consumers as
loans that are intended for short-term, infrequent use. The dependency
of many lenders on long-term reborrowing is in tension with this
marketing and exploits consumers' behavioral biases.\588\ The Bureau is
sensitive to the impacts that the proposed rule would have on small
entities. To the extent small lenders are relying on repeated
reborrowing and long loan sequences, however, the Bureau has the same
concerns it has expressed more generally with this market.
---------------------------------------------------------------------------
\588\ See Market Concerns--Short-Term Loans.
---------------------------------------------------------------------------
In proposing Sec. 1041.7, the Bureau does not mean to suggest that
lenders would generally be able to maintain their current business
model by making loans permitted by proposed Sec. 1041.7. To the
contrary, the Bureau acknowledges that a substantial fraction of loans
currently made would not qualify for the exemption under proposed Sec.
1041.7 because they are a part of extended cycles of reborrowing that
are very harmful to consumers. 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. For other lenders, the Bureau
expects that loans made under proposed Sec. 1041.7 would become one
element of a business model that would also incorporate covered short-
term and covered longer-term loans made using an ability-to-repay
determination under proposed Sec. Sec. 1041.5 and 1041.6 and
Sec. Sec. 1041.9 and 1041.10, respectively.
With respect to the argument from consumer advocates, the Bureau
does not believe that providing a carefully constructed alternative to
the proposed ability-to-repay requirements in Sec. Sec. 1041.5 and
1041.6 would undermine the consumer protections in this proposed
rulemaking. As discussed above, the exemption would provide a simpler
means of obtaining a covered short-term loan for consumers for whom the
loan is less likely to prove harmful. Moreover, the Bureau has built
into proposed Sec. 1041.7 a number of safeguards, including the
principal stepdown requirements and the limit on the number of loans in
a sequence of Section 7 loans, to ensure that consumers cannot become
trapped in long-term debt on an ostensibly short-term loan and to
reduce the risk of harms from reborrowing, default, and collateral
harms from making
[[Page 47971]]
unaffordable loan payments during a short sequence of Section 7 loans.
The proposal reflects the Bureau's belief that the requirements in
proposed Sec. 1041.7 would appropriately balance the interest of
providing strong consumer protections with the aim of permitting access
to less risky credit.
By including an alternative set of requirements under proposed
Sec. 1041.7, the Bureau is 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. Proposed Sec. 1041.7(a)
would not provide an exemption from any other provision of law. Many
States and other non-Federal jurisdictions have made and likely will
continue to make legislative and regulatory judgments to impose usury
limits, prohibitions on making high cost covered short-term loans
altogether, and other strong consumer protections under legal
authorities that in some cases extend beyond those of the Bureau. The
proposed regulation would coexist with--rather than supplant--State,
local, and tribal regulations that impose a stronger protective
framework. Proposed Sec. 1041.7 would also not permit loans to
servicemembers and their dependents that would violate the Military
Lending Act and its implementing regulations. (See discussion in part
IV.)
The Bureau seeks comment generally on whether to provide an
alternative to the ability-to-repay requirements under proposed
Sec. Sec. 1041.5 and 1041.6 for covered short-term loans that satisfy
certain requirements. The Bureau also seeks comment on whether proposed
Sec. 1041.7 would appropriately balance the considerations discussed
above regarding consumer protection and access to credit that presents
a lower risk of harm to consumers. The Bureau, further, seeks 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. The Bureau also seeks comment generally on
the costs and other burdens that would be imposed on lenders, including
small entities, by proposed Sec. 1041.7.
Legal Authority
Proposed Sec. 1041.7 would establish an alternative set of
requirements for covered short-term loans that, if complied with by
lenders, would conditionally exempt them from the unfair and abusive
practice identified in proposed Sec. 1041.4 and the ability-to-repay
requirements under proposed Sec. Sec. 1041.5 and 1041.6.\589\ The
Bureau is proposing the requirements of proposed Sec. 1041.7 pursuant
to the Bureau's authority under Dodd-Frank Act section 1022(b)(3)(A) to
grant conditional exemptions in certain circumstances from rules issued
by the Bureau under the Bureau's Dodd-Frank Act legal authorities. With
respect to proposed Sec. 1041.7(e), the Bureau is relying on the
Bureau's authority under sections 1032(a) of the Dodd-Frank Act, which
allows the Bureau 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 Dodd-
Frank Act, which provides for the use of model forms.
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\589\ As described in the section-by-section analysis of
proposed Sec. Sec. 1041.4 through 1041.6, the Bureau is proposing
those provisions pursuant to the Bureau's separate authority under
Dodd-Frank Act section 1031(b) 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.''
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Section 1022(b)(3)(A) of the Dodd-Frank Act--Exemption Authority
Dodd-Frank Act section 1022(b)(3)(A) authorizes the Bureau to, by
rule, ``conditionally or unconditionally exempt any class of . . .
consumer financial products or services'' from any provision of Title X
of the Dodd-Frank 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. The purposes of Title X are set forth in
Dodd-Frank Act section 1021(a),\590\ 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.''
---------------------------------------------------------------------------
\590\ 12 U.S.C. 5511(a).
---------------------------------------------------------------------------
The objectives of Title X are set forth in Dodd-Frank Act section
1021(b).\591\ Section 1021(b) of the Dodd-Frank Act authorizes the
Bureau to 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'' (see Dodd-Frank Act section 1021(b)(1) \592\);
(2) consumers ``are protected from unfair, deceptive, or abusive acts
and practices and from discrimination'' (see Dodd-Frank Act section
1021(b)(2) \593\); (3) ``outdated, unnecessary, or unduly burdensome
regulations are regularly identified and addressed in order to reduce
unwarranted regulatory burdens'' (see Dodd-Frank Act section 1021(b)(3)
\594\); (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 completion'' (see Dodd-Frank Act section
1021(b)(4) \595\); and ``markets for consumer financial products and
services operate transparently and efficiently to facilitate access and
innovation'' (see Dodd-Frank Act section 1021(b)(5) \596\).
---------------------------------------------------------------------------
\591\ 12 U.S.C. 5511(b).
\592\ 12 U.S.C. 5511(b)(1).
\593\ 12 U.S.C. 5511(b)(2).
\594\ 12 U.S.C. 5511(b)(3).
\595\ 12 U.S.C. 5511(b)(4).
\596\ 12 U.S.C. 5511(b)(5).
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When issuing an exemption under Dodd-Frank Act section
1022(b)(3)(A), the Bureau is required under Dodd-Frank Act section
1022(b)(3)(B) to take into consideration, as appropriate, three
factors. These enumerated factors are: (1) The total assets of the
class of covered persons; \597\ (2) the volume of transactions
involving consumer financial products or services in which the class of
covered persons engages; \598\ 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.\599\
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\597\ 12 U.S.C. 5512(b)(3)(B)(i).
\598\ 12 U.S.C. 5512(b)(3)(B)(ii).
\599\ 12 U.S.C. 5512(b)(3)(B)(iii).
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The Bureau believes that the proposed conditional exemption for
covered short-term loans is appropriate to carry out the purposes and
objectives of Title X of the Dodd-Frank Act, for three primary reasons.
First, proposed Sec. 1041.7 is consistent with both the Bureau's
statutory purpose under Dodd-Frank Act section 1021(a) of seeking to
implement consumer financial law consistently to ensure consumers'
access to fair, transparent, and competitive markets for consumer
financial products and services and the Bureau's related statutory
objective under Dodd-Frank Act section 1021(b)(5) of ensuring that such
markets operate transparently and efficiently to facilitate access with
respect to consumer financial products and services. As described in
more detail in the section-by-section analysis below, proposed Sec.
1041.7 would help to preserve access to credit by providing lenders an
option for making covered short-term loans that is an alternative to--
and a conditional exemption from--
[[Page 47972]]
the proposed ability-to-repay requirements. Because lenders making
Section 7 loans would be conditionally exempt from complying with the
ability-to-repay requirements under Sec. Sec. 1041.5 and 1041.6,
making loans under proposed Sec. 1041.7 would reduce the compliance
costs for lenders that make covered short-term loans relative to the
costs of complying with the ability-to-repay requirements under
proposed Sec. Sec. 1041.5 and 1041.6. This reduction in compliance
costs would help facilitate access. Moreover, consumers who lack the
necessary verification evidence to qualify for a covered short-term
loan under the proposed ability-to-repay requirements (for example,
those consumers who are paid in cash and thus cannot document income
through a pay stub) would be able to receive a covered short-term loan
under this option subject to the requirements set forth in proposed
Sec. 1041.7. This further advances the statutory purposes and
objective related to facilitating consumers' access to credit.
Second, the proposed conditional exemption for covered short-term
loans is consistent with the Bureau's statutory objective under Dodd-
Frank Act section 1021(b)(2) of ensuring that consumers are protected
from unfair or abusive acts and practices. The Bureau is proposing in
Sec. 1041.4 that it is an unfair and abusive practice for a lender to
make a covered short-term loan without making a reasonable
determination that the consumer has the ability to repay the loan. In
Sec. Sec. 1041.5 and 1041.6, the Bureau is proposing to prevent that
unfair and abusive practice by prescribing ability-to-repay
requirements for lenders making covered short-term loans. Although
lenders making Section 7 loans would not be required to satisfy these
ability-to-repay requirements, they would be required to satisfy the
requirements for the conditional exemption under proposed Sec. 1041.7.
As described in more detail in this section-by-section analysis below,
the requirements for proposed Sec. 1041.7 are designed to protect
consumers from the harms that result from lenders making short-term,
small-dollar loans with unaffordable payments--namely, repeat
borrowing, but also defaults and collateral harms from making
unaffordable loan payments. These are the same types of harms that the
ability-to-repay requirements under proposed Sec. Sec. 1041.5 and
1041.6 aim to address.
Third, the conditional exemption in proposed Sec. 1041.7 is
consistent with the Bureau's statutory objective under Dodd-Frank Act
section 1021(b)(1) of ensuring that consumers are provided with timely
and understandable information to make responsible decisions about
financial transactions. Under proposed Sec. 1041.7(e), the Bureau
would impose a series of disclosure requirements in connection with the
making of Section 7 loans. These disclosures would notify the consumer
of important aspects of the operation of these transactions, and would
contribute significantly to consumers receiving timely and
understandable information about taking out Section 7 loans.
The Bureau, furthermore, has taken the statutory factors listed in
Dodd-Frank Act section 1022(b)(3)(B) into consideration, as
appropriate. The first two factors are not materially relevant because
these factors pertain to exempting a class of covered persons, whereas
proposed Sec. 1041.7 would conditionally exempt a class of
transactions--Section 7 loans--from certain requirements of the
proposed rule. Nor is the Bureau basing the proposed conditional
exemption on the third factor. Certain proposed requirements under
Sec. 1041.7 are similar to requirements under certain applicable State
laws and local laws, as discussed below in the section-by-section
analysis. However, the Bureau is not aware of any State or locality
that has combined all of the elements that the Bureau believes are
needed to adequately protect consumers from the harms associated with
unaffordable payments in absence of an ability-to-repay
requirement.\600\
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\600\ See also the discussion in Market Concerns--Short-Term
Loans regarding the prevalence of harms in the short-term loan
market in spite of existing regulatory approaches.
---------------------------------------------------------------------------
The Bureau emphasizes that the proposed conditional exemption in
proposed Sec. 1041.7 would be a partial exemption. That is, Section 7
loans would still be subject to all of the requirements of the Bureau's
proposed rule other than the ability-to-repay requirements under
proposed Sec. Sec. 1041.5 and 1041.6.
The Bureau seeks comment on whether the Bureau should rely upon the
Bureau's statutory exemption authority under Dodd-Frank Act section
1022(b)(3)(A) to exempt loans that satisfy the requirements of proposed
Sec. 1041.7 from the unfair and abusive practice identified in
proposed Sec. 1041.4 and from the ability-to-repay requirements
proposed under Sec. Sec. 1041.5 and 1041.6. Alternatively, the Bureau
seeks comment on whether the requirements under proposed Sec. 1041.7
should instead be based on the Bureau's authority under Dodd-Frank Act
section 1031(b) to prescribe rules identifying as unlawful unfair,
deceptive, or abusive practices and to include in such rules
requirements for the purpose of preventing such acts or practices.
Dodd-Frank Act Sections 1032(a) and 1032(b)
The Bureau is proposing to require disclosures in Sec. 1041.7(e)
related to covered short-term loans made under proposed Sec. 1041.7
pursuant to the Bureau's authority under sections 1032(a) and (b) 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.'' 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 disclosure requirements in rules regarding particular
features even if other Federal consumer financial laws do not
specifically require disclosure of such features. Specifically, the
Bureau is proposing to require a lender to provide notices before
making the first and third loan in a sequence of Section 7 loans that
would inform consumers of the risk of taking such a loan and
restrictions on taking subsequent Section 7 loans in a sequence.
Under Dodd-Frank Act section 1032(b)(1), ``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 must
contain a clear and conspicuous disclosure according to Dodd-Frank Act
section 1032(b)(2). At a minimum, this clear and conspicuous disclosure
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. Dodd-Frank Act section 1032(b)(3)
provides that any model form the Bureau issues pursuant to Dodd-Frank
Act section 1032(b) shall be validated through consumer testing. In
developing the model forms for the proposed notices, the Bureau
conducted two rounds of qualitative consumer testing in September and
October of 2015. The
[[Page 47973]]
testing results are provided 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.''
7(a) Conditional Exemption for Certain Covered Short-Term Loans
Proposed Sec. 1041.7(a) would 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) could
make a covered short-term loan would be exempt from Sec. Sec. 1041.4,
1041.5, and 1041.6. Proposed Sec. 1041.7(a), like other sections of
proposed part 1041, would not pre-empt State, local, or tribal
restrictions that impose further limits on covered short-term loans, or
that prohibit high-cost, covered short-term loans altogether. Proposed
Sec. 1041.7(a) would 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, the records of the lender's affiliates, and a
consumer report from an information system registered under proposed
Sec. 1041.17(c)(2) or proposed Sec. 1041.17(d)(2).
Proposed comment 7(a)-1 explains that a lender could make a covered
short-term loan without making the ability-to-repay determination under
proposed Sec. Sec. 1041.5 and 1041.6, provided it complied with the
requirements set forth in proposed Sec. 1041.7(b) through (e).
Proposed comment 7(a)-2 clarifies that a lender cannot make a covered
short-term loan under proposed Sec. 1041.7 if no information system is
registered under proposed Sec. 1041.17(c)(2) or proposed Sec.
1041.17(d)(2) and available when the lender seeks to make the loan.
Proposed comment 7(a)-2 also clarifies that a lender may be unable to
obtain a report on the consumer's borrowing history if, for example,
information systems have been registered under proposed Sec.
1041.17(c)(2) or proposed Sec. 1041.17(d)(2) but are not yet
operational or registered information systems are operational but all
are temporarily unavailable.
The Bureau believes it is appropriate to condition the exemption in
proposed Sec. 1041.7 on the ability of a lender to obtain and review
of a consumer report from a registered information system. The Bureau
believes that this approach is warranted because making a covered
short-term loan under proposed Sec. 1041.7 does not require a detailed
analysis of the consumer's ability to repay the loan under proposed
Sec. Sec. 1041.5 and 1041.6. Rather, proposed Sec. 1041.7 protects
consumers through a carefully calibrated system of requirements to
ensure, among other things, that a consumer can reduce principal
amounts over the course of a loan sequence. Because lenders are not
required to conduct an ability-to-repay determination under proposed
Sec. Sec. 1041.5 and 1041.6, holistic information about the consumer's
recent borrowing history with the lender, as well as other lenders, is
especially important for ensuring the integrity of the requirements in
proposed Sec. 1041.7.
While the Bureau had proposed an income verification requirement in
the Small Business Review Panel Outline, the proposed rule would not
require a lender to verify a consumer's income before making a loan
under proposed Sec. 1041.7. Upon further consideration, the Bureau
believes that an income verification requirement is not necessary in
proposed Sec. 1041.7. Because lenders would know at the outset that
they would have to recoup the entire principal amount and finance
charges within a loan sequence of no more than three loans, the Bureau
believes that lenders would have strong incentives to verify that
consumers have sufficient income to repay within that window. In
addition, as discussed above, the Bureau believes that there are
meaningful advantages to providing flexibility both for consumers who,
in fact, have capacity to repay one or more covered short-term loans
but cannot easily provide the income documentation required in proposed
Sec. 1041.5(c), and for lenders in reducing compliance costs relative
to the income documentation requirement in proposed Sec. 1041.5(c). In
light of these considerations, the Bureau believes that it is
appropriate to allow lenders flexibility to adapt their current income
verification processes without dictating a specific approach under
proposed Sec. 1041.7.\601\
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\601\ As noted above and in part II.B, the Bureau believes that
most lenders already have some processes in place to verify that
applicants are not so lacking in income that they will default on a
first loan. See, e.g., Small Business Review Panel Report, at 16
(SERs' discussion of their practices).
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Consistent with the recommendations of the Small Business Review
Panel Report, the Bureau seeks comment on the cost to small entities of
obtaining information about consumer borrowing history and on potential
ways to reduce the operational burden of obtaining this information.
The Bureau also seeks comment on not requiring lenders to verify a
consumer's income when making a covered short-term loan under Sec.
1041.7. In particular, the Bureau seeks comment on whether lenders
should be required to verify a consumer's income when making a covered
short-term loan under proposed Sec. 1041.7, and if so how to craft a
standard that would offer additional protection for consumers and yet
preserve the advantages of a more flexible system relative to proposed
Sec. 1041.5(c).
7(b) Loan Term Requirements
Proposed Sec. 1041.7(b) would 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 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), would reduce the
likelihood that consumers who take Section 7 loans would end up in
extended loan sequences, default, or suffer substantial collateral
harms from making unaffordable loan payments on covered short-term
loans. Furthermore, these proposed requirements would limit the harm to
consumers in the event they are unable to repay the initial loan as
scheduled. Discussion of each of these loan term requirements is
contained in the section-by-section analysis below. If the loan term
requirements set forth in proposed Sec. 1041.7(b) are not satisfied,
the lender would not be able to make a loan under proposed Sec.
1041.7.
7(b)(1)
Proposed Sec. 1041.7(b)(1) would require a covered short-term loan
made under proposed Sec. 1041.7 to be subject to certain principal
amount limitations. Specifically, proposed Sec. 1041.7(b)(1)(i) would
require that the first loan in a loan sequence of Section 7 loans have
a principal amount that is no greater than $500. Proposed Sec.
1041.7(b)(1)(ii) would require that the second loan in a loan sequence
of Section 7 loans have a principal amount that is no greater than two-
thirds of the principal amount of the first loan in the loan sequence.
Proposed Sec. 1041.7(b)(1)(iii) would require that the third loan in a
loan sequence of Section 7 loans have a principal amount that is no
greater than one-third of the principal amount of the first loan in the
loan sequence.
Proposed comment 7(b)(1)-1 cross-references the definition and
commentary regarding loan sequences. Proposed comment 7(b)(1)-2
clarifies that the principal amount limitations apply regardless of
whether the loans are made by the same lender, an
[[Page 47974]]
affiliate, or unaffiliated lenders. Proposed comment 7(b)(1)-3 notes
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 gives an example of a loan
sequence in which the principal amount is stepped down in thirds.
The Bureau believes that the principal cap and principal reduction
requirements under proposed Sec. 1041.7(b)(1) are critical to reducing
both the risk of extended loan sequences and the risk that the loan
payments over limited shorter loan sequence would prove unaffordable
for consumers. Because proposed Sec. 1041.7 would not require an
ability-to-repay determination under proposed Sec. Sec. 1041.5 and
1041.6 for a covered short-term loan, some consumers may not be able to
repay these loans as scheduled. Absent protections, these consumers
would be in the position of having to reborrow or default on the loan
or fail to meet other major financial obligations or basic living
expenses as the loan comes due--that is, the same position faced by
consumers in the market today. As discussed in Market Concerns--Short-
Term Loans, the Bureau has found that when that occurs, consumers
generally reborrow for the same amount as the prior loan, rather than
pay off a portion of the loan amount on the previous loan and reduce
their debt burden. As a result, consumers may face a similar situation
when the next loan comes due, except that they have fallen further into
debt. 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 reborrowing and default.\602\
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\602\ See CFPB Data Point: Payday Lending, at 16.
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Proposed Sec. 1041.7(b)(1) would work in tandem with proposed
Sec. 1041.7(c)(3), which would limit a loan sequence of Section 7
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 in the first
loan over the course of a loan sequence. Without the principal
reduction requirements, consumers could reborrow twice and face
difficulty in repaying the third loan in the loan sequence, similar to
the difficulty that they had faced when the first loan was due. The
proposed principal reduction feature is intended to steadily reduce
consumers' debt burden and permit consumers to pay off the original
loan amount in more manageable increments over the course of a loan
sequence with three loans.
The Bureau believes that the proposed $500 limit for the first loan
is appropriate in light of current State regulatory limits and would
reduce the risks that unaffordable payments cause consumers to
reborrow, fail to meet other major financial obligations or basic
living expenses, or default during a loan sequence. As noted in part
II.B above, many State statutes authorizing payday loans impose caps on
the loan amount, with $500 being a common limit.\603\ In States that
have lower limits on loan amounts, these lower limits would prevail. In
addition, empirical research has found that average loan sizes are well
under this threshold.\604\
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\603\ E.g., Ala Code Sec. 5-18A-12(a); Iowa Code Sec.
533D.10(1)(b).
\604\ The Bureau's analysis of supervisory data indicates that
the median loan amount for payday loans is around $350. See CFPB
Payday Loans and Deposit Advance Products White Paper, at 15. As
noted in part II.B above, another study found that the average loan
amount borrowed was $375. See Pew Charitable Trusts, Payday Lending
in America: Policy Solutions at 53 (2013), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/
pewpaydaypolicysolutionsoct2013pdf.pdf.
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In the absence of an ability-to-repay determination under proposed
Sec. Sec. 1041.5 and 1041.6, the Bureau believes that loans with a
principal amount larger than $500 would carry a significant risk of
having unaffordable payments. A loan with a principal amount of $1,000,
for example, would be much harder for consumers to pay off in a single
payment, and even with the stepdown features of Sec. 1041.7(b)(1),
would require the consumer to pay at least $333 plus finance charges on
each of the second and third loans in the loan sequence. In contrast,
on a loan with a principal amount of $500 (the largest permissible
amount under proposed Sec. 1041.7(b)(1)), a minimum of $166.66 in
principal reduction would be required with each loan. For consumers who
are turning to covered short-term loans because they are already
struggling to meet their major financial obligations and basic living
expenses,\605\ the difference between payments of $333 and $167 may be
quite substantial and distinguish a loan with affordable payments from
a loan with unaffordable payments.
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\605\ See Market Concerns--Short-Term Loans.
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The proposed principal reduction requirements are consistent with
the guidance of a Federal prudential regulator and ordinances adopted
by a number of municipalities across the country. The FDIC, in its
``Affordable Small-Dollar Loan Guidelines'' in 2007, stated that,
``Institutions are encouraged to structure payment programs in a manner
that fosters the reduction of principal owed. For closed-end products,
loans should be structured to provide for affordable and amortizing
payments.'' \606\ Several Oregon municipalities, including Eugene and
Portland, impose a 25 percent principal stepdown requirement on
renewals.\607\ A number of cities in Texas, including Dallas, El Paso,
Houston, and San Antonio, have also adopted similar principal stepdown
requirements.\608\
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\606\ FDIC Financial Institution Letter FIL-50-2007, Affordable
Small-Dollar Loan Guidelines, (June 19, 2007), available at https://www.fdic.gov/news/news/financial/2007/fil07050a.html.
\607\ Eugene Code, Sec. 3.556, available at https://www.eugene-or.gov/DocumentCenter/Home/View/2165; Portland City Code, Ch.
7.25.050, available at http://www.portlandonline.com/auditor/?c=41523.
\608\ See City Regulation of Payday and Auto Title Lenders,
Texas Municipal League, http://www.tml.org/payday-updates (last
updated Jan. 15, 2016).
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The Bureau also has given extensive consideration to proposing an
``off-ramp'' for consumers struggling to repay a covered short-term
loan, in lieu of the principal reduction structure.\609\ The Bureau
identified this approach as an alternative in its Small Business Review
Panel Outline. 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.
As specifically proposed in the Outline, the third loan would be repaid
over an additional four installments without incurring additional cost.
As discussed above in Market Concerns--Short-Term Loans and in the
Small Business Review Panel Outline, similar extended payment plans are
required to be offered in some States and are a feature of some
industry trade association best practices. In light of concerns that
lenders may be failing to inform consumers of their options and
actively discouraging the use of off-ramps, the Bureau noted in the
Small Business Review Panel Outline that it was considering whether
additional features would be needed to facilitate access to the off-
ramp and prevent lender discouragement of off-ramp usage. The Small
Business Review Panel Outline listed examples of possible additional
conditions on the off-ramp, such as requiring lenders to notify
consumers of their right to take the off-ramp and prohibiting lenders
from initiating collections activity on the loan before offering the
consumer an off-ramp.
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\609\ See Small Business Review Panel Report, at 8.
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During the SBREFA process, the Bureau received feedback from the
SERs
[[Page 47975]]
regarding the off-ramp option, as well as the principal reduction
option discussed in the Small Business Review Panel Outline. Some SERs
noted that the proposed principal reduction requirement could present
compliance challenges. For example, these SERs stated that both the
principal reduction requirement and the off-ramp requirement under
consideration could conflict with State law requiring single payment
transactions. As an alternative, one SER recommended that the Bureau
adopt a provision in Washington State law that requires lenders to
offer an installment plan to consumers who are unable to repay their
loan.\610\ During broader outreach with stakeholders following the
release of the Small Business Review Panel Outline, industry
stakeholders suggested that the Bureau should consider requiring an
off-ramp option for borrowers unable to repay a covered short-term
loan, in lieu of the proposed ability-to-repay requirements coupled
with the alternative requirements. When discussing the principal
reduction and off-ramp options in the context of the framework laid out
in the Small Business Review Panel Outline, industry stakeholders were
critical of both approaches and did not state a preference. Consumer
advocates have expressed support for the principal reduction approach
based on their view that off-ramps have been ineffective at the State
level.
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\610\ See Small Business Review Panel Report, at 22.
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The Bureau has carefully considered the SERs' comments and the
broader stakeholder feedback following the release of the Small
Business Review Panel Outline. The Bureau does not believe the
principal reduction requirements under proposed Sec. 1041.7(b)(1)
would conflict with State law requiring single payment transactions.
The proposed requirement would not mandate payment of the loan in
installments or amortization of the initial loan in the sequence.
Rather, a lender that makes a series of covered short-term loans under
proposed Sec. 1041.7 would be required to reduce the principal amount
over a sequence of three loans so that a loan sequence would be
functionally similar to an amortizing loan.
After gathering substantial input and careful consideration, the
Bureau believes that the off-ramp approach would have three significant
disadvantages relative to the principal reduction structure outlined
above. First, the Bureau, in proposing an alternative to the
requirement to assess a consumer's ability to repay under proposed
Sec. Sec. 1041.5 and 1041.6, seeks to ensure that Section 7 loans do
not encumber consumers with unaffordable loan payments for an extended
period. As discussed in Market Concerns--Short-Term Loans, the Bureau
has found that consumers who reborrow generally reborrow for the same
amount as the prior loan, rather than pay off a portion of the loan
amount on the previous loan and reduce their debt burden. Given these
borrowing patterns, 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
period of time, raising the likelihood of default and collateral harms
from making unaffordable loan payments.
Second, the Bureau believes that an off-ramp provision likely could
not be designed in a way to ensure that consumers actually receive the
off-ramp. As discussed in part II.B above, the Bureau's analysis of
State regulator reports indicates that consumer use of available off-
ramps has been limited.\611\ In addition, anecdotal evidence suggests
that lenders discourage consumers from using State-imposed off-
ramps.\612\ Consumers can obtain an off-ramp only if they request it or
make statements indicating that they, for example, lack the ability to
repay the loan. If lenders are able to induce or pressure consumers
into repaying the third loan in a loan sequence made under proposed
Sec. 1041.7, the off-ramp provision would never be triggered.
Consumers who repay the loan when they cannot afford to repay it may
miss payments on other major financial obligations or forgo basic
living expenses. Thus, the Bureau remains extremely concerned that an
off-ramp would not, in fact, function as an important protection
against the harms from unaffordable payments because it could be so
easily circumvented.
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\611\ 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, Center for
Responsible Lending at 4 (2016), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
\612\ The Bureau is also aware of lender self-reported evidence
from Colorado State reports that lenders imposed their own cooling-
off periods on borrowers who took an off-ramp as a way to dissuade
borrowers from using the off-ramp mandated by Colorado State law.
The report concerns a 2007 statute which required lenders to offer
borrowers a no-cost repayment plan after the third balloon loan. See
Colo. Rev. Stat. Sec. 5-3.1-108(5). The law was changed in 2010 to
require a minimum six-month loan term for what Colorado law calls
``deferred deposit loans and maximum per annum interest rate of 45
percent.'' See Colo. Rev. Stat. Sec. Sec. 5-3.1-103 and 5-3.1-105.
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Third, to make an off-ramp approach less susceptible to such
defects, the Bureau continues to believe that 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. In contrast,
the proposed principal reduction requirements would be much simpler:
The principal of the first loan could be no greater than $500, and each
successive loan in the loan sequence would have a principal amount that
is reduced by at least one-third. The Bureau believes this approach
would both provide greater protection for consumers and offer easier
compliance for lenders.
The Bureau seeks comment on whether the principal reduction
requirements are appropriate under proposed Sec. 1041.7; whether $500
is the appropriate principal limit for the first loan in the sequence;
and whether a one-third reduction for each loan made under proposed
Sec. 1041.7 over the course of a three-loan sequence is the
appropriate principal reduction amount and appropriate length for a
loan sequence. The Bureau also seeks comment on whether the proposed
principal reduction requirements would conflict with any State, local,
or tribal laws and regulations. The Bureau separately seeks comment on
whether, in lieu of the principal reduction requirements, the Bureau
should adopt an off-ramp approach and, if so, what specific features
should be included. In particular, the Bureau seeks comment on whether
it should adopt the same parameters discussed in the Small Business
Review Panel Outline--a cost-free extension of the third loan in the
sequence over four installments--and additional measures to prevent
lenders from discouraging usage of the off-ramp, such as a disclosure
requirement, restrictions on collections activity prior to offering an
off-ramp during a loan sequence, and prohibitions on false and
misleading statements regarding
[[Page 47976]]
consumers' use of the off-ramp. The Bureau seeks comment on whether
there are other approaches that could encourage the use of an off-ramp.
The Bureau also seeks comment generally on whether an off-ramp could be
structured in a way that is relatively simple for compliance but still
ensures that it would be made available to all consumers who qualify
for it.
7(b)(2)
The Bureau expects that a covered short-term loan under proposed
Sec. 1041.7 would generally involve a single payment structure,
consistent with industry practice today. The Bureau also expects that
the principal reduction would typically be achieved via a sequence of
single-payment loans each for progressively smaller amounts. Proposed
Sec. 1041.7(b)(2), however, would provide 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 must have payments that are substantially equal
in amount, fall due in substantially equal intervals, and amortize
completely during the term of the loan. The proposed requirements under
Sec. 1041.7(b)(2) are consistent with the requirements for covered
longer-term loans that are made under proposed Sec. Sec. 1041.11 and
1041.12, the two conditional exemptions to proposed Sec. Sec. 1041.8,
1041.9, 1041.10 and 1041.15 for covered longer-term loans. Proposed
comment 7(b)(2)-1 provides 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) is 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 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 believes 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 believes that, in the absence of an
ability-to-repay determination under proposed Sec. Sec. 1041.5 and
1041.6, multi-payment loans with a final balloon payment are much more
likely to trigger default and up to two reborrowings than comparable
loans with amortizing payments. In the comparable context of longer-
term vehicle title installment loans, for example, the Bureau has found
that loans with final balloon payments are associated with much higher
rates of default, compared to loans with fully amortizing
payments.\613\ Furthermore, the balloon payment at the loans' maturity
date appears to trigger significant reborrowing activity.\614\
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\613\ CFPB Report on Supplemental Findings, at 31-32.
\614\ Id. at 32-33.
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The Small Business Review Panel Outline indicated that the Bureau
was considering whether the alternative requirements for covered short-
term loans should prohibit a lender from charging more than one finance
charge for the duration of the loan. The Bureau did not receive
feedback from the SERs regarding the specific requirement.\615\
Proposed Sec. 1041.7(b)(2) would differ from the Small Business Review
Panel Outline because it would require Section 7 loans with multiple
payments to have payments that are substantially equal in amount, fall
due within substantially equal intervals, and amortize completely
during the term of the loan.
---------------------------------------------------------------------------
\615\ Small Business Review Panel Report, at 22.
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The Bureau seeks comment on whether lenders would make covered
short-term loans with multiple payments under proposed Sec. 1041.7.
The Bureau also seeks comment on whether the requirement under proposed
Sec. 1041.7(b)(2) is appropriate and on whether any additional
requirements are appropriate with respect to multi-payment loans made
under proposed Sec. 1041.7. The Bureau also seeks comment on whether
any alternative approaches would protect consumers from the harms of
multi-payment, covered short-term loans with balloon payments. In
addition, the Bureau seeks comment on whether proposed Sec. 1041.7
should permit only single-payment covered short-term loans.
7(b)(3)
Proposed Sec. 1041.7(b)(3) would 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 to make an ability-to-repay determination under proposed
Sec. Sec. 1041.5 and 1041.6. Proposed comment 7(b)(3)-1 clarifies this
prohibition on a lender obtaining vehicle security on a Section 7 loan.
The Bureau is proposing this requirement because the Bureau is
concerned that some consumers obtaining a loan under proposed Sec.
1041.7 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 such consumers by putting their
vehicle at risk. The proposed requirement would protect consumers from
default harms, collateral harms from making unaffordable loan payments,
and reborrowing harms on covered short-term vehicle title loans. First,
the Bureau is particularly concerned about default that could result in
the loss of the consumer's vehicle. The Bureau has found sequences of
short-term vehicle title loans are more likely to end in default than
sequences of payday loans,\616\ and that 20 percent of loan sequences
of single-payment vehicle title loans result in repossession of the
consumer's vehicle.\617\ A consumer's vehicle may be essential for the
consumer to travel to and from work, school, and medical
appointments.\618\ The vehicle is likely also one of the consumer's
most valuable economic assets.\619\ Second, due to the potentially
serious consequences of defaulting on vehicle title loans, the Bureau
is concerned that consumers may take extraordinary measures to repay
vehicle title loans and, as a result, fail to meet other major
financial obligations or basic living expenses. Third, even with the
other protections against reborrowing in proposed Sec. 1041.7, the
[[Page 47977]]
Bureau is concerned that, due to the serious consequences of defaulting
on vehicle title loans, consumers may feel pressure to reborrow up to
twice on unaffordable vehicle title loans.\620\
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\616\ CFPB Single-Payment Vehicle Title Lending, at 11; CFPB
Report on Supplemental Findings, at 120.
\617\ CFPB Single-Payment Vehicle Title Lending, at 23.
\618\ 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 (``Thirty-five percent of [vehicle title
borrower] respondents report having no more than one working vehicle
in their household[.]); Fritzdixon, et al., at 1038 (finding that
nearly 15 percent of vehicle title borrowers did not have an
alternative means of getting to work).
\619\ Nathalie Martin & Ozymandias Adams, Grand Theft Auto
Loans: Repossession and Demographic Realities in Title Lending, 77
Mo. L. Rev. 41, 86 (2012). Interviews with 313 title loan borrowers
found that 50 percent are renters. The 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?la=en. An earlier study of Illinois
title loan borrowers found that ``homeownership rates for title loan
borrowers are far below the national average, with 80% of title loan
borrowers reporting that they rent their homes.'' See Nathalie
Martin & Ernesto Longa, High-Interest Loans and Class: Do Payday and
Title Loans Really Serve the Middle Class?, 24 Loy. Consumer L. Rev.
524, 550 (2012).
\620\ A single-payment short-term vehicle title loan is less
likely to be repaid after one loan than a payday loan. CFPB Single-
Payment Vehicle Title Lending, at 11; CFPB Report on Supplemental
Findings, at 120.
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Furthermore, the Bureau believes proposed Sec. 1041.7(b)(3) is
necessary to restrict lenders' incentives to make Section 7 loans with
unaffordable payments. Because loan sequences would be limited to a
maximum of three Section 7 loans under proposed Sec. 1041.7(c)(3) and
subject to principal reduction under Sec. 1041.7(b)(1), the Bureau
believes a lender that makes Section 7 loans would have a strong
incentive to underwrite effectively, even without having to comply with
the specific requirements in proposed Sec. Sec. 1041.5 and 1041.6.
However, with vehicle title loans, in which the lender obtains security
interest in an asset of significantly greater value than the principal
amount on the loan,\621\ the Bureau is concerned that a lender would
have much less incentive to evaluate the consumer's ability to repay.
The lender could repossess the vehicle if the loan were not repaid in
full, even after the first loan in the sequence.
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\621\ For short-term title loans, loan-to-value ratios have been
estimated to be between 25 and 40 percent. See discussion in part
II.B above.
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While Section 7 loans with vehicle security would be prohibited,
the Bureau notes that there would be alternatives available to
consumers and lenders. Lenders could make covered short-term loans with
vehicle security that comply with the ability-to-repay requirements in
proposed Sec. Sec. 1041.5 and 1041.6. In addition, many lenders could
offer covered longer-term loans with vehicle security that comply with
the ability-to-repay requirements in proposed Sec. Sec. 1041.9 and
1041.10. Lenders may, in fact, be able to recoup the costs of an
ability-to-repay determination more easily for a covered longer-term
loan than for a covered short-term loan of comparable amount.
Furthermore, in most States that permit short-term vehicle title loans,
payday lending is also permitted.\622\ Accordingly, lenders could offer
Section 7 loans if they decide such an alternative (including
satisfying additional State licensing requirements where applicable) is
advantageous.
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\622\ See part II.B.
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The Bureau included this requirement in the Small Business Review
Panel Outline. During the SBREFA process, the Bureau received feedback
from a SER that is a vehicle title lender questioning the need for this
requirement and urging the Bureau to consider permitting vehicle title
loans to be made under the alternative requirements for covered short-
term loans. The Bureau has considered this feedback but, as described
above, the Bureau remains concerned that the harms from unaffordable
payments on covered short-term loans with vehicle security may be
especially severe for consumers. In light of these concerns, the Bureau
believes it is appropriate to prohibit lenders, as a condition of
making covered short-term loans under the conditional exemption in
proposed Sec. 1041.7, from obtaining vehicle security.
The Bureau seeks comment on the protective benefits of this
proposed prohibition. The Bureau also seeks comment on whether there
are alternative approaches that could allow vehicle title lending under
the proposed conditional exemption for certain covered short-term loans
and still provide strong protections against the harms that can result
to consumers who lack the ability to repay their loans, including
default and potential loss of the consumer's vehicle, collateral harms
from making unaffordable loan payments, and reborrowing.
7(b)(4)
Proposed Sec. 1041.7(b)(4) would provide that, as a requirement 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
clarifies this prohibition on a lender structuring a Section 7 loan as
an open-end loan.
The Bureau is 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 reborrow serially on a single Section 7 loan structured as an
open-end loan. These consumers would not receive the important
protections in proposed Sec. 1041.7, including the ability to
gradually reduce their debt burden over the course of a sequence of
three Section 7 loans. The Bureau also believes 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 Small Business Review Panel Outline did not include this
requirement as part of the proposed alternative requirements for
covered short-term loans. Based on further consideration, the Bureau
believes this requirement is necessary for the reasons described above.
The Bureau seeks comment on whether proposed Sec. 1041.7 should
include this requirement and whether lenders, in the absence of this
requirement, would make covered short-term loans under proposed Sec.
1041.7 that are structured as open-end loans.
7(c) Borrowing History Requirements
Proposed Sec. 1041.7(c) would require the lender to determine that
the borrowing history requirements under proposed Sec. 1041.7(c) are
satisfied before making a Section 7 loan.
In conjunction with the other requirements set forth in proposed
Sec. 1041.7, the borrowing history requirements under proposed Sec.
1041.7(c) are intended to prevent consumers from falling into long-term
cycles of reborrowing and diminish the likelihood that consumers would
experience harms during shorter loan sequences.
7(c)(1)
Proposed Sec. 1041.7(c)(1) would require the lender to examine the
consumer's borrowing history to ensure that it does not make a covered
short-term loan under proposed Sec. 1041.7 when certain types of
covered loans are outstanding. Specifically, it would provide that, as
a requirement of making a covered short-term loan under proposed Sec.
1041.7, the lender must determine that the consumer does not have a
covered loan outstanding made under proposed Sec. 1041.5, proposed
Sec. 1041.7, or proposed Sec. 1041.9, not including a loan made under
proposed Sec. 1041.7 that the same lender seeks to roll over.
Proposed comment 7(c)(1)-1 clarifies the meaning of this
restriction and provides a cross-reference to the definition of
outstanding loan in proposed Sec. 1041.2(a)(15). Proposed comment
7(c)(1)-2 explains that the restriction in proposed Sec. 1041.7(c)(1)
does not apply to an outstanding loan made by the same lender or an
affiliate under proposed Sec. 1041.7 that is being rolled over.
The Bureau is proposing Sec. 1041.7(c)(1) because it is concerned
that consumers who have a covered loan outstanding made under proposed
Sec. 1041.5, proposed Sec. 1041.7, or proposed Sec. 1041.9 and seek
a new, concurrent covered short-term loan may be struggling to repay
the outstanding loan. These consumers may be seeking the new loan to
retire the outstanding loan or to cover major financial obligations or
basic living expenses that they cannot afford if they make one or
[[Page 47978]]
more payments on the outstanding loan.\623\ In the absence of an
ability-to-repay determination under proposed Sec. Sec. 1041.5 and
1041.6, however, the lender would not determine whether the new loan
would cause the consumer to fall deeper into a financial hole and
suffer additional reborrowing, default, or collateral harms from making
unaffordable loan payments. Accordingly, the Bureau believes that
making a loan without an ability-to-repay determination under proposed
Sec. 1041.7 would be inappropriate given the borrower's circumstances.
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\623\ A consumer also could be seeking a concurrent loan because
State laws limit the amount of principal that may be borrowed. Thus,
for some borrowers the same needs that triggered the decision to
take out the first loan may be triggering the decision to seek the
concurrent loan.
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The Bureau has addressed comparable concerns about concurrent
outstanding loans in the context of covered short-term loans made under
proposed Sec. Sec. 1041.5 and 1041.6, in two ways. First, the lender
would be required to obtain information about current debt obligations
(a subset of major financial obligations) under proposed Sec.
1041.5(c) and to account for it as part of its ability-to-repay
determination for any new loan. Second, a new, concurrent loan would be
considered the second loan in the loan sequence of consecutive covered
short-term loans and thereby would trigger the presumption of
unaffordability for a covered short-term loan under proposed Sec.
1041.6(b)(1), unless the exception under proposed Sec. 1041.6(b)(2)
applies. Covered short-term loans made under proposed Sec. 1041.7
would not have these means of accounting for the outstanding debt. As a
result, the Bureau believes the requirement under proposed Sec.
1041.7(c)(1) would ensure that consumers, who already have a covered
loan outstanding made under Sec. 1041.5, Sec. 1041.7, or Sec.
1041.9, would not increase their total debt burden and suffer
additional harms from unaffordable loan payments on a new loan under
proposed Sec. 1041.7.
One outside study examined a dataset with millions of payday loans
and found that approximately 15 to 25 percent of these loans are taken
out while another loan is outstanding.\624\ The Bureau believes that
this finding indicates that concurrent borrowing occurs frequently
enough to warrant concern and that, without this proposed requirement,
consumers could routinely take out concurrent covered short-term loans
not subject to the proposed ability-to-repay determination and suffer
harms as a result.
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\624\ nonPrime101, Report 7-A: How Persistent Is the Borrower-
Lender Relationship in Payday Lending 17-23 (2015), available at
https://www.nonprime101.com/data-findings/.
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For the proposed alternative set of requirements for covered short-
term loans, the Small Business Review Panel Outline required that the
consumer have no covered loans outstanding.\625\ The Bureau received
little feedback from the SERs or other industry stakeholders on this
provision during the SBREFA process and general outreach. The Bureau
notes that proposed Sec. 1041.7(c)(1) differs from the Small Business
Review Panel Outline because it would not apply to outstanding covered
longer-term loans made under proposed Sec. 1041.11 and Sec. 1041.12.
Upon further consideration, the Bureau believes that it is unlikely
that consumers would move from one of those loans to a short-term
alternative loan under proposed Sec. 1041.7 in the first
instance.\626\ In contrast, the Bureau believes that it is important to
apply this proposed requirement to covered loans subjected to the
ability to repay requirements in proposed Sec. Sec. 1041.5 and 1041.6
and proposed Sec. Sec. 1041.9 and 1041.10 to ensure that lenders do
not use combinations of different kinds of loans to try to evade the
safeguards against loans with unaffordable payments in proposed
Sec. Sec. 1041.6 and 1041.10.
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\625\ Small Business Review Panel Report, at 432.
\626\ The loans include various protections tied to loan
duration, cost or other loan terms, or portfolio performance, and
would not be as limited in amount and duration as loans under Sec.
1041.7. The Bureau believes that there would be little incentive for
consumers or lenders to move across loan products in this way, and
information on such loans would be less readily available in any
event under proposed Sec. Sec. 1041.11 and 1041.12.
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The Bureau seeks comment on whether the requirement under proposed
Sec. 1041.7(c)(1) is appropriate. The Bureau also seeks comment on
whether the requirement under proposed Sec. 1041.7(c)(1) should apply
to covered loans outstanding made under proposed Sec. 1041.11 or Sec.
1041.12. The Bureau further seeks comment on whether there are
alternative approaches to the proposed requirement that would still
protect consumers against the potential harms from taking concurrent
loans.
7(c)(2)
Proposed Sec. 1041.7(c)(2) would require that, prior to making a
covered short-term loan under Sec. 1041.7, the lender determine that
the consumer has not had in the past 30 days an outstanding loan that
was either a covered short-term loan (as defined in Sec. 1041.2(a)(6))
made under proposed Sec. 1041.5 or a covered longer-term balloon-
payment loan (as defined in Sec. 1041.2(a)(7)) made under proposed
Sec. 1041.9. The requirement under proposed Sec. 1041.7(c)(2) would
prevent 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
explains 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 provides an
illustrative example.
Much as with proposed Sec. 1041.7(c)(1) as discussed above,
proposed Sec. 1041.7(c)(2) would protect consumers, who lack the
ability to repay a current or recent covered short-term or balloon-
payment loan, from the harms of a covered short-term loan made without
an ability-to-repay determination under proposed Sec. Sec. 1041.5 and
1041.6. As explained in Market Concerns--Short-Term Loans, the Bureau
believes that such reborrowing frequently reflects the adverse
budgetary effects of the prior loan and the unaffordability of the new
loan. Indeed, for that reason, the Bureau is proposing to create a
presumption of unaffordability for a covered short-term loans subject
to the ability-to-repay requirements in proposed Sec. Sec. 1041.5 and
1041.6. This presumption would be undermined if consumers, who would be
precluded from reborrowing by the presumption under proposed Sec.
1041.6, could simply transition to covered short-term loans made under
proposed Sec. 1041.7.
Moreover, 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 ability-to-pay
requirements under proposed Sec. Sec. 1041.5 and 1041.6 and features
carefully structured consumer protections. If lenders were permitted to
make a Section 7 loan shortly after making a covered short-term 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. As noted, proposed Sec. 1041.7(b)(1)(i) would
require that the first loan in a loan sequence of Section 7 loans have
a principal amount no greater than $500,
[[Page 47979]]
and proposed Sec. 1041.7(b)(1)(ii) and (iii) would impose principal
reduction requirements for additional Section 7 loans that are part of
the same loan sequence. If a consumer were permitted to transition from
a covered short-term or balloon-payment loan made under proposed Sec.
1041.5 to a covered short-term loan made under proposed Sec. 1041.7,
the principal reduction requirements under proposed Sec. 1041.7(b)(1)
would be undermined.
The Bureau also believes providing separate paths for covered
short-term loans that are made under the ability-to-repay framework in
proposed Sec. Sec. 1041.5 and 1041.6 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.
These two proposed frameworks would work in tandem to ensure that
lenders could not transition consumers back and forth between covered
short-term loans made under proposed Sec. 1041.5 and under proposed
Sec. 1041.7. Furthermore, with these proposed provisions in place,
consumers and lenders would have clear expectations of the types of
covered short-term loans that could be made if the consumer were to
reborrow.
The Bureau seeks comment on whether this requirement is
appropriate. The Bureau also seeks comment on whether there are
alternative approaches that would allow consumers to receive covered
short-term loans made under both proposed Sec. 1041.5 and proposed
Sec. 1041.7 in a loan sequence and still maintain the integrity of the
consumer protections under the two proposed sections.
7(c)(3)
Proposed Sec. 1041.7(c)(3) would provide that a lender cannot make
a covered short-term loan under Sec. 1041.7 if the loan would result
in the consumer having a loan sequence of more than three Section 7
loans made by any lender. Proposed comment 7(c)(3)-1 clarifies 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 and explains that loans that are rollovers count
toward the sequence limitation. Proposed comment 7(c)(3)-1 includes an
example.
The Bureau is proposing Sec. 1041.7(c)(3) for several reasons.
First, the limitation on the length of loan sequences is aimed at
preventing further harms from reborrowing. As discussed in the
Supplemental Findings on Payday Loans, Deposit Advance Products, and
Vehicle Title Loans, 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.\627\ Second, the Bureau believes that a three-loan
limit would be consistent with evidence presented in the Supplemental
Findings on Payday Loans, Deposit Advance Products, and Vehicle Title
Loans, noted above, that approximately 38 percent of new loan sequences
end by the third loan without default.\628\ Third, a three-loan limit
would work in tandem with the principal 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, a three-
loan limit would align with proposed Sec. 1041.6(f), which would
prohibit a lender from making another short-term covered loan after the
third loan in a sequence of covered short-term loans made under
proposed Sec. 1041.5. Fifth, the Bureau believes that a three-loan
limit would provide lenders with a strong incentive to evaluate the
consumer's ability to repay before making Section 7 loans, albeit
without complying with the specific ability-to-repay requirements in
proposed Sec. Sec. 1041.5 and 1041.6.
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\627\ Results calculated using data described in Chapter 5 of
the CFPB Report on Supplemental Findings.
\628\ See CFPB Report on Supplemental Findings, at 116-17.
---------------------------------------------------------------------------
The Small Business Review Panel Outline stated that the Bureau was
considering a proposal to limit the length of a loan sequence of
covered short-term loans made under the alternative requirements for
covered short-term loans. The Bureau received feedback during the
SBREFA process from small lenders that the sequence limitations would
significantly reduce their revenue. During the SBREFA process and the
Bureau's general outreach following the Bureau's release of the Small
Business Review Panel Outline, many lenders and other industry
stakeholders argued that the alternative requirements for covered
short-term loans presented in the Small Business Review Panel Outline
did not provide sufficient flexibility. As noted above, a group of SERs
submitted a report projecting significantly lower revenue and profits
for small lenders if they originated loans solely under the alternative
approach. The Small Business Review Panel Report recommended that the
Bureau request comment on whether permitting more than three loans
under these requirements would enable the Bureau to satisfy its stated
objectives for this rulemaking while reducing the revenue impact on
small entities making covered short-term loans.\629\
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\629\ Small Business Review Panel Report, at 32.
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The Bureau seeks comment on whether the requirement under proposed
Sec. 1041.7(c)(3) is appropriate and also whether three covered short-
term loans is the appropriate number for the limitation on the length
of a loan sequence under proposed Sec. 1041.7(c)(3). The Bureau
specifically seeks comment on whether, given the principal reduction
requirement for the second and third loans made under proposed Sec.
1041.7, a four-loan sequence limit, with a 25 percent step down for
each loan would be more affordable for consumers than loans made under
a three-loan limit with a 33 percent step down. Moreover, consistent
with the Small Business Review Panel recommendation, the Bureau seeks
comment on whether permitting a loan sequence of more than three
Section 7 loans would enable the Bureau to satisfy its stated
objectives for the proposed rulemaking while reducing the impact on
small entities making covered short-term loans.
7(c)(4)
Proposed Sec. 1041.7(c)(4) would require that a covered short-term
loan made under proposed Sec. 1041.7 not result in the consumer having
more than six covered short-term loans outstanding during any
consecutive 12-month period (also referred to as the ``Section 7 loan
limit'') or having covered short-term loans outstanding for an
aggregate period of more than 90 days during any consecutive 12-month
period (also referred to as the ``Section 7 indebtedness limit''). The
lender would have to determine whether any covered short-term loans
were outstanding during the consecutive 12-month period. If a consumer
obtained a covered short-term loan prior to the consecutive 12-month
period and was obligated on the loan during part of the consecutive 12-
month period, this loan and the time in which it was outstanding during
the consecutive 12-month period would count toward the Section 7 loan
and Section 7 indebtedness limits.
Proposed comment 7(c)(4)-1 explains the meaning of consecutive 12-
month period as used in proposed Sec. 1041.7(c)(4). The proposed
comment clarifies that a consecutive 12-month period begins on the date
that is 12 months prior to the proposed contractual due date of the new
Section 7 loan and ends on the proposed contractual due date. Proposed
[[Page 47980]]
comment 7(c)(4)-1 explains 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. Proposed comment 7(c)(4)-1 also provides an example.
Under proposed Sec. 1041.7(c)(4), the lender would have to count
the proposed new loan toward the Section 7 loan limit and count the
anticipated contractual duration of the new loan toward the Section 7
indebtedness limit. 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.
As a general matter, the Bureau is concerned about consumers'
frequent use of covered short-term loans made under proposed Sec.
1041.7 for which lenders are not required to determine consumers'
ability to repay. The frequent use of covered short-term loans that do
not require an ability-to-repay determination may be a signal that
consumers are struggling to repay such loans without reborrowing. For
purposes of determining whether the making of a loan would satisfy the
Section 7 loan and Section 7 indebtedness limits under proposed Sec.
1041.7(c)(4), the lender would also have 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 consumer's decision to seek a Section 7 loan, after
previously obtaining a covered short-term loan based on an ability-to-
repay determination, suggests that the consumer may now lack the
ability to repay the loan and that an earlier ability-to-repay
determination may not have fully captured this particular consumer's
expenses or obligations. Under proposed Sec. 1041.7(c)(4), consumers
could receive up to six Section 7 loans and accrue up to 90 days of
indebtedness on Section 7 loans, assuming the consumer did not also
have any covered short-term loans made under proposed Sec. 1041.5
during the same time period. Because the duration of covered short-term
loans are typically tied to how frequently a consumer receives income,
the Bureau believes that the two overlapping proposed requirements are
necessary to provide more complete protections for consumers.
The Bureau seeks comment on whether the number of and period of
indebtedness on covered short-term loans made under proposed Sec.
1041.5 should count toward the Section 7 loan and Section 7
indebtedness limits, respectively. The Bureau also seeks comment on
whether there are alternative approaches that would address the
Bureau's concerns about a high number of and long aggregate period of
indebtedness on covered short-term loans made without the ability-to-
repay determination under proposed Sec. Sec. 1041.5 and 1041.6. The
Bureau also seeks comment on whether proposed Sec. 1041.7(c)(4) should
count loans with a term that partly fell in the 12-month period toward
the Section 7 loan and Section 7 indebtedness limits or alternatively
should count only covered short-term loans that were consummated during
the consecutive 12-month period toward the Section 7 loan and Section 7
indebtedness limits.
7(c)(4)(i)
Proposed Sec. 1041.7(c)(4)(i) would require that a covered short-
term loan made under proposed Sec. 1041.7 not result in the consumer
having more than six covered short-term loans outstanding during any
consecutive 12-month period. This proposed requirement would impose a
limit on the total number of Section 7 loans during a consecutive 12-
month period.
Proposed comment 7(c)(4)(i)-1 explains certain aspects of proposed
Sec. 1041.7(c)(4)(i) relating to the Section 7 loan limit. Proposed
comment 7(c)(4)(i)-1 clarifies 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 count toward the Section 7 loan limit. Proposed comment
7(c)(4)(i)-1 also clarifies 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 Section 7 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
gives examples.
The Bureau believes 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 be exhibiting an
inability to repay such loans. If a consumer is seeking a seventh
covered short-term loan under proposed Sec. 1041.7 in a consecutive
12-month period, 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.\630\ Under these circumstances, the Bureau believes that the
lender should make an ability-to-repay determination in accordance with
proposed Sec. Sec. 1041.5 and 1041.6 before making additional covered
short-term loans and ensure that the payments on any subsequent loan
are affordable for the consumer. If the consumer were found to be
ineligible for a covered short-term loan following the ability-to-repay
determination, this would suggest that the Section 7 loan limit was
having its intended effect and that the consumer would not be able to
afford another Section 7 loan.
---------------------------------------------------------------------------
\630\ Market Concerns--Short-Term Loans; Levy & Sledge, at 12.
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The specific limit of six Section 7 loans in a consecutive twelve-
month period in proposed Sec. 1041.7(c)(4)(i) is also informed by the
decisions of Federal prudential regulators and two States that have
directly or indirectly set limits on the total number of certain
covered short-term loans a consumer can obtain during a prescribed time
period. As described in part II.B above, the FDIC and the OCC in late
2013 issued supervisory guidance on DAP (FDIC DAP Guidance and OCC DAP
Guidance, respectively).\631\ The OCC DAP Guidance and FDIC DAP
Guidance set the supervisory expectation that regulated banks require
each deposit advance to be repaid in full before the extension of a
subsequent advance, offer no more than one deposit advance loan per
monthly statement cycle, and impose a cooling-off period of at least
one monthly statement cycle after the repayment of a deposit
advance.\632\ Taken collectively, these guidelines established the
supervisory norm that institutions regulated by the FDIC or OCC should
make no more than six deposit advances per year to a customer.
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\631\ 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).
\632\ Id.
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Two States have also placed a cap on the number of covered short-
term loans a consumer can receive in a year. In 2010, Washington State
enacted an annual loan cap that restricts the number of loans a
consumer may receive from all lenders to a maximum of eight in a 12-
month period.\633\
[[Page 47981]]
Delaware implemented a cap of five loans in any 12-month period in
2013.\634\
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\633\ Wash. Rev. Code Sec. 31.45.073(4). The Bureau examined
the impacts of the Washington State statutory regime in Chapter 3,
Part B of the CFPB Report on Supplemental Findings.
\634\ Del. Code Ann. Tit. 5, Sec. 2235A(a)(1).
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The Bureau seeks comment on whether it is appropriate to establish
a Section 7 loan limit. The Bureau also seeks comment on whether six
covered short-term loans made under proposed Sec. 1041.7 is the
appropriate Section 7 loan limit or whether a smaller or larger number
should be considered by the Bureau. The Bureau also seeks comment on
the impact of the Section 7 loan limit on small entities.
7(c)(4)(ii)
Proposed Sec. 1041.7(c)(4)(ii) would require that a covered short-
term loan made under proposed Sec. 1041.7 not 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. This proposed
requirement would limit the consumer's aggregate period of indebtedness
on such loans during a consecutive 12-month period.
Proposed comment 7(c)(4)(ii)-1 clarifies certain aspects of
proposed Sec. 1041.7(c)(4)(ii) relating to the Section 7 indebtedness
limit. Proposed comment 7(c)(4)(ii)-1 explains that, in addition to the
new loan, the time period in which all covered short-term loans made
under either Sec. 1041.5 or Sec. 1041.7 were outstanding during the
consecutive 12-month period count toward the Section 7 indebtedness
limit. Proposed comment 7(c)(4)(ii)-1 also clarifies 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
Section 7 indebtedness limit even if proposed Sec. 1041.7(c)(4)(ii)
would prohibit the consumer from obtaining one or two subsequent loans
in the sequence. Proposed comment 7(c)(4)(ii)-2 gives examples.
The Bureau believes it is important to complement the proposed six-
loan limit with the proposed 90-day indebtedness limit in light of the
fact that loan durations may vary under proposed Sec. 1041.7. For the
typical two-week payday loan, the two thresholds would reach the same
result, since a limit of six-loans under proposed Sec. 1041.7 means
that the consumer can be 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 six-loan limit would mean that the consumer could be in debt
for 180 days or 270 days out of a 12-month period. This result 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 believes the proposed Section 7 indebtedness
limit is an important protection for these consumers. Consumers who
receive 30-day payday loans are more likely to live on fixed incomes,
typically Social Security.\635\ Fifty-eight percent of monthly
borrowers were identified as recipients of government benefits in the
Bureau's 2014 Data Point.\636\ These borrowers are particularly
vulnerable to default and collateral harms from making unaffordable
loan payments. The Bureau has 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.\637\ Furthermore, because public benefits are typically fixed
and do not vary from month to month,\638\ in contrast to wage income
that is often tied to the number of hours worked in a pay period, the
Bureau believes monthly borrowers are more likely than biweekly
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.
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\635\ 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 15, 19.
\636\ CFPB Data Point: Payday Lending, at 14.
\637\ The Bureau previously noted in April 2013 in the CFPB
White Paper 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 towards 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.
\638\ Id., at 19.
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The Bureau has 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 of time. 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.\639\ The Bureau also found that
approximately 20 percent of borrowers \640\ paid monthly averaged at
least one loan per pay period.
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\639\ CFPB Report on Supplemental Findings, at 131.
\640\ CFPB Report on Supplemental Findings, at 121.
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In light of these considerations, the Bureau believes 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 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, 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.\641\ Under these circumstances,
the Bureau believes that the lender should make an ability-to-repay
determination in accordance with proposed Sec. Sec. 1041.5 and 1041.6
before making additional covered short-term loans and ensure that the
payments on any subsequent loan are affordable for the consumer. If the
consumer were found to be ineligible for a covered short-term loan
following the ability-to-repay determination, this would suggest that
the Section 7 indebtedness limit was having its intended effect and
that the consumer would not be able to afford another Section 7 loan.
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\641\ Market Concerns--Short-Term Loans; Levy & Sledge, at 12.
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Proposed Sec. 1041.7(c)(4)(ii) is also consistent with the policy
choice embodied in the FDIC's 2005 supervisory guidance on payday
lending. The FDIC recommended limits on the total time of indebtedness
during a consecutive 12-month period.\642\ Among other guidelines, the
FDIC advised that:
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\642\ FDIC Financial Institution Letter FIL-14-2005, Guidelines
for Payday Lending, (Mar. 1, 2005), available at https://www.fdic.gov/news/news/financial/2005/fil1405a.html.
Depository institutions should 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. When
calculating the three-month period, institutions should consider the
customers' total use of payday loans at all lenders. When a customer
has
[[Page 47982]]
used payday loans more than three months in the past 12 months,
institutions should offer the customer, or refer the customer to, an
alternative longer-term credit product that more appropriately suits
the customer's needs. Whether or not an institution is able to
provide a customer alternative credit products, an extension of a
payday loan is not appropriate under such circumstances.\643\
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\643\ FDIC Financial Institution Letter FIL-14-2005, Guidelines
for Payday Lending, (Mar. 1, 2005), available at https://www.fdic.gov/news/news/financial/2005/fil1405a.html.
The Bureau seeks comment on whether it is appropriate to establish
a Section 7 indebtedness limit. The Bureau also seeks comment on
whether 90 days of Section 7 indebtedness is the appropriate period for
the Section 7 indebtedness limit or whether a shorter or longer period
of time should be considered by the Bureau. Furthermore, consistent
with the Small Business Review Panel recommendation, the Bureau seeks
comment on whether a period of indebtedness longer than 90 days per
consecutive 12-month period would permit the Bureau to fulfill its
objectives for the rulemaking while reducing the revenue impact on
small entities.\644\ The Bureau also seeks comment on the interplay
between the proposed definition of outstanding loan and the requirement
under proposed Sec. 1041.7(c)(4)(ii). In addition, the Bureau seeks
comment on whether contractual indebtedness should be the standard by
which a covered short-term loan's duration is measured for purposes of
the Section 7 indebtedness limit in proposed Sec. 1041.7(c)(4)(ii).
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\644\ See Small Business Review Panel Report, at 32.
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7(d) Determining Period Between Consecutive Covered Short-Term Loans
Made Under the Conditional Exemption
Under proposed Sec. 1041.7(d), if a lender or an affiliate makes a
non-covered bridge loan during the time any covered short-term loan
made by a lender or an affiliate under proposed Sec. 1041.7 is
outstanding and for 30 days thereafter, the lender or an affiliate must
modify its determination of loan sequence for the purpose of making a
subsequent Section 7 loan. Specifically, the lender or an affiliate
must not count the days during which the non-covered bridge loan is
outstanding in determining whether a subsequent Section 7 loan made by
the lender or an affiliate is part of the same loan sequence as the
prior Section 7 loan.
Proposed comment 7(d)-1 provides a cross-reference to proposed
Sec. 1041.2(a)(13) for the definition of non-covered bridge loan.
Proposed comment 7(d)-2 clarifies that proposed Sec. 1041.7(d)
provides for 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 provides an illustrative example.
The Bureau believes that proposed Sec. 1041.7(d) would 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 covered short-term loans under proposed Sec.
1041.7 and evade the principal stepdown requirements in proposed Sec.
1041.7(b)(1). In the absence of this proposed restriction, 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 by means of the principal reduction requirement in
proposed Sec. 1041.7(b)(1). Proposed Sec. 1041.7(d) parallels the
restriction in proposed Sec. 1041.6(h) applicable to covered short-
term loans made under proposed Sec. 1041.5.
The Bureau seeks comment on whether this proposed restriction is
appropriate. The Bureau also seeks 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.
7(e) Disclosures
Proposed Sec. 1041.7(e) would require a lender to provide
disclosures before making the first and third loan in a sequence of
Section 7 loans. Proposed comment 7(e)-1 clarifies the proposed
disclosure requirements.
The disclosures are designed to provide consumers with key
information about how the principal amounts and the number of loans in
a loan 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.\645\ The notices in proposed
Sec. 1041.7(e)(2)(i) and Sec. 1041.7(e)(2)(ii) would have to be
substantially similar to the model forms. Proposed Sec. 1041.7(e)
would require a lender to provide the notices required under proposed
Sec. 1041.7(e)(2)(i) and Sec. 1041.7(e)(2)(ii) before the
consummation of a loan. Proposed comment 7(e)-1 explains the proposed
disclosure requirements.
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\645\ See FMG Report, at 11-15, 40-41.
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The Bureau believes that the proposed disclosures would help inform
consumers of the features of Section 7 loans in such a manner as to
make the costs, benefits, and risks clear. The Bureau believes that the
proposed disclosures would, consistent with Dodd-Frank section 1032(a),
ensure that these costs, benefits, and risks are fully, accurately, and
effectively disclosed to consumers. In the absence of the proposed
disclosures, the Bureau is concerned that consumers are less likely to
appreciate the risk of taking a loan with mandated principal reductions
or understand the proposed restrictions on Section 7 loans that are
designed to protect consumers from the harms of unaffordable loan
payments.
The Bureau believes that it is important for consumers to receive
the proposed notices before they are contractually obligated on a
Section 7 loan. By receiving the proposed notices before consummation,
a consumer can make a more fully informed decision, with an awareness
of the features of a Section 7 loan, including specifically the limits
on taking additional Section 7 loans in the near future. The Bureau
believes that some consumers, when informed of the restrictions on
taking subsequent loans in a sequence of Section 7 loans, may opt not
to take the loan. If the proposed notices only had to be provided after
the loan has been consummated, however, consumers would be unable to
use this information in deciding whether to obtain a Section 7 loan.
The Bureau seeks comment on the appropriateness of the proposed
disclosures and whether they would effectively aid consumer
understanding of Section 7 loans. Furthermore, the Bureau seeks comment
on the specific elements in the proposed disclosures. The Bureau also
seeks comment on the costs and burdens on lenders to provide the
proposed disclosures to consumers.
7(e)(1) General Form of Disclosures
Proposed Sec. 1041.7(e)(1) would establish the form of disclosures
that would be provided under proposed Sec. 1041.7. The format
requirements generally parallel the format requirements for disclosures
related to payment transfers under proposed Sec. 1041.15, as discussed
below. Proposed Sec. 1041.7(e)(1)(i) would require that the
disclosures be clear and conspicuous. Proposed Sec. 1041.7(e)(1)(ii)
would require that the disclosures be in provided in writing or through
[[Page 47983]]
electronic delivery. Proposed Sec. 1041.7(e)(1)(iii) would require the
disclosures to be provided in retainable form. Proposed Sec.
1041.7(e)(1)(iv) would require the notices to be segregated from other
items and to contain only the information in proposed Sec.
1041.7(e)(2). Proposed Sec. 1041.7(e)(1)(v) would require electronic
notices to have machine readable text. Proposed Sec. 1041.7(e)(1)(vi)
would require the disclosures to be substantially similar to the model
forms for the notices required under Sec. 1041.7(e)(2)(i) and (ii).
7(e)(1)(i) Clear and Conspicuous
Proposed Sec. 1041.7(e)(1)(i) would provide that the disclosures
required by Sec. 1041.7 must be clear and conspicuous. The disclosures
may use commonly accepted abbreviations that would be readily
understandable by the consumer. Proposed comment 7(e)(1)(i)-1 clarifies
that disclosures are clear and conspicuous if they are readily
understandable and their location and type size are readily noticeable
to consumers. This clear and conspicuous standard is based on the
standard used in other consumer financial services laws and their
implementing regulations, including Regulation E Subpart B (Remittance
Transfers).\646\ Requiring that the disclosures be provided in a clear
and conspicuous manner would aid consumer understanding of the
information in the disclosure about the risks and restrictions on
obtaining a sequence of covered short-term loans under Sec. 1041.7,
consistent with the Bureau's authority under section 1032(a) of the
Dodd-Frank Act.
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\646\ Regulation E, 12 CFR 1005.31.
---------------------------------------------------------------------------
The Bureau seeks comment on this clear and conspicuous standard and
whether it is appropriate for the proposed disclosures.
7(e)(1)(ii) In Writing or Electronic Delivery
Proposed Sec. 1041.7(e)(1)(ii) would require disclosures mandated
by proposed Sec. 1041.7(e) to be provided in writing or electronic
delivery. The disclosures must be provided in a form that can be viewed
on paper or a screen. This requirement cannot be satisfied by being
provided orally or through a recorded message. Proposed comment
15(e)(1)(ii)-1 clarifies the meaning of this proposed requirement.
Proposed comment 7(e)(1)(ii)-2 explains that the disclosures required
by proposed Sec. 1041.7(e) may be provided without regard to the
Electronic Signatures in Global and National Commerce Act (E-Sign Act)
(15 U.S.C. 7001 et seq.).
The Bureau is proposing to allow electronic delivery because
electronic communications may be more convenient than paper
communications for some lenders and consumers. In particular for
Section 7 loans that are made online, requiring disclosures in paper
form could introduce delay and additional costs into the process of
making loans online, without providing appreciable improvements in
consumer understanding.
The Bureau seeks comment on the benefits and risks to consumers of
providing these disclosures through electronic delivery. The Bureau
also seeks comment on whether electronic delivery should only be
permitted for loans that are made online. Furthermore, the Bureau seeks
comment on whether electronic delivery should be subject to additional
requirements, including specific provisions of the E-Sign Act. The
Bureau seeks comment on whether lenders should be subject to consumer
consent requirements, similar to those in proposed Sec. 1041.15(a)(4),
when providing the disclosures electronically. The Bureau also seeks
comment on whether it is feasible and appropriate to provide the
disclosures by text message or mobile application. The Bureau also
seeks comment on situations in which consumers would be provided with a
paper notice. The Bureau specifically seeks comment on the burdens of
providing these notices through paper and the utility of paper notices
to consumers.
7(e)(1)(iii) Retainable
Proposed Sec. 1041.7(e)(1)(iii) would require disclosures mandated
by proposed Sec. 1041.7(e) to be provided in a retainable form.
Proposed comment 7(e)(1)(iii)-1 explains that electronic disclosures
are considered retainable if they are in a format that is capable of
being printed, saved, or emailed by the consumer.
The Bureau believes that retainable disclosures are important to
aid consumer understanding of the features and restrictions on
obtaining a Section 7 loan at the time the consumer seeks the loan and
as the consumer potentially progresses through a loan sequence.
Requiring that disclosures be provided in this retainable form is
consistent with the Bureau's authority under section 1032 of the Dodd-
Frank Act to prescribe rules to ensure that the features of a product
over the term of the product are fully, accurate and effectively
disclosed in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product. With retainable
disclosures, consumers can review their content following the
consummation of a Section 7 loan and during the course of a sequence of
multiple Section 7 loans.
The Bureau seeks comment on whether to allow for an exception to
the requirement that notices be retainable for text messages and
messages within mobile applications and whether other requirements
should be placed on electronic delivery methods, such as a requirement
that the URL link stay active for a certain period of time or a short
notice requirement similar to that required in proposed Sec.
1041.15(c) and (e). The Bureau also seeks comment on whether the
notices should warn consumers that they should save or print the full
notice given that the URL link will not be maintained indefinitely.
7(e)(1)(iv) Segregation Requirements for Notices
Proposed Sec. 1041.7(e)(1)(iv) would require written, non-
electronic notices provided under proposed Sec. 1041.7(e) to be
segregated from all other written materials and to contain only the
information required by proposed Sec. 1041.7(e), other than
information necessary for product identification and branding. Proposed
Sec. 1041.7(e)(1)(iv) would require that electronic notices not have
any additional content displayed above or below the content required by
proposed Sec. 1041.7(e), other than information necessary for product
identification, branding, and navigation. Lenders would not be allowed
to include additional substantive information in the notice. Proposed
comment 7(e)(1)(iv)-1 explains how segregated additional content can be
provided to a consumer.
In order to increase the likelihood that consumers would notice and
read the written and electronic disclosures required by proposed Sec.
1041.7(e), the Bureau is proposing that the notices be provided in a
stand-alone format that is segregated from other lender communications.
This requirement would ensure that the disclosure contents are
effectively disclosed to consumers, consistent with the Bureau's
authority under section 1032 of the Dodd-Frank Act. The Bureau believes
that the addition of other items or the attachment of other documents
could dilute the informational value of the required content by
distracting consumers or overwhelming them with extraneous information.
The Bureau seeks comment on the proposed segregation requirements
for notices, including whether they provide enough specificity. The
Bureau also seeks comment on whether and how lenders currently
segregate separate
[[Page 47984]]
disclosures required under Federal or State law.
7(e)(1)(v) Machine Readable Text in Notices Provided Through Electronic
Delivery
Proposed Sec. 1041.7(e)(1)(v) would require, if provided through
electronic delivery, that the notices required by paragraphs (e)(2)(i)
and (ii) must be in machine readable text that is accessible via both
Web browsers and screen readers. Graphical representations of textual
content cannot be accessed by assistive technology used by the blind
and visually impaired. The Bureau believes that providing the
electronically-delivered disclosures with machine readable text, rather
than as a graphic image file, would help ensure that consumers with a
variety of electronic devices and consumers that utilize screen
readers, such as consumers with disabilities, can access the disclosure
information.
The Bureau seeks comment on this requirement, including its
benefits to consumers, the burden it would impose on lenders, and on
how lenders currently format content delivered through a Web page.
7(e)(1)(vi) Model Forms
Proposed Sec. 1041.7(e)(3) would require the notices under
proposed Sec. 1041.7(e)(2) to be substantially similar to the proposed
Model Forms A-1 and A-2 in appendix A. Proposed comment 7(e)(1)(vi)-1
explains 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.
The Bureau seeks comment on the content and form of the proposed
Model Forms A-1 and A-2 in appendix A.
7(e)(1)(vi)(A) First Loan Notice
Proposed Sec. 1041.7(e)(2)(i) would require the notice under
proposed Sec. 1041.7(e)(2)(i) to be substantially similar to the
proposed Model Form A-1 in appendix A.
Proposed Model Form A-1 was tested in two rounds.\647\ In Round 1,
nearly all participants understood that this notice sought to inform
them that subsequent Section 7 loans would have to be smaller than the
first loan. For Round 2, the ``30 days'' language was rephrased and the
``loan date'' column in the table and the two line items for consumer
initials were removed. Round 2 had results similar to Round 1.
Participants understood the table listing maximum loan amounts and
recognized that the notice sought to inform them that subsequent
Section 7 loans would have to be smaller. Proposed Model Form A-1 is
the notice tested in Round 2.
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\647\ See FMG Report, at 11-14, 40-41.
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7(e)(1)(vi)(B) Third Loan Notice
Proposed Sec. 1041.7(e)(2)(ii) would require the notice under
proposed Sec. 1041.7(e)(2)(ii) to be substantially similar to the
proposed Model Form A-2 in appendix A.
Proposed Model Form A-2 was tested in one round.\648\ The majority
of participants understood that they would not be allowed to take a
fourth Section 7 loan for 30 days after the third Section 7 loan was
repaid. Proposed Model Form A-2 is largely identical to the notice
tested in Round 1 but has a few important differences. The prohibition
on subsequent loan statement now refers to ``a similar loan'' instead
of a ``loan like this one'' and ``at least 30 days'' instead of just
``30 days.'' It also no longer has the two line items for consumer
initials.
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\648\ See FMG Report, at 14-15.
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7(e)(1)(vii) Foreign Language Disclosures
Proposed Sec. 1041.7(e)(1)(vii) would allow lenders to provide the
disclosures 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.
The Bureau believes that, if a lender offers or services covered
loans to a group of consumers in a foreign language, the lender should,
at least, be allowed to provide disclosures that would be required
under proposed Sec. 1041.7(e) to those consumers in that language, so
long as the lender also makes an English-language version available
upon request from the consumer. This option would allow lenders to more
effectively inform consumers who have limited or no proficiency in
English of the risks of and restrictions on taking Section 7 loans.
The Bureau seeks comment in general on this foreign language
requirement, including whether lenders should be required to obtain
written consumer consent before providing the disclosures in proposed
Sec. 1041.7(e) in a language other than English and whether lenders
should be required to provide the disclosure in English along with the
foreign language disclosure. The Bureau also seeks comment on whether
there are any circumstances in which lenders should be required to
provide the disclosures in a foreign language and, if so, what
circumstance should trigger such a requirement.
7(e)(2) Notice Requirements
Proposed Sec. 1041.7(e)(2) would require a lender to provide
notices to a consumer before making a first and third loan in a
sequence of Section 7 loans. Proposed Sec. 1041.7(e)(2)(i) would
require a lender before making the first loan in a sequence of Section
7 loans to provide a notice that warns the consumer not to take the
loan if the consumer will be unable to repay the loan by the
contractual due date and informs the consumer of the Federal
restrictions on the maximum number of and maximum loan amount on
subsequent Section 7 loans in a sequence. Proposed Sec.
1041.7(e)(2)(ii) would require a lender before making the third loan in
a sequence of Section 7 loans to provide a notice that informs the
consumer that the consumer will not be able to take another similar
loan for at least 30 days. More generally, these proposed notices would
help consumers understand the availability of Section 7 loans in the
near future.
7(e)(2)(i) First Loan Notice
Proposed Sec. 1041.7(e)(2)(i) would require a lender before making
the first loan in a sequence of Section 7 loans to provide a notice
that warns the consumer of the risk of an unaffordable Section 7 loan
and informs the consumer of the Federal restrictions governing
subsequent Section 7 loans. Specifically, the proposed notice would
warn 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 inform 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 Section 7 loans. The proposed notice would have to contain
the identifying statement ``Notice of restrictions on future loans,''
using that phrase. The other language in the proposed notice would have
to be substantially similar to the language provided in proposed Model
Form A-1 in appendix A. Proposed comment 7(e)(2)(i)-1 explains the ``as
applicable'' standard for information and statements in the proposed
notice. It states that, under 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.
[[Page 47985]]
The Bureau believes the proposed notice would ensure that certain
features of Section 7 loan 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 believes that disclosing them is critical to ensuring that
consumers understand the restriction on the number of and principal
amount on subsequent loans in a sequence of Section 7 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 Section 7 loans.\649\ 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. Sec. 1041.5 and 1041.6.\650\ Since the notice under proposed
Sec. 1041.7(e)(2)(i) would be provided in retainable form, the Bureau
believes that the incremental informational value of providing the same
or similar notice before the consummation of the second loan in a
sequence of Section 7 loans would be limited.
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\649\ 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, at
11. 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.
\650\ FMG Report, at 9-11, 38-39.
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The Bureau seeks comment on the content of the notice under
proposed Sec. 1041.7(e)(2)(i) and whether the addition or deletion of
any items would aid consumer understanding of the risks of and the
restrictions on taking a Section 7 loan. The Bureau also seeks comment
on whether a lender should be required to provide the notice under
proposed Sec. 1041.7(e)(2)(i) before making a second loan in a
sequence of Section 7 loans. Furthermore, consistent with the Small
Business Review Panel recommendation, the Bureau seeks comment on ways
to streamline information in the proposed notice and on methods of
delivering the notice in a way that would reduce the burden on small
lenders.\651\
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\651\ Small Business Review Panel Report, at 32.
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7(e)(2)(ii) Third Loan Notice
Proposed Sec. 1041.7(e)(2)(ii) would require a lender before
making the third loan in a sequence of Section 7 loans to provide a
notice that informs a consumer of the restrictions on the new and
subsequent loans. Specifically, the proposed notice would state that
the new Section 7 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. 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 believes the proposed notice is necessary to ensure that
the restrictions on taking Section 7 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 aided consumer
understanding of the prohibition on taking a subsequent Section 7
loan.\652\
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\652\ 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, at 14-15. The notice under proposed
Sec. 1041.7(e)(2)(ii) was not tested in Round 2.
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The Bureau seeks comment on the informational benefits of the
proposed notice for the third loan in a sequence of Section 7 loans.
The Bureau seeks comment on the content of the notice under proposed
Sec. 1041.7(e)(2)(ii) and whether the addition or deletion of any
items would aid consumer understanding of the restrictions attached to
taking a Section 7 loan. Furthermore, consistent with the Small
Business Review Panel recommendation, the Bureau seeks comment on ways
to streamline information in the proposed notice and on methods of
delivering the notice in a way that would reduce the burden on small
lenders.\653\
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\653\ Small Business Review Panel Report, at 32.
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7(e)(3) Timing
Proposed Sec. 1041.7(e)(3) would require a lender to provide the
notices required under proposed Sec. 1041.7(e)(2)(i) and
1041.7(e)(2)(ii) before the consummation of a loan. Proposed comment
7(e)(3)-1 explains 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 clarifies that a lender would not
have to provide the notices to a consumer who merely inquires about a
Section 7 loan but does not complete an application for this type of
loan. Proposed comment 7(e)(3)-2 states that a lender must provide
electronic notices, to the extent permitted by Sec. 1041.7(e)(1)(ii),
to the consumer before a Section 7 loan is consummated. It also offers
an example of an electronic notice that would satisfy the timing
requirement.
The Bureau believes that it is important for consumers to receive
the proposed notices before they are contractually obligated on a
Section 7 loan. By receiving the proposed notices before consummation,
a consumer can make a more fully informed decision, with an awareness
of the restrictions on the current loan and on additional Section 7 or
similar loans in the near future. The Bureau believes that some
consumers, when informed of the restrictions on taking subsequent loans
in a sequence of Section 7 loans, may opt not to take the loan. If the
proposed notices were provided after the loan has been consummated,
however, consumers would be unable to use this information in deciding
whether to obtain a Section 7 loan.
The Bureau seeks comment on the timing requirement under proposed
Sec. 1041.7(e)(3) and specifically whether the notices under proposed
Sec. 1041.7(e) should be provided earlier or later in the process of a
consumer seeking and obtaining a Section 7 loan.
Subpart C--Longer-Term Loans
While Subpart B generally covers loans with a duration 45 days or
less because of the unique risks to consumers posed by loans of such
short duration, Subpart C addresses a subset of longer-term loans:
Specifically, loans which are high priced (i.e., with an all-
[[Page 47986]]
in cost of credit greater than 36 percent) and which are backed either
by a leveraged payment mechanism or by vehicle security. As discussed
above, the Bureau's focus on loans with a duration of 45 days or less
is driven by a concern that for the liquidity-constrained consumers who
find it necessary to seek such loans in the first place, such an
accelerated repayment period makes it particularly likely that payments
will exceed consumers' ability to repay. And when payments exceed a
consumer's ability to repay, the consumer is likely to suffer very
substantial harms, as described above. The Bureau observes that the
characteristics of the longer-term loans addressed in this Subpart C
also present a high risk that the loan payments will exceed the
consumer's ability to repay and, in addition, then exacerbate the harms
that consumers suffer when the payments are unaffordable. Accordingly,
in proposed Sec. 1041.8, the Bureau proposes to identify an unfair and
abusive act or practice with respect to the making of such covered
longer-term loans. In the Bureau's view, it appears to be both unfair
and abusive for a lender to make such a loan without reasonably
determining that the consumer has the ability to repay the loan. To
avoid engaging in this unfair and abusive act or practice, a lender
would have to reasonably determine that the consumer has the ability to
repay the loan.
Proposed Sec. Sec. 1041.9 and 1041.10 would establish a set of
requirements to prevent the unlawful practice by requiring the lender
to reasonably determine that the consumer has the ability to repay the
loan. The Bureau is proposing the ability-to-repay requirements under
its authority to prescribe rules identifying as unlawful unfair,
deceptive, or abusive acts or practices and in such rules to include
requirements for the purpose of preventing such acts or practices.\654\
Proposed Sec. Sec. 1041.11 and 1041.12 would rely on section
1022(b)(3) of the Dodd-Frank Act to exempt certain covered longer-term
loans from the ability-to-repay requirements in proposed Sec. Sec.
1041.9 and 1041.10, as well as the prohibition in Sec. 1041.8.
Accordingly, lenders seeking to make covered longer-term loans would
have the choice, on a case by case basis, either to follow proposed
Sec. Sec. 1041.9 and 1041.10, proposed Sec. 1041.11, or proposed
Sec. 1041.12.
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\654\ 12 U.S.C. 5531(b).
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The predicate for the proposed identification of an unfair and
abusive act or practice in proposed Sec. 1041.8--and thus for the
prevention requirements contained in proposed Sec. Sec. 1041.9 and
1041.10--is a set of preliminary findings with respect to the consumers
who use covered longer-term loans, and the impact on those consumers of
the practice of making such loans without assessing the consumers'
ability to repay. Those preliminary findings are set forth in the
discussion below, hereinafter referred to as Market Concerns--Longer-
Term Loans. After laying out these preliminary findings, the Bureau
sets forth its reasons for proposing to identify as unfair and abusive
the act or practice described in proposed Sec. 1041.8. The Bureau
seeks comment on all aspects of this subpart, including the
intersection of the proposed interventions with existing State, tribal,
and local laws and whether additional or alternative protections should
be considered to address the core harms discussed below.
Market Concerns--Longer-Term Loans
a. Overview
As discussed in part II.C, beginning in the 1990s, a number of
States created carve-outs from their usury laws to permit single-
payment payday loans at annualized rates of between 300 and 400
percent. In these States, such payday loans became the dominant lending
product marketed to consumers who are facing liquidity shortfalls and
have difficulty accessing the mainstream credit system.
More recently, especially with the advent of the internet, a number
of lenders--including online lenders purporting to operate outside of
the confines of State law--have introduced newer forms of liquidity
loans. These include ``hybrid payday loans,'' which are high-cost loans
with full repayment nominally due within a short period of time, but
where rollover occurs 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. These newer forms of
liquidity loans also include ``payday installment loans,'' which are
high-cost installment loans where each succeeding payment is timed to
coincide with the consumer's next inflow of cash and generally is
automatically deducted from the consumer's bank account as the cash is
received. Two States have expressly authorized payday installment loans
and in other States the laws leave room for such loans. In these
States, licensed storefront payday lenders have taken to making payday
installment loans as well. Similarly, a number of States authorize
vehicle title installment loans and in those States storefront title
lenders are also making vehicle title installment loans.
Additional new forms of liquidity loans have developed in order to
fall outside of the scope of existing regulatory regimes that applied
narrowly to loans with particular durations or loan features. For
example, some lenders developed high-cost, 92-day loans to avoid the
usury cap for loans made to members of the armed forces and their
dependents under the Military Lending Act, which previously applied to
certain closed-end payday loans with durations of 91 days or less.
Similarly, lenders have developed high-cost open-end credit products to
avoid coverage of State regulatory regimes that apply only to closed-
end loans.
Some payday installment loans and vehicle title loans include a
built-in balloon payment, typically as the final payment due following
a series of smaller (often interest-only) payments, requiring the
principal to be repaid in full at one time. Unsurprisingly, 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 reborrowing. But even fully amortizing payday
installment and vehicle installment loans, when made without regard to
the consumer's ability to repay, are as capable of producing
unaffordable payments as short-term loans and, as discussed below, can
produce very substantial harms when combined with high cost and
leveraged payment mechanisms or vehicle security.
The Bureau preliminarily believes that consumers are adversely
affected by the practice of making these loans without making a
reasonable determination that the borrowers obtaining the loans can
afford to repay the loan while paying for major financial obligations
and basic living expenses. Many lenders who make these loans have
developed business models, loan structures, and pricing to permit them
to make loans profitably even when very large shares of borrowers
default. The Bureau also is concerned that if the Bureau regulated only
covered short-term loans and did not also address longer term loans,
lenders would further accelerate their gravitation toward hybrid payday
loans, payday installment loans, and auto title installment loans,
thereby continuing to cause similar harms as those caused by covered
short-term loans.
[[Page 47987]]
As discussed more fully in the section-by-section analysis of
proposed Sec. 1041.2, the Bureau is proposing to define ``covered
longer-term loan'' to mean loans with a term greater than 45 days for
which the lender charges an all-in cost greater than 36 percent and
also takes access to the consumer's account or vehicle security. The
Bureau recognizes that, in addition to capturing payday installment
loans and vehicle title installment loans, this definition also will
cover some longer-term installment loans that are made on the basis of
an assessment of the consumer's ability to repay, and where, for
example, the lender obtains repayment from the borrower's account as a
convenience to the borrower as not as an alternative to careful
underwriting.\655\ The Bureau does not believe that the requirements
contained in proposed Sec. 1041.9, coupled with the exemptions
contained in proposed Sec. Sec. 1041.11 and 1042.12, will have a
substantial impact on the making of these loans.
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\655\ This is largely true, for example, of community banks and
credit unions and also of traditional finance companies, a fraction
of whose loans would be covered by the proposed rule. It is also
true of some emerging companies that are seeking to use new
technology to make affordable loans. The Bureau believes that the
rule would have a minimal effect on such lenders because they
already engage in substantial underwriting. The Bureau notes that
there may be other problematic practices in markets for covered
long-term loans that would not be addressed by this rulemaking and
is issuing a Request for Information concurrently with this Notice
of Proposed Rulemaking to gather information about any such
practices.
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Accordingly, this section focuses specifically on hybrid payday,
payday installment, and vehicle title installment loans--loans that are
not subject to a meaningful assessment of borrowers' ability to repay.
It reviews the available evidence with respect to the demographics of
consumers who use these loans, their reasons for doing so, and the
outcomes they experience. It also reviews the lender practices that
cause these outcomes. In brief, the Bureau preliminarily finds:
Lower-income, lower-savings consumers in financial
difficulty. While there is less research available about the consumers
who use these products as compared to the short-term products addressed
in subpart B, available information suggests that consumers who use
hybrid payday, payday installment, and vehicle title installment loans
also tend to come 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 short-term borrowers.
Ability-to-collect business models. Lenders have built
their business model on an ``ability to collect,'' rather than the
consumers' ability to repay the loans. Specifically, 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. Lenders rely heavily on pricing structures and on leverage over
the consumer's bank account or vehicle title to protect their own
interests even when loans prove unaffordable for consumers. This
leverage helps ensure that lenders continue receiving payments even
when the consumer is then left unable to meet her other obligations and
expenses.
Payment structures. At least with regard to loans that are
structured to include large one-time balloon payments, both costly
refinancing and increased defaults are a concern. In data from one
lender analyzed by the Bureau, about 60 percent of balloon-payment
installment loans result in default or refinancing.
Very high default rates. Borrowers experience very high
levels of delinquency and default--in some cases the default rate is
over 50 percent at the loan sequence level. Prior to reaching the point
of default, borrowers are exposed to a variety of harms that are
substantially increased in magnitude because of the leveraged payment
mechanism or vehicle security relative to similar loans without these
features. For example, delinquencies and defaults on loans with
leveraged payment mechanisms can lead to multiple NSF fees and multiple
lender returned item fees and late fees. And defaulting on a vehicle
title loan carries with it the risk of having the vehicle repossessed,
which not only leads to the loss of a valuable asset but can also
disrupt consumers' lives and put at risk their ability to remain
employed.
Reborrowing. The combination of leveraged payment
mechanism or vehicle title with an unaffordable payment can induce the
consumer to have to reborrow, when extraction of the unaffordable loan
payment leaves, or would leave, consumers with insufficient funds for
other expenses. This outcome is prevalent with longer-term loans that
include a balloon payment.
Consumers lose control of their finances. In addition to
the harms that result from default, lender use of leveraged payment
mechanisms can reduce borrowers' control over their own funds by
essentially prioritizing repayment of the loan over payment of the
borrower's other important obligations and expenses, which can result
in late fees under those obligations and other negative consequences,
such as cut-off of utilities. As a practical matter, borrowers' loss of
control of their own funds also may occur with vehicle title loans,
given the importance to consumers of protecting their vehicle
ownership.
Consumers do not understand the risks. There is strong
reason to believe that borrowers do not fully understand or anticipate
these impacts in deciding to take out these loans, including both the
extraordinarily high likelihood of default and the degree of collateral
damage that can occur in connection with unaffordable loans due to the
impact on their ability to maintain control over their own funds and
accounts and to prioritize their expenditures.
The following discussion reviews the evidence underlying each of
these preliminary findings.
b. Borrower Characteristics and Circumstances of Borrowing
Standalone data specifically about payday installment and vehicle
title installment borrowers is less robust than for borrowers of the
short-term products discussed in subpart B. However, 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
short-term borrowers.
1. Borrower Characteristics
As described in Market Concerns--Short-Term Loans, 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.\656\ 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 borrowers'
paydays or next deposits of income), the Bureau believes that the
characteristics and circumstances of payday installment borrowers are
likely to be
[[Page 47988]]
very similar to those of short-term payday borrowers. To the extent
there is data available limited to payday installment borrowers, that
data confirms this view.
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\656\ 2013 FDIC National Survey of Unbanked and Underbanked
Households, at Table D-12a, Who Borrows, Where They Borrow, and Why
at 35. See also Elliehausen, An analysis of Consumers' Use of Payday
Loans (61percent of borrowers have household income under $40,000);
Zinman, Restricting Consumer Credit Access: Household Survey
Evidence on Effects Around the Oregon Rate Cap (2008).
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For example, a study of over one million high-cost loans made by
four installment lenders, both storefront and online, reported median
borrower gross annual income of $35,057.\657\ 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 credit reporting agency found a median income of $30,000 and
an average Vantage Score of 523; each of these was essentially
identical as the levels for storefront payday borrowers and for online
payday borrowers.\658\
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\657\ Howard Beales & Anand Goel, Small Dollar Installment
Loans: An Empirical Analysis, at Table 1 (March 20, 2015), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581667.
\658\ NonPrime 101, Report 8, Can Storefront Payday Borrowers
Become Installment Loan Borrowers? Can Storefront Payday Lenders
Become Installment Lenders? at 5 (credit scores), 7 (incomes)
(December 2015).
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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 believes
the demographic data with respect to short-term payday borrowers can be
extrapolated to payday installment borrowers, the Bureau also believes
that the demographic data is likely similar as between short-term
vehicle title borrowers and vehicle title installment borrowers. As
discussed in Market Concerns--Short-Term Loans, vehicle-title borrowers
across all categories tend to be low- or moderate-income, with 56
percent having reported incomes below $30,000, and are
disproportionately racial and ethnic minorities and disproportionately
members of female-headed households.\659\
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\659\ 2013 FDIC National Survey of Unbanked and Underbanked
Households, at Table D-12a., Pew; Auto Title Loans: Market Practices
and Borrowers' Experiences; Fritzdixon, et al., at 1029-1030.
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2. Circumstances of Borrowing
Similar to the data availability regarding customer demographics,
there is less data available that focuses specifically on the
circumstances of borrowing for users of payday installment and vehicle
title installment loans relative to short-term products. In addition,
as discussed in Market Concerns--Short-term Loans, the data must be
approached with some caution given that studies that attempt to examine
why consumers took out liquidity loans or for what purpose they used
the loan proceeds face a number of challenges. Any survey that asks
about past behavior or events runs the risk of recall errors, and the
fungibility of money makes this question 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 say 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.\660\ Responses were
reported for ``very short term'' and ``short term'' credit; ``short
term'' referred to non-bank installment loans and vehicle title
loans.\661\ 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 that their general living expenses
are 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 income than
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.
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\660\ Rob Levy & Joshua Sledge, Ctr. for Fin. Servs. Innovation,
A Complex Portrait: An Examination of Small-Dollar Credit Consumers
(2012).
\661\ ``Very short term'' referred to payday, pawn, and deposit
advance products offered by depository institutions. Rob Levy &
Joshua Sledge, Ctr. for Fin. Servs. Innovation, A Complex Portrait:
An Examination of Small-Dollar Credit Consumers, at 4 (2012).
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c. Lender Practices
Many lenders making hybrid payday, payday installment, and auto
title installment loans have constructed business models that allow
them to profitably offer loans 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 rely heavily on
loan features and practices that result in consumers continuing to make
payments beyond the point at which they are affordable. Some of these
consumers may repay the entire loan at the expense of suffering adverse
consequences in their ability to keep up with other obligations or meet
basic living expenses. Others end up defaulting on their installment
loans at a point later than would otherwise be the case, thus allowing
the lenders to extract additional revenue. The features that make this
possible include the ability to withdraw payments directly from
borrowers' deposit account or source of income, and the leverage that
comes from the ability to repossess the borrower's means of
transportation to work and other activities. When these features are
combined with the high cost of the loans and, in some cases, a balloon
payment structure or the ability to recover additional money through
repossessing and selling borrowers' vehicles, there are lenders that
operate, presumably at a profit, even when borrowers are defaulting on
50 percent of loan sequences.
1. Failure to Assess ATR
As discussed part II.C, lenders that make payday installment and
longer-term vehicle title loans generally gather some basic information
about borrowers before making a loan. They normally collect income
information, although that in some cases is limited to be self-reported
or ``stated'' income. Payday installment lenders collect information to
ensure the borrower has a checking account, and vehicle title lenders
collect information about the vehicle that will provide the security
for the loan. Some lenders access 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 lent.
The primary purposes of this screening, however, is to avoid fraud
and other ``first payment defaults,'' not
[[Page 47989]]
to ensure that borrowers have the ability to make all the required
payments on the loans. These lenders generally do not obtain
information about the borrower's existing obligations or living
expenses and do not 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 features of these loans--leveraged payment mechanisms,
vehicle security, and high cost--turn the traditional model on its
head. These features significantly reduce lenders' interest in ensuring
that payments under an offered covered longer-term loan are within a
consumer's ability to repay.
Leveraged repayment mechanisms and vehicle security significantly
reduce lenders' interest in ensuring that payments under an offered
covered longer-term loan are within a consumer's ability to repay. With
these features, the lender's risk of default is reduced and delayed,
even if loan payments ultimately and significantly exceed the
consumer's ability to repay. The effect is especially strong when--as
is typically the case for payday installment loans--such a lender times
the loan payments so that they coincide with deposits of the consumer's
periodic income into the account, or has secured the ability to take
payments directly from the borrower's paycheck via wage assignment or
similar mechanism. In these cases, lenders can succeed in extracting
payments from the consumer's account even if the payments are not
affordable to the consumer. The lender's risk of default is reduced,
and the point at which default ultimately occurs, if ever, 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.
Vehicle security loans provide a lender with the ability to
repossess and sell a consumer's automobile, which often is essential
for a consumer to be able to work and earn income. Given the dire
consequences of repossession, a consumer is likely to prioritize loan
payments under an auto title loan over almost all other financial
obligations, even if it greatly exceeds the consumer's ability to
repay, making it likely that the lender will receive its payment.
Indeed, through exercise of its statutory functions, the Bureau is
aware of an auto title lender that based its lending decisions, not on
consumers' ability to repay, but in part on consumers' ``pride of
ownership'' in the vehicle, suggesting that vehicle security functioned
to make the consumer prioritize loan payment over other expenses even
if it was unaffordable to the consumer.
The high-cost feature of covered longer-term loans also greatly
reduces the lender's incentive to determine whether a loan payment is
within the consumer's ability to repay. When a loan has a high total
cost of credit, the total revenue to the lender, relative to the loan
principal, enables the lender to profit from a loan, even if the
consumer ultimately defaults on the loan. For example, for a $1,000,
12-month loan with a 300 percent interest rate and typical
amortization, a lender would typically have received $1,608 after only
six months. Moreover, even if defaulted loans are not themselves
profitable, lenders can weather such losses when the performing loans
are generating such high returns.
As a result, the lender has substantially less incentive to conduct
a careful analysis of whether the loan payment will exceed the
consumer's ability to repay over the term of the loan and ultimately
drive the consumer to default, so long as the consumer has enough
income that can be extracted from the consumer by means of a leveraged
payment mechanism or vehicle title.
2. Pricing structure
Because loan losses are so high in the absence of underwriting for
affordability, lenders structure these loans with very high financing
costs to ensure profitability. Lenders can thus earn very high returns
on the (sometimes minority of) loans that are repaid in full. They also
receive substantial amounts in the early months of a loan from many
consumers who do ultimately default. Most borrowers who default make
some payments first, and because the costs on these loans are so high
many of these borrowers actually pay back more than they initially
borrowed despite ultimately defaulting on the loan. As discussed in the
example above, for a $1,000, 12-month loan with a 300 percent interest
rate, a lender would typically have received $1,608 after only six
months.
3. Leveraged Payment Mechanisms and Vehicle Security
Lenders also rely heavily on mechanisms that increase their
``ability to collect'' these expensive payments even if the loan proves
ultimately unaffordable for the consumer. In particular, lenders'
ability to withdraw payments from borrowers' deposit accounts, and to
time those payments to borrowers' receipt of income, increases the
likelihood that borrowers will repay, regardless of whether a payment
is affordable.
As discussed in part II and in Market Concerns--Presentments,
payday installment lenders--particularly those who operate online--are
often extremely aggressive in the ways in which they obtain
authorization to withdraw funds from consumers' accounts at
origination. Under EFTA lenders cannot condition credit on obtaining an
authorization from the consumer for ``preauthorized'' (recurring)
electronic fund transfers,\662\ but this limitation does not apply to
post-dated paper checks or one-time electronic fund transfers. Many
lenders often take authorization for multiple payment methods, such as
taking a post-dated check along with the consumer's debit card
information or for two forms of EFT. Lenders often make alternatives to
preauthorized EFTs significantly more burdensome, for instance by
requiring special origination procedures, increasing APRs, or delaying
the disbursement of loan proceeds if the consumer selects an
alternative rather than permitting preauthorized EFTs.\663\
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\662\ See 12 CFR 1005.10(e)(1).
\663\ 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.
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Moreover, as discussed in part II and in Market Concerns--
Presentments, it is often not feasible for consumers to prevent lenders
from collecting payment from their accounts once the authorizations are
granted. Revoking authorizations or instructing the consumer's
depository institution to stop payment can be logistically challenging
and involve substantial fees and may in any event prove unsuccessful.
Accordingly, in order to stop lenders from withdrawing (or attempting
to withdraw) funds, borrowers may have to cease depositing funds into
their account (and possibly close their accounts) or remove funds
quickly enough that lenders are unable to access them. Absent such
action, consumers may find themselves short of money for basic living
expenses or other
[[Page 47990]]
financial obligations, and may find themselves facing substantial
increases in account and loan fees if the lender's payment collection
attempts are paid through overdraft services or trigger returned
payments.
Similarly, the practical leverage that comes with a security
interest in the consumer's transportation, and the attendant threat of
repossession, can prompt consumers to prioritize vehicle title loans
above basic living expenses and other financial obligations. As
discussed above in part II.C, some lenders further increase this
leverage by installing devices on consumers' cars that allow the cars
to be shut off remotely in the event of non-payment. Particularly in
areas in which the consumer relies heavily on their car for
transportation to get to work, access health care, or conduct other
basic daily activities, the threat of repossession can be extremely
powerful. As discussed above in Part II.B, one or more lenders exceed
their maximum loan amount guidelines and consider a consumer's ``pride
of ownership,'' or vehicle's sentimental or use value to the borrower,
when assessing the amount of funds they will lend.
d. Patterns of Lending and Severity of Delinquency & Default Harms
The circumstances of the borrowers, the structure of the loans, and
the practices of the lenders together lead to dramatic negative
outcomes for many payday installment and vehicle title installment
borrowers. The Bureau is particularly concerned about the harms
associated with default, including vehicle repossession and the loss of
a deposit account; harms associated with reborrowing and refinancing,
especially for balloon-payment loans; harms associated with the ability
of lenders to directly withdraw funds from the deposit account; and
harms that flow from borrowers defaulting on other major obligations or
forgoing basic living expenses as a result of making unaffordable
payments on such loans.
1. Delinquency and Default
As discussed above, many borrowers, when faced with unaffordable
payments, will be late making loan payments and may ultimately cease
making payments altogether and default on their loans. The Bureau is
concerned that lenders' ability to withdraw funds from consumers'
accounts and to exercise their right to repossess consumers'
transportation in the case of vehicle title loans often cause consumers
to continue paying on unaffordable loans long past the point that the
consumers might otherwise cease making payments on the loan. Even with
these powerful mechanisms for extracting payments, however, a very
substantial number of borrowers eventually default on their non-
underwritten loans. Default leads to collections and, in the case of
vehicle title loans, often to repossession of the borrower's
vehicle.\664\
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\664\ The Bureau uses the term ``default'' to refer to borrowers
who do not repay their loans, or who repay only after the loan has
been charged off by the lender.
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While the Bureau is not aware of any data directly measuring the
number of late payments across the industry, the Bureau has analyzed
checking account data from 2011 and 2012 and identified borrowers who
took out loans from online lenders making high-cost loans that are
disbursed and repaid through the ACH system.\665\ These data
demonstrate high rates of overdrafts and returns for insufficient
funds. Over half of borrowers' deposit accounts had at least one
payment request that resulted in an overdraft or NSF fee. In either
case, the borrower would typically pay a fee to her financial
institution, and the median fee was $35. For borrowers who are charged
such a fee, the average total charge was $185, and 10 percent were
charged a total of at least $432. In addition, the consumer may also be
charged fees by the lender.
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\665\ CFPB Online Payday Loan Payments, at 12. This dataset
includes single-payment and installment loans, as well as notionally
single-payment loans that automatically renew, but it is not
possible to distinguish between these different types of loans and
derive separate results for each type.
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More data is available as to ultimate default rates. And even with
the priority provided by leveraged payment mechanisms and vehicle
title, an extremely high number of loans ultimately end in default.
Specifically, the Bureau has analyzed data on a number of different
payday installment loan products offered by seven non-depository
institutions. These unsecured installment loans typically carry triple-
digit APRs starting around 200 percent, with payment frequencies
generally tied to a borrower's payday or date on which benefits are
received and payment obtained through access to the consumer's checking
account. The lenders whose data the Bureau has studied typically verify
a borrower's identity, income, and bank account information. They may
also perform varying degrees of underwriting and obtain information
from a specialty credit reporting company, but as discussed above focus
primarily on screening out fraud and other first-payment defaults.
The overall loan level default rate across payday installment loan
products the Bureau is 24 percent. The default rate on loans originated
online is much higher, at 41 percent, while for loans originated
through storefronts that rate is 17 percent.\666\ Default rates are
higher at the sequence level. Many borrowers refinance their loans,
usually while taking out new cash. The Bureau also analyzed default
rates on sequences of loans, which include initial loans, refinancings,
and loans taken out within 30 days of the repayment of a prior loan.
The sequence default rate is 38 percent overall, 55 percent for loans
originated online, and 34 percent for loans originated in storefronts.
For loans originated through either channel, approximately 20 percent
of loans that defaulted had no payments made; for 80 percent of
defaults the lender was repaid at least in part before the borrower
defaulted.\667\
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\666\ Colorado's administrative data demonstrates that in 2013,
the number of loan defaults on payday installment loans, calculated
as a percent of the total number of borrowers, was 38 percent.
(State of Colorado, Department of Law, 2014 Deferred Deposit/Payday
Lenders Annual Report [hereinafter 2014 Deferred Deposit/Payday
Lenders Annual Report], available at http://coag.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/2014_ddl_ar_composite.pdf; Pew Charitable Trusts, Trial, Error, and
Success in Colorado's Payday Lending Reforms at 6 (Dec. 2014)
available at http://www.pewtrusts.org/~/media/assets/2014/12/
pew_co_payday_law_comparison_dec2014.pdf; Lauren Saunders, Colorado
Is No Model for a National Payday Rule, American Banker, (Dec. 10,
2014), available at http://www.nclc.org/images/pdf/high_cost_small_loans/ab-colorado-no-model-national-payday-rule.pdf.) Defaults per borrower increased in 2014 to 44 percent.
State of Colorado, Department of Law, 2014 Deferred Deposit/Payday
Lenders Annual Report.
\667\ An analysis by NonPrime 101 of online installment loans
also found loan-level default rates similar to those seen in the
data analyzed by the Bureau, even after excluding lenders with
extremely high default rates. NonPrime 101, Report 6, The CFPB Five
Percent Solution: Analysis of the Relationship of Payment-to-Income
Ratio to Defaults in Online Installment Loans (September 10, 2015).
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These defaults can cause not only direct harms to consumer with
regard to the payday installment loan itself, but also collateral
damage by way of the borrower's bank account. As discussed above,
default may come after a lender has made repeated attempts to collect
payments from the borrower's deposit account, such that a borrower not
only faces substantial increased fees from the lender and his or her
depository institution, but also may ultimately find it necessary to
close the account, or 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. In
the Bureau's analysis of checking account
[[Page 47991]]
data for borrowers who took out loans from online lenders thirty-six
percent of borrowers who experienced an unsuccessful attempt by an
online payday lender to collect a payment from their account
subsequently had their accounts closed involuntarily.\668\
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\668\ CFPB Online Payday Loan Payments, at 23.
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The Bureau also found very high rates of default on installment
vehicle title loans.\669\ In CFPB Report on Supplemental Findings, the
Bureau found that the default rate on these loans is 22 percent. When
measured at the sequence level, where a sequence includes initial
loans, refinancings, and loans that borrowers took out within 30 days
of repaying a prior loan, 31 percent of loan sequences ultimately led
to a default. The share of defaults where the borrower made no payments
prior to defaulting is higher on vehicle title loans, with 32 percent
of defaults having no payments made.
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\669\ For vehicle title loans, default is measured as the loan
being charged off and/or the vehicle being repossessed.
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Vehicle title lenders have secured the option, in most
circumstances, to repossess the vehicle upon default. In the data the
Bureau has analyzed, at both the loan and sequence level, approximately
35 percent of defaults led to repossession. That means that 11 percent
of loan sequences led to repossession. These rates of repossession are
similar to those reported by researchers who gathered data from State
regulators. They report a loan-level repossession rate in Idaho in 2011
of just under 10 percent, and a borrower-level default rate (similar to
a sequence-level rate) in Texas in 2012 of just under 8 percent.\670\
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\670\ Fritzdixon, et al. Vehicle title loans in Idaho are 30-day
single payment loans, but they can be structured to renew
automatically. Texas allows both 30-day single payment and
installment loans; the statistic on repossessions in Texas is for
all loans.
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Repossession can inflict great harm on borrowers. The loss of a
vehicle can disrupt people's lives and put at risk their ability to
remain employed. The potential impacts 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
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.\671\ More than one-third (35 percent) of
borrowers pledge the title to the only working vehicle in the household
(Pew 2015). 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.
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\671\ Id.; Pew Charitable Trusts, Auto Title Loans, Market
Practices and Borrower Experiences.
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Borrowers who default on all types of covered longer-term loans are
likely to be subject to collection efforts, except where vehicle
repossession yields sufficient money to cover the amount owed on the
loan. The Bureau has received complaints from borrowers of covered
longer-term loans that describe aggressive collections practices that
in some cases caused significant psychological and emotional stress and
put at risk the consumers' employment. These practices include frequent
and repeated phone calls, threats of legal action, repeated contacts
with consumers' family members and employers, and even--in some
instances--visits to consumers' homes and workplaces.
2. Reborrowing Spurred by Balloon Payment Loan Structures
In CFPB Report on Supplemental Findings, the Bureau analyzed
several aspects of refinancing and reborrowing behavior of borrowers
taking out vehicle title installment loans. For a longer-term loan with
a balloon payment 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 reborrowing and
refinancing was much more likely to occur around the time that the
balloon payment is due and consumers were less likely to take cash out
from such refinancings, suggesting that unaffordability of the balloon
payment is the primary or sole reason for the reborrowing or
refinancing.
Balloon payments were not only associated with a sharp uptick in
reborrowing, but also with increased incidence of default.
Specifically, about 60 percent of balloon-payment installment loans
resulted in refinancing, reborrowing, or default. In contrast, nearly
60 percent of comparable fully-amortizing installment loans were repaid
without refinancing or reborrowing. Moreover, the reborrowing often
only deepened the consumer's financial distress. 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.
Longer-term loans without balloon repayments also have substantial
rates of refinancing, but the dominant pattern appears to be somewhat
different than with regard to longer-term loans with balloon payments.
In case of longer-term loans without balloon payments, the Bureau's
research suggests that most borrowers are withdrawing substantial
amounts of cash at the time of the refinancing, and that their payment
history prior to the refinancing does not particularly evidence
distress.\672\ Accordingly, it appears that most refinances for such
products involve situations in which consumers are using longer-term
installment loans somewhat like a line of credit to take out additional
funds before paying back the original loan. This does not mean that the
products are ultimately affordable, however, since 38 percent of
longer-term loan sequences ultimately end in default.\673\ And in
individual cases there may still be situations in which consumers who
are in distress are pushed into refinancings as a way to forestall
default.
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\672\ CFPB Report on Supplemental Findings, at ch. 1.
\673\ CFPB Report on Supplemental Findings, at ch. 1.
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3. Collateral Harms From Making Unaffordable Payments
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 places control of the timing of
the payment with the lender, leading to the risk that the borrower's
remaining funds will be insufficient to make payments for other
obligations or to meet basic living expenses. Similarly, if a lender
has taken a security interest in a borrower's vehicle, the borrower is
likely to feel compelled to prioritize payments on the title loan over
other bills or crucial expenditures because of the leverage that the
threat of repossession gives to the lender. The resulting harms are
wide-ranging and, almost by definition, can be quite extreme, including
the loss of the consumer's housing, shut-off of utilities, and an
inability to provide basic requirements of life for the consumer and
any dependents. 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 a lender times the loan payment due dates to
coincide with the consumer's receipt of income,
[[Page 47992]]
which is typically the case with payday installment loans.
Furthermore, even if the consumer's account does not have
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 to meet her other obligations or basic living expenses. Thus,
at least certain types of covered long term loans carry with them a
high degree of risk that if the payment proves unaffordable the
consumer will still be forced to pay the loan and will incur penalties,
such as late fees or shut-off fees on other obligations, or face legal
action, such as eviction.
Similarly, with vehicle title loans, borrowers may feel compelled
to take extraordinary measures to avoid defaulting on the loans by
making a payment at the expense of their ability to meet other
obligations. The borrower may forgo paying other significant bills or
basic living expenses to avoid repossession of the vehicle.
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, both 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 loans means
that many borrowers do struggle to repay these loans, and it is
therefore reasonable to infer that many borrowers are suffering harms
from making unaffordable payments.
Wage assignments represent a particularly extreme form of a lender
taking 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.
e. Consumer Expectations and Understanding
The Bureau is concerned about these various negative consequences
for consumers from payday installment and vehicle title installment
loans because there is strong reason to believe that consumers do not
understand the high risk that such loans will prove to be unaffordable
or the likelihood of particular collateral consequences such as
substantial bank fees and risk of account closure.
As an initial matter, the Bureau believes that many consumers do
not understand that payday installment and vehicle title installment
lenders do not evaluate their ability to repay their loans and instead
have built a business model that tolerates default rates well in excess
of 30 percent in many cases. While the Bureau is unaware of any surveys
of borrowers 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. Consumers are highly
unlikely to understand the effects of leveraged payment mechanisms,
vehicle security, and high cost on lender incentives and on the
probability that loan payment will exceed consumers' ability to repay.
The Bureau believes that most borrowers are unlikely to take out a
loan that they expect to default on, and that the fact that at least
one in three sequences end in default strongly suggests that borrowers
do not understand how much risk they are exposing themselves to with
regard to such negative outcomes as default and loss of their vehicle,
having to forgo other major financial obligations or living expenses,
or reborrowing in connection with unaffordable loans.
Even if consumers did understand that companies offering payday
installment loans and vehicle title installment loans were largely
disinterested in their ability to repay, consumers would still be
handicapped in their ability to anticipate the risks associated with
these loans. As discussed above, borrowers taking out these loans are
often already in financial distress. Their long-term financial
condition is typically very poor, as evidenced by very low credit
scores. Many have had a recent unexpected expense, like a car repair,
or a drop in income, or are chronically having trouble making ends
meet.\674\
---------------------------------------------------------------------------
\674\ Levy & Sledge, at 12.
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As discussed above in Market Concerns--Short-Term Loans, consumers
in financial crisis tend be overly focused on their immediate problems
and not thinking about the future, even the near future. This
phenomenon is referred to as ``tunneling,'' evoking the tunnel-vision
decision making that consumers in these situations demonstrate.\675\
Even when not facing a crisis, research shows that consumers tend to
underestimate their near-term expenditures,\676\ and, when estimating
how much financial ``slack'' they will have in the future, discount
even the expenditures they do expect to incur.\677\ Finally, regardless
of their financial situation, research suggests consumers generally may
have unrealistic expectations about their future earnings, their future
expenses, and their ability to save money to repay future obligations.
Research documents that consumers in many contexts demonstrate this
``optimism bias.'' \678\ Consumers tend to underestimate that
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 the longer the length of time over which consumers are
projecting their income expenses. The payday installment loans and
vehicle title loans about which the Bureau is
[[Page 47993]]
concerned typically range in length from a few months to several years.
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\675\ Sendhil Mullainathan & Eldar Shafir, Scarcity: The New
Science of Having Less and How It Defines Our Lives (2014).
\676\ Gulden Ulkuman, Manoj Thomas & Vicki G. Morwitz, Will I
Spend More in 12 Months or a Year? The Effects of Ease of Estimation
and Confidence on Budget Estimates, 35 Journal of Consumer Research,
at 245-256 (2008); Johanna Peetz & Roger Buehler, Is the A Budget
Fallacy? The Role of Savings Goals in the Prediction of Personal
Spending, 35 Personality and Social Psychology Bulletin 1579 (2009);
Johanna Peetz & Roger Buehler, When Distance Pays Off: The Role of
Construal Level in Spending Predictions, 48 Journal of Experimental
Social Psychology 395 (2012).
\677\ Jonathan Z. Bermann, An T. K. Tran, John G. Lynch, Jr. &
Gal Zauberman, 2015 Expense Neglect in Forecasting Personal Finances
(2015).
\678\ The original work in the area of optimistic predictions
about the future is in the area of predicting how long it will to
complete certain tasks in the future. See, for example Daniel
Kahneman & Amos Tversky, Intuitive prediction: Biases and corrective
procedures, 12 TIMS Studies in Management Science, at 313-327
(1979); Roger Buehler, Roger, Dale Griffin & Michael Ross, Exploring
the Planning Fallacy: Why People Underestimate their Task Completion
Times, 67 Journal of Personality and Social Psychology, No. 3, at
366-381 (1994); Roger Buehler, Dale Griffin & Michael Ross, Inside
the planning fallacy: The causes and consequences of optimistic time
predictions (2002). In Thomas Gilovich, Dale Griffin & Daniel
Kahneman (Eds.), Heuristics and biases: The psychology of intuitive
judgment, at 250-270 (Cambridge, UK: Cambridge University Press).
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Finally, in addition to gaps in consumer expectations about the
likelihood that the loans will generally prove unaffordable, the Bureau
believes that consumers underestimate the potential damage from default
such as secondary fees, loss of vehicle or loss of account. For
instance, optimism bias may tend to cause consumers to underestimate
degree of harm that could occur if a loan proved unaffordable.
Moreover, the Bureau believes that many consumers do not appreciate the
degree to which leveraged payment mechanisms can increase the degree of
harm from unaffordable loans. As discussed further below in Market
Concerns--Payments, payment presentment practices in at least some
parts of the industry deviate wildly from other types of lenders and
businesses, and are therefore far more likely to trigger multiple NSF
and overdraft fees. The Bureau believes that consumers thus do not
recognize how much risk of secondary fees and account closure they are
taking on with such loans.
Section 1041.8 Identification of Abusive and Unfair Practice--Covered
Longer-Term Loans
As discussed above, in most consumer lending markets, it is
standard practice for lenders, before making loans, to assess whether
would-be borrowers have the ability to repay those loans. In certain
markets, Federal law requires this.\679\ The Bureau has not determined
whether, as a general rule, it is an unfair or abusive practice to make
a loan without making such a determination. Nor is the Bureau proposing
to resolve that question in this rulemaking.
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\679\ See, e.g., Dodd-Frank Act section 1411, codified at 15
U.S.C. 1639c(a)(1); CARD Act, 15 U.S.C. 1665e; Higher-Priced
Mortgage Loan Rule, 73 FR 44522 at 44543. The Office of the
Comptroller of the Currency has, in guidance, underscored the
importance of this concept as well. 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; OCC, Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Products, 78 FR 70624 (Nov. 26, 2010);
FDIC, Guidance on Supervisory Concerns and Expectations Regarding
Deposit Advance Products, 78 FR 70552 (Nov. 26, 2010).
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Rather, the focus of this subpart of the proposal is on a specific
set of loans that the Bureau has studied, as discussed in more detail
in part II.C and Market Concerns--Longer-Term Loans. Much as with the
short-term loans discussed in proposed Sec. 1041.4, above, the Bureau
believes that the structure and conditions of these longer-term loans
create severe risk to consumers where lenders fail to assess
applicants' ability to repay the loans. Specifically, the Bureau is
focused on non-underwritten loans that involve: (1) A structure that
puts the creditor in a preferred position over other obligations of the
consumer; and (2) a high cost. These structural features can take the
form of a ``leveraged payment mechanism'' (that is, an arrangement in
which the lender has the ability to extract loan payments directly from
the consumer's wages or from the consumer's bank account) or a form of
vehicle security that allows the lender to repossess the consumer's
automobile in the event of default. Sometimes the structures include
balloon payment features, which greatly increase the risk that
consumers will need to reborrow to meet other obligations.
Based on the evidence described in part II.C and in Market
Concerns--Longer-Term Loans, and pursuant to its authority under
section 1031(b) of the Dodd-Frank Act, the Bureau is proposing in Sec.
1041.8 to identify it as both an abusive and an unfair act or practice
for a lender to make such a loan (i.e., a covered longer-term loan)
without reasonably determining that the consumer has the ability to
repay the loan. ``Ability to repay'' in this context means that the
consumer has the ability to repay the loan over its life and according
to its terms without reborrowing and while meeting the consumer's major
financial obligations and basic living expenses.
As discussed above and further below, the Bureau is proposing to
identify this abusive and unfair practice based on its assessment of
the evidence regarding hybrid payday, payday installment, and vehicle
title installment loans, which generally are made without any genuine
attempt to assess the consumer's ability to repay over the life of the
loan. The Bureau again notes that its proposed definition for covered
longer-term loans would also include some loans made by other types of
lenders that engage in varying types of underwriting designed to assess
the consumer's repayment ability. The Bureau believes that the proposed
definition of covered longer-term loans is warranted to ensure that the
rule is not thwarted by superficial evolution in product structures or
descriptions. It also believes that adjusting to the proposed rule
would not be a heavy burden for such lenders.
The Bureau's preliminary findings with regard to abusiveness and
unfairness are discussed separately below. The Bureau is making these
preliminary findings based on the evidence discussed in part II.C and
Market Concerns--Longer-Term Loans.\680\
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\680\ Any references in this discussion to specific evidence are
not intended to suggest that the Bureau is relying only on such
specific evidence in making the preliminary findings regarding
abusiveness and unfairness.
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a. Abusiveness
Under Sec. 1031(d)(2)(A) and (B) of the Dodd-Frank Act, the Bureau
may find an act or practice to be abusive in connection with the
provision of a consumer financial product or service if it 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. When a lender structures a loan so that it meets
the definition of a covered longer-term loan, the loan's structure and
conditions greatly exacerbate the risks to the consumer of harm from
unaffordable loan payments compared to the risks to consumers from most
other types of loans, especially given the characteristics of the
consumers to whom such loans are marketed. Based on the evidence and
concerns described in part II.C and Market Concerns--Longer-Term Loans,
the Bureau believes it may be an abusive act or practice under both
section 1031(d)(2)(A) and (B) of the Dodd-Frank Act for a lender to
make such a loan, which is defined as a covered longer-term loan in
proposed Sec. 1041.3(b)(3), without first making a reasonable
determination that the consumer will have the ability to repay the loan
according to its terms.
1. Consumers Lack Understanding of Material Risks and Costs
As discussed in Markets Concerns--Longer-Term Loans, hybrid payday,
payday installment and vehicle title installment loans can and
frequently do lead to a range of negative consequences for consumers,
including high levels of default, being unable to pay other obligations
or basic living expenses as a result of making unaffordable payments,
and in some cases refinancing or reborrowing, especially where, as is
true of hybrid payday loans, the loan includes an unaffordable balloon
payment. All of these--including the direct costs that may be payable
to lenders and the collateral consequences that may flow from the
loans--are risks or costs of these loans, as the Bureau understands and
reasonably interprets that phrase.
[[Page 47994]]
The Bureau recognizes that, as with short-term covered loans, many
consumers who take out hybrid payday, payday installment, and vehicle
title installment loans understand that they are incurring a debt that
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 such as being subject to debt collection
or, in the case of loans with vehicle security, repossession. But as
discussed in connection with the Bureau's preliminary abusiveness
finding regarding short-term covered loans, the Bureau does not believe
that such a generalized understanding suffices to establish that
consumers understand the material costs and risks of these loans.
Rather, as previously explained, the Bureau believes that it is
reasonable to interpret ``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 cost may be incurred as a
result of using the product. For example, consumers may not understand
that a risk is very likely to happen or that--though relatively rare--
the impact of a particular risk would be severe. If consumers are not
actually aware of the likelihood and severity of potential consequences
of a product at the point in time they must determine whether to use
that product, they are particularly vulnerable to lender acts or
practices that can take unreasonable advantage of consumers' lack of
understanding.
As discussed in Market Concerns--Longer-Term Loans, the defining
characteristics of these loans--a leveraged repayment position or
vehicle security combined with a high-cost structure--enable lenders to
profitably make the loans without engaging in robust underwriting as is
done in most other credit markets. These very same characteristics
increase the likelihood that consumers will suffer the harms of
unaffordable payments and the amount of harm they will experience. The
Bureau believes that with respect to covered longer-term loans,
consumers generally lack understanding of both the likelihood and the
severity of the harms they face.
i. Likelihood of Harm
In most credit markets, lenders' and consumers' interests are
normally aligned, so that the success of a lender and a consumer in a
transaction is made much more likely by a lender's insistence that loan
payments be within the consumer's ability to repay. For that reason,
lenders normally engage in underwriting. If the lender determines that
payments under a particular prospective loan would exceed a consumer's
ability to repay, the lender instead offers a loan with payments that
are within the consumer's ability to repay or simply declines to make a
loan to that consumer. But in covered longer-term loans markets,
lenders find it unnecessary to underwrite, so this beneficial effect
for consumer is lacking. The absence of lender underwriting enabled by
the two defining characteristics of a covered longer-term loan mean
that there is often little or no relationship between the payments
under a loan and the financial capacity of the particular consumer who
takes the loan. The result is a very high likelihood that a covered
longer-term loan will prove to be unaffordable for the consumer who
takes it, and thus result in potentially severe harms.
The Bureau believes that consumers taking these loans generally do
not understand the counterintuitively high likelihood that loan
payments will exceed their ability to repay because of the particular
features of these loans, and that they therefore do not understand the
magnitude of the risk that they will default, suffer collateral harms
from making unaffordable payments, or have to reborrow. As discussed in
Market Concerns--Longer-Term Loans, above, lenders that do not
determine ability to repay have default rates of 30 percent and as high
as 55 percent. A consumer seeking a loan from such a lender is unlikely
to understand that the consumer has more than a one-in-three chance of
defaulting. Few consumers will be aware that a lender could stay in
business while making loans that so frequently result in default, or
that its business model depends upon the lender's ability to time and
extract payments from the consumer's account or paycheck, even if
extraction of those loan payments leaves the consumer unable to meet
other financial obligations and basic living expenses. Instead, based
on common experience with consumer credit generally, consumers are
likely to assume that the lender's continued existence means the vast
majority of a lender's loans are successfully repaid, and that a lender
that makes them a covered longer-term loan has determined that they are
in approximately as good of a financial position to be able to repay
the loan as the other consumers who borrow and repay successfully.
The Bureau believes consumers are especially likely to make such an
assumption because of the challenges the consumers would face if they
were to attempt to assess their own ability to repay instead of
assuming that the lender has done so. A consumer seeking to take out a
payday installment or vehicle title installment loan is unlikely to
have a recent history of a regular periodic excess of income above
expenditures (i.e., additions to savings) that she can simply compare
to the loan payment under a prospective covered loan. Instead, to
assess her own ability to repay, the consumer would have to assess, at
a time of high need and high stress, what level of recent expenditures
she could eliminate or reduce, and what additional income she could
bring in, immediately and for the full term of the loan. Consumers
attempting such assessments would likely fall back on the assumption
that other similarly situated consumers must have been able to repay
covered longer-term loans under the offered terms, and that she is
therefore likely to be able to do so too.
Even if a consumer considering offered loan terms actually attempts
such a mental budget exercise, in which she postulates what amounts of
recent expenses she could eliminate or of extra income she could bring
in going forward, such on-the-fly estimates are highly likely to
overestimate her true ability to repay. As discussed above in Market
Concerns--Longer-Term Loans, decision-making of consumers confronting
time pressure and financial distress are especially likely to be
affected by optimism bias. A consumer under these conditions is likely
to make exaggerated estimates of additional income she could earn or of
expenses that she could reduce. She is also likely to underestimate the
likelihood of periodic decreases in income and spikes in expenses. And
yet an understanding of the risks of a covered longer-term loan
requires a reasonably accurate comparison of her true ability to repay
and the prospective loan payments. Even a small error is likely to
result in a much higher risk than she likely understands, since the
risk of harm from a payment that exceeds her ability to repay will
typically compound with each successive payment. As a result, an
attempt to assess her personal risk from an unaffordable covered
longer-term loan payments is unlikely to lead to an accurate
understanding of the true risks. Instead, her attempt to understand the
risks is highly likely to seriously underestimate them.
For these reasons, the Bureau preliminarily believes that consumers
who take out covered longer-term loans do not understand the high risk
that the loan will prove unaffordable, and thus, the risk that they are
exposing themselves to collateral consequences of
[[Page 47995]]
delinquency and default, such as the relatively high likelihood of
vehicle repossession.
ii. Severity of Harms
The Bureau likewise believes that consumers who take out covered
longer-term loans do not understand just how severe some of the
collateral consequences can be if the loan in fact proves unaffordable.
This is especially true with respect to hybrid payday loans and payday
installment products, which are generally accompanied by a leveraged
payment mechanism which enables the lender to automatically debit the
consumer's bank account.
When a lender obtains a leveraged payment mechanism, even if a loan
payment proves unaffordable, the lender still may be able to extract
payment from the consumer's account--especially for loans where
payments are timed to coincide with the consumer's paycheck. Thus, the
consumer loses a degree of control over her finances, including the
ability to prioritize payments of her obligations and expenses based on
the timing of her receipts of income. So long as there is money in the
account when the lender seeks to collect, the lender can get paid
without regard to whether the remaining funds will be sufficient to
enable the consumer to make payments on other obligations when she must
make them or cover basic living expenses. Thus, at least certain types
of covered longer-term loans carry with them a high degree of risk that
if the payment proves unaffordable the consumer will still be forced to
pay the loan and will incur penalties on other obligations, such as
late fees or shut-off fees, or face legal action, such as eviction,
because of having had to forgo payment on those other obligations.
Furthermore, even if the consumer's account does not have
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 to meet her other obligations or basic living expenses. If the
account remains negative for a prolonged period of time, the bank will
likely close the account.
Of course, the fact that such a large portion of covered longer-
term loans end up in default indicates that frequently lenders are
unable to collect despite their access to the consumer's account and
despite their potential ability to force an overdraft. But before these
defaults occur, the lenders will almost surely have made at least one--
and more often multiple--attempts to debit the consumer's account. Each
such attempt will likely result in an NSF fee, which the bank will
recover from any subsequent deposits the consumer makes; again, if the
account remains negative for a prolonged period of time the bank will
likely close the account. In addition, each failed payment may result
in the lender tacking on a returned check fee, a late payment fee, or
both, and adding that to the amount the lender demands from the
consumer through the collection process.
The Bureau's research provides some insight into the magnitude of
these consequences. The Bureau was unable to quantify the extent to
which the ability of lenders to extract payments using leveraged
payment mechanisms causes collateral injury with respect to consumers'
ability to meet other obligations or pay basic living expenses. But by
studying payment attempts made by over 330 lenders to almost 20,000
accounts, the Bureau was able to quantify the bank fees that borrowers
face. Specifically, the Bureau found that 50 percent of these borrowers
incur at least one overdraft or NSF fee in connection with their online
payday loans--most of which the Bureau believes to be covered longer
term loans--and that these borrowers were charged on average $185 in
fees. Thirty-six percent of borrowers who experienced an unsuccessful
attempt by an online payday lender to collect a payment from their
account subsequently had their accounts closed involuntarily.
The Bureau believes that consumers are not likely to understand the
magnitude of these adverse consequences that can arise when
unaffordable loan payments are combined with a lender's ability to
extract loan payments from a consumer's account when she receives her
income. A consumer is unlikely to be aware of the types and severity of
such harms at the time the consumer accepts offered loan terms. Some of
these harms, such as multiple NSF fees from multiple presentments, are
not an obvious or widely understood feature of the ACH system and
therefore are likely to be unknown to many consumers. Other types of
harm, such as overdraft fees, may be familiar to consumers in a general
sense, but consumers are not likely to be aware of the extent to which
they risk incurring them. The magnitude of these harms--and the
potential for consumer misunderstanding--are multiplied by the fact
that as discussed below in this part and in Market Concerns--Payments,
leveraged payment mechanisms, once authorized, are not easily revoked.
The consumer is likely to assume erroneously that de-authorizing is as
easy as authorizing.
2. Consumers Are Unable To Protect Their Interests
Under Sec. 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.'' Consumers who lack an
understanding of the material risks and costs of a consumer financial
product or service often will also have an inability to protect their
interests in selecting or using that consumer financial product or
service. For instance, as discussed above, the Bureau believes that
consumers are unlikely to be able to protect their interests in
selecting or using hybrid payday, payday installment, and vehicle title
installment loans because they do not understand the material risks and
costs associated with the products.
But it is reasonable to also conclude from the structure of section
1031(d), which separately declares it abusive to take unreasonable
advantage of consumer lack of understanding or of consumers' inability
to protect their interests in using or selecting a product or service
that in some circumstances, consumers may understand the risks and
costs of a product, but nonetheless be unable to protect their
interests in selecting or using the product.
The Bureau believes that consumers who take out hybrid payday,
payday installment, and vehicle title installment loans may be unable
to protect their interests in selecting or using such loans, given
their immediate need for cash and their inability in the moment to
search out or develop alternatives that would either enable them to
avoid the need to borrow or to borrow on affordable terms. Even if some
consumers suspect the unaffordability and resulting risks and costs
from payments under an offered covered longer-term loan, they may
reasonably believe that they cannot obtain a loan with more affordable
payments or a loan without leveraged payment mechanism or vehicle
security, either from the same lender or by shopping among other
lenders. They may not have the time or other resources to seek out,
develop, or take advantage of any existing alternatives, and may
reasonably believe that
[[Page 47996]]
searching for alternatives will be fruitless and costly. As discussed
in Markets Concerns--Longer-Term Loans, consumers who take out covered
longer-term loans typically have tried and failed to obtain other forms
of credit before turning to these loans as a ``last resort.'' Thus,
based on their prior unsuccessful experience with attempting to obtain
credit, these consumers may reasonably--and often correctly--believe
that alternative options would not be available to them. These factors
place consumers in a vulnerable position when seeking out and taking
these loans, leading to an inability to protect their interests.
Once a consumer has taken out a covered longer-term loan she cannot
afford, she will be unable to protect her interests in connection with
the loan for a different reason. The unaffordability of loan payments
under a covered longer-term loan likely will become apparent to a
consumer eventually, either after the consumer makes one loan payment
or several loan payments. But by then the consumer is legally obligated
to repay the debt, and the best the consumer can do is choose among
three bad options: Defaulting on the loan, skipping or delaying
payments on major financial obligations or living expenses in order to
repay the loan, or taking out another loan that will pose the same
predicament. It is even difficult for the consumer to limit the
collateral consequences of harm to her bank accounts, since as
discussed in Market Concerns--Payments, revocation rights related to
various forms of leveraged payment mechanisms are complicated by both
lender and financial institution procedural requirements, fees, and
other obstacles. Some forms of payment may have no practical revocation
right and, of course, there is no revocation right with regard to
vehicle security.
3. Practice Takes Unreasonable Advantage of Consumer Vulnerabilities
Congress, through section 1031(d) of the Dodd-Frank Act, has made
it unlawful for a lender to take unreasonable advantage of certain
specified consumer vulnerabilities in the context of consumer financial
products or services. Those specified vulnerabilities include, in
relevant part, a consumer's lack of understanding of the material
risks, costs, or conditions of a product or service and a consumer's
inability to protect her interests in selecting and using a product or
service.
The Bureau believes that lenders may take unreasonable advantage of
consumers' lack of understanding of the material risks and costs of
covered longer-term loans, and of consumers' inability to protect their
interests in selecting and using these loans, by structuring the loans
to combine a leveraged payment mechanism or vehicle security with high
cost and then making such loans without first reasonably determining
that the loan payments are within consumers' ability to repay.
As discussed in connection with the Bureau's abusiveness analysis
of covered short-term loans, the Bureau recognizes, of course, 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. As previously noted, the Bureau does
not believe that section 1031(d) of the Dodd-Frank Act prohibits
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 are generally
expected to pursue their self-interests. However, section 1031(d) of
the Dodd-Frank Act makes plain that there comes a point at which a
financial institution's conduct in leveraging consumer's lack of
understanding or inability to protect their interests becomes
unreasonable advantage-taking and thus potentially abusive.
The Dodd-Frank Act delegates to the Bureau the responsibility for
determining when that line has been crossed. As previously explained,
the Bureau believes that such determinations are best made with respect
to any particular act or practice by taking into account all of the
facts and circumstances that are relevant to assessing whether such an
act or practice takes unreasonable advantage of consumers' lack of
understanding or of consumers' inability to protect their interests.
Several interrelated considerations lead the Bureau to believe that the
practice of making covered longer-term loans without regard to
consumers' ability to repay may cross the line and take unreasonable
advantage of consumers' lack of understanding and inability to protect
their interests.
The Bureau first notes that the practice of making loans without
regard to the borrower's ability to repay 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 laws.\681\ The
general presupposition of credit markets is that the interest of
lenders and borrowers are closely aligned: Lenders succeed (i.e.,
profit) only when consumers succeed (i.e., repay their loans according
to their terms). For example, lenders in other markets, including other
subprime lenders, typically do not make loans without first making a
reasonable 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.
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\681\ 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 at
44543; 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. 23, 2010); FDIC, Guidance on Supervisory
Concerns and Expectations Regarding Deposit Advance Products, 78 FR
70552 (Nov. 23, 2010).
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In the markets for hybrid payday, payday installment, and vehicle
installment loans, however, lenders have built a business model that--
unbeknownst to borrowers--depends on the lenders' ability to collect
rather than on the consumers' ability to repay. As explained above,
lenders have used leveraged payment mechanisms and vehicle security in
combination with high pricing to ensure that they can extract payments
from consumers without regard to whether consumers can afford to make
those payments. This assures that lenders can collect enough money from
enough consumers to allow the lenders to stay in business and profit
despite extraordinarily high levels of default. The cycle quickly
becomes vicious for consumers: Lenders make loans without regard to
consumers' ability to repay, which results in high levels of defaults
and, in turn, further fuels lenders' dependence on high prices and
various back-end mechanisms to extract sufficient payments to cover
loan losses.
As discussed above, the result is that consumers face very
significant and severe risks that they do not understand and from which
they are unable to protect their interests by taking any realistic
action prior to or after consummation of the loan. On the other side of
the transaction, lenders are of course aware of the high default rates
on their loans and know that they have not made any attempt to match
the payment terms they offer to the financial capacity
[[Page 47997]]
of the consumer, so that there is a high likelihood that the loan
payments will prove unaffordable for a given consumer. But consumers do
not understand this. Lenders also know that the defining loan features
will enable the lender to extract payment from the consumer even if the
payment exceeds the consumer's ability to repay and leaves her in
financial distress, but consumers do not understand the likelihood or
severity of the harms they will suffer in that scenario.
Also relevant in assessing whether the practice at issue involves
unreasonable advantage-taking is the vulnerability of the consumers
seeking these types of loans. As discussed in Market Concerns--Longer-
Term Loans, borrowers of hybrid payday, payday installment, and vehicle
installment loans generally have modest incomes, little or no savings,
and have tried and failed to obtain other forms of credit. As discussed
above, consumers who seek a covered longer-term loan typically do so
when they face an immediate need for cash. They are unlikely to be able
to accurately self-underwrite and, even if they recognized or suspected
that offered loan terms are likely to prove unaffordable, reasonably
believe that more favorable loans are not available to them. On the
other side of the transaction, lenders know, at a minimum, that many
consumers who are unable to afford the loans they offer take them out
anyway.
For these reasons, the Bureau believes that lenders may take
unreasonable advantage of consumers' lack of understanding of these
risks and costs, and of consumers' inability to protect their
interests, when they make covered longer-term loans without making any
reasonable determination that the consumer will have the ability to
make the payments under the loan.
b. Unfairness
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 avoidably by consumers and such
substantial injury is not outweighed by countervailing benefits to
consumers or to competition. Based on the evidence and concerns
described in Market Concerns--Longer-Term Loans, the Bureau is
proposing to identify the practice of making a covered longer-term loan
without making a reasonable determination that the consumer will have
the ability to repay the loan as an unfair practice. When a lender
makes such a loan to a consumer without first making a reasonable
determination that the consumer will have the ability to repay it, it
appears that act or practice causes or is likely to cause substantial
injury to consumers that is not reasonably avoidable by consumers and
that is not outweighed by countervailing benefits to consumers or
competition.
1. Causes or Is Likely To Cause Substantial Injury
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.\682\ Under these authorities, as
discussed in part IV, 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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\682\ 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 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).
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When a lender makes a loan with the characteristics that make it a
covered longer-term loan--a leveraged payment mechanism or vehicle
title and a high-cost structure--and fails to first determine that the
consumer will have the ability to repay, that practice appears to cause
or likely cause serious injury to substantial numbers of consumers. As
discussed above in Market Concerns--Longer-Term Loans, failure to first
determine that the loan payments will be within a consumer's ability to
repay causes or is likely to cause many consumers to receive loans with
payments that exceed their ability to repay. When the lender also
obtains a leveraged payment mechanism or vehicle security when
originating the loan, the injury to consumers from making unaffordable
payments is likely to be substantial, as is also discussed above in
Markets--Longer-Term Loans. By engaging in practices that increase the
likelihood, magnitude, and severity of the risks to consumers, the
lender's actions cause or are likely to cause substantial injury.
The injury that is easiest to observe and quantify is the extent to
which the practice of making these loans without assessing the
consumer's ability to repay leads to default. As discussed above,
lenders that do not determine ability to repay commonly have default
rates of 30 percent and as high as 55 percent. In the case of a loan
for which the lender obtains the ability to extract loan payments from
the consumer's bank account, the course of default typically includes
several attempts by a lender to extract the payments, which fail due to
insufficient funds in the account. Each time this occurs, the
consumer's depository institution typically imposes an NSF fee, and the
lender often imposes a fee as well. Repeated NSF fees can be followed
by involuntary account closure and exclusion from the banking system.
As discussed above, the Bureau's research with respect to online payday
and payday installment loans found that following an NSF fee, 36
percent of accounts were closed within thirty days. In the case of an
auto title loan, the lender may repossess the consumer's car, which can
in turn result in inability to travel to work and loss of employment.
As discussed above in part Market Concerns--Longer-Term Loans, evidence
shows that over one in ten vehicle title installment loan sequences
leads to repossession.
Even consumers who are able to make all of their payments on a
payday installment or vehicle title installment loan can suffer
substantial injury as a result of the failure of the lender to assess
whether the consumer can afford to repay the loan. As discussed in
Market Concerns--Longer-Term Loans the lender may extract, or the
consumer may make, loan payments which leave the consumer unable to
meet other financial obligations as they fall due and meet basic living
expenses as they arise. Indeed, when a loan is an auto title loan or
provides the lender the ability to extract loan payments from the
consumer's bank account or paycheck, the lender is likely to receive
payment
[[Page 47998]]
even when that leaves the consumer with insufficient funds to meet
other obligations and expenses. At a minimum, as discussed above in
Market Concerns--Longer-Term Loans, the consumer loses control over her
finances, including the ability to prioritize payments of her
obligations and expenses based on the timing of her receipts of income.
This injury is especially likely to occur when a lender times the
unaffordable loan payments to coincide with the consumer's receipts of
income, which is common with covered longer-term loans. The consumer is
then left with insufficient funds to meet other financial obligations
and basic living expenses. For example, a consumer may then be unable
to meet expenses such as food, medical care, daycare for dependent
children, transportation, or other expenses that are essential for
maintaining her source of income. Such consequences could occur prior
to a default--if the lender for a time was able to exact unaffordable
payments from the consumer's account--or could occur in lieu of a
default, if the lender is able to consistently extract payments that
are not affordable.
In addition, it is common for depository institutions to honor a
payment of a deposited post-dated check or electronic debit even if the
payment exceeds the consumer's account balance. In that case, the
result is that the payment results in overdraft of the consumer's
account, which typically leads to substantial fees imposed on the
consumer and, if the consumer cannot clear the overdraft, may lead to
involuntary account closure and even exclusion from the banking system.
Third, a consumer facing an imminent unaffordable loan payment may
refinance or reborrow in a way that adds to its total costs. As
discussed above in Market Concerns--Longer-Term Loans, refinancing and
reborrowing are especially likely to be provoked by a balloon payment,
and refinancing and reborrowing are especially likely to add
dramatically to total costs when the payments preceding a balloon-
payment are interest-only payments, as is common. In that case,
refinancing or reborrowing may bring about new finance charges equal to
what the consumer paid under the prior loan, because the payments on
the prior loan did little, if anything, to amortize the principal. The
additional cost is then the result of the original, unaffordable loan,
and constitutes injury because it is a cost that the consumer almost
certainly did not anticipate and take into account at the time she
decided to take out the original loan. The higher the total cost of
credit, the greater the injury to consumers from these unanticipated
costs.
2. Consumer Injury Not Reasonably Avoidable
As previously noted in part IV, under the FTC Act unfairness
standard, the FTC Policy Statement on Unfairness, FTC and other Federal
agency rulemakings, and related case law, which informs 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,'' \683\ or put another way,
unless consumers have reason to anticipate the injury and the means to
avoid it.
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\683\ FTC Policy Statement on Unfairness, 104 FTC at 1074.
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It appears that many consumers cannot reasonably avoid the injury
that results when a lender makes a covered longer-term loan and does
not determine that the loan payments are within the consumer's ability
to repay. To be able to avoid the injury from entering into a loan with
unaffordable payments, a consumer must have a reason to anticipate the
injury before entering into the loan. But a confluence of factors
creates obstacles to free and informed consumer decision-making,
preventing consumers from being able to reasonably anticipate the
likelihood and severity of injuries that frequently result from such
loans. And after entering into the loan, consumers do not have the
means to avoid the injuries that may result should the loan prove
unaffordable.
Many consumers are unable to reasonably anticipate the risk that
payments under a prospective covered longer-term loan will be
unaffordable to them or the range and severity of the harm they will
suffer if payments under the loan do prove unaffordable. Based, in
part, on their experience with other credit products, they have no
reason to understand the way lenders use the ability to extract
unaffordable payments from borrowers to make more loans, larger loans,
and loans with less affordable payment schedules than they otherwise
would while disregarding the affordability of loan payments to a
consumer. For example, few consumers are likely aware that an auto
title lender may base its underwriting decisions in part on the
borrower's perceived attachment to and practical reliance on a vehicle,
rather than on the consumer's ability to make loan payments or even on
the resale value of the car alone.
Similarly, based on their experience with other credit products,
few, if any, consumers are likely aware of the high percentage of
covered longer-term loans that result in default or collateral harms
from unaffordable payments or that lenders are able to stay in business
and profit even when so many consumers default. On the contrary,
consumers reasonably expect that the lender's continued existence means
the vast majority of a lender's loans are successfully repaid, and that
a lender that makes them a covered longer term loan has determined that
they are in approximately as good of a financial position to be able to
repay the loan as the other consumers who borrow and repay
successfully. As a result, a consumer is unlikely to appreciate the
high degree of vigilance she must exercise to ensure that loan payments
will in fact be within her ability to repay.
In theory, a consumer who realized the importance of being so
vigilant could avoid injury by self-underwriting. However, consumers'
ability to make accurate assessments is hindered by the specific
conditions under which these borrowers seek out such credit in the
first place. A consumer seeking to take out a payday installment or
vehicle title installment loan is unlikely to have a recent history of
a regular periodic excess of income above expenditures (i.e., additions
to savings) that she can simply compare to the loan payment under a
prospective covered loan. Instead, to assess her own ability to repay,
the consumer would have to assess, at a time of high need and high
stress, what level of recent expenditures she could eliminate or
reduce, and what additional income she could bring in, immediately and
for the full term of the loan. Consumers attempting such assessments
would likely fall back on the assumption that other similarly situated
consumers must have been able to repay covered longer-term loans under
the offered terms, and that she is therefore likely to be able to do so
too.
As discussed above, even if a consumer considering offered loan
terms actually attempts such a mental budget exercise, in which she
postulates what amounts of recent expenses she could eliminate or of
extra income she could bring in going forward, such on-the-fly
estimates are highly likely to overestimate her true ability to repay.
As discussed above in Market Concerns--Longer-Term Loans, decision-
making of consumers confronting time pressure and financial distress
are especially likely to be
[[Page 47999]]
affected by optimism bias. A consumer under these conditions is likely
to make exaggerated estimates of additional income she could earn or of
expenses that she could reduce. She is also likely to underestimate the
likelihood of periodic decreases in income and spikes in expenses. And
yet an understanding of the risks of a covered longer-term loan
requires a reasonably accurate comparison of her true ability to repay
and the prospective loan payments. Even a small error is likely to
result in a much higher risk than she likely understands, since the
risk of harm from a payment that exceeds her ability to repay will
typically compound with each successive payment. As a result, an
attempt to assess her personal risk from an unaffordable covered
longer-term loan payments is unlikely to lead to an accurate
understanding of the true risks. Instead, her attempt to understand the
risks is highly likely to seriously underestimate them.
Consumers likewise do not have a reason to anticipate the impact of
strategically timed payment extraction on their finances. Consumers who
mistakenly believe that a loan payment is within their ability to repay
do not have an incentive to seek out and focus on provisions for
income-timed payments extraction or to understand the implication or
effect of such provisions if combined with an unaffordable payment.
Consumers who believe they are unlikely to qualify for loans on more
favorable terms are especially unlikely to focus on such provisions and
on severity of the risk they pose, since they believe--often
correctly--they are not in a position to obtain a more advantageous
loan even if they identified objectionable provisions. Further, the
provisions do not make clear how the lender may time extraction of the
payment so that the lender will receive payment even if it exceeds the
consumer's ability to repay. Provisions permitting a lender to make use
of remotely created checks are even more obscure and incomprehensible
to consumers than those providing for more traditional electronic funds
transfers from consumers' accounts.
As discussed above, some consumers may suspect that payments under
a prospective covered longer-term loan may be unaffordable. Such
consumers could protect their interest in connection with such a loan
by locating a more favorable loan. Such an alternative loan could be
more favorable in two ways: (1) Being less expensive, or (2) lacking a
leveraged payment mechanism or vehicle security. However, the Bureau
believes that consumers who take out a covered longer-term loan may not
be able to avoid the substantial injury in this manner for at least two
reasons. First, consumers who find it necessary to seek covered longer-
term loans are likely to be experiencing an immediate need for cash and
reasonably believe that they are unlikely to find and qualify for
better credit options in the immediate timeframe they face. As a
result, they may make a reasoned decision to accept covered longer-term
loans even when suspecting they may have difficulty affording the
payments. Second, lenders do not compete on loans' inclusion (or
exclusion) of leveraged payment mechanisms or vehicle security because
they have no incentive to do so. On the contrary, as discussed above
and in Market Concerns--Longer-Term Loans, lenders have a powerful
incentive to include these features: Their entire business model
depends on it.
As discussed above, once a consumer has become obligated on a
covered longer-term loan with unaffordable payments because she was
unable to reasonably anticipate the injuries from taking out such a
loan, it is often too late for the consumer to act to avoid the injury.
At that point the consumer lacks the means to avoid the injury. If the
lender secured the ability to extract payments from the consumer's
account, the consumer may theoretically be able to revoke her
authorization to the lender to do so or otherwise stop payment, but as
explained in Market Concerns--Longer-Term Loans, above, and Market
Concerns--Payments, below, there are numerous practical impediments to
such revocation that prevent it from being a reasonable means of
avoiding the injury. For example, lenders often create a variety of
procedural obstacles to revocation, and depository institutions may
also impose procedural hurdles and fees for revocation. Some
mechanisms, such as remotely created checks, once authorized, may not
be revocable. And some lenders may attempt to require the consumer to
provide an alternative leveraged payment mechanism or impose other
penalties if the consumer seeks to revoke authorization for a
particular method of accessing the consumer's account.
3. Injury Not Outweighed by Benefits to Consumers or Competition
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, it generally
is 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
benefits and costs.
It appears to the Bureau that the current practice of making payday
installment, vehicle title installment loans, and other covered longer-
term loans without determining that the consumer has the ability to
repay does not result in benefits to consumers or competition that
outweigh the substantial injury that consumers cannot reasonably avoid.
As discussed above, the amount of injury that is caused by the unfair
practice, in the aggregate, appears to be extremely high. Although some
individual consumers may be able to avoid the injury, as noted above, a
large amount of the substantial injury is not reasonably avoidable. A
significant number of consumers who obtain payday installment and
vehicle title installment loans end up defaulting. These consumers put
either their checking account or their vehicle at risk, and subject
themselves to aggressive debt collection practices. In addition, many
borrowers also experience substantial injury that is not reasonably
avoidable as a result of repaying a loan but not being able to meet
other obligations and expenses. Many consumers also suffer harm in the
form of costs of refinancing and reborrowing caused by unaffordable
payments, most often in connection with a covered longer-term loan that
includes a balloon payment.
Against this very significant amount of harm, the Bureau must weigh
several potential countervailing benefits to consumers or competition
of the practice in assessing whether it is unfair. For purposes of
analysis, the Bureau divided would-be borrowers into two groups.
The first group consists of borrowers who obtain loans under the
status quo and make each payment that falls due under the loans. The
Bureau includes in this group those consumers who make a payment but
then find it necessary to reborrow, most notably those who do so upon
making a balloon payment. The Bureau also includes in this group those
consumers who refinance a loan so that, for example, an unaffordable
balloon payment that would have fallen due is replaced with a new loan
that the consumer repays. The Bureau refers to these borrowers as
``repayers'' for purposes of this countervailing benefits analysis. As
discussed in Market Concerns--Longer-Term Loans, 62 percent of payday
installment loan
[[Page 48000]]
sequences and 69 percent of vehicle title loan sequences end with the
consumer repaying the loan.
The Bureau believes that for the most part these consumers could
reasonably have been determined at consummation to have had the ability
to repay the loans they received, such that the ability-to-repay
requirement in proposed Sec. 1041.9 would not have a significant
impact on their eligibility for this type of credit. For these
borrowers, at most the proposed requirements would reduce somewhat the
speed and convenience of applying for a loan. Under the status quo,
consumers generally can obtain payday installment loans simply by going
online, filling out an application, and showing some evidence of a
checking account; storefront payday lenders making payday installment
loans may require a little more. For vehicle title loans, all that is
generally required is that the consumer owns her vehicle outright
without any encumbrance.
Under the proposal, lenders likely would require more information
and documentation from or for the consumer. Indeed, under the proposed
rule, lenders would be required to obtain a consumer's written
statement of her income and payments under major financial obligations.
Lenders would also be required to obtain verification evidence of
consumers' income and payments under major financial obligations,
including their housing expenses. Lenders may in some cases comply with
these proposed requirements for verification evidence by seeking
documentation from the consumer, which could reduce the speed and
convenience for consumers.
Additionally, when a lender makes a loan without determining a
consumer's ability to repay today, the lender can make the loan
instantaneously upon obtaining whatever documentation the lender
chooses to require. In contrast, if lenders assessed consumers' ability
to repay under proposed Sec. 1041.9, they would be required to obtain
the consumer's borrowing history and determine the consumer's
outstanding covered loans using the lender's own records and a report
from a registered information system. Lenders would also be required to
obtain a consumer report from a national credit reporting agency as
verification evidence of a consumer's payments under other major
financial obligations. Using this information, along with verification
evidence of income, lenders would have to calculate the consumer's
residual income by subtracting the consumer's payments under major
financial obligations from the consumer's projected income.
As discussed below in the section-by-section analysis of proposed
Sec. 1041.9, the proposed rule has been designed to enable lenders to
obtain electronic verification evidence for income and payments under
major financial obligations, to use a model to estimate housing
expenses, and to automate the process of securing additional
information and determining the consumer's ability to repay. If the
proposed ability-to-repay requirements are finalized, the Bureau
anticipates that repayers would be able to obtain credit under proposed
Sec. 1041.9 to a similar extent as they do in the current market.
While the speed and convenience fostered by the current practice may be
reduced for these consumers under the proposed rule's requirements, the
Bureau does not believe that the proposed requirements will be overly
burdensome in this respect. As described in part VI, the Bureau
estimates 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 believes that lenders would be able to obtain
verification evidence needed to demonstrate the ability to repay of
most repayers under proposed Sec. 1041.9, the Bureau recognizes that
there is a subset of repayers who could not demonstrate their ability
to repay the loans they currently are able to receive if required to do
so by a lender. For example, some consumers may face challenges in
providing verification evidence for a portion or even all of their
income. The current lender practice of making loans without determining
ability to repay enables these consumers to obtain credit that, by
hypothesis, may actually be within their ability to repay. In contrast,
the proposed rule's requirement for a lender to obtain verification
evidence for a consumer's income may result in some such consumers
being deemed to lack the ability to repay a loan they actually might be
able to repay (i.e., the ``false negative'' effect). The Bureau
acknowledges that for this group of consumers there may be a
significant benefit in being able to obtain covered loans despite a
lender's inability to determine their ability to repay in the way
prescribed by proposed Sec. 1041.9.
However, the Bureau believes that under the proposed rule, lenders
will generally be able to determine consumers' ability to repay and
that the size of any residual false negative population will be small.
As discussed further below, the Bureau has structured the proposed rule
to try to provide substantial flexibility on verification and other
underwriting requirements, and is seeking further comment in hopes of
identifying additional appropriate measures. The Bureau also notes that
these borrowers will generally be motivated to attempt to provide
verification evidence needed to determine their ability to repay, in
order to receive the loan. It will also be in lenders' interest to
obtain the verification evidence needed to determine consumers' an
ability to repay. Moreover, even if these consumers could not qualify
for the same loan they would have obtained absent an ability-to-pay
requirement (e.g., if verification evidence does not exist for a
portion of their income), they may still be able to get credit on
different terms within their demonstrable ability to repay, such as a
loan with a longer term and smaller periodic payments.\684\ So long as
the loan did not come with a prepayment penalty, these consumers would
not be adversely affected by obtaining such a loan since, if the lender
underestimates their ability to repay, the consumers could prepay the
loan. For these reasons, the Bureau does not believe that there would
be a large false negative effect if lenders made loans only to those
with the ability to repay.
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\684\ The borrowers might also be able to obtain loans made
under proposed Sec. Sec. 1041.11 and 1041.12.
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In addition, the Bureau notes that some current repayers may not
actually be able to afford payments under the loans the currently are
able to obtain, but end up repaying it nonetheless (rather than
reborrowing or defaulting). By definition, this subset of repayers are
then unable to meet other expenses and obligations, which may result in
them defaulting on or incurring costs in connection with those
obligations, such as shut-off of or late fees on utilities. Other
repayers respond to an unaffordable payment by refinancing the original
loan and incurring additional costs, most typically when a consumer
confronts an unaffordable balloon payment. Such repayers would not be
able to obtain under proposed Sec. 1041.9 the same loan that they
would have obtained absent an ability-to-repay requirement, but they
might obtain a loan on different terms (e.g., a longer term with
smaller payments) that they could afford. Thus, any benefit they
receive under the current practice--to the extent such benefit exists
at all--would appear to be extremely modest.
The other group of borrowers consists of those who eventually
default on their loans, either when the first payment is due or at a
later point in time. In some
[[Page 48001]]
cases these borrowers default after having refinanced a prior loan with
an unaffordable balloon payment and replacing it with a new loan with
an unaffordable balloon payment that falls due later. The Bureau refers
to all of these borrowers as ``defaulters'' for purposes of this
countervailing benefits analysis. As discussed in Market Concerns--
Longer-Term Loans, in the data available to the Bureau, 31 percent of
payday installment sequences and 38 percent of vehicle title
installment sequences are taken out by borrowers who end up defaulting.
For these consumers, the current lender practice of making loans
without regard to their ability to repay may enable them to obtain what
amounts to a temporary ``reprieve'' from their current situation: They
can obtain some cash, which may enable them to pay a current bill or
current expense. How much of a reprieve the loan provides is entirely
speculative. The fact that these consumers eventually default suggests
that similar-sized payments they made prior to the payment provoking
default--either because the lender extracted money from the consumer's
account or because the consumer elected to make a payment to stave off
a potential automobile repossession--were unaffordable and caused
collateral harm in the meantime. Defaulters are merely substituting a
payday installment lender or auto title installment lender for a
preexisting creditor, and in doing so, end up in a deeper hole by
accruing and paying finance charges, late fees, or other charges at a
high rate and enduring additional financial distress, only to face the
injuries of default once it occurs. Moreover, for the vast majority of
consumers, who do not understand how much risk of default and of
collateral damage they are taking on with these loans,\685\ at least
some portion of these defaulters would be able to obtain credit on more
affordable terms if lenders were required to undertake ability-to-repay
determinations. To the extent that is true, the ``reprieve'' that these
borrowers are obtaining from the present system is illusory and
actually detrimental to their well-being relative to a system in which
lenders made loans that consumers could afford to repay. In sum, the
Bureau thus does not believe that these defaulters obtain significant
benefits from the current lender practice of not determining ability to
repay.\686\
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\685\ The Bureau would not count for purposes of substantial
injury the default costs of individual consumers who fully
recognized the risks and costs of hybrid payday, payday installment,
and vehicle title installment loans and decided that the temporary
reprieves were worth the downstream costs, but the Bureau believes
that there are few such consumers.
\686\ The Bureau recognizes that defaulters may not default
because they lack the ability to repay, but the Bureau believes 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 proposed Sec.
1041.9 precisely because they have the ability to repay the loans.
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In all events, the Bureau believes that the substantial injury
suffered by the defaulters, as well as by those repayers who suffer
collateral harms from unaffordable or who must refinance or reborrow as
a result of balloon and similar unaffordable payments, dwarfs any
benefits these groups of borrowers may receive in terms of a temporary
reprieve. It also dwarfs the speed and convenience benefits that the
repayers may experience. The Bureau acknowledges that any benefits
derived by the aforementioned consumers subject to false negative
effects may be reduced under the proposed rule, but the Bureau believes
that the benefits that this relatively small group receives is
outweighed by the substantial injuries to the defaulters and repayers
as discussed above. Further, the Bureau believes that under the
proposed intervention, many of these borrowers may find more affordable
options, such as underwritten credit on terms that are tailored to
their budget and more affordable.
The Bureau recognizes that the proposed rule would also have some
impacts on lenders' operating costs relative to the status quo, where
instead of undertaking the expense and effort of evaluating a potential
borrower's residual income, lenders need only secure relatively
inexpensive forms of preferred repayment. Theoretically, these
resulting avoided costs could benefit consumers, and therefore be
germane to the present analysis, to the extent that they resulted in
lender net savings that lenders passed on to consumers in the form of
lower borrowing costs. But there is little reason to believe that this
actually happens in practice. As discussed above in Part II, rather
than competing on price, lenders typically charge the maximum amount
allowed under State law and instead compete based on friendliness of
customer service, as well as on the convenience of store locations and
similar factors. In such a market, marginal costs avoided--such as
costs avoided by declining to underwrite--are unlikely to result in
lower borrowing costs for consumers.
In addition, the Bureau also believes that the net savings to
lenders from making loans without determining ability to repay is
relatively modest. The Bureau has crafted the proposed ability-to-repay
requirement to avoid unnecessary costs. For example, the proposal
provides substantial flexibility in the options for verification
evidence that lenders could use. It provides an option for lenders to
estimate housing expense, rather than to obtain verification evidence,
and it does not require inventorying or verification of basic living
expenses. Further, the principal amounts and total costs of credit that
are typical with covered longer-term loans mean that in many cases the
cost of compliance per prospective transaction should be relatively
modest compared to revenue from each transaction.
Similarly, the Bureau does not believe that overall lender revenues
would be significantly reduced as a result of the proposed
requirements, in that lenders would still be able to make loans to most
consumers, but loans with payments that are within the consumer's
ability to repay. Such loans would tend to have more affordable
payments but longer durations, compared to loans made under the status
quo, and there is no reason to assume that shift in repayment schedules
would tend to reduce lender revenues. Further, the Bureau believes that
the total cost of compliance to lenders would be offset to a
significant extent by losses from default that lenders will avoid as a
result of complying with the requirement to make a reasonable
determination that the borrower has the ability to repay the loan prior
to making the loan.\687\
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\687\ The Bureau also believes that these features will minimize
costs for lenders who offer longer-term products besides hybrid
payday, payday installment, and vehicle title installment loans that
would fall within the scope of the definition. The Bureau recognizes
that these lenders tend to engage in more substantive underwriting
and that in some cases their ability to repay determinations are
very similar to, and have similar costs as, the determination that
would be required under this proposal.
Some of these lenders have indicated to the Bureau that they do
not believe compliance with the rule would involve substantial
amounts of new cost. See, e.g., World Acceptance, Form 10-K Part II,
Item 7, ``Management's Discussion and Analysis of Financial
Condition and Results of Operations--Regulatory Matters'' (2015),
available at https://www.sec.gov/Archives/edgar/data/108385/000010838515000036/wrld-331201510xk.htm (``The Company does not
believe that these proposals as currently described by the CFPB
would have a material impact on the Company's existing lending
procedures, because the Company currently underwrites all its loans
(including those secured by a vehicle title that would fall within
the scope of these proposals) by reviewing the customer's ability to
repay based on the Company's standards.'').
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[[Page 48002]]
Turning to benefits of the practice for competition, the Bureau
does not believe that the proposed ability-to-repay requirement will
reduce the competitiveness of the markets for covered longer-term
loans. The Bureau does not expect, based on its analysis, that the
proposed rule will lead to substantial contraction in the industry.
In sum, it appears that the benefits of the identified unfair
practice for consumers and competition do not outweigh the substantial,
not reasonably avoidable injury caused or likely to be cause by the
practice. On the contrary, it appears that the very significant injury
caused by the practice outweighs the very small benefits of the
practice to consumers.
4. Public Policy
Section 1031(c)(2) of the Dodd-Frank Act states that ``the Bureau
may consider established public policies as evidence to be considered
with all other evidence'' in determining whether an act or practice is
unfair. In addition to the evidence described above and in Markets
Concerns--Longer-Term Loans, established public policy appears to
support a finding that it is an unfair practice for lenders to make
covered longer-term loans without making a reasonable determination
that the consumer will have the ability to repay the loan.
As discussed above, the Dodd-Frank Act, the CARD Act, the Federal
Reserve Board's Higher-Priced Mortgage Loan Rule, guidance from the OCC
on abusive lending practices, and guidance from the OCC and FDIC on
deposit advance products all require or recommend that certain lenders
assess their customers' ability to repay before extending credit.
Such widely-adopted requirements and guidance evince a clear public
policy that consumers (as well as safety and soundness interests)
suffer substantial injury from loans and other extensions of credit
that exceed their ability to repay, and that it is necessary or
appropriate for lenders to determine that loan and credit terms are
within a consumer's ability to repay, as a condition of making the loan
or extending the credit. These public policies show that such
determinations are especially critical when subprime or high-cost
credit is extended to vulnerable consumers. These policies evince a
determination by policymakers that such determinations are necessary
because the consumer injury from such practices persists in the absence
of regulatory intervention, and that such practices do not provide
benefits to consumers that outweigh the harm they cause. Accordingly,
the Bureau believes this extensive body of policy is evidence
supportive of its unfairness finding.
In addition, the FTC's Credit Practices Rule \688\ bans certain
provisions in consumer credit contracts allowing for extraction of
unaffordable payments from consumers, such as certain provisions for
wage assignments and taking a security interest in household goods.
That rule reflects a conclusion that such provisions can cause severe
risk of injury to consumers. The Bureau's proposal would not be as
limiting as the Credit Practices Rule, in that the Bureau is not
proposing to prohibit vehicle title loans or loans under which a lender
can extract payment from a consumer's account or paycheck. Instead, the
Bureau's proposal would permit such practices, provided that the lender
first determines that the consumer will have the ability to repay the
loan.
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\688\ 16 CFR part 444.
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The Bureau seeks comment on the evidence and proposed findings and
conclusions in proposed Sec. 1041.8 and Market Concerns--Longer-Term
Loans above. As discussed below in connection with proposed Sec. Sec.
1041.11 and 1041.12, the Bureau also seeks comment on whether making
loans with the types of consumer protections contained in proposed
Sec. 1041.11(b) through (e) or the types of consumer protections
contained in proposed Sec. 1041.12(b) through (f) should not be
included in the practice identified in proposed Sec. 1041.8.
Section 1041.9 Ability-to-Repay Determination Required
As discussed in the section-by-section analysis of Sec. 1041.8
above, the Bureau has tentatively concluded that it is an unfair and
abusive act or practice to make a covered longer-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 is proposing to prevent
the abusive and unfair practice by including in proposed Sec. Sec.
1041.9 and 1041.10 minimum requirements for how a lender may reasonably
determine that a consumer has the ability to repay a covered longer-
term loan.
The Bureau notes that the provisions of proposed Sec. 1041.9,
which would apply to longer-term loans, mirror and for the most part
are identical to the provisions of proposed Sec. 1041.5, which would
apply to short-term loans. The same is true of the corresponding
proposed commentary for and section-by-section analyses of the two
proposed sections. Accordingly, readers who have reviewed proposed
Sec. 1041.5, its proposed commentary, and their section-by-section
analyses, may find it unnecessary to review the entirety of this
section-by-section analysis of proposed Sec. 1041.9 or the proposed
regulatory and commentary provisions it discusses. The Bureau is
proposing to include proposed Sec. Sec. 1041.5 and 1041.9 and
providing separate commentary and section-by-section analyses for those
readers who may be interested in only the content that applies to
short-term or longer-term loans, respectively.
Proposed Sec. 1041.9 sets forth the prohibition against making a
covered longer-term loan (other than a loan that satisfies the
conditions in proposed Sec. 1041.11 or Sec. 1041.12) without first
making a reasonable determination that the consumer will have the
ability to repay the covered longer-term loan according to its terms.
It also, in combination with proposed Sec. 1041.10, specifies 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 crafting the baseline ability-to-repay methodology established in
proposed Sec. Sec. 1041.9 and 1041.10, the Bureau is attempting to
balance carefully several considerations, including the need for
consumer protection, industry interests in regulatory certainty and
manageable compliance burden, and preservation of access to credit.
Proposed Sec. 1041.9 would generally require the lender to make a
reasonable determination that a consumer will have sufficient income,
after meeting major financial obligations, to make payments under a
prospective covered longer-term loan and to continue meeting basic
living expenses. However, based on feedback from a wide range of
stakeholders and its own internal analysis, as well as the Bureau's
belief that consumer harm has resulted despite more general standards
in State law, the Bureau believes that merely establishing such a
general requirement would provide insufficient protection for consumers
and insufficient certainty for lenders.
Many lenders making payday installment loans have informed the
Bureau that they conduct some type of underwriting on covered loans and
assert that it should be sufficient to meet the Bureau's standards.
However, as discussed above, such underwriting often is designed to
screen primarily for fraud (including first payment defaults)
[[Page 48003]]
and to assess whether the lender will be able to extract payments from
the consumer. It typically makes no attempt to assess whether the
consumer might be forced to forgo basic necessities or to default on
other obligations in order to repay the covered loan over its term. At
most, industry underwriting goes no further than to predict the
consumer's propensity to repay rather than the consumer's financial
capacity (i.e. ability) to repay consistent with the consumer's other
obligations and need to cover basic living expenses. Such underwriting
ignores the fact that repayment may force the consumer to miss other
obligations or to be unable to cover basic living expenses.
The Bureau acknowledges that some online and storefront lenders
have reported to the Bureau that they have adopted robust underwriting
approaches in making loans, some of which would be covered longer-term
loans under the proposal. The Bureau believes that these lenders will
be able to adjust their underwriting methodologies to comply with
proposed Sec. Sec. 1041.9 and Sec. 1041.10 with relatively minor
modifications. The Bureau also recognizes that some community banks
have reported to the Bureau that they make some covered longer-term
loans based on their relationship method of underwriting. Proposed
Sec. 1041.12 would provide an exemption that the Bureau believes many
lenders will be able to rely upon to continue making such loans subject
to certain protective conditions.
The Bureau believes that to prevent the abusive and unfair practice
that appears to be occurring in the market, it is appropriate not only
to require lenders to make a reasonable determination of a consumer's
ability to repay before making a covered longer-term loan but also to
specify minimum elements of a baseline methodology for evaluating
consumers' individual financial situations, including their borrowing
history. The baseline methodology is not intended to be a substitute
for lender screening and underwriting methods, such as those designed
to screen out fraud or predict and avoid other types of lender losses.
Accordingly, lenders would be permitted to supplement the baseline
methodology with other underwriting and screening methods.
The baseline methodology in proposed Sec. 1041.9 rests 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 Bureau recognizes that in other markets and under other
regulatory regimes financial capacity is more typically measured by
establishing a maximum DTI ratio.\689\ DTI tests generally rest on the
assumption that so 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 consumer to be able to meet non-
debt obligations and other expenses. However, for low- and moderate-
income consumers, that assumption is less likely to be true: A DTI
ratio that might seem quite reasonable for the ``average'' consumer can
be quite unmanageable for a consumer at the lower end of the income
spectrum and the higher end of the debt burden range.\690\ Ultimately,
whether a particular loan is affordable will depend upon how much money
the consumer will have left after paying existing obligations and
whether that amount is sufficient to cover the proposed new obligation
while still meeting basic living expenses.
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\689\ For example, DTI is an important component of the Bureau's
ability to repay mortgage regulation in 12 CFR 1026.43. It is a
factor that a creditor must consider in determining a consumer's
ability to repay and also a component of the standards that a
residential mortgage loan must meet to be a qualified mortgage under
that regulation.
\690\ For example, under the Bureau's ability-to-repay
requirements for residential mortgage loans, a qualified mortgage
has 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 may not 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. That is
especially true if the low income consumer also faces significant
non-debt expenses, such as high rent payments, that consume
significant portions of the remaining 57 percent of her income.
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In addition, in contrast with other markets in which there are
long-established norms for DTI levels that are consistent with
sustainable indebtedness, the Bureau does not believe that there exist
analogous norms for sustainable DTI levels across the wide range of
terms and repayment structures used for covered longer-term loans.
Thus, the Bureau believes that residual income is a more direct test of
ability to pay 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 has designed the residual income methodology
requirements specified in proposed Sec. Sec. 1041.9 and 1041.10 in an
effort to ensure that ability-to-repay determinations can be made
through scalable underwriting models. The Bureau is proposing that the
most critical inputs into the determination rest on documentation but
the Bureau's proposed methodology allows for various means of
documenting major financial obligations and also establishes
alternatives to documentation where appropriate. It recognizes that
rent, in particular, often cannot be readily documented and therefore
allows for estimation of rental expense. See the section-by-section
analysis of Sec. 1041.9(c)(3)(ii)(D), below. The Bureau's proposed
methodology also would not mandate verification or detailed analysis of
every individual consumer expenditure. The Bureau believes that such
detailed analysis may not be the only method to prevent unaffordable
loans and is concerned that it would substantially increase costs to
lenders and borrowers. See the discussion of basic living expenses,
below.
Finally, the Bureau's proposed methodology does not dictate a
formulaic answer to whether, in a particular case, a consumer's
residual income is sufficient to make a particular loan affordable.
Instead, the proposed methodology allows lenders to exercise discretion
in arriving at a reasonable determination with respect to that
question. Because this type of underwriting is so different from what
many lenders currently engage in, the Bureau is particularly conscious
of the need to leave room for lenders to innovate and refine their
methods over time, including by building automated systems to assess a
consumer's ability to repay so long as the basic elements are taken
into account.
Proposed Sec. 1041.9 outlines the methodology for assessing the
consumer's residual income as part of the assessment of ability to
repay. Proposed Sec. 1041.9(a) would set forth definitions used
throughout proposed Sec. Sec. 1041.9 and 1041.10. Proposed Sec.
1041.9(b) would establish the requirement for a lender to determine
that a consumer will have the ability to repay a covered longer-term
loan and would set forth minimum standards for a reasonable
determination that a consumer will have the ability to repay a covered
longer-term loan. The standards in proposed Sec. 1041.9(b) generally
require a lender to determine that the consumer's income will be
sufficient for the consumer to make payments under a covered longer-
term loan while accounting for the consumer's payments for major
financial obligations and the consumer's basic living expenses.
Proposed Sec. 1041.9(c) would establish standards for verification and
projections of a
[[Page 48004]]
consumer's income and major financial obligations on which the lender
would be required to base its determination under proposed Sec.
1041.9(b). Section 1041.10 imposes certain additional presumptions,
prohibitions, and requirements where the consumer's reborrowing while
or shortly after having a prior loan outstanding suggests that the
prior loan was not affordable for the consumer, so that the consumer
may have particular difficulty in repaying a new covered longer-term
loan with similar repayment terms.
As an alternative to the proposed ability-to-repay requirement, the
Bureau has considered proposing a disclosure remedy consisting of
requiring lenders to provide disclosures to borrowers warning them of
the costs and risks of default and other harms that are associated with
taking out covered longer-term loans. However, the Bureau believes that
such a disclosure remedy would be significantly less effective in
preventing the harms described above, for three reasons. First,
disclosures do not address the underlying incentives observed in the
markets for covered longer-term loans, i.e., that lenders are able to
make loans profitably even when a very large share of borrowers
default. Second, empirical analysis of the impacts of disclosures for
payday borrowers, including the Bureau's own analysis of the Texas
disclosure requirement impacts, showed that disclosures have only
modest impact overall on borrowing patterns. See section-by-section
analysis for proposed Sec. 1041.5. The Bureau believes these findings
provide insights into the challenges of informing borrowers in
difficult financial circumstances about risks of borrowing, and
therefore are relevant to the markets for covered longer-term loans.
Third, as discussed in part VI, the Bureau believes that behavioral
factors make it likely that disclosures to consumers taking out covered
longer-term loans would be ineffective in warning consumers of the
risks and preventing the harms that the Bureau seeks to address with
the proposal. Due to the potential for tunneling in their decision-
making and general optimism bias, as discussed in more detail in Market
Concerns--Longer-Term Loans, consumers 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 an outcome,
default, that they do not anticipate experiencing themselves. 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.
The Bureau requests comment on all aspects of the appropriateness
of the proposed approach. For example, the Bureau requests comment on
whether a simple prohibition on making covered longer-term loans
without determining ability to repay, without specifying the elements
of a minimum baseline methodology, would provide adequate protection to
consumers and clarity to industry about what would constitute
compliance. Similarly, the Bureau requests comment on the adequacy of a
less prescriptive requirement for lenders to ``consider'' specified
factors, such as payment amount under a covered longer-term loan,
income, debt service payments, and borrowing history, rather than a
requirement to determine that residual income is sufficient. (Such an
approach could be similar to that of the Bureau's ability-to-repay
requirements for residential mortgage loans.) Specifically, the Bureau
requests comment on whether there currently exist sufficient norms
around the levels of such factors that are and are not consistent with
a consumer's ability to repay, such that a requirement for a lender to
``consider'' such factors would provide adequate consumer protection,
as well as adequate certainty for lenders regarding what determinations
of ability to repay would and would not reflect sufficient
consideration of those factors.
Also during outreach, some stakeholders suggested that the Bureau
should adopt underwriting rules of thumb--for example, a maximum
payment-to-income ratio--to either presumptively or conclusively
demonstrate compliance with the rule. The Bureau solicits comment on
whether the Bureau should define such rules of thumb and, if so, what
metrics should be included in a final rule and what significance should
be given to such metrics.
9(a) Definitions
Proposed Sec. 1041.9(a) would provide definitions of several terms
used in Sec. 1041.9 in assessing the consumer's financial situation
and proposed Sec. 1041.10 in assessing consumers' borrowing history
before determining whether a consumer has the ability to repay a new
covered longer-term loan. In particular, proposed Sec. 1041.9(a)
includes definitions for various categories of income and expenses that
are used in Sec. 1041.9(b), which would establish the methodology that
would generally be required for assessing consumers' ability to repay
covered longer-term loans. The substantive requirements for making the
calculations for each category of income and expenses, as well as the
overall determination of a consumer's ability to repay, are provided in
Sec. 1041.9(b) and (c), and in their respective commentary. These
proposed definitions are discussed in detail below.
9(a)(1) Basic Living Expenses
Proposed Sec. 1041.9(a)(1) would define the basic living expenses
component of the ability-to-repay determination that would be required
in Sec. 1041.9(b). It would define basic living expenses as
expenditures, other than payments for major financial obligations, that
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. Section 1041.9(b) would require
the lender to reasonably determine a dollar amount that is sufficiently
large so that the consumer would likely be able to make the loan
payments and meet basic living expenses without having to default on
major financial obligations or having to rely on new consumer credit
during the applicable period.
Accordingly, the proposed definition of basic living expenses is a
principle-based definition and does not provide a comprehensive list of
the expenses for which a lender must account. Proposed comment 9(a)(1)-
1 provides illustrative examples of expenses that would be covered by
the definition. It provides that food and utilities are examples of
goods and services that are necessary for maintaining health and
welfare, and that transportation to and from a place of employment and
daycare for dependent children, if applicable, are examples of goods
and services that are necessary for maintaining the ability to produce
income.
The Bureau recognizes that provision of a principle-based
definition leaves some ambiguity about, for example, what types and
amounts of goods and services are ``necessary'' for the stated
purposes. Lenders would have flexibility in how they determine dollar
amounts that meet the proposed definition, provided that they do not
rely on amounts that are so low that they are not reasonable for
consumers to pay for the types and level of expenses in the definition.
The Bureau's proposed methodology also would not mandate
verification or detailed analysis of every individual consumer
expenditure. In contrast to major financial obligations (see below),
[[Page 48005]]
a consumer's recent expenditures may not necessarily reflect the
amounts a consumer needs for basic living expenses during the term of a
prospective loan, and the Bureau is concerned that such a requirement
could substantially increase costs for lenders and consumers while
adding little protection for consumers.
The Bureau solicits comment on its principle-based approach to
defining basic living expenses, including whether limitation of the
definition to ``necessary'' expenses is appropriate, and whether an
alternative, more prescriptive approach would be preferable. For
example, the Bureau solicits comment on whether the definition should
include, rather than expenses of the types and in amounts that are
``necessary'' for the purposes specified in the proposed definition,
expenses 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. The Bureau also solicits comment on whether there are standards
used in other contexts that could be relied upon by the Bureau. For
example, the Bureau is aware that the Internal Revenue Service and
bankruptcy courts have their own respective standards for calculating
amounts an individual needs for expenses while making payments toward a
delinquent tax liability or under a bankruptcy-related repayment plan.
9(a)(2) Major Financial Obligations
Proposed Sec. 1041.9(a)(2) would define the major financial
obligations component of the ability-to-repay determination specified
in Sec. 1041.9(b). Section 1041.9(b) would generally require a lender
to determine that a consumer will have sufficient residual income,
which is net income after subtracting amounts already committed for
making payments for major financial obligations, to make payments under
a prospective covered longer-term loan and to meet basic living
expenses. Payments for major financial obligations would be subject to
the consumer statement and verification evidence provisions under
proposed Sec. 1041.9(c)(3).
Specifically, proposed Sec. 1041.9(a)(2) would define 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. Comment 9(a)(2)-1 would 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
provide 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.
Expenses that the Bureau has included in the proposed definition
are expenses 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 longer-term loan. The Bureau believes that the extent to which
a particular consumer's net income is already committed to making such
payments is highly relevant to determining whether that consumer has
the ability to make payments under a prospective covered longer-term
loan. As a result, the Bureau believes 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 consumer income
already committed to such payments in determining a consumer's ability
to repay. Expenses 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. (See 12 CFR 1026.43(c)(7)(i)(A.))
The Bureau has adjusted its approach to major financial obligations
based on feedback from SERs and other industry stakeholders on 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 that the Bureau had considered an alternative approach
that would have included utility payments and regular medical expenses.
However, the Bureau now believes 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
believes 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 is not including a category of ``other legally required payments''
because the Bureau believes that category, which was included in the
Small Business Review Panel Outline, would leave too much ambiguity
about what other payments are covered. For further discussion of burden
on small businesses associated with verification requirements, see the
section-by-section analysis of Sec. 1041.9(c)(3), below.
The Bureau invites comment on whether the items included in the
proposed definition of major financial obligations are appropriate,
whether other items should be included, and, if so, whether and how the
items should be subject to verification. For example, the Bureau
invites comment on whether there are other obligations that are
typically recurring, significant, and not changeable by the consumer,
such as, for example, alimony, daycare commitments, health insurance
premiums (other than premiums deducted from a consumer's paycheck,
which are already excluded from the proposed definition of net income),
or unavoidable medical care expenses. The Bureau likewise invites
comment on whether there are payments to which a consumer may be
contractually obligated, such as payments or portions of payments under
contracts for telecommunication services, that a consumer is unable to
reduce from their amounts as of consummation, such that the amounts
should be included in the definition of major financial obligations.
The Bureau also invites comment on the inclusion in the proposed
definition of delinquent amounts due, such as on the practicality of
asking consumers about delinquent amounts due on major financial
obligations, of comparing stated amounts to any delinquent amounts that
may be included in verification evidence (e.g., in a national consumer
report), and of accounting for such amounts in projecting a consumer's
residual income during the term of the prospective loan. The Bureau
also invites comment on whether the Bureau should specify additional
rules for addressing major financial obligations that are joint
obligations of a consumer applying for a covered longer-term loan (and
of a consumer who is not applying for the loan), or whether the
provision in proposed Sec. 1041.9(c)(1) allowing lenders to consider
consumer explanations and other evidence is sufficient.
9(a)(3) National Consumer Report
Proposed Sec. 1041.9(a)(3) would define national consumer report
to mean a consumer report, as defined in section
[[Page 48006]]
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). Proposed Sec.
1041.9(c)(3)(ii) would require a lender to obtain a national consumer
report as verification evidence for a consumer's required payments
under debt obligations and required payments 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 credit reporting agencies
or bureaus. A national consumer report may be furnished to a lender
from a consumer reporting agency that is not a nationwide consumer
reporting agency, such as a consumer reporting agency that is a
reseller.
9(a)(4) Net Income
Proposed Sec. 1041.9(a)(4) would define the net income component
of the ability-to-repay determination calculation specified in Sec.
1041.9(b). Specifically, it would define the term as the total amount
that a consumer receives after the payer deducts amounts for taxes,
other obligations, and voluntary contributions that the consumer has
directed the payer to deduct, but before deductions of any amounts for
payments under a prospective covered longer-term loan or for any major
financial obligation. Proposed Sec. 1041.9(b) would generally require
a lender to determine that a consumer will have sufficient residual
income to make payments under a prospective covered longer-term loan
and to meet basic living expenses. Section 1041.9(a)(6), discussed
below, would define residual income as the sum of net income that the
lender projects the consumer 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 the period. Net income would be
subject to the consumer statement and verification evidence provisions
under proposed Sec. 1041.9(c)(3).
The proposed definition is 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 believes 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. Other deductions may not be revocable,
at least for a significant period of time, as a result of contractual
obligations to 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, between consummation of a loan and
the time when payments under the loan would begin to fall due. The
Bureau also believes 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 longer-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
proposed definition would clarify, however, that net income is
calculated before deductions of any amounts for payments under a
prospective covered longer-term loan or for any major financial
obligation. The Bureau proposes the clarification to prevent double
counting any such amounts when making the ability-to-repay
determination.
The Bureau invites comment on the proposed definition of net income
and whether further guidance would be helpful.
9(a)(5) Payment Under the Covered Longer-Term Loan
Proposed Sec. 1041.9(a)(5) would define payment under the covered
longer-term loan, which is a component of the ability-to-repay
determination calculation specified in Sec. 1041.9(b). Proposed Sec.
1041.9(b) would generally require a lender to determine that a consumer
will have sufficient residual income to make payments under a covered
longer-term loan and to meet basic living expenses. Specifically, the
definition of payment under the covered longer-term loan in proposed
Sec. 1041.9(a)(5)(i) and (ii) would include 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. 1041.9(a)(5)(iii) provides
special rules for projecting payments under the covered loan on lines
of credit for purposes of the ability-to-repay test, since actual
payments for lines of credit may vary depending on usage.
Proposed Sec. 1041.9(a)(5)(i) would apply to all covered longer-
term loans. It would define payment under the covered longer-term loan
broadly to mean the combined dollar amount payable by the consumer in
connection with the covered loan at a particular time following
consummation. Under proposed Sec. 1041.9(b), the lender would be
required to reasonably determine the payment amount under this proposed
definition as of the time of consummation. The proposed definition
would further provide that in calculating the payment under the covered
longer-term loan, the lender must assume that the consumer has made
preceding required payments and that the consumer 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 longer-term loan.
Proposed Sec. 1041.9(a)(5)(ii) would similarly apply to all covered
longer-term loans and would clarify that payment under the covered loan
includes all principal, interest, charges, and fees.
The Bureau believes that a broad definition, such as the one
proposed, is necessary to capture the full dollar amount payable by the
consumer in connection with the covered longer-term loan, including
amounts for voluntary insurance or memberships and regardless of
whether amounts are due to the lender or another person. 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 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. The Bureau recognizes,
however, that there is great variety in the repayment terms of covered
longer-term loans, and that under the terms of some covered longer-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 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
[[Page 48007]]
with the covered longer-term loan. Proposed comment 9(a)(5)(i) and
9(a)(5)(ii)-1 includes three examples applying the proposed definition
to scenarios in which the payment under the covered longer-term loan
includes several components, including 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. 1041.9(a)(5)(iii) would include 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 9(a)(5)(iii)-1, such rules
are 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 longer-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. 1041.9(a)(5)(iii)
therefore prescribes assumptions that a lender must make in calculating
the payment under the covered longer-term loan. It would require the
lender to assume that the consumer will utilize the full amount of
credit under the covered longer-term loan as soon as the credit is
available to the consumer, that the consumer will make only minimum
required payments under the covered longer-term loan, and, if the terms
of the covered longer-term loan would not provide for termination of
access to the line of credit by a date certain and for full repayment
of all amounts due by a subsequent date certain, that the consumer must
repay any remaining balance in one payment on the date that is 180 days
following the consummation date. The lender would then apply the
ability-to-repay determination to that assumed repayment schedule.
The Bureau believes these assumptions about a consumer's
utilization and repayment are important to ensure that the lender makes
its ability-to-repay determination based on the most challenging loan
payment that a consumer may face under the covered longer-term loan.
They also reflect the likely borrowing and repayment behavior of many
consumers who obtain covered loans with a line of credit. Such
consumers are typically facing an immediate liquidity need and, in
light of the relatively high cost of credit, would normally seek a line
of credit approximating the amount of the need. Assuming the lender
does not provide a line of credit well in excess of the consumer's
need, the consumer is then likely to draw down the full amount of the
line of credit shortly after consummation. Liquidity-constrained
consumers may make only minimum required payments under a line of
credit and, if the terms of the covered longer-term loan provide for an
end date, may then face having to repay the outstanding balance in one
payment at a time specified under the terms of the covered loan. It is
such a payment that is likely to be the highest payment possible under
the terms of the covered longer-term loan and therefore the payment for
which a consumer is least likely to have the ability to repay. Indeed,
as discussed above in Market Concerns--Longer-Term Loans, consumers
very often refinance or reborrow when such a high payment falls due,
even after successfully making a series of lower, often interest-only
minimum payments. The lender would then apply the ability-to-repay
determination to that assumed repayment schedule.
For any covered longer-term loan with a line of credit that does
not provide for a date certain by which the outstanding balance must be
repaid, the definition would require the lender to assume full
repayment of the outstanding balance 180 days after consummation. It
would ensure that lenders make the required ability-to-repay
determination for an assumed repayment schedule that would result in
full repayment of the loan and provide lenders with greater certainty
as to how to comply with the requirements of Sec. 1041.9.
The Bureau invites comment on the proposed definition of payment
under the covered longer-term loan. Specifically, the Bureau invites
comment on whether the provisions of proposed Sec. 1041.9(a)(5) are
sufficiently comprehensive and clear to allow for determination of a
payment under the wide variety of terms that are available under
covered longer-term loans, especially for lines of credit. The Bureau
also invites comment on the proposed approach to lines of credit that
do not provide for repayment by a date certain and whether an
alternative approach would be more appropriate for purposes of
assessing ability to repay.
9(a)(6) Residual Income
Proposed Sec. 1041.9(a)(6) would define the residual income
component of the ability-to-repay determination calculation specified
in Sec. 1041.9(b). Specifically, it would 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 the period, all of which projected amounts must be
based on verification evidence, as provided under Sec. 1041.9(c).
Proposed section 1041.9(b) would generally require a lender to
determine that a consumer will have sufficient residual income to make
payments under a covered longer-term loan and to meet basic living
expenses.
The proposed definition would ensure that a lender's ability-to-
repay determination cannot rely on the amount of a consumer's net
income that, as of the time a prospective loan would be consummated, is
already committed to pay for major financial obligations during the
applicable period. For example, a consumer's net income may be greater
than the amount of a loan payment, so that the lender successfully
obtains the loan payment from a consumer's deposit account once the
consumer's income is deposited into the account. But if the consumer is
then left with insufficient funds to make payments for major financial
obligations, such as a rent payment, then the consumer may be forced to
choose between failing to pay rent when due, forgoing basic needs, or
reborrowing.
9(b) Reasonable Determination Required
Proposed Sec. 1041.9(b) would prohibit lenders from making covered
longer-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 are made in accordance with Sec. 1041.11 or
Sec. 1041.12. Specifically, Sec. 1041.9(b)(1) requires lenders to
make a reasonable determination of ability to repay before making a new
covered longer-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. 1041.9(b)(2) specifies 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 require
the assessment to be based on projections of the consumer's net income,
major financial obligations, and basic living
[[Page 48008]]
expenses that are made in accordance with proposed Sec. 1041.9(c). It
would require 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 term of the loan. It would further require
that for a covered longer-term balloon-payment loan, a lender must
conclude that the consumer, after making the highest payment under the
loan, will continue to be able to meet major financial obligations as
they fall due and meet basic living expenses for a period of 30
additional days. Finally, proposed Sec. 1041.9(b)(2) would require
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. 1041.10, a lender must make the additional
determinations required by proposed Sec. 1041.10 before extending
credit.
9(b)(1)
Proposed Sec. 1041.9(b)(1) would provide generally that, except as
provided in 1041.11 or Sec. 1041.12, a lender must not make a covered
longer-term loan or increase the credit available under a covered
longer-term loan unless the lender first makes a reasonable
determination of ability to repay for the covered longer-term loan. The
provision would also impose a requirement to determine a consumer's
ability to repay before advancing additional funds under a covered
longer-term loan that is a line of credit if such advance would occur
more than 180 days after the date of a previous required determination.
Section 1041.9(b)(1)(i) would provide that a lender is not required
to make the determination when it makes a covered longer-term loan
under the conditions set forth in Sec. 1041.11 or Sec. 1041.12. The
conditions that would apply under Sec. 1041.11 and Sec. 1041.12
provide alternative protections from the harms caused by covered
longer-term loan payments that exceed a consumer's ability to repay,
such that the Bureau is proposing to allow lenders to make such loans
in accordance with the regulation without engaging in an ability-to-
repay determination under Sec. Sec. 1041.9 and 1041.10. (See the
section-by-section analysis of Sec. Sec. 1041.11 and 1041.12, below.)
The Bureau notes that proposed Sec. 1041.9(b)(1) would require the
ability-to-repay determination before a lender actually takes one of
the triggering actions. The Bureau recognizes 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 Sec.
1041.9(b)(1) would not require a lender to make the ability-to-repay
determination for every covered longer-term loan application it
receives, but rather only before taking one of the enumerated actions
with respect to a covered longer-term loan. Similarly, nothing in
proposed Sec. 1041.9(b)(1) would prohibit a lender from applying
screening or underwriting approaches in addition to those required
under Sec. 1041.9(b) prior to making a covered longer-term loan.
Proposed Sec. 1041.9(b)(1)(ii) would provide that for a covered
longer-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
will have the ability to repay the covered longer-term loan. 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
deteriorated significantly. 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
believes 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 balances the burden on lenders and
the protective benefit for consumers.
Reasonable Determination
Proposed Sec. 1041.9(b) would require a lender to make a
reasonable determination that a consumer will be able to repay a
covered longer-term loan according to its terms. As discussed above and
as reflected in the provisions of proposed Sec. 1041.9(b), a consumer
has the ability to repay a covered loan according to its terms 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 without, as a result of making payments under a covered
loan, having to reborrow.
Proposed comment 9(b)-1 provides an overview of the baseline
methodology that would be required as part of a reasonable
determination of a consumer's ability to repay in Sec. Sec.
1041.9(b)(2), 1041.9(c), and 1041.10 and under their associated
commentary.
Proposed comment 9(b)-2 would identify standards for evaluating
whether a lender's ability-to-repay determinations under proposed Sec.
1041.9 are reasonable. It would clarify minimum requirements of a
reasonable ability-to-repay determination; identify assumptions that,
if relied upon by the lender, render a determination not reasonable;
and establish that the overall performance of a lender's covered
longer-term loans is evidence of whether the lender's determinations
for those covered longer-term loans are reasonable.
The proposed standards would not impose bright line rules
prohibiting covered longer-term loans based on fixed mathematical
ratios or similar distinctions, and they are designed to apply to the
wide variety among covered longer-term loans and lender business
models. For many lenders and many loans, several aspects of the
proposed standards will not be applicable at all. For example, a lender
that does not make covered longer-term balloon-payment loans would not
have to make the determination under proposed Sec. 1041.9(b)(2)(ii),
concerning a consumer's ability to meet basic living expenses over a
30-day period following the highest payment under these types of loans.
Moreover, the Bureau does 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, each lender would be
required under proposed Sec. 1041.18 to develop and implement policies
and procedures for approving and making covered longer-term loans in
compliance with the proposed standards and based on the types of
covered longer-term loans that the lender makes. A lender would then
apply its own policies and procedures to its underwriting decisions,
which the Bureau anticipates could be largely automated for the
majority of consumers and covered longer-term loans.
Minimum requirements. Proposed comment 9(b)-2.i would provide that
for a lender's ability-to-repay determination
[[Page 48009]]
to be reasonable, the lender must comply with applicable provisions in
proposed Sec. 1041.9. It also provides additional interpretation of
what makes a determination reasonable. For example, it would note that
the determination must include the applicable determinations provided
in Sec. 1041.9(b)(2), be based on reasonable projections of a
consumer's net income and major financial obligations in accordance
with Sec. 1041.9(c), be based on reasonable estimates of a consumer's
basic living expenses under Sec. 1041.9(b), and appropriately account
for the possibility of volatility in a consumer's income and basic
living expenses during the term of the loan under Sec.
1041.9(b)(2)(i). It would also have to be consistent with the lender's
written policies and procedures required under Sec. 1041.18(b).
Proposed comment 9(b)-2.i would also provide that to be reasonable,
a lender's ability-to-repay determination must be grounded in
reasonable inferences and conclusions in light of information the
lender is required to obtain or consider. As discussed above, each
lender would be required under proposed Sec. 1041.18 to develop
policies and procedures for approving and making covered longer-term
loans in compliance with the proposal. The policies and procedures
would specify the conclusions that the lender makes based on
information it obtains, and lenders would then be able to largely
automate application of those policies and procedures for most
consumers. For example, proposed Sec. 1041.9(c) would require a lender
to obtain verification evidence for a consumer's net income and
payments for major financial obligations, but it would provide for
lender discretion in resolving any ambiguities in the verification
evidence to project what the consumer's net income and payments for
major financial obligations will be following consummation of the
covered longer-term loan.
Finally, proposed comment 9(b)-2.i would provide 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 Sec.
1041.9, that indicates that the consumer may not have the ability to
repay a covered longer-term loan according to its terms. The provision
would not require a lender to obtain information other than information
specified in proposed Sec. 1041.9. However, a lender might become
aware of information that casts doubt on whether a particular consumer
would have the ability to repay a particular prospective covered
longer-term loan. For example, proposed Sec. 1041.9 would not require
a lender to inquire about a consumer's individual transportation or
medical expenses, and the lender's ability-to-repay method might comply
with the proposed requirement to estimate consumers' basic living
expenses by factoring into the estimate of basic living expenses a
normal allowance for expenses of this type. But if the lender learned
that a particular consumer had a transportation or recurring medical
expense dramatically in excess of an amount the lender used in
estimating basic living expenses for consumers generally, proposed
comment 9(b)-2.i would clarify that the lender could not simply ignore
that fact. Instead, it would have to consider the transportation or
medical expense and then reach a reasonable determination that the
expense does not negate the lender's otherwise reasonable ability-to-
repay determination.
The Bureau invites comment on the minimum requirements for making a
reasonable determination of ability to repay, including whether
additional specificity should be provided in the regulation text or in
the commentary with respect to circumstances in which a lender is
required to take into account information known by the lender.
Determinations that are not reasonable. Proposed comment 9(b)-2.ii
would provide two examples of ability-to-repay determinations that are
not reasonable. The first example is a determination that relies on an
assumption that the consumer will obtain additional consumer credit to
be able to make payments under the covered longer-term loan, to make
payments under major financial obligations, or to meet basic living
expenses. The Bureau believes that a consumer whose net income would be
sufficient to make payments under a prospective covered longer-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 longer-term loan. Although the Bureau believes this
reasoning is clear, it is proposing the commentary example because some
lenders have argued that the mere fact that a lender successfully
secures repayment of the full amount due from a consumer's deposit
account shows that the consumer had the ability to repay the loan, even
if the consumer then immediately has to reborrow to meet the consumer's
other obligations and expenses. Inclusion of the example in commentary
would confirm that an ability-to-repay determination is not reasonable
if it relies on an implicit assumption that a consumer will have the
ability to repay a covered longer-term loan for the reason that the
consumer will obtain further consumer credit to make payments under
major financial obligations or to meet basic living expenses.
The second example in proposed comment 9(b)-2.ii of an ability-to-
repay determination that is not reasonable 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. 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. 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. As discussed in Market
Concerns--Longer-Term Loans, above, the high incidence of reborrowing
and refinancing coinciding with balloon payments under longer-term
loans strongly 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. 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 therefore
believes that basing a determination of a consumer's ability to repay
on such speculative projections would not be reasonable.
The Bureau, invites comment on whether there are any circumstances
under which basing an ability-to-repay determination for a covered
longer-term loan on assumed future borrowing or assumed future
accumulation of savings would be reasonable.
Performance of a lender's covered longer-term loans as evidence. In
determining whether a lender has complied with the requirements of
proposed Sec. 1041.9, there is a threshold
[[Page 48010]]
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. In some cases, a lender might have carried
out these steps but still have violated Sec. 1041.9 by making
determinations that are facially unreasonable, such as if a lender's
determinations assume that a consumer needs amounts to meet basic
living expenses that are clearly insufficient for that purpose.
In other cases the reasonableness or unreasonableness of a lender's
determinations might be less clear. Accordingly, proposed comment 9(b)-
2.iii would provide that evidence of whether a lender's determinations
of ability to repay are reasonable may include the extent to which the
lender's determinations subject to Sec. 1041.9 result in rates of
delinquency, default, and reborrowing for covered longer-term loans, as
well as how those rates compare to the rates of other lenders making
similar covered longer-term loans to similarly situated consumers. As
discussed above, the Bureau recognizes that the affordability of loan
payments is not the only factor that affects whether a consumer repays
a covered longer-term loan according to its terms without reborrowing.
A particular consumer may obtain a covered longer-term loan with
payments that are within the consumer's ability to repay at the time of
consummation, but factors such as the consumer's continual opportunity
to work, willingness to repay, and financial management may affect the
performance of that consumer's loan. Similarly, a particular consumer
may obtain a covered longer-term loan with payments that exceed the
consumer's ability to repay at the time of consummation, but factors
such as a lender's use of a leveraged payment mechanism, taking of
vehicle security, and collection tactics, as well as the consumer's
ability to access informal credit from friends or relatives, might
result in repayment of the loan without reborrowing or other indicia of
harm that are visible through observations of loan performance and
reborrowing. However, if a lender's determinations subject to proposed
Sec. 1041.9 regularly result in rates of delinquency, default, or
reborrowing that are significantly higher than those of other lenders
making similar covered longer-term loans to similarly situated
consumers, that fact is evidence that the lender may be systematically
underestimating amounts that consumers generally need for basic living
expenses, or is in some other way overestimating consumers' ability to
repay.
Proposed comment 9(b)-2.iii would not mean that a lender's
compliance with the requirements of Sec. 1041.9 for a particular loan
could be determined based on the performance of that loan. Nor would
proposed comment 9(b)-2.iii mean that comparison of the performance of
a lender's covered longer-term loans with the performance of covered
longer-term loans of other lenders could be the sole basis for
determining whether that lender's determinations of ability to repay
comply or do not comply with the requirements of Sec. 1041.9. 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. Similarly, the fact that one lender's default rates are
similar to the default rates of other lenders does not indicate that
the lenders' determinations of ability to repay are reasonable; the
similar rates could also result from the fact that the lenders'
respective determinations of ability to repay are similarly
unreasonable. The Bureau believes, however, that such comparisons will
provide important evidence that, considered along with other evidence,
would facilitate evaluation of whether a lender's ability-to-repay
determinations are reasonable.
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 Sec.
1041.9 and otherwise result in covered longer-term loan performance
that is materially better than that of peer lenders, the covered
longer-term loan performance may help show that the lender's
determinations are reasonable. Similarly, 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. On
the other hand, if consumers experience systematically worse rates of
delinquency, default, and reborrowing on covered longer-term loans made
by lender A, 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.
The Bureau invites comment on whether and, if so, how the
performance of a lender's portfolio of covered longer-term loans should
be factored in to an assessment of whether the lender has complied with
its obligations under the rule, including whether the Bureau should
specify thresholds which presumptively or conclusively establish
compliance or non-compliance and, if so, how such thresholds should be
determined.
Payments Under a Covered Longer-Term Loan
Proposed comment 9(b)-3 notes that a lender is responsible for
calculating the timing and amount of all payments under the covered
longer-term loan. The timing and amount of all loan payments under the
covered longer-term loan are an essential component of the required
reasonable determination of a consumer's ability to repay under
proposed Sec. 1041.9(b)(2)(i), (ii), and (iii). Calculation of the
timing and amount of all payments under a covered longer-term loan is
also necessary to determine which component determinations under
proposed Sec. 1041.9(b)(2)(i), (ii), and (iii) apply to a particular
prospective covered longer-term loan. Proposed comment 9(b)-3 cross
references the definition of payment under a covered longer-term loan
in proposed Sec. 1041.9(a)(5), which includes requirements and
assumptions that apply to a lender's calculation of the amount and
timing of all payments under a covered longer-term loan.
Basic Living Expenses
A lender's ability-to-repay determination under proposed Sec.
1041.9(b) would be 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
longer-term loan. As discussed above, Sec. 1041.9(a)(1) would define
basic living expenses as expenditures, other than payments for major
financial obligations, that the consumer must make 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 members of
the consumer's household who are financially dependent on the consumer.
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
[[Page 48011]]
income is sufficient to make payments for major financial obligations
and for the covered longer-term loan, the determination would greatly
overestimate a consumer's ability to repay a covered longer-term loan
and would be unreasonable. 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 believes there would be nearly
universal consensus that such a determination would be unreasonable.
However, the Bureau recognizes that in contrast with payments under
most major financial obligations, which the Bureau 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, a consumer may have somewhat greater ability to reduce in the
short-run some expenditures that do not meet the Bureau's proposed
definition of major financial obligations. For example, a consumer may
be able for a period of time to reduce commuting expenses by ride
sharing.
Accordingly, the Bureau is not proposing to prescribe a particular
method that a lender would be required to use for estimating an amount
of funds that a consumer requires to meet basic living expenses for an
applicable period. Instead, proposed comment 9(b)-4 would provide the
principle that whether a lender's method complies with the Sec. 1041.9
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 9(b)-4 would provide a non-exhaustive list of
methods that may be reasonable ways to estimate basic living expenses.
The first method is 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. This example is based on a method that
several lenders have told the Bureau they currently 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 notes that the Bureau of Labor Statistics conducts a periodic
survey of consumer expenditures which may be useful for this purpose.
The Bureau invites comment on whether the example should identify
consideration of a consumer's income, location, and household size as
an important aspect of the method.
The second method is to obtain additional reliable information
about a consumer's expenses other than the information required to be
obtained under Sec. 1041.9(c), to develop a reasonably accurate
estimate of a consumer's basic living expenses. The example would not
mean that a lender is required to obtain this information but would
clarify that doing so may be one effective method of estimating a
consumer's basic living expenses. 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 is any method that reliably predicts basic living
expenses. The Bureau is 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 would expect to evaluate the reliability of such
methods by taking into account the performance of the lender's covered
longer-term loans, as discussed in proposed comment 9(b)-3.iii.
Proposed comment 9(b)-4 would provide a non-exhaustive list of
unreasonable methods of determining basic living expenses. The first
example is 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 is a method of setting minimum percentages of income or dollar
amounts that, when used in ability-to-repay determinations for covered
longer-term loans, have yielded high rates of default and reborrowing
relative to rates of default and reborrowing of other lenders making
covered longer-term loans to similarly situated consumers.
The Bureau solicits comment on all aspects of the proposed
requirements for estimating basic living expenses, including the
methods identified as reasonable or unreasonable, whether additional
methods should be specified, or whether the Bureau should provide
either a more prescriptive method for estimating basic living expenses
or a safe harbor methodology (and, if so, what that methodology should
be). The Bureau also solicits comment on whether lenders should be
required to ask consumers to identify, on a written questionnaire that
lists common types of basic living expenses, how much they typically
spend on each type of expense. The Bureau further solicits comment on
whether and how lenders should be required to verify the completeness
and correctness of the amounts the consumer lists and how a lender
should be required to determine how much of the identified or verified
expenditures is necessary or, under the alternative approach to
defining basic living expenses discussed above, is recurring and not
realistically reducible during the term of the prospective loan.
9(b)(2)
Proposed Sec. 1041.9(b)(2) would set forth the Bureau's specific
proposed methodology for making a reasonable determination of a
consumer's ability to pay a covered longer-term loan. Specifically, it
would provide that a lender's determination of a consumer's ability to
repay is reasonable only if, based on projections in accordance with
Sec. 1041.9(c), the lender reasonably makes the applicable
determinations provided in Sec. Sec. 1041.9(b)(2)(i) and (iii).
Section 1041.9(b)(2)(i) would require an assessment of the sufficiency
of the consumer's residual income during the term of the loan, while
Sec. 1041.9(b)(2)(ii) requires assessment of an additional period in
light of the special harms associated with loans with balloon-payment
structures.
Section 1041.9(b)(2)(iii) would require compliance with additional
requirements in proposed Sec. 1041.10 in situations in which the
consumer's borrowing history suggests that he or she may have
difficulty repaying additional credit.
9(b)(2)(i)
Proposed Sec. 1041.9(b)(2)(i) would provide that for any covered
longer-term loan subject to the ability-to-repay requirement of Sec.
1041.9, a lender must reasonably conclude that the consumer's residual
income will be sufficient for the consumer to make all payments under
the covered longer-term loan and to meet basic living expenses during
the term of covered longer-term loan. As defined in proposed Sec.
1041.9(a)(6) residual income is the
[[Page 48012]]
amount of a consumer's net income during a period that is not already
committed to payments under major financial obligations during the
period. If the payments for a covered longer-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 reborrowing or suffer collateral harms from
unaffordable payments.
In proposing Sec. 1041.9(b)(2)(i) the Bureau recognizes that, even
when lenders determine at the time of consummation that consumers will
have the ability to repay a covered longer-term loan, some consumers
may still face difficulty making payments under covered longer-term
loans because of changes that occur after consummation. 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 make a reasonable
assessment of the consumer's ability to repay ex ante. Rather, proposed
Sec. 1041.9(b)(2)(i) looks to the facts as reasonably knowable prior
to consummation and would mean that a lender is prohibited from making
a covered longer-term loan subject to Sec. 1041.9 if there is not a
reasonable basis at consummation for concluding that the consumer will
be able to make payments under the covered longer-term loan while also
meeting the consumer's major financial obligations and meeting basic
living expenses.
While some consumers may have so little (or no) residual income as
to be unable to afford any loan, for other consumers the ability to
repay will depend on the amount and timing of the required repayments.
Thus, even if a lender concludes that there is not a reasonable basis
for believing that a consumer can pay a particular prospective loan,
proposed Sec. 1041.9(b)(2)(i) would not prevent a lender from making a
different covered longer-term loan with more affordable payments to
such a consumer, provided that the more affordable payments would not
consume so much of a consumer's residual income that the consumer would
be unable to meet basic living expenses and provided further that the
alternative loan is consistent with applicable State law.
Applicable Period for Residual Income
As discussed above, under proposed Sec. 1041.9(b)(2)(i) a lender
must reasonably conclude that the consumer's residual income will be
sufficient for the consumer to make all payments under the covered
longer-term loan and to meet basic living expenses during the term of
the covered longer-term loan. To provide greater certainty, facilitate
compliance, and reduce burden, the Bureau is proposing comment
9(b)(2)(i)-1.i to explain how lenders could comply with Sec.
1041.9(b)(2)(i).
Proposed comment 9(b)(2)(i)-1 would provide that for a covered
longer-term loan, a lender complies with the requirement in Sec.
1041.9(b)(2)(i) if it reasonably determines that for the month with the
highest sum of payments (if applicable) under the covered longer-term
loan, the consumer's residual income will be sufficient for the
consumer to make the payments and to meet basic living expenses during
that month. The method of compliance in proposed comment 9(b)(2)(i)-1.i
would allow a lender to make one determination using the sum of all
payments due in the month, rather than having to make a separate
determination for, for example, each payment period. For loans longer
than 45 days, the Bureau believes that the particular number and amount
of net income payments and payments for major financial obligations
that will accrue following consummation and before a payment due date
is less instructive for determining sufficiency of the consumer's
residual income, compared to when a loan is less than 45 days. (See
section-by-section analysis of proposed Sec. 1041.5(b)(2), above.)
Accordingly, proposed comment 9(b)(2)(i)-1.i would allow a lender to
apply the determination (i.e., that residual income for a period will
be sufficient for the consumer to make prospective loan payments during
the period while meeting basic living expenses during the period) to a
monthly period. However, because some covered longer-term loans may
have payment structures that cause higher payments, or a higher number
of payments, to fall due within one month versus other months during
the term of the covered longer-term loan, proposed comment 9(b)(2)(i)-
1.i specifies that the determination applies to the month with the
highest sum of payments, if applicable. If the same sum of payments
would be due in each month, or if the highest sum of payments applies
to more than one month, the lender could make the determination for any
such month. Proposed comment 9(b)(2)(i)-1.i includes an example
applying the method of compliance to a covered loan with six biweekly
payments, the last of which is higher than the first five biweekly
payments.
The Bureau believes that, in general, a lender's projection of a
consumer's residual income in compliance with proposed Sec. 1041.9(c)
for a covered longer-term loan will not vary from payment period to
payment period. Thus, if the consumer's projected residual income for
the month with the highest sum of payments will be sufficient for the
consumer to make those payments while also meeting basic living
expenses during that month, then that fact is generally sufficient to
infer that the same would be true for other months as well. Such an
inference would not necessarily be supported, however, if, to reach a
conclusion that the consumer will have sufficient residual income in
the month with the highest sum of payments, the lender relies on a
projected increase in the consumer's residual income during the term of
the loan (e.g., a projected spike in a consumer's net income coinciding
with the month when the highest payment is due). In that case, even if
the projected spike were itself reasonable, there would not necessarily
be a reasonable basis to infer that the consumer would also have
sufficient residual income in other months (e.g., when the consumer's
net income is projected to be lower) for the consumer to make the sum
of lower payments due in that month. Accordingly, proposed comment
9(b)(2)(i)-1.i would clarify that the method of compliance it describes
is not applicable if the lender's determination relies on a projected
increase in the consumer's residual income during the term of the loan.
In that case, to comply with proposed Sec. 1041.9(b)(2)(i), the lender
would be have to use some other method to determine that the consumer's
residual income will be sufficient for the consumer to make all
payments under the covered longer-term loan and to meet basic living
expenses during the term of covered longer-term loan.
The Bureau invites comment on all aspects of its proposed
applicable time periods for assessing residual income.
Sufficiency of Residual Income; Accounting for Volatility in Net Income
and Basic Living Expenses
As discussed above, under proposed Sec. 1041.9(b)(2)(i) a lender
must reasonably conclude that the consumer's residual income will be
sufficient for the consumer to make all payments under the covered
longer-term loan and to meet basic living expenses during the term of
the covered longer-term loan. Proposed comment 9(b)(2)(i)-2 would
clarify what constitutes
[[Page 48013]]
``sufficient'' residual income for a covered longer-term loan.
For a covered longer-term loan, proposed comment 9(b)(2)(i)-2.i
would provide that the determination of ``sufficient'' residual income
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. It clarifies that reasonably accounting for
volatility requires considering the length of the covered longer-term
loan term because the longer the term of a covered longer-term loan,
the greater the possibility that residual income could decrease or
basic living expenses could increase at some point during the term of
the covered longer-term loan, increasing the risk that the consumer's
residual income will be insufficient at some point during the term of
the covered longer-term loan.
Proposed comment 9(b)(2)(i)-2.i identifies two ways that a lender
reasonably accounts for the possibility of volatility in a consumer's
residual income or basic living expenses. First, it provides that a
lender does so 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 covered longer-term loan and of the
amount needed for basic living expenses. It clarifies that a cushion is
reasonably determined if it is large enough so that a consumer would
have sufficient residual income to make payments under the covered
longer-term loan despite volatility in net income or basic living
expenses experienced by similarly situated consumers during a similar
period of time. Second, proposed comment 9(b)(2)(i)-2.i provides that a
lender also reasonably accounts for the possibility of volatility in
consumer income by reasonably determining that a particular consumer is
unlikely to experience such volatility notwithstanding the experience
of otherwise similarly situated consumers during a similar period of
time, such as if a consumer has stable employment and receives a salary
and sick leave and health insurance.
The provision in proposed comment 9(b)(2)(i)-2.i requiring a lender
to account for volatility does not mean that a lender must provide a
cushion that is so large that it could shield a consumer from
extraordinary shocks in income or basic living expenses, such as those
resulting from job loss or medical bills from catastrophic illness. But
occasional reductions in hours (and resulting earnings) or occasional
spikes in expenses (such as an occasional spike in a utility bill) are
very much to be expected over the course of a longer-term loan.\691\
Thus proposed comment 9(b)(2)(i)-2.i provides that for a covered
longer-term loan, it is not reasonable to assume that the consumer has
the ability to make all of the required payments under the loan if a
consumer who experiences ordinary volatility in income or basic living
expenses would not have sufficient residual income so that, after
making loan payments under the covered longer-term loan, she would be
able to meet basic living expenses. The Bureau's outreach found that
that at least two lenders that currently undertake ability-to-repay
determinations already impliedly or expressly consider volatility of
consumer income and expenses in determining what loan payments a
consumer can afford.
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\691\ See generally Diana Farrell & Fiona Greig, Weathering
Volatility: Big Data on the Financial Ups and Downs of U.S.
Individuals (2015), https://www.jpmorganchase.com/content/dam/jpmorganchase/en/legacy/corporate/institute/document/54918-jpmc-institute-report-2015-aw5.pdf; Anthony Hannagan & Jonathan Morduch,
Income Gains and Month-to-Month Income Volatility: Household
Evidence from the US Financial Diaries (2015), http://www.usfinancialdiaries.org/paper-1.
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The Bureau invites comment on all aspects of its proposal for
accounting for volatility in projected net income and basic living
expenses, including whether lenders can reasonably account for
volatility in income and basic living expenses and, if so, whether
additional specificity should be provided as to how to do so. The
Bureau also invites comment on whether there are other circumstances,
other than the duration of a loan, that should affect how lenders
account for volatility.
9(b)(2)(ii)
Proposed Sec. 1041.9(b)(2)(ii) would provide that for a covered
longer-term balloon-payment loan subject to the ability-to-repay
requirement of Sec. 1041.9, a lender must reasonably conclude that the
consumer will be able to make payments required for major financial
obligations as they fall due, to make any remaining payments under the
covered longer-term balloon-payment loan, and to meet basic living
expenses for 30 days after having made the highest payment under the
covered longer-term loan on its due date. Proposed comment 9(b)(2)(ii)-
1 notes that a lender must include in its determination under Sec.
1041.9(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 Sec. 1041.9(c). Proposed comment
9(b)(2)(ii)-1 also includes an example of a covered longer-term loan
for which a lender could not make a reasonable determination that the
consumer will have the ability to repay under Sec. 1041.9(b)(2)(ii).
The Bureau proposes to include the requirement in Sec.
1041.9(b)(2)(ii) for covered longer-term balloon-payment loans because
the Bureau's research has found that these loan structures are
particularly likely to result in reborrowing around the time that a
balloon payment is due.\692\ When a covered longer-term loan's terms
provide for repayment under a schedule that includes a payment that is
much larger than the other payments, the fact that the consumer must
repay so much or at one time makes it especially likely that the
consumer will be left with insufficient funds to make subsequent
payments under major financial obligations and to meet basic living
expenses. The consumer may then end up falling behind on payments under
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 longer-term loan.
---------------------------------------------------------------------------
\692\ See Market Concerns--Longer-Term Loans.
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This shortfall in a consumer's funds is most likely to occur
following the highest payment under the covered longer-term loan (which
is typically but not necessarily the final payment) and before the
consumer's subsequent receipt of significant income. However, depending
on regularity of a consumer's income payments and payment amounts, the
point within a consumer's monthly expense cycle when the problematic
covered longer-term loan payment falls due, and the distribution of a
consumer's expenses through the month, the resulting shortfall may not
manifest until a consumer has attempted to meet all expenses in the
consumer's monthly expense cycle. Indeed, as noted in Market Concerns--
Short-Term Loans, many payday loan borrowers who repay a first loan and
do not reborrow during the ensuing pay cycle (i.e., within 14 days)
nonetheless do find it necessary to reborrow before the end of the
expense cycle (i.e., within 30 days).
In the Small Business Review Panel Outline, the Bureau described a
proposal to require lenders to determine that a consumer will have the
ability to repay a covered short-term loan without needing to reborrow
for 60 days, consistent with the its proposal in the same document to
treat a loan taken within 60 days of having a prior covered
[[Page 48014]]
short-term loan outstanding as part of the same sequence. Several
consumer advocates have argued that consumers may be able to juggle
expenses and financial obligations for a time, so that an unaffordable
loan may not result in reborrowing until after a 30-day period. For the
reasons discussed further above in the section-by-section analyses of
Sec. 1041.6, the Bureau is now proposing a 30-day period for both
purposes.
The Bureau believes that the incidence of reborrowing caused by
balloon-payment loan structures would be somewhat ameliorated simply by
determining that a consumer will have residual income during the term
of the loan that exceeds the sum of covered longer-term loan payments
plus an amount necessary to meet basic living expenses during that
period. But if the loan payments consume all of a consumer's residual
income during the period other than the amount needed to meet basic
living expenses during the period, then the consumer will be left with
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. Often, though, the
opposite is true: A lender schedules the due dates of loan payments
under covered longer-term loans so that the loan payment due date
coincides with dates of the consumer's receipts of income. This
practice maximizes the probability that the lender will timely receive
the payment under the covered longer-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. 1041.9(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, even if a lender made a reasonable determination under
proposed Sec. 1041.9(b)(2)(i) that the consumer would have sufficient
residual income during the loan term to make loan payments under the
covered longer-term balloon-payment loan and meet basic living expenses
during the period, there would remain a significant risk that, as a
result of an unaffordable highest payment, the consumer would be forced
to reborrow or suffer collateral harms from unaffordable payments. The
example included in proposed comment 9(b)(2)(ii)-1 illustrates just
such a result.
The Bureau invites comment on the necessity of the requirement in
proposed Sec. 1041.9(b)(2)(ii) to prevent consumer harms and on any
alternatives that would adequately prevent consumer harm while reducing
burden for lenders. The Bureau also invites comment on whether the 30-
day period in proposed Sec. 1041.9(b)(2)(ii) is the appropriate period
of time to use or whether a shorter or longer period of time, such as
the 60-day period described in the Small Business Review Panel Outline,
would be appropriate. The Bureau also invites comment on whether the
time period chosen should run from the date of the final payment,
rather than the highest payment, in cases where the highest payment is
other than the final payment.
9(b)(2)(iii)
Proposed Sec. 1041.9(b)(2)(iii) would provide that for a covered
longer-term loan for which a presumption of unaffordability applies
under Sec. 1041.10, the lender must determine that the requirements of
proposed Sec. 1041.10 are satisfied. As discussed below, proposed
Sec. 1041.10 would apply certain presumptions and requirements when
the consumer's borrowing history indicates that he or she may have
particular difficulty in repaying a new covered longer-term loan with
certain payment amounts or structures.
9(c) Projecting Consumer Net Income and Payments for Major Financial
Obligations
Proposed Sec. 1041.9(c) provides requirements that would apply to
a lender's projections of net income and major financial obligations,
which in turn serve as the basis for the lender's reasonable
determination of ability to repay. Specifically, it would establish
requirements for obtaining information directly from a consumer as well
as specified types of verification evidence. It would also provide
requirements for reconciling ambiguities and inconsistencies in the
information and verification evidence.
9(c)(1) General
As discussed above, Sec. 1041.9(b)(2) would provide that a
lender's determination of a consumer's ability to repay is reasonable
only if the lender determines that the consumer will have sufficient
residual income during the term of the loan to repay the loan and still
meet basic living expenses. Proposed Sec. 1041.9(b)(2) thus carries
with it the requirement for a lender to make projections with respect
to the consumer's net income and major financial obligations--the
components of residual income--during the relevant period of time.
Proposed Sec. 1041.9(b)(2) further provides that to be reasonable such
projections must be made in accordance with proposed Sec. 1041.9(c).
Proposed Sec. 1041.9(c)(1) would provide 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.
1041.9(c)(3)(i), and verification evidence as provided for in proposed
Sec. 1041.9(c)(3)(ii), each of which are discussed below. Proposed
Sec. 1041.9(c)(1) further provides 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.
The Bureau believes verification of consumers' net income and
payments for major financial obligations is 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 under 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 reborrow. This result is especially likely if a consumer
perceives that, for any given loan amount, lenders offer only one-size-
fits-all loan repayment structure and will not offer an alternative
loan with payments that are within the consumer's ability to repay. An
ability-to-repay determination that is based on unrealistic factual
assumptions will yield unrealistic and unreliable results, leading to
the consumer harms that the Bureau's proposal is intended to prevent.
Accordingly, proposed Sec. 1041.9(c)(1) would permit a lender to
base its projection of the amount and timing of a consumer's net income
or payments under major financial obligations on a consumer's written
statement of amounts and timing under Sec. 1041.9(c)(3)(i) only to the
extent the stated amounts and timing are consistent with verification
evidence of the type specified in Sec. 1041.9(c)(3)(ii). Proposed
Sec. 1041.9(c)(1) would further provide that in determining whether
and the extent to which such stated amounts and timing are consistent
with verification evidence, a lender may reasonably consider other
reliable
[[Page 48015]]
evidence the lender obtains from or about the consumer, including any
explanations the lender obtains from the consumer. The Bureau believes
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.
However, the proposed approach also recognizes 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 longer-term loans may have varied over a
period preceding the prospective covered longer-term loans, 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 longer-term loan, immediately following a temporary decrease in
net income from their more typical levels. As a result, a lender's
compliance with proposed Sec. 1041.9(c)(1) would often mean it must
project a consumer's likely or typical level of net income during the
term of the prospective covered longer-term loan, based in part on
varying recent net income receipts shown in the verification evidence.
Accordingly, the proposed approach would not require a lender to base
its projections exclusively on the consumer's most recent net income
receipt shown in the verification evidence. Instead, it allows the
lender reasonable flexibility in the inferences the lender draws about,
for example, a consumer's net income during the term of the covered
longer-term 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 allow 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.
As discussed above, proposed comment 9(b)(2)(i)-2 addresses the
proposed requirement for a lender to reasonably account for the
possibility of volatility in a consumer's residual income (and basic
living expenses), as would occur for a consumer whose net income may
vary from a lender's reasonable projection of net income in accordance
with proposed 1041.9(c)(1).
In this regard, the proposed approach recognizes that a consumer's
own statements, explanations, and other evidence are important
components of a reliable projection of future net income and payments
for major financial obligations. Proposed comment 9(c)(1)-1 includes
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 includes 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 examples do
not address compliance or noncompliance with the proposed requirement
in Sec. 1041.9(c)(3)(ii) for a lender to obtain a reliable records
covering ``sufficient'' history of income payments.
The Bureau anticipates 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. 1041.9(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 believes that many
lenders and vendors would develop methods of automating projections, so
that for a typical consumer, relatively little labor would be required.
The Bureau invites comment on the proposed approach to verification
and to making projections based upon verified evidence, including
whether the Bureau should permit projections that vary from the most
recent verification evidence and, if so, whether the Bureau should be
more prescriptive with respect to the permissible range of such
variances.
9(c)(2) Changes Not Supported by Verification Evidence
Proposed Sec. 1041.9(c)(2) would provide an exception to the
requirement in Sec. 1041.9(c)(1) that projections must be consistent
with the verification evidence that a lender would be required to
obtain under proposed 1041.9(c)(3)(ii). As discussed below, the
required verification evidence will normally consist of third-party
documentation or other reliable records of recent transactions or of
payment amounts. Proposed Sec. 1041.9(c)(2) would permit a lender to
project a net income amount that is higher than an amount that would
otherwise be supported under Sec. 1041.9(c)(1), or a payment amount
under a major financial obligation that is lower than an amount that
would otherwise be supported under Sec. 1041.9(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. The exception would
accommodate situations in which 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 generally required under proposed Sec. 1041.9(c)(3)(ii)(A).
Proposed Sec. 1041.9(c)(2) would permit 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 be required to retain the statement
in accordance with proposed Sec. 1041.18.
The Bureau invites comment as to whether lenders should be
permitted to rely on such evidence in projecting residual income.
9(c)(3) Evidence of Net Income and Payments for Major Financial
Obligations
9(c)(3)(i) Consumer Statements
Proposed Sec. 1041.9(c)(3)(i) would require a lender to obtain a
consumer's written statement of the amount and timing of the consumer's
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, etc.). 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 be required to retain the statements in
accordance with proposed Sec. 1041.18. As discussed above, the Bureau
believes it is important to require lenders to obtain this information
directly from consumers in addition to obtaining reasonably available
verification evidence under proposed
[[Page 48016]]
Sec. 1041.9(c)(3)(ii) because the latter sources of information may
sometimes contain ambiguous, out-of-date, or missing information.
Accordingly, the Bureau believes that projections based on both sources
of information will be more reliable than either one standing alone.
Proposed comment 9(c)(3)(i)-1 clarifies that 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 and retains. It further clarifies 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 paid through the period required under Sec.
1041.9(b)(2). Proposed comment 9(c)(3)(i)-1 includes 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. 1041.9(c)(3)(i) would not specify any
particular form or even particular questions or particular words that a
lender must use to obtain the required consumer statements.
The Bureau invites comment on whether to require a lender to obtain
a written statement from the consumer with respect to the consumer's
income and major financial obligations, including whether the Bureau
should establish any procedural requirements with respect to securing
such a statement and the weight that should be given to such a
statement. The Bureau also invites comments on whether a written
memorialization by the lender of a consumer's oral statement should not
be considered sufficient.
9(c)(3)(ii) Verification Evidence
Proposed Sec. 1041.9(c)(3)(ii) would require 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 period of
time prior to consummation. It would specify the type of verification
evidence required for net income and each component of major financial
obligations. The proposed requirements are intended to provide
reasonable assurance that the lender's projections of a consumer's net
income and payments for major financial obligations are based on
accurate and objective information, while also allowing lenders to
adopt innovative, automated, and less burdensome methods of compliance.
A lender making a covered longer-term loan within 30 days of the
borrower having an outstanding covered short-term loan or covered
longer-term balloon-payment loan would also be, in certain
circumstances, required under proposed Sec. 1041.10 to obtain
verification evidence for components of residual income that a consumer
states have changed since obtaining the preceding loan or for certain
prior loans relative to the components of residual income for the prior
30 days.
9(c)(3)(ii)(A)
Proposed Sec. 1041.9(c)(3)(ii)(A) would specify that for a
consumer's 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
Sec. 1041.9(c)(1). It would not specify a minimum look-back period or
number of net income payments for which the lender must obtain
verification evidence. The Bureau believes that, generally, the term of
a loan will affect the period of time for which a lender will need
verification evidence in order reasonably to project the consumer's net
income. However, the Bureau does not believe it is necessary or
appropriate to require verification evidence covering a lookback period
of a prescribed length. Rather, sufficiency of the history for which a
lender obtains verification evidence may depend upon the term of the
prospective covered longer-term loan and the consistency of the income
shown in the verification evidence the lender initially obtains. For
example, a lender's normal practice in making loans for six-month terms
may be to obtain verification evidence showing the consumer's three
most recent receipts of net income. But if there is significant
variation in a particular consumer's three most recent receipts of net
income, simply projecting income based on the highest of the three
would generally not comply with proposed Sec. 1041.9(c)(1). (See the
example in proposed comment 9(c)(1)-D.) A lender's examination of
additional receipts of consumer net income might show that the highest
of the three most recent receipts of net income initially examined is
in fact typical for that consumer and that the lower amounts were
aberrational. In that case, the lender may be able to reasonably
project income based on that highest of the three most recent amounts,
for the reason that the combination of the initial and additional
receipts of consumer net income the lender examines is sufficient to
support the lender's projection of net income. On the other hand, for a
consumer who recently started a new job and has received only one
salary payment, verification evidence showing the amount and timing of
the payment may be sufficient to support the lender's projection.
Lenders would be required to develop and maintain policies and
procedures for establishing the sufficient history of net income
payments in verification evidence tailored to the covered longer-term
loans they make, in accordance with proposed Sec. 1041.18.
Proposed comment 9(c)(3)(ii)(A)-1 would clarify 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
would further clarify that 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.
The Bureau believes that the proposed requirement would be
sufficiently flexible to provide lenders with multiple options for
obtaining verification evidence for a consumer's net income. For
example, a paper paystub would generally satisfy the requirement, as
would a photograph of the paystub uploaded from a mobile phone to an
online lender. In addition, 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 9(c)(3)(ii)(A)-1 would also
allow 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.
[[Page 48017]]
Several SERs expressed concern during the SBREFA process that the
Bureau's approach to income verification described in the Small
Business Review Panel Outline was too burdensome and inflexible.
Several other lender representatives expressed similar concerns during
the Bureau's outreach to industry. Many perceived that the Bureau would
require outmoded or burdensome methods of obtaining verification
evidence, such as always requiring a consumer to submit a paper paystub
or transmit it by facsimile (fax) to a lender. Others expressed concern
about the Bureau requiring income verification at all, stating that
many consumers are paid in cash and therefore have no employer-
generated records of income.
The Bureau's proposed approach is intended to respond to many of
these concerns by providing for a wide range of methods for obtaining
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. In developing this proposal, Bureau staff met
with dozens of lenders, nearly all of which stated they already use
some method--though not necessarily the precise methods the Bureau is
proposing--to verify consumers' income as a condition of making a
covered longer-term loan. The Bureau's proposed approach thus
accommodates most of the methods they described and that the Bureau is
aware of from other research and outreach. It is also intended to
provide some accommodation for making covered longer-term loans to many
consumers who are paid in cash. For example, under the Bureau's
proposed approach, a lender may be 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. Lenders
often require consumers to have deposit accounts as a condition of
obtaining a covered longer-term loan, so the Bureau believes that
lenders would be able to obtain verification evidence for many
consumers who are paid in cash in this manner.
The Bureau recognizes that there are some consumers who receive a
portion of their income in cash and also do not deposit their cash
income 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 that
portion of such consumers' income. The Bureau, however, does not
believe it is appropriate to make an ability-to-repay determination for
a covered longer-term loan based on income that cannot be reasonably
substantiated through any verification evidence. When there is no
verification evidence for a consumer's net income, the Bureau believes
the risk is too great that projections of net income would be
overstated and that payments under a covered longer-term loan
consequently would exceed the consumer's ability to repay, resulting in
the harms targeted by this proposal.
For similar reasons, the Bureau is not proposing 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.
Given the risks associated with unaffordable loan payments, the Bureau
believes that such models--which the Bureau believes typically are used
to estimate annual income--lack the precision required to reasonably
project an individual consumer's net income for a short period of time.
The Bureau notes that it has received recommendations from the
Small Dollar Roundtable, comprised of a number of lenders making loans
the Bureau proposes to cover in this rulemaking and a number of
consumer advocates, recommending that the Bureau require income
verification as provided for above.
The Bureau invites comment on the types of verification evidence
permitted by the proposed rule and what, if any, other types of
verification evidence should be permitted, especially types of
verification evidence that would be at least as objective and reliable
as the types provided for in proposed Sec. 1041.9(c)(3)(ii)(A) and
comment 9(c)(3)(ii)(A)-1. For example, the Bureau is aware of service
providers who are seeking to develop methods to verify a consumer's
stated income based upon extrinsic data about the consumer or the area
in which the consumer lives. The Bureau invites comment on the
reliability of such methods, their ability to provide information that
is sufficiently current and granular to address a consumer's stated
income for a particular and short period of time, and, if they are able
to do so, whether income amounts determined under such methods should
be a permissible as a form of verification evidence. The Bureau also
invites comments on whether the requirements for verification evidence
should be relaxed for a consumer whose principal income is documented
but who reports some amount of supplemental cash income and, if so,
what approach would be appropriate to guard against the risk of
consumers overstating their income and obtaining an unaffordable loan.
9(c)(3)(ii)(B)
Proposed Sec. 1041.9(c)(3)(ii)(B) would specify 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 Sec. 1041.17(d)(2), if available. The Bureau believes
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 national consumer reporting
agencies, so the lender would also be required to obtain, as
verification evidence, a consumer report from a designated reporting
system. As discussed above, Sec. 1041.9(c)(1) would permit 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 9(c)(1)-1 includes examples applying that
proposed requirement in scenarios when a major financial obligation
shown in the verification evidence 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 verification evidence at all.
Proposed comment 9(c)(3)(ii)(B)-1 would clarify 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. The Bureau anticipates that in some cases, the
national consumer report the lender obtains will not include a
particular debt obligation stated by the consumer, or that the national
consumer report may include, for example, the payment amount under the
debt obligation but not the timing of the payment. Similar anomalies
could occur with covered loans and a consumer report obtained from a
designated reporting system. To the extent the national consumer report
and consumer report from a designated reporting system omit information
for a
[[Page 48018]]
payment under a debt obligation stated by the consumer, the lender
would simply base its projections on the amount and timing stated by
the consumer.
The Bureau notes that proposed Sec. 1041.9(c)(3)(ii)(B) does not
require a lender to obtain a credit report unless the lender is
otherwise prepared to make a loan to a particular consumer. Because
obtaining a credit report will add some cost, the Bureau expects that
lenders will order such reports only after determining that the
consumer otherwise satisfies the ability-to-repay test so as to avoid
incurring these costs for applicants who would be declined without
regard to the contents of the credit report. For the reasons previously
discussed, the Bureau believes that verification evidence is critical
to ensuring that consumers in fact have the ability to repay a loan,
and that therefore the costs are justified to achieve the objectives of
the proposal.
The Bureau invites comment on whether to require lenders to obtain
credit reports from a national credit reporting agency and from a
registered information system. In particular, and in accordance with
the recommendation of the Small Business Review Panel, the Bureau
invites comment on ways of reducing the operational burden for small
businesses of verifying consumers' payments under major financial
obligations.
9(c)(3)(ii)(C)
Proposed Sec. 1041.9(c)(3)(ii)(C) would specify that for a
consumer's required payments under court- or government agency-ordered
child support obligations, the applicable verification evidence would
be a national consumer report, which also serves as verification
evidence for a consumer's required payments under debt obligations, in
accordance with proposed Sec. 1041.9(c)(3)(ii)(B). The Bureau
anticipates that some required payments under court- or government
agency-ordered child support obligations will not appear in a national
consumer report. To the extent the national consumer report omits
information for a required payment, the lender could simply base its
projections on the amount and timing stated by the consumer, if any.
The Bureau intends this clarification to address concerns from some
lenders, including from SERs, that a requirement to obtain verification
evidence for payments under court- or government agency-ordered child
support obligations from sources other than a national consumer report
would be onerous and create uncertainty.
9(c)(3)(ii)(D)
Proposed Sec. 1041.9(c)(3)(ii)(D) would specify 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), 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 with
households in the locality of the consumer.
Proposed comment 9(c)(3)(ii)(D)-1 explains that the proposed
provision means a lender would have three methods that it could choose
from for complying with the requirement to obtain verification evidence
for a consumer's housing expense. Proposed comment 9(c)(3)(ii)(D)-1.i
explains that under the first method, which could be used for a
consumer whose housing expense is a mortgage payment, the lender may
obtain a national consumer report that includes the mortgage payment. A
lender would be required to obtain a national consumer report as
verification evidence of a consumer's payments under debt obligations
generally, pursuant to Sec. 1041.9(c)(3)(ii)(B). A lender's compliance
with that requirement would satisfy the requirement in proposed Sec.
1041.9(c)(3)(ii)(D), provided the consumer's housing expense is a
mortgage payment and that mortgage payment appears in the national
consumer report the lender obtains.
Proposed comment 9(c)(3)(ii)(D)-1.ii explains that the second
method is for the lender to obtain a reliable transaction record (or
records) of recent housing expense payments or a rental or lease
agreement. It clarifies that for purposes of this method, reliable
transaction records include a facially genuine original, photocopy or
image of a receipt, cancelled check, or money order, or an electronic
or paper record of depository account transactions or prepaid account
transactions (including transactions on a general purpose reloadable
prepaid card account, a payroll card account, or a government benefits
card account), from which the lender can reasonably determine that a
payment was for housing expense as well as the date and amount paid by
the consumer. This method mirrors options a lender would have for
obtaining verification evidence for net income. Accordingly, data
derived from a record of depository account transactions or of prepaid
account transactions, such as data from account data aggregator
services that obtain and categorize consumer deposit account and other
account transaction data, would also generally satisfy the requirement.
Bureau staff have met with service providers that state that they
currently provide services to lenders and are typically able to
identify, for example, how much a particular consumer expends on
housing expense as well as other categories of expenses.
Proposed comment 9(c)(3)(ii)(D)-1.iii explains that the third
method is for a lender to use 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 locality of the consumer seeking a
covered loan. Proposed comment 9(c)(3)(ii)(D)-1.iii provides, as an
example, that a lender may use data from a statistical survey, such as
the American Community Survey of the United States Census Bureau, to
estimate individual or household housing expense in the locality (e.g.,
in the same census tract) where the consumer resides. It provides that,
alternatively, 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
explains that a lender may estimate a consumer's share of household
expense based on estimated household housing expense by reasonably
apportioning the estimated household housing expense by the number of
persons sharing housing expense as stated by the consumer, or by
another reasonable method.
Several SERs expressed concern during the SBREFA process that the
Bureau's approach to housing expense verification described in the
Small Business Review Panel Outline was burdensome and impracticable
for many consumers and lenders. Several lender representatives
expressed similar concerns during the Bureau's outreach to industry.
The Small Business Review Panel Outline 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. But some
SERs and other lender representatives stated many consumers
[[Page 48019]]
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 subsequently locating and transmitting
or delivering a copy of the lease to a lender would be unduly
burdensome, if not impracticable, for both consumers and lenders.
The Bureau believes that many consumers would have paper or
electronic records that they could provide to a lender to establish
their housing expense. In addition, as discussed above, information
presented to the Bureau during outreach suggests that data aggregator
services may be able to electronically and securely obtain and
categorize, with a consumer's consent, the consumer's deposit account
or other account transaction data to reliably identify housing expenses
payments and other categories of expenses.
Nonetheless, the Bureau intends its proposal to be responsive to
these concerns by providing lenders with multiple options for obtaining
verification evidence for a consumer's housing expense, including by
using estimates based on the housing expenses of similarly situated
consumers with households in the locality of the consumer seeking a
covered loans. The Bureau's proposal also is intended to facilitate
automation of the methods of obtaining the verification evidence,
making projections of a consumer's housing expense, and calculating the
amounts for an ability-to-repay determination, such as residual income.
A related concern raised by some SERs is that a consumer may be the
person legally obligated to make a rent or mortgage payment but may
receive contributions toward it from other household members, so that
the payment the consumer makes, even if the consumer can produce a
record of it, is much greater than the consumer's own housing expense.
Similarly, a consumer may make payments in cash to another person, who
then makes the payment to a landlord or mortgage servicer covering the
housing expenses of several residents. During outreach with industry,
one lender stated that many of its consumers would find requests for
documentation of housing expense to be especially intrusive or
offensive, especially consumers with informal arrangements to pay rent
for a room in someone else's home.
To address these concerns, the Bureau is proposing the option of
estimating a consumer's housing expense based on the individual or
apportioned household housing expenses of similarly situated consumers
with households in the locality. The Bureau believes the proposed
approach would address the concerns raised by SERs and other lenders
while also reasonably accounting for the portion of a consumer's net
income that is consumed by housing expenses and, therefore, not
available for payments under a prospective loan. The Bureau notes that
if the method the lender uses to obtain verification evidence of
housing expense for a consumer--including the estimated method--
indicates a higher housing expense amount than the amount in the
consumer's statement under proposed Sec. 1041.9(c)(3)(i), then
proposed Sec. 1041.9(c)(1) would generally require a lender to rely on
the higher amount indicated by the verification evidence. Accordingly,
a lender may prefer use one of the other two methods for obtaining
verification evidence, especially if doing so would result in
verification evidence indicating a housing expense equal to that in the
consumer's written statement of housing expense.
The Bureau recognizes that in some cases the consumer's actual
housing expense may be lower than the estimation methodology would
suggest but may not be verifiable through documentation. For example,
some consumers may live for a period of time rent-free with a friend or
relative. However, the Bureau does not believe it is possible to
accommodate such situations without permitting lenders to rely solely
on the consumer's statement of housing expenses, and for the reasons
previously discussed the Bureau believes that doing so would jeopardize
the objectives of the proposal. The Bureau notes that the approach it
is proposing is consistent with the recommendation of the Small Dollar
Roundtable which recommended that the Bureau permit rent to be verified
through a ``geographic market-specific . . .valid, reliable proxy.''
The Bureau invites comment on whether the proposed methods of
obtaining verification evidence for housing expense are appropriate and
adequate.
Sec. 1041.10 Additional Limitations on Lending--Covered Longer-Term
Loans
Background
Proposed Sec. 1041.10 would augment the basic ability-to-repay
determination required by proposed Sec. 1041.9 in circumstances in
which the consumer's recent borrowing history or current difficulty
repaying an outstanding loan provides important evidence with respect
to the consumer's financial capacity to afford a new covered longer-
term loan. In these circumstances, proposed Sec. 1041.10 would require
the lender to factor this evidence into the ability-to-repay
determination. The Bureau proposes the additional requirements in Sec.
1041.10 for the same basic reason that it proposes Sec. 1041.9: to
prevent the unfair and abusive practice identified in proposed Sec.
1041.8, and the consumer injury that results from it. The Bureau
believes that these additional requirements may be needed in
circumstances in which proposed Sec. 1041.9 alone may not be
sufficient to prevent a lender from making a covered longer-term loan
that the consumer might not have the ability to repay.
Proposed Sec. 1041.10 would generally impose a presumption of
unaffordability on continued lending where evidence suggests that the
prior or outstanding loan was not affordable for the consumer, such
that the consumer may have particular difficulty repaying a new covered
longer-term loan. Specifically, such presumptions would apply when a
consumer seeks a covered longer-term loan during the term of 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 and for 30
days thereafter, unless payments on the new covered longer-term loan
would meet certain conditions, or seeks to take out a covered longer-
term loan when there are indicia that an outstanding loan with the same
lender or its affiliate is unaffordable for the consumer. Proposed
Sec. 1041.10 would also prohibit lenders from making a covered longer-
term loan under proposed Sec. 1041.9 during the term of and shortly
following a covered short-term loan made by the same lender or its
affiliate under proposed Sec. 1041.7.
The Bureau is proposing a presumption of unaffordability in
situations in which the fact that the consumer is seeking to take out a
new covered longer-term loan during the term of, or in certain
circumstances shortly after repaying, a prior loan with similar
payments suggests that the new loan, like the prior loan, will exceed
the consumer's ability to repay. As
[[Page 48020]]
discussed above in the section-by-section analysis of proposed Sec.
1041.6, the Bureau believes that the most common explanation when a
consumer returns to borrow within 30 days of a prior covered short-term
loan is that the prior loan was unaffordable. As discussed further
below, the Bureau believes based on its research that it makes sense to
apply the same presumption where a borrower returns to borrow within 30
days of a prior covered long-term balloon-payment loan. And as
discussed further below, the Bureau believes it is appropriate to apply
a presumption where there are indicia that the borrower is already in
distress with regard to other types of loans outstanding with the same
lender.
The presumption is based on concerns that, in these narrowly-
defined circumstances, the prior loan may have triggered the need for
the new loan because it exceeded the consumer's ability to repay, and
that, absent an increase in residual income or a substantial decrease
in the size of the payments on the loan, the new loan will also be
unaffordable for the consumer. As with covered short-term loans, the
Bureau is concerned that payments on a covered longer-term loan that
exceed a consumer's ability to repay will cause the consumer to
experience harms associated with defaulting on the loan or satisfying
the loan payment but being unable to then meet other financial
obligations and basic living expenses.
The presumption can be overcome, however, in circumstances that
suggest that there is sufficient reason to believe that the consumer
would, in fact, be able to afford the new loan even though he or she is
seeking to reborrow during the term of or shortly after a prior loan.
The Bureau recognizes, for example, that there may be situations in
which the prior loan would have been affordable but for some unforeseen
disruption in income or unforeseen increase in major financial
obligations that occurred during the prior expense cycle and is not
reasonably expected to recur during the underwriting period under Sec.
1041.9 for the new loan. The Bureau also recognizes 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--for example, if the consumer has obtained a
second, steady job that will increase the consumer's residual income
going forward or the consumer has moved in the prior 30 days and will
have lower housing expenses going forward.
Proposed Sec. 1041.10(b) and (c) would define a set of
circumstances in which the Bureau believes that consumer's recent
borrowing history makes it unlikely that the consumer can afford a new
covered longer-term loan on terms similar to a prior or existing
loan.\693\ In such circumstances, a consumer would be presumed to not
have the ability to repay a covered longer-term loan under proposed
Sec. 1041.9. Proposed Sec. 1041.10(d) would define the additional
determinations that a lender would be required to make in cases where
the presumption applies in order for the lender's determination under
proposed Sec. 1041.9 that the consumer will have the ability to repay
a new covered longer-term loan to be reasonable despite the
unaffordability of the prior loan. In addition, for the convenience of
lenders and so that all restrictions relating to covered longer-term
loans made under proposed Sec. 1041.9 are found in one section of the
proposed rule, proposed Sec. 1041.10(e) contains a prohibition
relating to effectuation of the provisions for making covered short-
term loans under proposed Sec. 1041.7.
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\693\ The Bureau notes that the proposed ability-to-repay
requirements do not prohibit a consumer from taking out a covered
longer-term loan when the consumer has one or more covered loans
outstanding, but instead account for the presence of concurrent
loans in two ways: (1) A lender would be required to obtain
verification evidence about required payments on debt obligations,
which are defined under proposed Sec. 1041.9(a)(2) to include
outstanding covered loans, and (2) any concurrent loans would be
counted for purposes of applying the presumptions and prohibition
under proposed Sec. 1041.10. See the section-by-section analysis of
proposed Sec. Sec. 1041.6 and 1041.7(c)(1) for further discussion
of how the proposed rule treats concurrent loans.
---------------------------------------------------------------------------
The Bureau notes that this overall proposed approach is fairly
similar to the framework included in the Small Business Review Panel
Outline. There, the Bureau included a presumption of inability to repay
for a covered longer-term loan if there are circumstances indicating
distress and the new loan is made during the term of a prior loan,
whether covered or not, from the same lender or its affiliates, or is
made during the term of a prior covered loan from any lender. The
Bureau considered a ``changed circumstances'' standard for overcoming
the presumption that would have required lenders to obtain and verify
evidence of a change in consumer circumstances indicating that the
consumer had the ability to repay the new loan according to its terms.
The Bureau also, as noted above, included a 60-day reborrowing period
in the Small Business Review Panel Outline.
SERs and other stakeholders that offered feedback on the Outline
urged the Bureau to provide greater flexibility with regard to using a
presumptions framework to address concerns about repeated borrowing
despite the contemplated requirement to determine ability to repay. The
SERs and other stakeholders also urged the Bureau to provide greater
clarity and flexibility in defining the circumstances that would permit
a lender to overcome the presumption of unaffordability.
The Small Business Review Panel Report recommended that the Bureau
request comment on whether a loan sequence could be defined with
reference to a period shorter than the 60 days under consideration
during the SBREFA process. The Small Business Review Panel Report
further recommended that the Bureau consider additional approaches to
regulation, including whether existing State laws and regulations could
provide a model for elements of the Bureau's proposed interventions. In
this regard, the Bureau notes that some States have cooling-off periods
of one to seven days, as well as longer periods that apply after a
longer sequence of loans. The Bureau's prior research has examined the
effectiveness of these cooling-off periods \694\ and, in the CFPB
Report on Supplemental Findings, the Bureau is publishing research
showing how different definitions of loan sequence affect the number of
loan sequences and the number of loans deemed to be part of a
sequence.\695\ In the CFPB Report on Supplemental Findings, the Bureau
is publishing additional analysis on the impacts of State cooling-off
periods.\696\ The latter analysis is also discussed in Market
Concerns--Short-Term Loans.
---------------------------------------------------------------------------
\694\ See CFPB Data Point: Payday Lending, at 8.
\695\ Report on Supplemental Findings, Chapter 5.
\696\ Report on Supplemental Findings, Chapter 4.
---------------------------------------------------------------------------
The Bureau has made a number of adjustments to the presumptions
framework in response to this feedback. For instance, the Bureau is
proposing a 30-day reborrowing period rather than a 60-day reborrowing
period. The Bureau has also provided greater specificity and
flexibility about when a presumption of unaffordability would apply,
for example, by proposing certain exceptions to the presumptions of
unaffordability. The proposal also would provide somewhat more
flexibility about when a presumption of unaffordability could be
overcome by permitting lenders to determine that there would be
sufficient improvement in financial capacity for the new loan because
of a one-time drop in income since obtaining the prior loan (or during
the prior 30 days, as applicable). The Bureau has also continued to
assess
[[Page 48021]]
potential alternative approaches to the presumptions framework,
discussed below.
The Bureau solicits comment on all aspects of the proposed
presumptions of unaffordability, and other aspects of proposed Sec.
1041.10, including the circumstances in which the presumptions apply
(e.g., the appropriate length of the reborrowing period and the
appropriateness of other circumstances giving rise to the presumptions)
and the requirements for overcoming a presumption of unaffordability.
In addition, and consistent with the recommendations of the Small
Business Review Panel Report, the Bureau solicits comment on whether
the 30-day reborrowing period is appropriate for the presumptions and
prohibitions, or whether a longer or shorter period would better
address the Bureau's concerns about repeat borrowing.
Alternatives Considered
As with the additional limitations on making a covered short-term
loan under Sec. 1041.5 contained in proposed Sec. 1041.6, the Bureau
considered a number of alternative approaches to address reborrowing in
circumstances indicating that the consumer was unable to afford the
prior loan.
The Bureau considered an alternative approach under which, instead
of defining the circumstances in which a formal presumption of
unaffordability applies and the determinations that a lender must make
when such a presumption applies to a transaction, the Bureau would
identify circumstances indicative of a consumer's inability to repay
that would be relevant to whether a lender's determination under
proposed Sec. 1041.9 is reasonable. This approach would likely involve
a number of examples of indicia requiring greater caution in
underwriting and examples of countervailing factors that might support
the reasonableness of a lender's determination that the consumer could
repay a subsequent loan despite the presence of such indicia. This
alternative approach would be less prescriptive and thus leave more
discretion to lenders to make such a determination. However, it would
also provide less certainty as to when a lender's particular ability-
to-repay determination is reasonable.
In addition, the Bureau has considered whether there is a way to
account for unusual expenses within the presumptions framework without
creating an exception that would swallow the rule. In particular, the
Bureau considered permitting lenders to overcome the presumptions of
unaffordability in the event that the consumer provided evidence that
the reason the consumer was struggling to repay the outstanding loan or
was seeking to reborrow was due to a recent unusual and non-recurring
expense. For example, under such an approach, a lender could overcome
the presumption of unaffordability by finding that the reason the
consumer was seeking a new covered longer-term loan was as a result of
a recent emergency car repair, furnace replacement or an unusual
medical expense, so long as the expense is not reasonably likely to
recur during the period of the new loan. The Bureau considered
including such circumstances as an additional example of a situation in
which the consumer's financial capacity going forward could be
considered to be significantly better than it was during the prior 30
days (or since obtaining the prior loan) as described with regard to
proposed Sec. 1041.10(d) below.
While such an addition could provide more flexibility to lenders
and to consumers to overcome the presumptions of unaffordability, an
unusual and non-recurring expense test would also present several
challenges. To effectuate this test, the Bureau would need to define,
in ways that lenders could implement, what would be a qualifying
``unusual and non-recurring expense,'' a means of assessing whether a
new loan was attributable to such an expense rather than to the
unaffordability of the prior loan, and standards for how such an
unusual and non-recurring expense could be documented (e.g., through
transaction records). Such a test would have substantial implications
for the way in which the ability-to-repay requirements in Sec. 1041.9
address the standards for basic living expenses and accounting for
potential volatility over the term of a loan. Most significantly, the
Bureau is concerned that if a lender is permitted to overcome the
presumption of unaffordability by finding that the consumer faced an
unusual and non-recurring expense during repayment of the prior or
outstanding loan, this justification would be invoked in cases in which
the earlier loan had, in fact, been unaffordable. As discussed above,
the fact that a consumer may cite a particular expense shock when
seeking to reborrow does not necessarily mean that a recent prior loan
was affordable; if a consumer, in fact, lacked the ability to repay the
prior loan, it would be a substantial factor in why the consumer could
not absorb the expense. Accordingly, the Bureau believes that it may be
difficult to parse out causation and to differentiate between types of
expense shocks and the reasonableness of lenders' ability-to-repay
determinations where such shocks are asserted to have occurred.
In light of these competing considerations, the Bureau has chosen
to propose the approach of supplementing the proposed Sec. 1041.9
determination with formal presumptions. The Bureau is, however, broadly
seeking 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. Specifically, the Bureau also solicits comment on the
alternative of defining indicia of unaffordability, as described above.
In addition, the Bureau specifically seeks comment on whether to permit
lenders to overcome a presumption of unaffordability by finding that
the consumer had experienced an unusual and non-recurring expense and,
if so, on measures to address the challenges described above.
Legal Authority
As discussed in the section-by-section analysis of proposed Sec.
1041.8 above, the Bureau believes that it may be an unfair and abusive
practice to make a covered longer-term loan without determining that
the consumer will have the ability to repay the loan. Accordingly, in
order to prevent that unfair and abusive practice, proposed Sec.
1041.9 would require lenders prior to making a covered longer-term
loan--other than a loan made under a conditional exemption to the
ability-to-repay requirements in Sec. 1041.11 or Sec. 1041.12--to
make a reasonable determination that the consumer will have sufficient
income, after meeting major financial obligations, to make payments
under a prospective covered longer-term loan and to continue meeting
basic living expenses. Proposed Sec. 1041.10 would augment the basic
ability-to-repay determination required by proposed Sec. 1041.9 in
circumstances in which the consumer's recent borrowing history or
current difficulty repaying an outstanding loan provides important
evidence with respect to the consumer's financial capacity to afford a
new covered longer-term loan. The Bureau is proposing Sec. 1041.10
based on the same source of authority that serves as the basis for
proposed Sec. 1041.9: the Bureau's authority under section 1031(b) of
the Dodd-Frank Act, which
[[Page 48022]]
provides that the Bureau's rules may include requirements for the
purposes of preventing unfair, deceptive, or abusive acts or
practices.\697\
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\697\ 12 U.S.C. 5531(b). As discussed below, the Bureau is
proposing Sec. 1041.10(e) to effectuate the conditions of proposed
Sec. 1041.7 and therefore is based on its authority under section
1022(b)(3)(A) of the Dodd-Frank Act.
---------------------------------------------------------------------------
As with proposed Sec. 1041.9, the Bureau proposes the requirements
in Sec. 1041.10 to prevent the unfair and abusive practice identified
in proposed Sec. 1041.8, and the consumer injury that results from it.
The Bureau believes that the additional requirements of proposed Sec.
1041.10 may be needed in circumstances in which proposed Sec. 1041.9
alone may not be sufficient to prevent a lender from making a covered
longer-term loan that the consumer might not have the ability to repay.
Accordingly, the Bureau believes that the requirements set forth in
proposed Sec. 1041.10 bear a reasonable relation to preventing the
unfair and abusive practice identified in proposed Sec. 1041.8. In
addition, as further discussed in the section-by-section analysis of
proposed Sec. 1041.10(e), the Bureau proposes that provision pursuant
to the Bureau's authority under section 1022(b)(3)(A) of the Dodd-Frank
Act to conditionally or unconditionally exempt any class of covered
persons, service providers, or consumer financial products or services
from the requirements of a rule under Title X of the Dodd-Frank Act if
the Bureau determines that doing so is ``necessary or appropriate to
carry out the purposes and objectives'' of Title X of the Act.\698\
Further, as further discussed in the section-by-section analysis of
proposed Sec. 1041.10(f), the Bureau proposes that provision pursuant
to both the Bureau's authority under section 1031(b) of the Dodd-Frank
Act and the Bureau's authority under section 1022(b)(1) of the Dodd-
Frank Act to prevent evasions of the purposes and objectives of Federal
consumer financial laws, including Bureau rules issued pursuant to
rulemaking authority provided by Title X of the Dodd-Frank Act.\699\
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\698\ 12 U.S.C. 5512(b)(3).
\699\ 12 U.S.C. 5512(b)(1).
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10(a) Additional Limitations on Making a Covered Longer-Term Loan Under
Sec. 1041.9
Proposed Sec. 1041.10(a) would set forth the general additional
limitations on making a covered longer-term loan under proposed Sec.
1041.9. Proposed Sec. 1041.10(a) would provide that when a consumer is
presumed not to have the ability to repay a covered longer-term loan, a
lender's determination that the consumer will have the ability to repay
the loan is not reasonable, unless the lender can overcome the
presumption of unaffordability. Proposed Sec. 1041.10(a) would further
provide that a lender is prohibited from making a covered longer-term
loan to a consumer during the period specified in proposed Sec.
1041.10(e). In order to determine whether the presumptions and
prohibition in proposed Sec. 1041.10 apply to a particular
transaction, proposed Sec. 1041.10(a)(2) would require a lender to
obtain and review information about the consumer's borrowing history
from its own records, the records of its affiliates, and a consumer
report from an information system currently registered under proposed
Sec. 1041.17(c)(2) or (d)(2), if one is available.
The Bureau notes that, as drafted, the proposed presumptions and
prohibition in Sec. 1041.10 would apply only to making specific
additional covered longer-term loans. The Bureau solicits comment on
whether a presumption of unaffordability or other additional
limitations on lending also would be appropriate for transactions
involving an increase in the credit available under an existing covered
loan, making an advance on a line of credit under a covered longer-term
loan, or other circumstances that may evidence repeated borrowing. If
such limitations would be appropriate, the Bureau requests comment on
how they should be tailored in light of relevant considerations.
In this regard, the Bureau further notes that the presumptions of
unaffordability depend on the definition of outstanding loan in
proposed Sec. 1041.2(a)(15) and therefore would not cover
circumstances in which the consumer is more than 180 days delinquent on
the prior loan. The Bureau solicits comment on whether additional
requirements should apply to the ability-to-repay determination for a
covered longer-term loan in these circumstances; for instance, whether
to generally prohibit lenders from making a new covered longer-term
loan to a consumer for the purposes of satisfying a delinquent
obligation on an existing loan with the same lender or its affiliate.
In addition, the Bureau solicits comment on whether additional
requirements should apply to covered longer-term loans that are lines
of credit; for instance, whether a presumption of unaffordability
should apply at the time of the ability-to-repay determination required
under Sec. 1041.9(b)(1)(ii) for a consumer to obtain an advance under
a line of credit more than 180 days after the date of a prior ability-
to-repay determination.
The Bureau also solicits comment on the proposed standard in Sec.
1041.10(a) and on any alternative approaches to the relationship
between proposed Sec. 1041.9 and proposed Sec. 1041.10 that would
prevent consumer harm while reducing the burden on lenders. In
particular, the Bureau solicits comment on whether the formal
presumption and prohibition approach in Sec. 1041.10 is an appropriate
supplement to the Sec. 1041.9 determination.
10(a)(1) General
Proposed Sec. 1041.10(a)(1) would provide that if a presumption of
unaffordability applies, a lender's determination that the consumer
will have the ability to repay a covered longer-term loan is not
reasonable unless the lender makes the additional determination set
forth in proposed Sec. 1041.10(d), and discussed in detail below, and
the requirements set forth in proposed Sec. 1041.9 are satisfied.
Under proposed Sec. 1041.10(d), a lender can make a covered longer-
term loan notwithstanding the presumption of unaffordability if the
lender reasonably determines, based on reliable evidence, that there
will be sufficient improvement in the consumer's financial capacity
such that the consumer will have the ability to repay the new loan
according to its terms despite the unaffordability of the prior loan.
Proposed Sec. 1041.10(a)(1) would further provide that a lender must
not make a covered longer-term loan under proposed Sec. 1041.9 to a
consumer during the period specified in proposed Sec. 1041.10(e).
Proposed comment 10(a)(1)-1 clarifies that the presumptions and
prohibition would apply to making a covered longer-term loan and, if
applicable, are triggered at the time of consummation of the new
covered longer-term loan. Proposed comment 10(a)(1)-2 clarifies that
the presumptions and prohibitions would apply to rollovers of a covered
short-term loan into a covered longer-term loan (or what is termed a
``renewal'' in some States), to the extent that such transactions are
permitted under State law. Proposed comment 10(a)(1)-3 clarifies that a
lender's determination that a consumer will have the ability to repay a
covered long-term loan is not reasonable within the meaning of proposed
Sec. 1041.9 if under proposed Sec. 1041.10 the consumer is presumed
to not have the ability to repay the loan and that presumption of
unaffordability has not been overcome in the manner set forth in
proposed Sec. 1041.10(d). Accordingly, if proposed Sec. 1041.10
prohibits a lender from making a covered longer-term loan, then
[[Page 48023]]
the lender must not make the loan, regardless of the lender's
determination under proposed Sec. 1041.9. Nothing in proposed Sec.
1041.10 would displace the requirements of Sec. 1041.9; on the
contrary, the determination under proposed Sec. 1041.10 would be, in
effect, an additional component of the proposed Sec. 1041.9
determination of ability to repay in situations in which the basic
requirements of proposed Sec. 1041.9 alone would be insufficient to
prevent the unfair and abusive practice.
10(a)(2) Borrowing History Review
Proposed Sec. 1041.10(a)(2) would require a lender 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
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. 1041.10. Proposed comment 10(a)(2)-1
clarifies that a lender satisfies its obligation under Sec.
1041.10(a)(2) to obtain a consumer report obtained from an information
system currently registered pursuant to Sec. 1041.17(c)(2) or (d)(2),
if available, when it complies with the requirement in Sec.
1041.9(c)(3)(ii)(B) to obtain this same consumer report. Proposed
comment 10(a)(2)-2 clarifies that if no information systems currently
registered pursuant to Sec. 1041.17(c)(2) or (d)(2) are currently
available, the lender is nonetheless required to obtain information
about a consumer's borrowing history from the records of the lender and
its affiliates.
Based on outreach to lenders, including feedback from SERs, the
Bureau believes that lenders already generally review their own records
for information about a consumer's history with the lender prior to
making a new loan to the consumer. The Bureau understands that some
lenders in the market for covered longer-term loans also pull a
consumer report from a specialty consumer reporting agency as part of
standardized application screening, though practices in this regard
vary widely across the market.
As detailed below in the section-by-section analysis of proposed
Sec. Sec. 1041.16 and 1041.17, the Bureau believes that information
regarding the consumer's borrowing history is important to facilitate
reliable ability-to-repay determinations. If the consumer already has a
relationship with a lender or its affiliates, the lender can obtain
some historical information regarding borrowing history from its own
records. However, without obtaining a report from an information system
currently registered pursuant to Sec. 1041.17(c)(2) or (d)(2), the
lender will not know if its existing customers or new customers have
obtained a prior covered short-term loan or a prior covered longer-term
balloon-payment loan from other lenders, as such information generally
is not available in national consumer reports. Accordingly, the Bureau
is proposing in Sec. 1041.10(a)(2) to require lenders to obtain a
report from an information system currently registered pursuant to
Sec. 1041.17(c)(2) or (d)(2), if one is available.
The section-by-section analysis of proposed Sec. Sec. 1041.16 and
1041.17, and part VI below explain the Bureau's attempts to minimize
burden in connection with furnishing information to and obtaining a
consumer report from an information system currently registered
pursuant to proposed Sec. 1041.17(c)(2) or (d)(2). Specifically, the
Bureau estimates that each report would cost approximately $0.50.
Consistent with the recommendations of the Small Business Review Panel
Report, the Bureau requests comment on the cost to small entities of
obtaining information about consumer borrowing history and on potential
ways to further reduce the operational burden of obtaining this
information.
10(b) Presumption of Unaffordability for Certain Covered Longer-Term
Loans Following a Covered Short-Term Loan or Covered Longer-Term
Balloon-Payment Loan
10(b)(1) Presumption
Proposed Sec. 1041.10(b)(1) would provide that a consumer is
presumed not to have the ability to repay a covered longer-term loan
under proposed Sec. 1041.9 during the time period in which the
consumer has a covered short-term loan made under proposed Sec. 1041.5
or a covered longer-term balloon-payment loan made under Sec. 1041.9
outstanding and for 30 days thereafter. As described further below,
under an exception contained in proposed Sec. 1041.10(b)(2), the
presumption would not apply where the loan payments meet certain
conditions.
Proposed comment 10(b)(1)-1 clarifies that a lender cannot make a
covered longer-term loan under Sec. 1041.9 during the time period in
which the consumer has a covered short-term loan made under Sec.
1041.5 or a covered longer-term balloon-payment loan made under
proposed Sec. 1041.9 outstanding and for 30 days thereafter unless
either the exception to the presumption applies or the lender can
overcome the presumption under proposed Sec. 1041.10(d). The proposed
comment also clarifies that the presumption would not apply if the loan
is subject to the prohibition in proposed Sec. 1041.10(c).
Where the presumption in proposed Sec. 1041.10(b)(1) applies, it
would not be reasonable for a lender to determine that the consumer
will have the ability to repay the new covered longer-term loan without
determining under proposed Sec. 1041.10(d) that the presumption of
unaffordability had been overcome. Such a determination under proposed
Sec. 1041.10(d) would require the lender to determine, based on
reliable evidence, that the consumer will have sufficient improvement
in financial capacity such that the consumer will have the ability to
repay the new loan according to its terms despite the unaffordability
of the prior loan.
The presumption in proposed Sec. 1041.10(b) uses the same 30-day
period used in proposed Sec. 1041.6 to define when there is sufficient
risk that the need for the new loan was triggered by the
unaffordability of the prior loan. As discussed in the section-by-
section analysis of Sec. 1041.6(b), the Bureau believes that when a
consumer seeks to take out a new covered short-term loan during the
term of or within 30 days of a prior covered short-term loan, there is
substantial reason for concern that the need to reborrow is being
triggered by the unaffordability of the prior loan. The same is true if
the new loan the consumer seeks is a covered longer-term loan with a
similarly-sized payment obligation. Accordingly, proposed Sec.
1041.10(b) applies a similar presumption to a reborrowing involving a
covered longer-term loan as applies under proposed Sec. 1041.6(b) to a
reborrowing involving a covered short-term loan.
Similarly, covered longer-term balloon-payment loans, by
definition, require a large portion of the loan to be paid at one time.
As discussed in Market Concerns--Longer-Term Loans, the Bureau's
research suggests 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 found that the
approach of the balloon payment coming due is associated with
[[Page 48024]]
significant reborrowing.\700\ This also may provide strong evidence
that the consumer will not be able to afford a new covered longer-term
loan unless payments on that new loan would be substantially smaller
than were payments on the prior loan. However, the need to reborrow
caused by an unaffordable covered longer-term balloon-payment loan is
not necessarily limited to taking out a new loan of this same type. If
the borrower takes out a new covered longer-term loan other than a
covered longer-term balloon-payment loan in such circumstances, it is
also a reborrowing. Accordingly, unless every payment on the new
covered longer-term loan would be substantially smaller than the
largest payment on the prior loan, the Bureau believes that there is
substantial reason for concern that the new loan also would be
unaffordable.
---------------------------------------------------------------------------
\700\ Report on Supplemental Findings, Chapter 1. The findings
in the CFPB Report on Supplemental Findings refer to both
``refinancing'' and reborrowing.'' Consistent with the Bureau's
approach to defining reborrowing for the purposes of this proposal,
both refinancing and reborrowing, as reported in the CFPB Report on
Supplemental Findings, are considered reborrowing.
---------------------------------------------------------------------------
Given these considerations, to prevent the unfair and abusive
practice identified in proposed Sec. 1041.8, proposed Sec. 1041.10(b)
would create a presumption of unaffordability for a covered longer-term
loan during the time period in which the consumer has a covered short-
term loan made under Sec. 1041.5 or a covered longer-term balloon-
payment loan made under Sec. 1041.9 outstanding and for 30 days
thereafter. As a result of this presumption, it would not be reasonable
for a lender to determine that the consumer will have the ability to
repay the new covered longer-term loan without taking into account the
fact that the consumer did need to reborrow after obtaining a prior
loan and making a reasonable determination that the consumer will be
able to repay the new covered longer-term loan without reborrowing.
Proposed Sec. 1041.10(d), discussed below, defines the elements for
such a determination.
The Bureau solicits comment on the appropriateness of the proposed
presumption to prevent the unfair and abusive practice and on any
alternatives that would adequately prevent consumer harm while reducing
the burden on lenders. In particular, the Bureau solicits comment on
other methods of supplementing the basic ability-to-repay determination
required for a covered longer-term loan shortly following a covered
short-term loan or covered longer-term balloon-payment loan.
The Bureau also solicits comment on whether there are other
circumstances of borrowing on covered longer-term loans in close
proximity to covered short-term loans or covered longer-term balloon-
payment loans that would also warrant a presumption of unaffordability.
In this regard, the Bureau notes that it is not proposing a mandatory
cooling-off period applicable to covered longer-term loans, as proposed
for covered short-term loans in proposed Sec. 1041.6(f). However, some
consumer groups have advocated for applying a presumption of
unaffordability based on the intensity of a consumer's use of covered
loans during a defined period of time; the Bureau solicits comment on
the appropriateness of such an approach.
10(b)(2) Exception
Proposed Sec. 1041.10(b)(2) would provide an exception to the
presumption in Sec. 1041.10(b)(1) if every payment on the new covered
longer-term loan would be substantially smaller than the largest
required payment on the prior covered short-term loan or covered
longer-term balloon-payment loan. Proposed comment 10(b)(2-1 clarifies
which payment on the prior loan is the largest payment and clarifies
that the specific timing of payments on the prior loan and the new
covered longer-term loan would not affect whether the exception in
Sec. 1041.10(b)(2) applies. Proposed comment 10(b)(1)-2 provides
illustrative examples.
The Bureau believes that if payment of the largest required payment
on the prior loan proved unaffordable, this unaffordability provides a
strong basis for a presumption of unaffordability for a new covered
longer-term loan with payments of a similar size. However, if every
payment on the new covered longer-term loan would be substantially
smaller than that highest payment on the prior loan, then the Bureau
believes that there is not an adequate basis for such a presumption of
unaffordability. In these circumstances, the Bureau believes that the
basic ability-to-repay determination required by Sec. 1041.9 would be
sufficient to prevent the unfair and abusive practice identified in
proposed Sec. 1041.8.
The Bureau solicits comment on the appropriateness of the proposed
exception to the presumption of unaffordability and on any other
circumstances that would also warrant an exception to the presumption.
The Bureau further seeks comment on whether a general ``substantially
smaller'' standard is appropriate to prevent the unfair and abusive
practice; whether a specific percentage reduction would be more
appropriate; and, if so, what specific threshold or methodology should
be used and why that number or formula appropriately differentiates
substantially smaller payments. The Bureau particularly seeks comment
on what type of reduction in balloon payments would be sufficient to
warrant excepting the new loan from the presumption of unaffordability,
and whether carrying over the threshold for the exception in proposed
Sec. 1041.6(b)(2)(i) for covered short-term loans would be appropriate
in this context. That exception would generally apply when the amount
that the consumer would owe on a new covered short-term loan would not
be more than 50 percent of the amount paid on the prior covered short-
term loan (or, if the transaction is a rollover, would not be more than
the amount that the consumer paid on the prior covered short-term loan
being rolled over).
10(c) Presumption of Unaffordability for a Covered Longer-Term Loan
During an Unaffordable Outstanding Loan
Proposed Sec. 1041.10(c) would create a presumption of
unaffordability applicable to new covered longer-term loans when the
consumer has a loan outstanding that was made or is being serviced by
that same lender or its affiliate, other than a covered short-term loan
or covered longer-term balloon-payment loan that would trigger the
presumption in proposed Sec. 1041.10(b) or the prohibition in proposed
Sec. 1041.10(e), and there are indicia that the consumer cannot afford
the outstanding loan. Proposed Sec. 1041.10(c)(2) would provide an
exception to the presumption when every payment on the new covered
longer-term loan would be substantially smaller than every payment on
the outstanding loan or the new covered longer-term loan would result
in a substantial reduction in the total cost of credit for the consumer
relative to the outstanding loan.
The ability-to-repay determination under proposed Sec. 1041.9
would require that a lender appropriately account for information known
by the lender that indicates that the consumer may not have the ability
to repay a covered longer-term loan according to its terms. Proposed
Sec. 1041.10(c) would supplement and strengthen that requirement in
specific circumstances indicating that the current outstanding loan may
not be affordable for the consumer and that, therefore, the new
[[Page 48025]]
covered longer-term loan may not be affordable to the consumer.
The Bureau has found that, for the lenders whose data was available
to the Bureau, there is a very high level of refinancing, that
consumers generally are taking substantial cash out at the time of
refinancing, and that repayment patterns of consumers who refinanced a
longer-term installment loan are generally identical to repayment
patterns of consumers who ultimately repaid their loans in full.\701\
This seems to indicate that consumers in the Bureau's data use longer-
term loans as a continuing source of liquidity to meet ongoing needs.
---------------------------------------------------------------------------
\701\ See Report on Supplemental Findings, Chapter 1.
---------------------------------------------------------------------------
The Bureau believes that this evidence can be viewed in one of two
ways. On the one hand, the fact that in most situations consumers who
are refinancing these loans have been able to make the required
payments when due could be understood to suggest that they are not
refinancing a loan because of difficulty satisfying obligations on the
existing loan. On the other hand, the fact that after making a certain
number of such payments consumers need to borrow more money could be
seen as evidence that these consumers cannot afford the cumulative
effect of the repayments and that the repayments are causing the need
to reborrow. Because the evidence is ambiguous, the Bureau is not
proposing to impose a general presumption of unaffordability for
covered longer-term loans taken out during the term of or within 30
days following a previous covered longer-term loan, except with regard
to covered longer-term balloon-payment loans, as proposed in Sec.
1041.10(b) and discussed above.
However, the Bureau remains concerned that in some circumstances a
refinancing or taking out a new loan during the term of an outstanding
loan does evidence or could mask a problem a consumer is experiencing
in repaying a loan and that in these cases a new covered longer-term
loan may pose heightened risk to consumers. In particular, the Bureau
believes that it is appropriate to apply heightened review to a
consumer's ability to repay a new loan where the circumstances suggest
that the consumer is struggling to repay an outstanding loan. The
Bureau believes that the analysis required by proposed Sec. 1041.10(c)
may provide greater protection to consumers and certainty to lenders
than simply requiring that such transactions be analyzed under proposed
Sec. 1041.9 alone. Proposed Sec. 1041.9 would require generally that
the lender make a reasonable determination that the consumer will have
the ability to repay the contemplated covered longer-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. 1041.10(c) would provide a more
detailed roadmap as to when a new covered longer-term loan would not
meet the reasonable determination test.
The Bureau also has concerns about potential risks with regard to
refinancing by consumers who appear to be using covered longer-term
loans like a line of credit over time, but such concerns are not the
focus of this rulemaking. Specifically, for consumers who appear to be
refinancing in order to use a covered longer-term loan like a line of
credit over time, the Bureau is worried that other harms could result
if lenders use aggressive marketing tactics. The Bureau understands
that some lenders use aggressive marketing tactics to encourage
consumers to refinance their loans and structure their loans such that
a refinancing generates additional revenue for the lender, beyond the
incremental finance charges, as a result of, for example, prepayment
penalties, new origination fees, or new fees to purchase ancillary
products associated with the refinancing. The Bureau is concerned that
some of these practices may be unfair, deceptive, or abusive. However,
such practices fall outside of the scope of the current rulemaking. If,
however, the Bureau finds evidence of unlawful acts or practices
through its supervisory or enforcement work, the Bureau will not
hesitate to take appropriate action. Also, the Accompanying RFI seeks
further information from the public about these practices and the
Bureau also will continue to consider whether there is a need for
additional rulemaking in this area.
For the purposes of this proposal, the Bureau is focused on certain
lender practices regarding refinancing where the circumstances suggest
that the consumers are having difficulty repaying the outstanding loan.
Such practices are at the core of the Bureau's concern about making a
covered longer-term loan to a consumer without determining that the
consumer will be able to repay the loan according to its terms.
Accordingly, the Bureau proposes to supplement the basic ability-to-
repay determination in certain circumstances where the conditions of a
consumer's existing indebtedness with the same lender or its affiliate
indicate that the consumer may lack the ability to repay a new covered
longer-term loan.
10(c)(1) Presumption
Proposed Sec. 1041.10(c)(1) would require a lender to presume that
a consumer does not have the ability to repay a covered longer-term
loan if, at the time of the lender's determination under Sec. 1041.9,
the consumer has a loan outstanding that was made or is being serviced
by the same lender or its affiliate and the consumer indicates or the
circumstances suggest that the consumer may be experiencing difficulty
repaying the outstanding loan. The proposed presumption would apply
regardless of whether the outstanding loan is a covered loan, other
than when proposed Sec. 1041.10(b), (c), or (e) apply, or a non-
covered loan.
Proposed Sec. 1041.10(c)(1) would apply both to circumstances in
which the consumer applies for a new loan from the same lender that
made the outstanding loan (or its affiliate) and in which the consumer
applies for a new loan from the company that now services the
outstanding loan (or its affiliate), even if that company is not the
original lender. The Bureau believes that it is appropriate to apply
the proposed provision in the servicing scenario because the servicer
and its affiliates would be in a particularly good position to
determine if any of the four triggering circumstances in proposed Sec.
1041.10(c)(1)(i) through (iv) is present as a result of its current
relationship with the consumer, even if that company did not originate
the outstanding loan.
Proposed comment 10(c)(1)-1 clarifies that if any of the
circumstances in Sec. 1041.10(c)(1) are present such that the consumer
would be presumed to not have the ability to repay a contemplated
covered longer-term loan under Sec. 1041.9, then the lender cannot
make that loan unless one of the exceptions to the presumption applies
or the lender can overcome the presumption in the manner set forth in
proposed Sec. 1041.10(d). Proposed comment 10(c)(1)-2 clarifies that
the presumption would not apply if the consumer's only outstanding
loans are with other, unaffiliated lenders. Proposed comment 10(c)(1)-2
further clarifies that if Sec. 1041.10(b), (c), or (e) applies to the
transaction, then Sec. 1041.10(c) would not apply.
Proposed Sec. 1041.10(c)(1) would mean that in circumstances where
there is an indication that an outstanding covered loan or non-covered
loan that was made or is being serviced by the same lender or its
affiliate is unaffordable, and neither of the exceptions in
[[Page 48026]]
Sec. 1041.10(c)(2) applies, a lender cannot make a covered longer-term
loan under Sec. 1041.9 unless the lender reasonably determines, based
on reliable evidence, that the consumer will have sufficient
improvement in financial capacity such that the consumer will have the
ability to repay the new loan according to its terms, notwithstanding
the fact that the consumer was unable to repay the prior loan without
needing to reborrow.
In the Small Business Review Panel Outline, the Bureau included a
presumption of inability to repay for certain refinances of existing
loans, whether covered or not covered, from the same lender or its
affiliates into covered longer-term loans. The Bureau also considered
applying the presumption to any transaction in which the new loan would
be a covered longer-term loan and the debt being refinanced was a
covered loan from any lender. The Bureau understands, though, that
lenders may have difficulty obtaining information about whether a
consumer has indicated or the circumstances suggest an inability to
repay a covered loan made or being serviced by a different and
unaffiliated lender, rendering such a presumption particularly
burdensome in those circumstances. Accordingly, the Bureau is not
proposing such a presumption.
The Bureau solicits comment on the appropriateness of the proposed
presumption to prevent the unfair and abusive practice, on each of the
particular circumstances indicating unaffordability, discussed below,
and on any alternatives that would adequately prevent consumer harm
while reducing the burden on lenders. The Bureau also solicits comment
on whether the specified conditions sufficiently capture circumstances
in which consumers manifest distress in repaying a loan and on whether
there are additional circumstances in which it may be appropriate to
trigger the presumption of unaffordability.
In particular, the Bureau solicits comment on whether a pattern of
refinancing that significantly extends the initial term of the loan
warrants application of a presumption of unaffordability and, if so, at
what point that presumption would be warranted; whether refinancing
early in the repayment schedule of the loan would evidence
unaffordability of the outstanding loan and, if so, up until what point
in the life of the loan; and whether other performance indicators
should be included in the circumstances triggering application of a
presumption of unaffordability. In this regard, the Bureau specifically
notes that some consumer groups have encouraged the Bureau to impose a
presumption of unaffordability when a lender refinances an outstanding
loan on which the consumer has repaid less than 75 percent of the loan;
the Bureau seeks comment on the advisability of such an approach. The
Bureau also solicits comment on whether to include a specific
presumption of unaffordability in the event that the lender or its
affiliate has recently contacted the consumer for collections purposes,
received a returned check or payment attempt, or has an indication that
the consumer's account lacks funds prior to making an attempt to
collect payment. The Bureau further solicits comment on whether there
are circumstances in which a loan ceases to be an outstanding loan
within the meaning of Sec. 1041.2(a)(15) because the consumer is more
than 180 days delinquent on the loan that would nonetheless warrant
applying a presumption of unaffordability.
The Bureau further seeks comment on the timing elements of the
proposed indications of unaffordability and on whether alternative
timing conditions, such as considering whether the consumer has been
delinquent on a payment or otherwise expressed an inability to make one
or more payments within the prior 60 days, would better prevent
consumer harm. In this regard, the Bureau also solicits comment on
whether seven days is the appropriate amount of time for a buffer
period before a delinquency would prompt a presumption of
unaffordability for a new covered longer-term loan and whether a
shorter or longer period of time would be appropriate.
10(c)(1)(i)
Proposed Sec. 1041.10(c)(1)(i) would make the presumption in Sec.
1041.10(c)(1) applicable if a consumer is or has been delinquent by
more than seven days on a scheduled payment on an outstanding loan
within the past 30 days. Proposed comment 10(c)(1)(i)-1 clarifies that
older delinquencies that have been cured would not trigger the
presumption.
Recent delinquency indicates that a consumer is having difficulty
repaying an outstanding loan. Through analysis of confidential
information gathered in the course of its statutory functions, the
Bureau has observed that for covered longer-term loans that are
ultimately repaid rather than ending in default, the vast majority do
not fall more than seven days delinquent. Accordingly, the Bureau
believes that a delinquency of more than seven days indicates
unaffordability of the scheduled payment and that permitting a buffer
of seven days after a payment due date would avoid triggering the
presumption in situations where the consumer is late in making a
payment for reasons unrelated to difficulty repaying the loan.
The Bureau proposes to impose the presumption of unaffordability in
proposed Sec. 1041.10(c)(1) only if the indication of unaffordability
on the part of the consumer occurred within the 30 days prior to the
lender's determination under proposed Sec. 1041.9 for the new covered
longer-term loan. The Bureau believes that recent indications of
unaffordability are most relevant in assessing the consumer's ability
to repay. As discussed in the section-by-section analysis of Sec.
1041.9(c)(3) above, the Bureau believes that the monthly income and
expense cycle is the appropriate measure for a determination of whether
a consumer will have the ability to repay a covered longer-term loan.
Similarly, the Bureau believes that consideration of the consumer's
borrowing history on an outstanding loan with the same lender or an
affiliate within the past 30 days would appropriately identify current
unaffordability of an existing obligation.
The Bureau solicits comment on whether using a seven-day
delinquency metric and a 30-day lookback period is sufficient to
identify consumers experiencing distress in repaying a loan or whether
some other shorter or longer metric or lookback period would be more
appropriate.
10(c)(1)(ii)
Proposed Sec. 1041.10(c)(1)(ii) would make the presumption in
Sec. 1041.10(c)(1) applicable if the consumer expressed within the
past 30 days an inability to make one or more payments on the
outstanding loan. Proposed comment 10(c)(1)(ii)-1 clarifies that older
consumer expressions would not trigger the presumption and provides
illustrative examples. The Bureau believes that if a consumer informs a
lender or its representative that the consumer is having difficulty
making a payment, such information must be considered by the lender in
determining whether the consumer will have the ability to repay a new
covered longer-term loan.
As with delinquencies, the Bureau proposes to impose this
presumption of unaffordability only if the expression on the part of
the consumer occurred within the 30 days prior to the lender's
determination under proposed Sec. 1041.9 for the new covered longer-
term loan because, as described above, the Bureau believes that an
older expression from a consumer does not necessarily indicate whether
the consumer would currently
[[Page 48027]]
lack the ability to repay a covered longer-term loan.
The Bureau solicits comment on whether 30 days is an appropriate
period of time for triggering this presumption of unaffordability and,
if not, what time period should be used.
10(c)(1)(iii)
Proposed Sec. 1041.10(c)(1)(iii) would make the presumption in
Sec. 1041.10(c)(1) applicable if the new covered longer-term loan
would have the effect of the consumer being able to skip a payment on
the outstanding loan that would otherwise fall due. Proposed comment
10(c)(1)(iii)-1 provides an illustrative example. Generally, both
consumers and lenders have an incentive to make and receive regularly
scheduled payments on loans. A transaction that would have the effect
of permitting a consumer to skip a payment--without another benefit to
the consumer in the form of substantially smaller payments or a
substantial reduction in the total cost of credit, as discussed in the
section-by-section analysis of proposed Sec. 1041.10(c)(2) below--and
that would deprive the lender of the receipt of funds that would
otherwise be due may indicate a distressed refinance of the outstanding
loan. The Bureau believes that refinancing in this manner may indicate
that a consumer does not have the ability to repay a new covered
longer-term loan.
The Bureau solicits comment on whether the skipped payment metric
is an appropriate condition for application of the presumption; if so,
whether 30 days is an appropriate period of time for triggering this
presumption of unaffordability and, if not, what time period should be
used.
10(c)(1)(iv)
Proposed Sec. 1041.10(c)(1)(iv) would make the presumption in
Sec. 1041.10(c)(1) applicable if the new covered longer-term loan
would result in the consumer receiving no disbursement of loan proceeds
or a disbursement of loan proceeds that is an amount not substantially
more than the amount of payment or payments that would be due under the
outstanding loan within 30 days of consummation of the new loan.
Proposed comment 10(c)(1)(iv)-1 provides illustrative examples.
A transaction that would result in a consumer receiving only enough
cash to satisfy the forthcoming payment or payments due to the lender
or its affiliate within 30 days, the length of a typical income and
expense cycle, may indicate that the consumer is having difficulty
making payments on the outstanding loan and is seeking the new covered
longer-term loan in order to obtain cash to make those payments. The
Bureau's analysis of confidential data gathered in the course of its
statutory functions indicates that the circumstance in proposed Sec.
1041.10(c)(1)(iv) would likely occur rarely because most consumers in
the loan sample analyzed by the Bureau took out substantial cash when
refinancing a longer-term installment loan.
While the Bureau is concerned that this condition could prompt some
lenders to encourage consumers to take out loans in amounts larger than
the consumer may actually need, the Bureau believes the circumstance
may indicate that the outstanding loan is unaffordable and so the harm
of not imposing a presumption of unaffordability for a new covered
longer-term loan in this circumstance would outweigh the potential harm
of larger loans. Additionally, the Bureau notes that the lender would
still need to satisfy the requirements of proposed Sec. 1041.9 for the
new covered longer-term loan and, therefore, any loan amount would be
permissible only if the lender makes a reasonable determination that
the consumer will have the ability to repay the new covered longer-term
loan.
The Bureau solicits comment on whether a consumer who would receive
a disbursement of loan proceeds to cover more than one month's worth of
payments should also be presumed not to have the ability to repay the
new loan and, if so, at what point to draw the line in determining the
applicability of the presumption.
10(c)(2) Exception
Proposed Sec. 1041.10(c)(2) would provide an exception to the
presumption of unaffordability in Sec. 1041.10(c)(1) in the event that
the new covered longer-term loan would meet certain conditions. As
described below, the Bureau believes that if the new covered longer-
term loan would reduce the consumer's costs in certain ways, the
rationale for the presumption does not apply.
The Bureau solicits comment on the appropriateness of the proposed
exception and on any alternatives or additions that would adequately
protect consumers while reducing burden on lenders.
10(c)(2)(i)
Proposed Sec. 1041.10(c)(2)(i) would provide an exception from the
proposed presumption of unaffordability if every payment on the new
covered longer-term loan would be substantially smaller than every
payment on the outstanding loan. Proposed comment 10(c)(2)(i)-1
provides illustrative examples.
The Bureau believes that if payments of a certain amount proved
unaffordable for a given consumer, this unaffordability provides a
strong basis for a presumption of unaffordability for a new covered
longer-term loan with payments of a similar size. However, if every
payment on the new covered longer-term loan would be substantially
smaller than every payment on the outstanding loan, then the Bureau
believes that there is not an adequate basis for such a presumption of
unaffordability. In these circumstances, the Bureau believes that the
basic ability-to-repay determination required by Sec. 1041.9 would be
sufficient to prevent the unfair and abusive practice identified in
proposed Sec. 1041.8.
While the Bureau is concerned that this exception could prompt some
lenders to extend loans with substantially smaller payments but a
substantially longer duration, which could impose higher costs on the
consumer over repayment of the loan, the Bureau believes that the
benefits of this exception outweigh this potential source of consumer
harm. Additionally, the Bureau notes that the lender would still need
to satisfy the requirements of proposed Sec. 1041.9 for the new
covered longer-term loan and, therefore, any loan amount would be
permissible only if the lender makes a reasonable determination that
the consumer will have the ability to repay the loan, including
accounting for volatility in income over time.
The Bureau solicits comment on the appropriateness of providing an
exception to the proposed presumption in this circumstance. The Bureau
also solicits comment on the proposed standard for substantially
smaller payments and on alternatives--such as a specific percentage
decrease in the size of payments relative to payments on the
outstanding loan--that would adequately protect consumers while
reducing burden on lenders. In particular, the Bureau solicits comment
on available sources of information that would provide the basis for
such a standard. In addition, the Bureau particularly seeks comment on
whether carrying over the threshold for the exception in proposed Sec.
1041.6(b)(2)(i) for covered short-term loans would be appropriate in
this context. That exception would generally apply when the amount that
the consumer would owe on the new covered short-term loan would not be
more than 50 percent of the amount paid on the prior covered
[[Page 48028]]
short-term loan (or, if the transaction is a rollover, would not be
more than the amount that the consumer paid on the prior covered short-
term loan that is rolled over).
10(c)(2)(ii)
Proposed Sec. 1041.10(c)(2)(ii) would create an exception from the
proposed presumption of unaffordability if the new covered longer-term
loan would result in a substantial reduction in the total cost of
credit for the consumer relative to the outstanding loan. Proposed
comment Sec. 1041.10(c)(2)(ii)-1 clarifies that the relative total
costs of credit reflects the definition contained in proposed Sec.
1041.2(a)(18) and provides illustrative examples.
The Bureau believes that providing an exception from the
presumption of unaffordability for loans that would yield a substantial
reduction in the total cost of credit may be appropriate to enable
lenders to refinance consumers into relatively lower-cost loans. The
effect of the proposed exception would be only to relieve the burden of
the presumption of unaffordability when the refinance would result in a
benefit to the consumer in the form of a substantially lower total cost
of credit: The new covered longer-term loan would still need to satisfy
the basic ability-to-repay requirements of proposed Sec. 1041.9.
The Bureau solicits comment on the appropriateness of providing an
exception to the proposed presumption in this circumstance. The Bureau
also solicits comment on the proposed standard for substantial
reduction in the total cost of credit and on alternatives--such as a
specific percentage decrease in the total cost of credit relative to
the cost of the outstanding loan--that would adequately protect
consumers while reducing burden on lenders.
10(d) Overcoming the Presumption of Unaffordability
Proposed Sec. 1041.10(d) would set forth the elements required for
a lender to overcome the presumptions of unaffordability in proposed
Sec. 1041.10(b) and (c). Proposed Sec. 1041.10(d) would provide that
a lender can overcome the presumption of unaffordability only if the
lender reasonably determines, based on reliable evidence, that the
consumer will have sufficient improvement in financial capacity such
that the consumer will have the ability to repay the new loan according
to its terms despite the unaffordability of the prior loan. Proposed
Sec. 1041.10(d) would require lenders to measure sufficient
improvement in financial capacity by comparing the consumer's financial
capacity during the period for which the lender is required to make an
ability-to-repay determination for the new loan pursuant to Sec.
1041.9(b)(2) to the consumer's financial capacity since obtaining the
prior loan or, if the prior loan was not a covered short-term loan or
covered longer-term balloon-payment loan, during the 30 days prior to
the lender's determination.
The Bureau proposes several comments to clarify the requirements
for a lender to overcome a presumption of unaffordability. Proposed
comment 10(d)-1 clarifies that proposed Sec. 1041.10(d) would permit
the lender to overcome the presumption in limited circumstances
evidencing an improvement in the consumer's financial capacity for the
new loan relative to the consumer's financial capacity since obtaining
the prior loan or, in some circumstances, during the prior 30 days.
Proposed comments 10(d)-2 and comment 10(d)-3 provide illustrative
examples of these circumstances. Proposed comment 10(d)-2 clarifies
that a lender may overcome a presumption of unaffordability where there
is reliable evidence that the need to reborrow is prompted by a decline
in income during the prior 30 days that is not reasonably expected to
recur for the period during which the lender is making an ability-to-
repay determination for the new covered longer-term loan. Proposed
comment 10(d)-3 clarifies that a lender may overcome a presumption of
unaffordability where there is reliable evidence that the consumer's
financial capacity will be sufficiently improved relative to the prior
30 days because of a projected increase in net income or a decrease in
major financial obligations for the period during which the lender is
making an ability-to-repay determination for the new covered longer-
term loan. Proposed comment 10(d)-4 clarifies that reliable evidence
consists of verification evidence regarding the consumer's net income
and major financial obligations sufficient to make the comparison
required under Sec. 1041.10(d). Proposed comment 10(d)-4 further
clarifies that a self-certification by the consumer does not constitute
reliable evidence unless the lender verifies the facts certified by the
consumer through other reliable means.
With respect to proposed comment 10(d)-2, the Bureau believes that
if the reborrowing is prompted by a decline in income since obtaining
the prior loan (or during the prior 30 days, as applicable) that is not
reasonably expected to recur during the period for which the lender is
underwriting the new covered longer-term, the unaffordability of the
prior loan, including difficulty repaying an outstanding loan, may not
be probative as to the consumer's ability to repay a new covered short-
term loan. Similarly, with respect to proposed comment 10(d)-3, the
Bureau believes that permitting a lender to overcome the presumption of
unaffordability in these circumstances would be appropriate because an
increase in the consumer's expected income or decrease in the
consumer's expected payments on major financial obligations relative to
the prior 30 days may materially impact the consumer's financial
capacity such that a prior unaffordable loan, including difficulty
repaying an outstanding loan, may not be probative as to the consumer's
ability to repay a new covered longer-term loan. Similarly, the Bureau
believes that if the reborrowing is prompted by a decline in income
during the prior 30 days that is not reasonably expected to recur
during the period for which the lender is underwriting the new covered
longer-term loan, the unaffordability of the prior loan, including
difficulty repaying an outstanding loan, may not be probative as to the
consumer's ability to repay a new covered longer-term loan.
As discussed above, the presumptions in proposed Sec. 1041.10
supplement the basic ability-to-repay requirements in proposed Sec.
1041.9 in certain circumstances where a consumer's recent borrowing
indicates that a consumer would not have the ability to repay a new
covered longer-term loan. Accordingly, the procedure in proposed Sec.
1041.10(d) for overcoming the presumption of unaffordability would
address only the presumption; lenders would still need to determine
ability to repay in accordance with proposed Sec. 1041.9 before making
the new covered longer-term loan.
The Bureau's proposal would permit lenders to overcome the
presumption of unaffordability for multiple successive refinancings.
However, the Bureau notes that, as discussed with regard to proposed
Sec. 1041.6(e), certain patterns of reborrowing may indicate that the
repeated determinations that the presumption of unaffordability was
overcome were not consistent with proposed Sec. 1041.10(d) and that
the ability-to-repay determination for such loans were not reasonable
under proposed Sec. 1041.9.
The Bureau recognizes that the standard in proposed Sec.
1041.10(d) would permit a lender to overcome a presumption of
unaffordability only in a narrow set of circumstances that are
reflected in certain aspects of a
[[Page 48029]]
consumer's financial capacity and can be verified through reliable
evidence. As discussed above with regard to alternatives considered for
Sec. 1041.10, the Bureau considered including an additional set of
circumstances permitting lenders to overcome the presumptions of
unaffordability in the event that the lender determined that the need
to reborrow was prompted by an unusual and non-recurring expense rather
than by the unaffordability of the prior loan. In light of the
challenges with such an approach, described above, the Bureau elected
instead to propose Sec. 1041.10(d) without permitting an unusual and
non-recurring expense to satisfy the conditions of the test. However,
the Bureau solicits comment on including an unusual and non-recurring
expense as a third circumstance in which lenders could overcome the
presumptions of unaffordability.
The Bureau solicits comment on all aspects of the proposed standard
for overcoming the presumptions of unaffordability. In particular, the
Bureau solicits comment on the circumstances that would permit a lender
to overcome a presumption of unaffordability; on whether other or
additional circumstances should be included in the standard and, if so,
how to define such circumstances. In addition, the Bureau solicits
comment on the appropriate time period for comparison of the consumer's
financial capacity between the prior and prospective loans, and, in
particular, the different requirements for prior loans of different
types. The Bureau solicits comment on the types of information that
lenders would be permitted to use as reliable evidence to make the
determination in proposed Sec. 1041.10(d).
The Bureau also solicits comment on any alternatives that would
adequately prevent consumer injury while reducing the burden on
lenders, including any additional circumstances that should be deemed
sufficient to overcome a presumption of unaffordability. The Bureau
also solicits comment on how to address unexpected and non-recurring
increases in expenses, such as major vehicle repairs or emergency
appliance replacements, including on the alternative discussed above
with regard to alternatives considered for proposed Sec. 1041.10.
10(e) Prohibition on Making a Covered Longer-Term Loan Under Sec.
1041.9 Following a Covered Short-Term Loan Made Under Sec. 1041.7
Proposed Sec. 1041.10(e) would prohibit a lender or its affiliate
from making a covered longer-term loan under proposed Sec. 1041.9 to a
consumer during the time period in which a loan made by the lender or
its affiliate under Sec. 1041.7 is outstanding and for 30 days
thereafter.\702\ Proposed comment 10(e)-1 clarifies that lenders are
permitted to make a covered longer-term loan under Sec. 1041.11 or
Sec. 1041.12 during this period. While the purpose of the restriction
in proposed Sec. 1041.10(e) is to safeguard an important component of
the proposed conditional exemption in Sec. 1041.7, the Bureau is
including this provision in proposed Sec. 1041.10 for ease of
reference for lenders so that they can 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.
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\702\ Proposed Sec. 1041.10(e) provides that it applies
notwithstanding the presumption of unaffordability under proposed
Sec. 1041.10(b). If the covered longer-term loan would be made
during the time period in which the consumer has a covered short-
term loan made by the lender or its affiliate under proposed Sec.
1041.7 outstanding and for 30 days thereafter, then the prohibition
in proposed Sec. 1041.10(e) would apply, rather than the
presumption under proposed Sec. 1041.10(b).
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For purposes of proposed Sec. 1041.10(e) and its accompanying
commentary, the Bureau is relying on authority under section
1022(b)(3)(A) of the Dodd-Frank Act to grant conditional exemptions in
certain circumstances from rules issued by the Bureau under the
Bureau's Dodd-Frank Act legal authorities. As discussed at part IV,
Dodd-Frank Act section 1022(b)(3)(A) authorizes the Bureau to, by rule,
``conditionally or unconditionally exempt any class of . . . consumer
financial products or services'' from any provision of Title X of the
Dodd-Frank 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. As discussed in the section-by-section
analysis of proposed Sec. 1041.7, the Bureau believes that the
proposed conditional exemption for covered short-term loans is
appropriate to carry out the purposes and objectives of Title X of the
Dodd-Frank.
To effectuate the important conditions of the exemption in proposed
Sec. 1041.7, the Bureau is proposing the prohibition contained in
Sec. 1041.10(e). A covered short-term loan made under proposed Sec.
1041.7 is not subject to the ability-to-repay requirements in proposed
Sec. Sec. 1041.5 and 1041.6. As a result, for some consumers, a
covered short-term loan made under proposed Sec. 1041.7 would be
unaffordable and leave them in a vulnerable financial position. Under
these circumstances, the principal reduction requirements under
proposed Sec. 1041.7(b)(1) and the three loan limit on a sequence of
loans made under Sec. 1041.7 would allow consumers to repay the
principal gradually over a three-loan sequence. 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 Sec. 1041.7 or while such first or
second loan in the sequence was outstanding.
Furthermore, the Bureau believes 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. As noted
above, many consumers would not be able to afford to repay the full
amount of a covered short-term loan made under proposed Sec. 1041.7
when the loan comes due. For that reason, proposed Sec. 1041.7 would
permit the lender to make two additional loans with a one-third
principal reduction for each subsequent loan so that the consumer
effectively can repay the initial loan amount in installments. In the
absence of the proposed requirement, as a covered short-term loan made
under proposed Sec. 1041.7 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 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 recognizes that proposed Sec. 1041.10(e) would prohibit
a lender or its affiliate from making a covered longer-term loan that
otherwise could be made assuming that the applicable requirements of
proposed Sec. Sec. 1041.9 and 1041.10 were satisfied. The Bureau views
this proposed requirement as a reasonable restriction to prevent
lenders from using the framework provided in proposed Sec. 1041.7 to
induce consumers to borrow covered longer-term loans under proposed
Sec. 1041.9.
[[Page 48030]]
The Bureau notes that, unlike the prohibition in proposed Sec.
1041.6(g) applicable to covered short-term loans, the prohibition in
proposed Sec. 1041.10(e) would apply only to loans made by the same
lender or its affiliate, not to loans made by unaffiliated lenders. A
consumer who chooses to transition from a covered short-term loan made
under proposed Sec. 1041.7 to a covered longer-term loan made under
proposed Sec. 1041.9 could do so by seeking out this type of loan from
a different (unaffiliated) lender, or by waiting 30 days after
repayment of the prior covered short-term loan made under Sec. 1041.7.
In addition, the lending restrictions under proposed Sec.
1041.10(e) would not encompass covered longer-term loans made under
proposed Sec. Sec. 1041.11 and 1041.12. With respect to the types of
loans subject to the requirements under proposed Sec. 1041.10(e), the
Bureau is drawing a distinction between covered longer-term loans made
under proposed Sec. Sec. 1041.11 and 1041.12 and covered longer-term
loans made under proposed Sec. 1041.9 for two principal reasons.
First, the Bureau does not believe that the same incentives would be
present for lenders to use covered short-term loans made under proposed
Sec. 1041.7 to induce consumers to take out covered longer-term loans
under proposed Sec. Sec. 1041.11 and 1041.12. Covered longer-term
loans under proposed Sec. Sec. 1041.11 and 1041.12 would be subject to
various requirements related to duration, cost, and other loan terms,
as well as important backend protections. The Bureau believes these
requirements in proposed Sec. Sec. 1041.11 and 1041.12 would make
offering a covered short-term loan under proposed Sec. 1041.7 to
induce consumers to take out a covered longer-term loan under proposed
Sec. Sec. 1041.11 and 1041.12 an unattractive business model for
lenders. Second, even if the Bureau were concerned that such incentives
exist, the Bureau believes that it is unlikely that many lenders would
offer both covered short-term loans under proposed Sec. 1041.7 and
covered longer-term loans under proposed Sec. Sec. 1041.11 and
1041.12.
The Bureau notes that this proposed prohibition was not included in
the Small Business Review Panel Outline. The Bureau seeks comment on
whether this proposed prohibition is appropriate to carry out the
purposes and objectives of Title X of the Dodd-Frank Act. In this
regard, the Bureau solicits comment on whether it is likely that
covered short-term loans made under proposed Sec. 1041.7 could be used
to induce consumers to take covered longer-term loans under proposed
Sec. 1041.9. The Bureau seeks comment on whether lenders would
anticipate making covered short-term loans under proposed Sec. 1041.7
and covered longer-term loans under proposed Sec. 1041.9 to consumers
close in time to one another, if permitted to do so under a final rule.
The Bureau, further, seeks comment on whether imposing the prohibition
for 30 days after the loan made under proposed Sec. 1041.7 is repaid
is the appropriate length of time or whether a shorter or longer period
is appropriate. The Bureau seeks comment on the impact this proposed
prohibition would have on small entities. Finally, the Bureau seeks
comment 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.
10(f) Determining Period Between Consecutive Covered Loans
Proposed Sec. 1041.10(f) would define how a lender must determine
the number of days between covered loans for the purposes of proposed
Sec. 1041.10(b) and (e). In particular, proposed Sec. 1041.10(f)
would specify that days on which a consumer had a non-covered bridge
loan outstanding do not count toward the determination of time periods
specified by proposed Sec. 1041.10(b) and (e). Proposed comment 10(f)-
1 clarifies that the proposed requirement reflects the requirement in
proposed Sec. 1041.6(h): Proposed Sec. 1041.10(f) would apply if the
lender or its affiliate makes a non-covered bridge loan to a consumer
during the time period in which any covered short-term loan or covered
longer-term balloon-payment loan made by the lender or its affiliate is
outstanding and for 30 days thereafter.
As with proposed Sec. 1041.6(h), the Bureau is concerned that
there is some risk that lenders might seek to evade the proposed rule
designed to prevent the unfair and abusive practice by making certain
types of loans that fall outside the scope of the proposed rule during
the 30-day period following repayment of a covered short-term loan or
covered longer-term balloon-payment loan. Since the due date of such
loans would be beyond that 30-day period, the lender would be free to
make a covered longer-term loan without having to comply with proposed
Sec. 1041.10(b) or proposed Sec. 1041.10(e). Proposed Sec.
1041.2(a)(13) would define non-covered bridge loan as a non-recourse
pawn loan made within 30 days of an outstanding covered short-term loan
and that the consumer is required to repay within 90 days of its
consummation. The Bureau is seeking comment under that provision as to
whether additional non-covered loans should be added to the definition.
As with other provisions of proposed Sec. 1041.10, in proposing
Sec. 1041.10(f) and its accompanying commentary, the Bureau is relying
on the Bureau's authority to prevent unfair, deceptive, and abusive
acts and practices under the Dodd-Frank Act.\703\ For purposes of
proposed Sec. 1041.10(f) in particular, the Bureau is also relying on
the Bureau's anti-evasion authority under section 1022(b)(1) of the
Dodd-Frank Act. As discussed at part IV, Dodd-Frank Act section
1022(b)(1) 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 believes that the
requirements of proposed Sec. 1041.10(f) would prevent evasions of the
reborrowing restrictions under proposed Sec. 1041.10(b) by not
counting the days on which a non-covered bridge loan is outstanding
toward the determination of whether a subsequent covered longer-term
loan made by the lender or an affiliate is made within 30 days of the
prior covered short-term loan or covered longer-term balloon-payment
loan outstanding, as applicable. This would prevent evasion insofar as,
in the absence of this proposed restriction, a lender or its affiliate
could make a non-covered bridge loan to keep a consumer in debt on a
non-covered bridge loan during the reborrowing period and then wait to
make a new covered longer-term loan with similar payments more than 30
calendar days after the prior loan, which would evade the presumption
in proposed Sec. 1041.10(b) and the prohibition in proposed Sec.
1041.10(e). The Bureau is concerned that this type of circumvention of
the reborrowing restrictions could lead to lenders making covered
longer-term loans that consumers do not have the ability to repay.
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\703\ 12 U.S.C. 5531(b).
---------------------------------------------------------------------------
Accordingly, the Bureau proposes to exclude from the period of time
between affected loans those days on which a consumer has a non-covered
bridge loan outstanding. The Bureau believes that defining the period
of time between covered loans in this manner may be appropriate to
prevent lenders from making covered longer-term loans for
[[Page 48031]]
which the consumer does not have the ability to repay.
The Bureau solicits comment on the appropriateness of the standard
in proposed Sec. 1041.10(f) and on any alternatives that would
adequately prevent consumer harm while reducing burden on lenders.
Section 1041.11 Conditional Exemption for Certain Covered Longer-Term
Loans of up to 6 Months' Duration
Background
Proposed Sec. 1041.11 would provide a conditional exemption from
Sec. Sec. 1041.8, 1041.9, 1041.10, and 1041.15(b) for certain covered
longer-term loans that share certain features of the NCUA PAL program.
Proposed Sec. 1041.11 would allow a lender to make a covered longer-
term loan without making the ability-to-repay determination that would
be required by proposed Sec. Sec. 1041.9 and 1041.10 and without
complying with the payment notice requirement of Sec. 1041.15(b),
provided that certain conditions and requirements are satisfied. The
conditions for making a loan under Sec. 1041.11 largely track the
conditions set forth by the NCUA at 12 CFR 701.21(c)(7)(iii) for a
Payday Alternative Loan made by a Federal credit union; in addition,
the Bureau is proposing certain additional requirements. The Bureau
proposes this provision pursuant to its authority under section
1021(b)(3) of the Dodd-Frank Act \704\ to create conditional exemptions
from rules issued under Title X of the Dodd-Frank Act.
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\704\ 12 U.S.C. 5512(b)(3).
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As discussed in part II.C above, the NCUA amended its regulations
in 2010 to authorize credit unions within its jurisdiction to make what
it denominated as ``payday alternative loans.'' \705\ These rules are
intended to provide a ``regulatory structure under which [credit
unions] could offer a responsible payday loan alternative to members in
a safe and sound manner.'' \706\ In a subsequent advance notice of
proposed rulemaking, NCUA explained that it was concerned that many
credit union members who turned to typical payday loans ``are often
unable to break free of [an] unhealthy dependence'' on such loans. The
agency created the Payday Alternative Loan program to provide ``a
viable alternative'' that could provide a lower cost in the short term
and, in the long term, ``offer borrowers a way to break the cycle of
reliance on payday loans by building creditworthiness and transitioning
to traditional, mainstream financial products.'' \707\
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\705\ 75 FR 58285 (Sept. 24, 2010).
\706\ 75 FR 58285 (Sept. 24, 2010).
\707\ 77 FR 59347 (Sept. 27, 2012).
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Over 700 Federal credit unions, nearly 20 percent of Federal credit
unions nationally, made approximately $123.3 million in Payday
Alternative Loans during 2015. In 2014, the average loan amount was
$678. Three-quarters of the participating Federal credit unions
reported consumer payment history to consumer reporting agencies. The
annualized net charge-off rate, as a percent of average loan balances
outstanding, in 2014 for these loans was 7.5 percent.
Proposed Sec. 1041.11 reflects the Bureau's belief that it may be
appropriate to incorporate certain aspects of the NCUA Payday
Alternative Loan program into the Bureau's regulation in order to
enable such lending to continue with minor modifications and, where
applicable State law permits, to allow lenders that are not Federal
credit unions to make such loans without undertaking the ability-to-
repay determination that would be required by proposed Sec. Sec.
1041.9 and 1041.10 and without complying with the payment notice
requirement of proposed Sec. 1041.15(b). The Bureau believes that
proposed Sec. 1041.11 would provide strong consumer protections to
address consumer harms in this market by limiting the loan terms,
including the permissible cost of credit and placing restrictions on
reborrowing loans, while largely preserving an existing product that is
already subject to Federal law designed to ensure that the loans are
affordable and the risks to consumers are minimized. Further, as
discussed in the section-by-section analysis of proposed Sec.
1041.15(b)(2)(i), the Bureau is concerned that lenders may be unable to
continue offering Payday Alternative Loans if the payment notice
requirement of proposed Sec. 1041.15(b) is applied to these loans.
The Bureau believes that proposed Sec. 1041.11 would reduce the
cost of compliance with the Bureau's proposal, if finalized, for
lenders that would make covered longer-term loans meeting the proposed
conditions by relieving lenders of the obligation to satisfy various
requirements of proposed Sec. Sec. 1041.9, 1041.10, and 1041.15(b).
Further, the Bureau believes that the conditional exemption in proposed
Sec. 1041.11 is appropriate to carry out the purposes and objectives
of Title X of the Dodd-Frank Act, including ensuring that ``all
consumers have access to markets for consumer financial products and
services'' and that these markets ``operate transparently and
efficiently to facilitate access and innovation.'' \708\ Specifically,
the proposed conditional exemption is designed to facilitate access to
credit by permitting lenders an alternative option for making covered
longer-term loans, subject to important structural, cost, and borrowing
history limitations.
---------------------------------------------------------------------------
\708\ 12 U.S.C. 5511(a), (b)(5).
---------------------------------------------------------------------------
During the SBREFA process, the Bureau received feedback from some
of the SERs--including, in particular, comments from some of the SERs
that are non-depository lenders--generally expressing skepticism that
loans sharing the features of the NCUA Payday Alternative Loan would be
viable products for their businesses. The Bureau also received similar
feedback from other lenders in response to the Small Business Review
Panel Outline. Responding to the proposals being considered by the
Bureau as part of the SBREFA process, some of the SERs asserted that
the loan principal amount was too small, the duration was too short,
and the permissible cost of credit too low for such loans to be
economically viable for their businesses. The Bureau also received
feedback from lenders, including some credit unions and other
depository institutions that otherwise expressed general willingness to
make loans that were generally similar to loans under Sec. 1041.11,
but objected to the particular pricing structure permitted under the
NCUA regulation.
Incorporating many of the conditions established by the NCUA for
its Payday Alternative Loan program into a conditional exemption would
create a narrow exemption to the general requirement of the Bureau's
proposal to determine a consumer's ability to repay prior to making a
covered longer-term loan. The Bureau recognizes that the conditional
exemption would be more attractive to lenders if the conditions were
more permissive. The Bureau believes, however, that such an expansion
of the conditional exemption could undermine the core consumer
protection purpose of the Bureau's proposal. To the extent that a
lender finds the conditions in proposed Sec. 1041.11 too limiting,
they would be able to make larger, higher-cost, or longer-term loans to
those consumers that the lender reasonably determines have the ability
to repay such loans.
At the same time, the Bureau also observed from engagement with
credit unions after releasing the Small Business Review Panel Outline
that some Federal credit unions have found the requirements of the NCUA
Payday
[[Page 48032]]
Alternative Loan program to be feasible for certain consumers, even if
generating limited revenue for these entities. The purpose of the
conditional exemption in proposed Sec. 1041.11 is to enable these
lenders to continue making loans under the NCUA Payday Alternative Loan
Program and to allow other lenders, including banks and non-
depositories to make similar loans, as well. The Bureau received
feedback indicating that layering of additional requirements on top of
the NCUA regulations could cause lenders currently making or otherwise
interested in making loans of this type to refrain from doing so. For
instance, lenders that indicated that they would otherwise be inclined
to make Payday Alternative Loan-like loans stated that one of their
biggest concerns was that the Small Business Review Panel Outline
indicated that the Bureau was considering requiring lenders to furnish
to and obtain a consumer report from one or more specialty consumer
reporting agencies, which the lenders believed would be costly and
unwarranted given the limited revenues likely to be generated by these
loans.
The Small Business Review Panel Report recommended that the Bureau
solicit comment on additional options for alternative requirements for
making covered longer-term loans without satisfying the proposed
ability-to-repay requirements. Considering the feedback from SERs and
the recommendation of the Small Business Review Panel, the Bureau
evaluated each potential condition under Sec. 1041.11 and has made
some adjustments to the approach included in the Small Business Review
Panel Outline, as discussed the section-by-section analysis of each
proposed provision. The Bureau is also proposing an additional set of
alternative requirements for making covered longer-term loans in
proposed Sec. 1041.12 in part to address concerns related to making
loans under proposed Sec. 1041.11 and, as discussed further below, is
soliciting comment on whether additional alternatives would be
appropriate to carry out the purposes and objectives of Title X of the
Dodd-Frank Act.
In proposing to permit all lenders to make covered longer-term
loans under Sec. 1041.11--rather than limiting the exemption to
certain lenders, such as Federal credit unions--the Bureau endeavors to
facilitate access to credit, regardless of the size or charter status
of the entity with which a consumer conducts her other financial
transactions, within the important limits imposed by more protective
State, local, and tribal laws. Extending the conditional exemption to
all financial institutions that choose to make loans of the type
provided for in Sec. 1041.11 furthers that purpose.
The Bureau seeks comment generally on whether to provide a
conditional exemption from the proposed ability-to-repay and payment
notice requirements for covered longer-term loans sharing certain
requirements of the NCUA Payday Alternative Loan. In particular, the
Bureau solicits comment on whether proposed Sec. 1041.11 would
appropriately balance the concerns for access to credit and consumer
protection; on the costs and other burdens that proposed Sec. 1041.11
would, if finalized, impose on lenders, including small entities; and
on each of the specific conditions and requirements under proposed
Sec. 1041.11, discussed below.
The Bureau also solicits comment on whether to restrict the
availability of the conditional exemption under proposed Sec. 1041.11
to certain classes of lenders denominated by size or charter type, and,
if so, what the justification for such a restriction would be. In
addition, the Bureau seeks comment on whether a different set of
conditions for covered longer-term loans exempt from the proposed
ability-to-repay and payment notice requirements would be appropriate,
and, if so, what, specifically, such an alternative set of conditions
would be. For example, the Bureau seeks comment on whether the
conditional exemption should be limited to loans made to consumers with
whom the lender has a pre-existing relationship and, if so, what type
and duration of relationship should be required. In addition, the
Bureau solicits comment on the extent to which lenders interested in
making a covered longer-term loan conditionally exempt from the
proposed ability-to-repay and payment notice requirements anticipate
making loans subject to the requirements of proposed Sec. 1041.11, as
compared to proposed Sec. 1041.12.
Legal Authority
Proposed Sec. 1041.11 would establish an alternative set of
requirements for covered short-term loans that, if complied with by
lenders, would conditionally exempt them from the unfair and abusive
practice identified in proposed Sec. 1041.8, the ability-to-repay
requirements under proposed Sec. Sec. 1041.9 and 1041.10, and the
payment notice requirement of proposed Sec. 1041.15(b). The Bureau is
proposing the requirements of proposed Sec. 1041.11 pursuant to the
Bureau's authority under Dodd-Frank Act section 1022(b)(3)(A) to grant
conditional exemptions in certain circumstances from rules issued by
the Bureau under the Bureau's Dodd-Frank Act legal authorities.
Dodd-Frank Act section 1022(b)(3)(A) authorizes the Bureau to, by
rule, ``conditionally or unconditionally exempt any class of . . .
consumer financial products or services'' from any provision of Title X
of the Dodd-Frank 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. The purposes of Title X are set forth in
Dodd-Frank Act section 1021(a),\709\ 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.''
---------------------------------------------------------------------------
\709\ 12 U.S.C. 5511(a).
---------------------------------------------------------------------------
The objectives of Title X are set forth in Dodd-Frank Act section
1021(b).\710\ Section 1021(b) of the Dodd-Frank Act authorizes the
Bureau to 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'' (see Dodd-Frank Act section 1021(b)(1)); \711\
(2) consumers ``are protected from unfair, deceptive, or abusive acts
and practices and from discrimination'' (see Dodd-Frank Act section
1021(b)(2)); \712\ (3) ``outdated, unnecessary, or unduly burdensome
regulations are regularly identified and addressed in order to reduce
unwarranted regulatory burdens'' (see Dodd-Frank Act section
1021(b)(3)); \713\ (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 completion'' (see Dodd-Frank Act
section 1021(b)(4)); \714\ and ``markets for consumer financial
products and services operate transparently and efficiently to
facilitate access and innovation'' (see Dodd-Frank Act section
1021(b)(5)). \715\
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\710\ 12 U.S.C. 5511(b).
\711\ 12 U.S.C. 5511(b)(1).
\712\ 12 U.S.C. 5511(b)(2).
\713\ 12 U.S.C. 5511(b)(3).
\714\ 12 U.S.C. 5511(b)(4).
\715\ 12 U.S.C. 5511(b)(5).
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When issuing an exemption under Dodd-Frank Act section
1022(b)(3)(A), the Bureau is required under Dodd-Frank Act section
1022(b)(3)(B) to take into consideration, as appropriate, three
factors. These enumerated factors are:
[[Page 48033]]
(1) The total assets of the class of covered persons; \716\ (2) the
volume of transactions involving consumer financial products or
services in which the class of covered persons engages; \717\ 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.\718\
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\716\ 12 U.S.C. 5512(b)(3)(B)(i).
\717\ 12 U.S.C. 5512(b)(3)(B)(ii).
\718\ 12 U.S.C. 5512(b)(3)(B)(iii).
---------------------------------------------------------------------------
In connection with the statutory factor focusing on the extent to
which existing applicable provisions of law provide consumers with
adequate protections, the Bureau observes that the Federal Credit Union
Act \719\ and associated NCUA regulations \720\ currently provide a
suite of protections for certain small-dollar loans made by Federal
credit unions that would be covered longer-term loans if the Bureau
finalized the proposed rule. These protections include an express
limitation on the permissible cost of credit, as well as a number of
structural conditions for such loans, limitations related to the
consumer's borrowing history, and requirements related to the Federal
credit union's underwriting policies.\721\
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\719\ 12 U.S.C. 1751, et seq.
\720\ 12 CFR 701.21(c)(7)(iii).
\721\ The Bureau has taken the other two statutory factors
listed in 12 U.S.C. 5512(b)(3)(B) into consideration and has
concluded that it is not able, in this instance, to incorporate
these two factors into its justification for the proposed
conditional exemption. These factors are relevant to an exemption of
a class of covered persons, whereas proposed Sec. 1041.11 would
exempt a class of transactions from certain requirements of the
proposed rule, and the Bureau is proposing to make this conditional
exemption available to lenders of any class that elect to make loans
consistent with the terms of Sec. 1041.11.
---------------------------------------------------------------------------
As discussed above, the loans currently offered by Federal credit
unions appear to be substantially safer with regard to risk of default,
reborrowing, and collateral harms from unaffordable payments than many
alternative products on the market today. While the Bureau believes
that certain additional safeguards would be prudent, as discussed
below, to adaption of the product by other types of lenders, the Bureau
believes that the track record of Federal credit unions concerning the
adequacy of the existing applicable provisions of law is a substantial
factor supporting issuance of the proposed conditional exemption.
Accordingly, the Bureau proposes to provide a conditional exemption
from proposed Sec. Sec. 1041.8, 1041.9, 1041.10, and 1041.15(b) for
covered longer-term loans that share certain features of the NCUA
Payday Alternative Loans. The proposed conditional exemption would be a
partial exemption meaning that loans under Sec. 1041.11 would still be
subject to all other provisions of the Bureau's proposed rule; for
example, lenders would still be required to comply with the limitation
on payment transfer attempts in proposed Sec. 1041.14, the consumer
rights notice in proposed Sec. 1041.15(d), and the compliance program
and record retention requirements in proposed Sec. 1041.18.
The Bureau believes that these loans are a lower-cost, safer
alternative in the market for payday, vehicle title, and installment
loans. In addition, the Bureau has not observed evidence that lenders
making loans under the NCUA Payday Alternative Loan program participate
in widespread questionable payment practices that warrant the proposed
payment notice requirement in Sec. 1041.15(b). The Bureau therefore
believes that a conditional exemption for loans sharing certain
features of the NCUA Payday Alternative Loan program is necessary or
appropriate to carry out the purposes or objectives of Title X of the
Dodd-Frank Act, including the objective of making credit available to
consumers in a fair and transparent manner. Accordingly, the Bureau
proposes to provide an exemption from Sec. Sec. 1041.8, 1041.9,
1041.10, and 1041.15(b) for such covered longer-term loans.
The Bureau seeks comment on whether the Bureau should rely upon the
Bureau's statutory exemption authority under Dodd-Frank Act section
1022(b)(3)(A) to exempt loans that satisfy the requirements of proposed
Sec. 1041.11 from the unfair and abusive practice identified in
proposed Sec. 1041.8, the ability-to-repay requirements proposed under
Sec. Sec. 1041.9 and 1041.10, and the payment notice requirement
proposed under Sec. 1041.15(b). Alternatively, the Bureau seeks
comment on whether the requirements under proposed Sec. 1041.11 should
instead be based on the Bureau's authority under Dodd-Frank Act section
1031(b) to prescribe rules identifying as unlawful unfair, deceptive,
or abusive practices and to include in such rules requirements for the
purpose of preventing such acts or practices. In particular, the Bureau
requests comment on whether loans made under proposed Sec. 1041.11
should be expressly excluded from the identification of the unfair and
abusive practice rather than exempted therefrom or whether the
requirements for loans made under proposed Sec. 1041.11 should be
considered requirements for preventing unfair and abusive practices.
11(a) Conditional Exemption for Certain Covered Longer-Term Loans
Proposed Sec. 1041.11(a) would provide a conditional exemption
from Sec. Sec. 1041.8, 1041.9, 1041.10, and 1041.15(b) for covered
longer-term loans satisfying the conditions and requirements in Sec.
1041.11(b) through (e). Proposed Sec. 1041.11(a) would not provide an
exemption from any other provision of law. For example, proposed Sec.
1041.11(a) would not permit loans to servicemembers and their
dependents that would violate the Military Lending Act and its
implementing regulations.
Proposed comment 11(a)-1 clarifies that, subject to the
requirements of other applicable laws, Sec. 1041.11(a) would permit
all lenders to make loans pursuant to Sec. 1041.11. Proposed comment
11(a)-1 further clarifies that Sec. 1041.11(a) applies only to covered
longer-term loans and so loans under Sec. 1041.11 would have a
duration of more than 45 days.
While the NCUA requirements for Payday Alternative Loans permit
Federal credit unions to make loans with a duration of one month, the
Bureau is concerned that, given the financial circumstances of many
borrowers, it may be difficult for many borrowers to repay a 30-day
loan without the need to reborrow in short order. The Bureau is
proposing a separate alternative path for covered short-term loans
under proposed Sec. 1041.7, which would permit borrowers to obtain up
to three back-to-back covered short-term loans with gradual tapering of
the loan principal. The Bureau believes that restricting the
availability of the proposed exemption for the loans sharing certain
features of NCUA's Payday Alternative Loan program to covered longer-
term loans would permit lenders an alternative way to make relatively
lower-cost loans without disrupting the core features of the Bureau's
proposed framework for regulation in the affected markets.
The Bureau solicits comment on whether to extend the proposed
conditional exemption to include covered short-term loans with a
minimum duration of 30 days.
11(b) Loan Term Conditions
Proposed Sec. 1041.11(b) would require loans under Sec. 1041.11
to meet certain conditions as to the loan terms. In general, the
requirements in proposed Sec. 1041.11(b) parallel certain conditions
already required for Federal credit unions making loans pursuant to the
NCUA Payday Alternative Loan requirements.
Each proposed condition for a loan under Sec. 1041.11 is described
below. The
[[Page 48034]]
Bureau solicits comment on all aspects of the loan term conditions,
including on the burden such conditions, if finalized, would impose on
lenders, including small entities, making loans under Sec. 1041.11.
The Bureau also seeks comment on whether other or additional loan term
conditions would be appropriate to carry out the objectives of Title X
of the Dodd-Frank Act, including the consumer protection and access to
credit objectives. In this regard, the Bureau notes that proposed Sec.
1041.12 would also provide lenders with an alternative path to making
covered longer-term loans without satisfying the proposed ability-to-
repay requirements and that the loan terms in proposed Sec. 1041.12
would provide lenders with somewhat greater flexibility, relative to
proposed Sec. 1041.11, in the structure and pricing of loan products
subject to a set of back-end protections. Additionally, the Bureau
solicits comment on whether to prohibit lenders from taking a vehicle
security interest in connection with a covered longer-term loan that
would be exempt from Sec. Sec. 1041.8, 1041.9, 1041.10, and 1041.15(b)
under proposed Sec. 1041.11.
11(b)(1)
Proposed Sec. 1041.11(b)(1) would provide that the loan not be
structured as open-end credit. The proposed limitation mirrors the NCUA
requirement that Payday Alternative Loans be closed-end credit.\722\
The Bureau believes that attempting to develop restrictions for open-
end credit in proposed Sec. 1041.11 would add undue complexity without
providing appreciable benefit for consumers and that limiting the
proposed conditional exemption from the ability-to-repay and payment
notice requirements to closed-end loans would result in a simpler and
more transparent transaction for both consumers and lenders. The Bureau
therefore believes that this limitation would help ensure that, among
other things, that this market operates fairly and transparently.
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\722\ 12 CFR 701.21(c)(7)(iii)(A).
---------------------------------------------------------------------------
The Bureau solicits comment on whether to permit open-end loans to
be made under this conditional exemption; whether lenders would choose
to make open-end loans under this conditional exemption if permitted to
do so; and what the benefit for consumers would be of permitting such
loans and what additional conditions may then be appropriate for
proposed Sec. 1041.11.
11(b)(2)
Proposed Sec. 1041.11(b)(2) would limit the conditional exemption
to covered longer-term loans with a duration of not more than six
months. The proposed limitation mirrors the NCUA requirement that
Payday Alternative Loans have a maximum duration of six months.\723\ In
finalizing the Payday Alternative Loan duration conditions, NCUA
explained that ``[the NCUA Board] is concerned that longer term loans
may actually have unintended negative consequences'' and that Federal
credit unions should structure these loans ``in a way that allows a
borrower to repay the loan in the given term.'' \724\ The Bureau
believes that the NCUA limitation on maximum duration is appropriate to
maintain in the context of the other protections under Sec. 1041.11
and would help ensure that, among other things, consumers are protected
from unfair or abusive practices and this market operates efficiently
to facilitate access to credit. In contrast, proposed Sec. 1041.12
would permit loans with a duration longer than six months, subject to
the conditions in that section.
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\723\ 12 CFR 701.21(c)(7)(iii)(A)(2).
\724\ 75 FR 58285, 58286 (September 24, 2010).
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The Bureau solicits comment on whether to include a maximum
duration for loans under Sec. 1041.11 and, if so, whether six months
is an appropriate maximum duration. The Bureau further solicits comment
on the extent to which the maximum duration condition would affect
whether lenders would make loans under Sec. 1041.11.
11(b)(3)
Proposed Sec. 1041.11(b)(3) would limit the conditional exemption
to covered longer-term loans with a principal of not less than $200 and
not more than $1,000. The proposed loan principal conditions mirror the
NCUA loan principal requirements for Payday Alternative Loans.\725\ The
Bureau is aware that some lenders, as expressed during the SBREFA
process, believe the proposed loan principal conditions would unduly
restrict the types of longer-term loans that could be made under this
conditional exemption. The Bureau is concerned that larger loans, when
accompanied with a leveraged payment mechanism, may present more risks
to consumers. The Bureau also notes that larger loans may make it
easier for lenders to absorb the costs of conducting an ability-to-
repay determination and providing payment notice in accordance with
proposed Sec. 1041.15(b). In proposing the minimum principal
requirement for Payday Alternative Loans, the NCUA observed that there
is a demand for loans of $200.\726\ The Bureau believes that it would
not be consistent with the purposes of Title X of the Dodd-Frank Act to
expand the conditional exemption and believes that this limitation
would help ensure that, among other things, consumers are protected
from unfair or abusive practices and this market operates efficiently
to facilitate access to credit. The Bureau also notes that proposed
Sec. 1041.12 would permit lenders to make larger covered longer-term
loans under that proposed conditional exemption.
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\725\ 12 CFR 701.21(c)(7)(iii)(A)(1).
\726\ 75 FR 24497, 24499 (May 5, 2010).
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The Bureau solicits comment on whether to include a minimum
principal amount and, if so, whether $200 is the appropriate minimum
principal. The Bureau also solicits comment on whether to include a
maximum principal amount and, if so, whether $1,000 is the appropriate
maximum principal. The Bureau further solicits comment on the extent to
which principal amount conditions would affect whether lenders would
make loans under Sec. 1041.11.
11(b)(4)
Proposed Sec. 1041.11(b)(4) would limit the conditional exemption
to loans that are repayable in two or more payments due no less
frequently than monthly, due in substantially equal amounts, and due in
substantially equal intervals. Proposed Sec. 1041.11(b)(4) reflects
the NCUA guidance for the repayment structure of Payday Alternative
Loans.\727\ The Bureau is concerned that consumers may struggle to
repay a loan due in a single payment, therefore suffering harms from
becoming delinquent or defaulting on the loan or taking steps to avoid
default on the covered loan and jeopardizing their ability to meet
other financial obligations or basic living expenses.
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\727\ 12 CFR 701.21(c)(7)(iii)(A)(5); 75 FR 58285, 58287 (Sept.
24, 2010).
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Proposed comment 11(b)(4)-1 clarifies that payments may be due with
greater frequency, such as biweekly. Proposed comment 11(b)(4)-2
clarifies that payments would be substantially equal in amount if each
scheduled payment is equal to or within a small variation of the
others. Proposed comment 11(b)(4)-3 clarifies that the intervals for
scheduled payments would be substantially equal if the payment schedule
requires repayment on the same date each month or in the same number of
days and also that lenders may disregard the effects of slight changes
in the calendar. Proposed
[[Page 48035]]
comment 11(b)(4)-3 further clarifies that proposed Sec. 1041.11(b)(4)
would not prohibit a lender from accepting prepayment on a loan made
under Sec. 1041.11.
Extended periods without a scheduled payment could subject the
consumer to a payment shock when the eventual payment does come due,
potentially prompting the need to reborrow, default, or suffer
collateral harms from unaffordable payments. In contrast, monthly
payments, when amortizing as discussed below, may facilitate repayment
of the debt over the contractual term. Regularity of payments is
particularly important given the exemption from the payment notice
requirement of proposed Sec. 1041.15(b).
Additionally, as discussed in the section-by-section analysis of
proposed Sec. 1041.9(b)(2)(ii), the Bureau believes that loans with
balloon payments pose particular risk to consumers. For example, the
Bureau found that vehicle title loans with a balloon payment were much
more likely to end in default, compared to fully amortizing installment
vehicle title loans and that the approach of the balloon payment coming
due was associated with significant reborrowing.\728\ Given these
considerations, the Bureau proposes to restrict the proposed
conditional exemption from the proposed ability-to-repay and payment
notice requirements to loans that have two or more payments due no less
frequently than monthly and that do not have a balloon payment. The
Bureau believes that the conditions in proposed Sec. 1041.11(b)(4) may
be appropriate to reduce the risk of injury from an inability to
satisfy payment obligations or loss of budgeting control associated
with a loan under Sec. 1041.11. Accordingly, the Bureau believes that
the proposed limitation would help ensure that, among other things,
consumers are protected from unfair or abusive practices.
---------------------------------------------------------------------------
\728\ CFPB Report on Supplemental Findings, at 30-32.
---------------------------------------------------------------------------
The Bureau solicits comment on whether the repayment structure
requirements are appropriate for this conditional exemption. In
particular, the Bureau solicits comment on whether two is the
appropriate minimum number of payments; and, if not, what would be the
justification for more or fewer minimum payments. Additionally, the
Bureau solicits comment on whether the proposed standards for
substantially equal payments and substantially equal intervals provide
sufficient guidance to lenders.
11(b)(5)
Proposed Sec. 1041.11(b)(5) would limit the conditional exemption
to loans that amortize completely over the loan term and would define
the manner in which lenders must allocate consumer payments to amounts
owed. The proposed amortization requirement for loans under Sec.
1041.11 reflects the NCUA requirement that Payday Alternative Loans
fully amortize over the loan term.\729\ Proposed comment 11(b)(5)-1
clarifies that the interest portion of each payment would need to be
computed by applying a periodic interest rate to the outstanding
balance due.
---------------------------------------------------------------------------
\729\ 12 CFR 701.21(c)(7)(iii)(A)(5).
---------------------------------------------------------------------------
A fully amortizing loan facilitates consumer repayment of the loan
principal from the beginning of repayment. This progress toward
repayment means that a consumer who later faces difficulty making
payments on such a loan will be better positioned to refinance on
favorable terms or eventually retire the debt than would a consumer
that had not made any progress repaying the loan principal. In
finalizing the amortization requirement for Payday Alternative Loans,
the NCUA noted that ``requiring FCUs to fully amortize the loans will
allow borrowers to make manageable payments over the term of the
loan.'' \730\ The Bureau believes that the amortization requirement
would provide an important protection for loans conditionally exempt
from the proposed ability-to-repay and payment notice requirements: a
steady amortization structure that applies a portion of each payment to
principal and to interest and fees as they accrue and for which
interest is calculated only by applying a fixed periodic rate to the
outstanding balance of the loan facilitates consumer repayment of the
loan and minimizes the risk of harm to a consumer in the event that a
loan is unaffordable. Accordingly, the Bureau believes that the
proposed limitation would help ensure that, among other things,
consumers are protected from unfair or abusive practices.
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\730\ 75 FR 58285, 58287 (Sept. 24, 2010).
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The Bureau solicits comment on whether an amortization requirement
in proposed Sec. 1041.11 is appropriate; if so, whether the
amortization method that the Bureau would require in proposed Sec.
1041.11(b)(5) is appropriate for this conditional exemption; and, if
not, what alternative method or methods should be required for loans
made under proposed Sec. 1041.11.
11(b)(6)
Proposed Sec. 1041.11(b)(6) would limit the conditional exemption
to loans that carry a total cost of credit of not more than the cost
permissible for Federal credit unions to charge under NCUA regulations
for Payday Alternative Loans. For Payday Alternative Loans, NCUA
permits Federal credit unions to charge an interest rate of 1,000 basis
points above the maximum interest rate established by the NCUA Board,
and an application fee of not more than $20.\731\ Proposed comment
11(b)(6)-1 clarifies that proposed Sec. 1041.11(b)(6) means that
lenders must not charge any fees other than the interest rate and fees
permitted for Federal credit unions under the NCUA regulations. As the
NCUA explained in finalizing the amount of the permissible application
fee for Payday Alternative Loans, ``[Regulation Z] limits application
fees to the recovery of costs associated with processing applications
for credit that are charged to all consumers who apply . . . a maximum
application fee of $20 is sufficient to allow FCUs to recoup the costs
associated with processing an application for [a Payday Alternative
Loan].'' \732\
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\731\ 12 CFR 701.21(c)(7)(iii).
\732\ 75 FR 58285, 58287 (Sept. 24, 2010).
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By tying this conditional exemption to the judgment NCUA made with
respect to the cost of credit, the proposed cost condition for loans
under Sec. 1041.11 would not establish a Federal usury limit, as the
Bureau is not proposing to prohibit charging interest rates or APRs
above the demarcation in proposed Sec. 1041.11(b)(6). Rather, covered
longer-term loans carrying a total cost of credit more than the cost in
proposed Sec. 1041.11(b)(6) could be made under Sec. 1041.9, and
comply with proposed Sec. Sec. 1041.10 and 1041.15(b). The Bureau
believes that by reflecting the cost criteria of the NCUA Payday
Alternative Loan program, the proposed limitation would help ensure
that, among other things, consumers are protected from unfair or
abusive practices and this market operates efficiently to facilitate
access to credit.
The Bureau solicits comment on whether to limit the conditional
exemption to loans meeting certain cost criteria; and, if so, whether
the NCUA cost limitation would be appropriate or what alternative cost
limitation should be required for loans made under proposed Sec.
1041.11.
11(c) Borrowing History Condition
Proposed Sec. 1041.11(c) would exclude from the conditional
exemption a loan that would otherwise satisfy the
[[Page 48036]]
conditions of proposed Sec. 1041.11 if the loan would result in the
consumer being indebted on more than three outstanding loans made under
Sec. 1041.11 from the lender or its affiliates within a period of 180
days. Proposed Sec. 1041.11(c) would require a lender to review its
own records and the records of its affiliates prior to making a loan
under proposed Sec. 1041.11 to determine that the loan would not
result in the consumer being indebted on more than three outstanding
loans made under Sec. 1041.11 from the lender or its affiliates within
a period of 180 days. Proposed Sec. 1041.11(c) generally mirrors the
NCUA requirement that a Federal credit union not make more than three
Payday Alternative Loans to any one consumer in a rolling 6-month
period.\733\
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\733\ 12 CFR 701.21(c)(7)(iii)(A)(3).
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Proposed comment 11(c)-1 clarifies that a lender needs to review
only its own records and the records of its affiliates to determine the
consumer's borrowing history on covered longer-term loans under Sec.
1041.11 and does not need to obtain information from other,
unaffiliated lenders or a consumer report from an information system
currently registered pursuant to Sec. 1041.17(c)(2) or (d)(2).
Proposed comment 11(c)-2 clarifies the manner in which a lender must
calculate the 180-day period for the purposes of proposed Sec.
1041.11(c). Proposed comment 11(c)-3 clarifies that proposed Sec.
1041.11(c) would not limit the ability of lenders to make additional
covered loans subject to the proposed ability-to-repay requirements or
to one of the other proposed conditional exemptions. Proposed comment
11(c)-4 provides an illustrative example.
The Bureau also considered, and included in the Small Business
Review Panel Outline, a proposal to limit the maximum number of loans
made under Sec. 1041.11 to two in a 6-month period. Additionally,
subsequent to the release of the Small Business Review Panel Outline,
the Department of Defense finalized regulations under the Military
Lending Act that effectively permits a Federal credit union subject to
the requirements of the Federal Credit Union Act and NCUA regulations
to make one Payday Alternative Loan to a servicemember or dependent
during a rolling 12-month period without exceeding the Military Lending
Act's limitation on the cost of consumer credit.\734\
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\734\ 32 CFR 232.4(c)(iii)(B).
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During the SBREFA process and other engagement, particularly with
Federal credit unions, the Bureau received feedback indicating that
layering an additional borrowing history condition on the NCUA Payday
Alternative Loan requirements would impose burden on lenders currently
offering these loans and would reduce the likelihood that lenders would
choose to offer loans made under Sec. 1041.11 if the Bureau's proposal
is finalized. Accordingly, the Bureau is proposing a borrowing history
condition that mirrors this component of the NCUA Payday Alternative
Loan condition. The Bureau believes that the proposed limitation would
help ensure that, among other things, consumers are protected from
unfair or abusive practices and consumers have access to this market.
In addition, the Bureau considered, and included in the Small
Business Review Panel Outline, two additional borrowing history
conditions for loans under Sec. 1041.11. The Bureau considered
prohibiting lenders from making a loan under Sec. 1041.11 to a
consumer if the consumer had any other covered loan outstanding. The
Bureau also considered incorporating another NCUA requirement related
to borrowing history that prohibits Federal credit unions from making
more than one Payday Alternative Loans at a time to a consumer.\735\
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\735\ 12 CFR 701.21(c)(7)(iii)(A)(3).
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The Bureau believes that measures to minimize the burden on lenders
making loans under Sec. 1041.11 may further the purposes of this
proposed conditional exemption because the conditional exemption is
intended to facilitate access to credit that is relatively lower-cost
than other credit that would be covered by the Bureau's proposals. To
that end, the Bureau believes that limiting the number of loans under
Sec. 1041.11 from the same lender or its affiliates--rather than from
all lenders--would appropriately balance the consumer protection and
access to credit objectives for this conditional exemption.
The Bureau is not proposing to incorporate the NCUA limitation on a
lender making more than one Payday Alternative Loan at a time to a
consumer. In proposing this requirement, the NCUA Board stated its
belief that the restriction would, in concert with the other borrowing
history limitations, ``curtail a member's repetitive use and reliance
on [payday alternative loans].'' \736\ However, loans under the NCUA
program are available only to members of the credit union, thereby
providing a natural limit on the likelihood that a consumer would
obtain such loans from multiple lenders. In contrast, the Bureau's
exemption for loans under Sec. 1041.11 would be available to all
lenders in jurisdictions permitting such lending. Without the
membership requirements of a credit union, the Bureau believes that a
per-lender limit on concurrent loans is unlikely to yield meaningful
consumer protections because a consumer could go to a different lender.
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\736\ 75 FR 24497, 24499 (May 5, 2010) (Proposed Rule); 75 FR
58285, 58287 (Sept. 24, 2010) (Final Rule).
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Similarly, the Bureau is not proposing to incorporate the NCUA
prohibition on rolling over a Payday Alternative Loan. The Bureau
believes that the requirements related to the structure of repayment in
proposed Sec. 1041.11(b)(4) and (b)(5) means that borrowers are
unlikely to face a payment that prompts the need to rollover a loan
under Sec. 1041.11. While the Bureau is concerned about repeat
borrowing--including rollovers--on covered loans, the Bureau does not
believe that the NCUA limitation is necessary in the context of the
other conditions and requirements that the Bureau is proposing in Sec.
1041.11.
The Bureau solicits comment on whether the borrowing history
condition in proposed Sec. 1041.11(c) is appropriate; whether three
loans in a 180-day period achieves the objectives of Title X of the
Dodd-Frank Act, including the consumer protection and access to credit
objectives; and whether a different limitation, such as two loans in a
180-day period, would better achieve those objectives.
Additionally, the Bureau solicits comment on whether to also
include other borrowing history conditions. In particular, the Bureau
solicits comment on whether a per-lender limitation on concurrent loans
would be appropriate for this conditional exemption and on whether a
prohibition on rolling over a loan would be appropriate for this
conditional exemption. The Bureau also solicits comment on whether to
prohibit lenders from making concurrent loans under Sec. 1041.11;
whether to prohibit lenders from making a loan under Sec. 1041.11 to a
consumer with an outstanding covered loan of any type, either with the
same lender or its affiliates or with any lender. In this regard, the
Bureau solicits comment on whether to require lenders to obtain a
consumer report from an information system currently registered
pursuant to Sec. 1041.17(c)(2) or (d)(2) prior to making a loan under
Sec. 1041.11 and on the costs that such a requirement if finalized,
would impose on lenders, including small entities, making loans under
the conditional exemption.
[[Page 48037]]
11(d) Income Documentation Condition
Proposed Sec. 1041.11(d) would require lenders to maintain
policies and procedures for documenting proof of a consumer's recurring
income and to comply with those policies and procedures in making loans
under Sec. 1041.11. Proposed Sec. 1041.11(d) reflects one component
of the NCUA requirement that Federal credit unions implement
appropriate underwriting guidelines for Payday Alternative Loans, and
instructing that underwriting standards should address required
documentation for proof of employment or income.\737\ Proposed comment
11(d)-1 clarifies that proposed Sec. 1041.11(d) would not require
lenders to comply with the same procedures for loans under Sec.
1041.11 as would be required under proposed Sec. 1041.9(c)(3) for the
ability-to-repay determination. Proposed comment 11(d)-1 further
clarifies that Sec. 1041.11(d) would permit lenders to use any
procedure for documenting proof of recurring income that satisfies the
lender's own underwriting obligations.
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\737\ 12 CFR 701.21(c)(7)(iii)(B)(2). The Bureau also is not
proposing to incorporate the NCUA Payday Alternative Loan program's
limitation on outstanding Payday Alternative Loans as a percentage
of a Federal credit union's net worth. The Bureau believes that this
condition is intended to mitigate prudential risk to Federal credit
unions of making short-term, higher-cost loans to consumers that
present a greater credit risk. While important considerations, the
Bureau is not proposing this condition as this rulemaking is not
intended to establish prudential standards for creditors that make
loans under Sec. 1041.11.
---------------------------------------------------------------------------
In the Small Business Review Panel Outline, the Bureau included a
proposal that would require lenders to apply minimum underwriting
standards and to verify income prior to making a loan under Sec.
1041.11. Such standards would mirror the NCUA Payday Alternative Loan
program guidance. However, the Bureau believes that appropriate
underwriting standards for covered longer-term loans, including income
verification procedures, are expressed in proposed Sec. Sec. 1041.9
and 1041.10 and that imposing such conditions for loans under Sec.
1041.11 would be inconsistent with the Bureau's objective of providing
an alternative path for making covered longer-term loans without
undertaking the proposed ability-to-repay determination. Accordingly,
the Bureau is proposing a requirement that a lender maintain and comply
with policies and procedures regarding income documentation for loans
under Sec. 1041.11 as a minimum safeguard against unaffordable loans,
but proposed Sec. 1041.11(d) would be a more flexible standard than
that in Sec. 1041.9(c)(3), would not specify the manner in which a
lender would be required to document proof of recurring income, and
would not impose minimum underwriting standards for loans under Sec.
1041.11. The Bureau believes this requirement would help ensure that,
among other things, consumers have access to this market.
The Bureau solicits comment on whether the income documentation
condition in proposed Sec. 1041.11(d) is appropriate; the costs that
the proposed requirement would impose, if finalized, on lenders,
including small entities; whether the requirement should specify the
manner in which lenders must document income; and whether the
requirement should include a minimum amount of income that must be
documented.
11(e) Additional Requirements
Proposed Sec. 1041.11(e) would impose additional requirements
related to loans made under Sec. 1041.11. The Bureau solicits comment
on each of the requirements described below, including on the burden
such requirements, if finalized, would impose on lenders, including
small entities, making loans under Sec. 1041.11. The Bureau also seeks
comment on whether other or additional requirements would be
appropriate for loans under Sec. 1041.11 in order to fulfill the
objectives of Title X of the Dodd-Frank Act, including the objectives
related to consumer protection and access to credit.
11(e)(1)
Proposed Sec. 1041.11(e)(1) would prohibit lenders from taking
certain additional actions with regard to a loan made under Sec.
1041.11. The Bureau solicits comment on whether the prohibitions are
appropriate to advance the objectives of Title X of the Dodd-Frank Act
and whether other actions should also be prohibited in connection with
loans made under Sec. 1041.11.
11(e)(1)(i)
Proposed Sec. 1041.11(e)(1)(i) would prohibit lenders from
imposing a prepayment penalty in connection with a loan made under
Sec. 1041.11. The Bureau is not proposing in this rulemaking to
determine all instances in which prepayment penalties may raise
consumer protection concerns. However, the Bureau believes that for
loans qualifying for a conditional exemption under proposed Sec.
1041.11, penalizing a consumer for prepaying a loan would be
inconsistent with the consumer's expectation for the loan and may
prevent consumers from repaying debt that they otherwise would be able
to retire.
The Bureau also believes that this proposed restriction is
consistent with the practices of Federal credit unions making loans
under NCUA's Payday Alternative Loan Program. In light of these
considerations, the Bureau believes that the proposed condition would
help ensure that, among other things, consumers are protected from
unfair or abusive practices and that this market operates transparently
and efficiently.
The Bureau solicits comment on the extent to which the requirement
in proposed Sec. 1041.11(e)(1)(i) is appropriate and on any
alternative ways of defining the prohibited conduct that would provide
adequate protection to consumers while encouraging access to credit.
11(e)(1)(ii)
Proposed Sec. 1041.11(e)(1)(ii) would prohibit lenders that hold a
consumer's funds on deposit from, in response to an actual or expected
delinquency or default on the loan made under proposed Sec. 1041.11,
sweeping the account to a negative balance, exercising a right of set-
off to collect on the loan, or closing the account. Proposed comment
11(e)(1)(ii)-1 clarifies that the prohibition in Sec.
1041.11(e)(1)(ii) applies regardless of the type of account in which
the consumer's funds are held and also clarifies that the prohibition
does not apply to transactions in which the lender does not hold any
funds on deposit for the consumer. Proposed comment 11(e)(1)(ii)-2
clarifies that the prohibition in Sec. 1041.11(e)(1)(ii) does not
affect the ability of the lender to pursue other generally-available
legal remedies; the proposed clarification is similar to a provision in
the Bureau's Regulation Z, 1026.12(d)(2).
Because loans under Sec. 1041.11 would be exempt from the proposed
ability-to-repay and payment notice requirements, the Bureau is
concerned that in the event that a lender holds a consumer's funds on
deposit and the loan turns out to be unaffordable to the consumer, the
potential injury to a consumer could be exacerbated if the lender takes
actions that cause the consumer's account to go to a negative balance
or closes the consumer's account. Accordingly, the Bureau believes that
the proposed prohibition would help ensure that, among other things,
consumers are protected from unfair or abusive practices.
The Bureau solicits comment on whether the prohibition in proposed
Sec. 1041.11(e)(1)(ii) would be appropriate and, alternatively,
whether other
[[Page 48038]]
restrictions related to treatment of a consumer's account held by a
lender that makes a loan under Sec. 1041.11 to the consumer would be
appropriate. The Bureau also solicits comment, in particular from banks
and credit unions or other lenders that hold consumer funds, on current
practices taken in response to actual or expected delinquency or
default related to sweeping consumer accounts to negative, exercising a
right of set-off to collect on a loan, and closing consumer accounts.
The Bureau recognizes that Federal credit unions are permitted under
section 1757(11) of the Federal Credit Union Act to ``impress and
enforce a lien upon the shares and dividends of any member, to the
extent of any loan made to him and any dues or charges payable by
him''; the Bureau solicits comment on whether the proposed prohibition
would raise concerns, including safety and soundness concerns, for
Federal credit unions and other depository institutions. Additionally,
the Bureau solicits comment on whether the same or similar condition
would be appropriate for transactions in which a lender does not hold a
consumer's funds on deposit.
11(e)(2)
Proposed Sec. 1041.11(e)(2) would require lenders to furnish
information concerning a loan made under Sec. 1041.11 either to each
information system described in Sec. 1041.16(b) or to a consumer
reporting agency that compiles and maintains files on consumers on a
nationwide basis. Lenders could select which type of furnishing to do.
The Bureau considered, and included in the Small Business Review
Panel Outline, a requirement that lenders obtain a consumer report from
and furnish information concerning loans under Sec. 1041.11 to
registered information systems. During the SBREFA process and in
outreach with industry and others, the Bureau received feedback from
Federal credit unions and other lenders that such obligations would be
a substantial burden and pose a barrier to making relatively small-
dollar and relatively lower-cost loans. The Bureau understands that 75
percent of Federal credit unions that make Payday Alternative Loans
include furnishing loan information to consumer reporting agencies in
their program policies and procedures.\738\ However, from outreach to
credit unions, the Bureau understands that these institutions generally
do not furnish loan information to or obtain consumer reports from
specialty consumer reporting agencies.
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\738\ NCUA Letter to Department of Defense (Dec. 16, 2014), at 5
(Dec. 16, 2014).
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As proposed in Sec. 1041.11(e)(2), lenders would not be required
to furnish information about loans made under Sec. 1041.11 to
information systems described in proposed Sec. 1041.16(b) if the
lender instead furnishes information about that loan to a consumer
reporting agency that compiles and maintains files on consumers on a
nationwide basis. The Bureau believes that this furnishing requirement
strikes the appropriate balance between minimizing burden on lenders
that would make loans under Sec. 1041.11 and establishing a reasonably
comprehensive record of a consumer's borrowing history with respect to
these loans, which would be useful for the other provisions of the
Bureau's proposed rule that require assessing the amount and timing of
a consumer's debt payments. In light of these considerations, the
Bureau believes that the proposed requirement would help ensure that,
among other things, this market operates efficiently to facilitate
access to credit.
The Bureau solicits comment on the proposed furnishing requirement
in Sec. 1041.11(e)(2) and on the costs that the proposed requirement
would impose, if finalized, on lenders, including small entities. In
particular, the Bureau solicits comment on whether to require lenders
to furnish in the manner set forth in proposed Sec. 1041.11(e)(2) or
whether to relieve lenders from a requirement to furnish information
concerning loans made under Sec. 1041.11. In addition, the Bureau
solicits comment on whether to require lenders to furnish to multiple
consumer reporting agencies that compile and maintain files on
consumers on a nationwide basis rather than only one. The Bureau also
solicits comment on the extent to which lenders that currently make
loans similar to those that would be permitted under proposed Sec.
1041.11 currently furnish information to nationwide consumer reporting
agencies or to specialty consumer reporting agencies.
11(e)(2)(i)
Proposed Sec. 1041.11(e)(2)(i) would permit lenders to satisfy the
requirement in Sec. 1041.11(e)(2) by furnishing information concerning
a loan made under Sec. 1041.11 to each information system described in
Sec. 1041.16(b). Lenders furnishing in the manner provided for in
proposed Sec. 1041.11(e)(2)(i) would be required to furnish the loan
information described in proposed Sec. 1041.16(c).
11(e)(2)(ii)
Proposed Sec. 1041.11(e)(2)(ii) would permit lenders to satisfy
the requirement in Sec. 1041.11(e)(2) by furnishing information
concerning a loan made under Sec. 1041.11 at the time of the lender's
next regularly-scheduled furnishing of information to a consumer
reporting agency that compiles and maintains files on consumers on a
nationwide basis or within 30 days of consummation, whichever is
earlier. Proposed Sec. 1041.11(e)(2)(ii) would further provide that
``consumer reporting agency that compiles and maintains files on a
consumers on a nationwide basis'' has the same meaning as in section
603(p) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(p).
Section 1041.12 Conditional Exemption for Certain Covered Longer-Term
Loans of Up to 24 Months' Duration
Background
Proposed Sec. 1041.12 would provide a conditional exemption from
Sec. Sec. 1041.8, 1041.9, 1041.10, and 1041.15(b) for certain covered
longer-term loans that share certain features of loans made through
accommodation lending programs and that are underwritten to achieve an
annual portfolio default rate of not more than 5 percent. Proposed
Sec. 1041.12 would allow a lender to make a covered longer-term loan
without making the ability-to-repay determination that would be
required by proposed Sec. Sec. 1041.9 and 1041.10 and without
complying with the payment notice requirement of Sec. 1041.15(b),
provided that certain conditions and requirements are satisfied. The
Bureau proposes this provision pursuant to its authority under section
1021 (b)(3) of the Dodd-Frank Act \739\ to create conditional
exemptions from rules issued under Title X of the Dodd-Frank Act.
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\739\ 12 U.S.C. 5512(b)(3).
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Community banks and credit unions make a number of different types
of underwritten loans to their customers. Based on the Bureau's
engagement with industry, the Bureau understands that some of these
underwritten consumer loans may be covered longer-term loans under the
Bureau's proposed rule. The loans that would be covered longer-term
loans tend to carry a relatively low periodic interest rate, but with
an origination fee that would cause the total cost of credit to exceed
36 percent particularly with regard to smaller sized
[[Page 48039]]
loans, and involve a leveraged payment mechanism or security interest
in a vehicle title.\740\ From outreach to lenders, the Bureau
understands that, in general, these loans tend to be a relatively small
percentage of a lender's total lending portfolio and are made as an
accommodation for a community bank or credit union's existing
customers. In this regard, as noted in the section-by-section analysis
of proposed Sec. 1041.2(a)(11), the Bureau is soliciting comment on
whether to 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.
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\740\ For example, the Independent Community Bankers of America
(ICBA) provides one illustration of what the Bureau understands to
be typical accommodation lending practices. ICBA reports that among
its member banks that engage in accommodation lending, all review a
consumer's history with the bank before making a loan, 91 percent
verify a consumer's major financial obligations and debts, and 80
percent verify a consumer's income. ICBA also states that much of
the banks' revenue from these loans comes from origination fees,
with typical fees ranging from $28 to $94. ICBA Letter October 6,
2015.
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With proposed Sec. 1041.12, the Bureau would allow the relatively
lower-cost accommodation lending taking place today to continue without
requiring lenders to undertake the ability-to-repay determination that
would be required by proposed Sec. Sec. 1041.9 and 1041.10 and without
requiring lenders to comply with the payment notice requirement of
proposed Sec. 1041.15(b). The conditions for making a loan under Sec.
1041.12 reflect certain requirements that the Bureau has observed are
characteristic of relatively lower-cost loans made by many community
banks as an accommodation to existing customers and limitations that
the Bureau believes will minimize the risk of harm to consumers from a
conditional exemption for certain covered longer-term loans. In
particular, proposed Sec. 1041.12 would provide a conditional
exemption from the proposed ability-to-repay and payment notice
requirements for closed-end covered longer-term loans underwritten in
accordance with a underwriting method designed to result in a portfolio
default rate of not more than 5 percent per year, carrying a modified
total cost of credit of less than or equal to 36 percent, and meeting
certain additional condition and requirements.
The Small Business Review Panel Report recommended that the Bureau
solicit comment on additional options for alternative requirements for
making covered longer-term loans without satisfying the proposed
ability-to-repay requirements. Considering the feedback from SERs, the
recommendation of the Small Business Review Panel Report, and
observations from other outreach following publication of the Small
Business Review Panel Outline, the Bureau is proposing an additional
alternative path for making covered longer-term loans in proposed Sec.
1041.12 and is soliciting comment on whether other alternatives also
would be appropriate to carry out the purposes and objectives of Title
X of the Dodd-Frank Act.
The Bureau considered limiting the availability of the conditional
exemption under proposed Sec. 1041.12 to certain categories of
financial institutions, potentially defined by size, preexisting
customers relationship, or charter type. In proposing to permit all
lenders to make covered longer-term loans under Sec. 1041.12, the
Bureau endeavors to facilitate access to credit, regardless of the size
or charter status of the entity, within the important limits imposed by
more protective State, local, and tribal laws. Extending the
conditional exemption to all financial institutions that choose to make
loans of the type provided for in Sec. 1041.12 furthers that purpose.
The Bureau seeks comment generally on whether to provide a
conditional exemption from the proposed ability-to-repay and payment
notice requirements for covered longer-term loans sharing the features
of accommodation lending, subject to the loan term conditions and
underwriting method requirements in proposed Sec. 1041.12. In
particular, the Bureau solicits comment on whether proposed Sec.
1041.12 would appropriately balance the concerns for access to credit
and consumer protection; on the costs and other burdens that proposed
Sec. 1041.12 would, if finalized, impose on lenders, including small
entities; and on each of the specific conditions and requirements under
proposed Sec. 1041.12, discussed below.
The Bureau seeks comment on whether a different set of conditions
for covered longer-term loans exempt from the proposed ability-to-repay
and payment notice requirements would more appropriately achieve the
objectives of Title X of the Dodd-Frank Act, and, if so, what,
specifically, such an alternative set of conditions would be. For
example, as discussed below with regard to the alternative considered,
the Bureau seeks comment on whether such an alternative should include
a maximum payment-to-income ratio; the Bureau also seeks comment on
whether such an alternative should include a maximum duration, minimum
number of payments, amortization requirement, limitation on prepayment
penalties and collections mechanisms, limitation on permissible cost
structure, borrowing history conditions, or minimum underwriting
requirements. The Bureau also seeks comment on whether to provide a
conditional exemption for loans in a portfolio with low levels of
delinquency or default measured as a portion of originated loans and,
if so, what the appropriate metric for such a conditional exemption
would be and what additional conditions and requirement may be
appropriate for such a conditional exception. In addition, the Bureau
solicits comment on the extent to which lenders interested in making a
covered longer-term loan conditionally exempt from the proposed
ability-to-repay and payment notice requirements anticipate making
loans subject to the requirements of proposed Sec. 1041.12, as
compared to proposed Sec. 1041.11.
Alternative Considered
The Bureau developed the proposed alternative path to making
covered longer-term loans reflected in proposed Sec. 1041.12 following
feedback from SERs during the SBREFA process and other lenders in
outreach following publication of the Small Business Review Panel
Outline. Going into the SBREFA process, the Bureau had focused
primarily on two proposals for alternative requirements for covered
longer-term loans: The NCUA-type loan alternative, now reflected in
proposed Sec. 1041.11, and an alternative that would have permitted
lending so long as the maximum payment-to-income ratio did not exceed a
specified threshold, such as 5 percent, and the loan met certain other
conditions and requirements.
The Bureau modeled the payment-to-income alternative on a proposal
put forth by The Pew Charitable Trusts, a public policy research
organization, based on analysis of the small dollar lending
markets.\741\ In considering the proposal for maximum payment-to-income
loans included in the Small Business Review Panel Outline, the Bureau
believed that this alternative would be a burden-reduction measure,
particularly if many of these loans would also satisfy the ability-to-
repay requirements.
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\741\ Pew Charitable Trusts, Payday Lending in America: Policy
Solutions.
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The Bureau has received communications from over 30 credit unions,
including several large credit unions, supportive of the 5 percent
payment-to-income ratio alternative. Several large banks have also
reported to the Bureau that they believe the 5 percent payment-to-
income ratio would
[[Page 48040]]
provide a workable underwriting rule for use in extending credit to
their customers.
However, the Bureau also received feedback from some of the SERs
asserting that the 5 percent payment-to-income ratio that the Bureau
contemplated proposing was too low to allow the lenders to make a
significant number of loans and that the maximum permissible duration
was too short to be economically viable for their businesses. The
Bureau also heard feedback from other lenders following publication of
the Small Business Review Panel Outline echoing similar concerns. In
particular, during the SBREFA process and subsequent outreach, the
Bureau learned that neither of the alternative sets of requirements
included in the Small Business Review Panel Outline would capture a
category of loans being made by community banks and credit unions as an
accommodation to existing customers and that do not appear to present a
risk of the type of consumer injury that is the focus of the Bureau's
proposed requirement to determine ability to repay. In evaluating the
proposal, the Bureau became concerned that a payment-to-income ratio
higher than 5 percent might be needed to provide sufficient flexibility
to accommodate existing lending programs at many community banks and
credit unions.
The Bureau also received feedback from some consumer groups
asserting that the maximum payment-to-income alternative for making
covered longer-term loans provided inadequate protections to minimize
the risk that consumers would face a payment obligation that they could
not afford and the risk of harm in the event of such inability to
satisfy payment obligations. Some consumer groups expressed concern
that even at 5 percent the maximum payment-to-income ratio was too high
for some consumers to maintain for six months, the maximum loan
duration being considered by the Bureau during the SBREFA process.
These groups expressed still greater concern about the higher payment-
to-income ratios sought by industry.
The Bureau's research does suggest that there is a correlation
between the payment-to-income ratio and levels of default.\742\
However, that research does not point to a clear inflection point below
which the payment-to-income ratio leads to positive outcomes for
consumers and above which it leads to negative outcomes. Moreover, at
any payment-to-income threshold, there will be some consumers for whom
a covered loan would be unaffordable; the Bureau believes that higher
ratios could increase the risk of consumer injury from loans made under
an alternative to the proposed ability-to-repay requirements.
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\742\ See CFPB Report on Supplemental Findings, at 22-29.
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Faced with these trade-offs, the Bureau developed proposed Sec.
1041.12 as an alternative that it believes provides important
structural conditions and back-end protections, while also permitting
accommodation lenders a more flexible option than the conditional
exemption under proposed Sec. 1041.11. The Bureau notes, moreover,
that to the extent that a particular payment-to-income ratio produces
the result required under Sec. 1041.12, a lender may include that
ratio in the lender's underwriting methodology. The Bureau believes
that proposed Sec. 1041.12 would provide a conditional exemption for
at least some lending programs that would satisfy a payment-to-income
test and provide lenders with flexibility to develop alternative
underwriting methods satisfying the specified low portfolio default
rate outcomes. The Bureau believes the proposal would also provide
consumers with important back-end protections in the event that a
lender's underwriting does not achieve those portfolio default rate
outcomes. In particular, the Bureau believes that this alternative
would capture the category of loans discussed above that are being made
by community banks and credit unions as an accommodation to existing
customers and that do not appear to present a risk of the type of
consumer injury that is the focus of the Bureau's proposed requirement
to determine ability-to-repay.
At the same time, the Bureau recognizes that there may be lenders
that would be prepared to make loans using a 5 percent payment-to-
income alternative and that would not do so under the conditional
exemption in proposed Sec. 1041.12 because of the portfolio default
rate requirement. Thus, while the Bureau is not proposing to create an
alternative for loans with a maximum payment-to-income ratio, the
Bureau broadly solicits comment on the advisability of such an
approach. In particular, the Bureau solicits comment on whether
providing an alternative path for making loans with a maximum payment-
to-income ratio would be necessary or appropriate to carry out the
purposes and objectives of Title X of the Dodd-Frank Act; if so, what
the appropriate payment-to-income ratio would be and what would be the
basis for such a threshold; and what other consumer protections may be
appropriate conditions as part of such an alternative path to lending.
The Bureau further solicits comment on the extent to which lenders
would make loans subject to a maximum payment-to-income ratio and not
subject to the proposed ability-to-repay and notice requirements.
Legal Authority
Proposed Sec. 1041.12 would establish an alternative set of
requirements for covered short-term loans that, if complied with by
lenders, would conditionally exempt them from the unfair and abusive
practice identified in proposed Sec. 1041.8, the ability-to-repay
requirements under proposed Sec. Sec. 1041.9 and 1041.10, and the
payment notice requirement of proposed Sec. 1041.15(b). The Bureau is
proposing the requirements of proposed Sec. 1041.12 pursuant to the
Bureau's authority under Dodd-Frank Act section 1022(b)(3)(A) to grant
conditional exemptions in certain circumstances from rules issued by
the Bureau under the Bureau's Dodd-Frank Act legal authorities.
Dodd-Frank Act section 1022(b)(3)(A) authorizes the Bureau to, by
rule, ``conditionally or unconditionally exempt any class of . . .
consumer financial products or services'' from any provision of Title X
of the Dodd-Frank 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. The purposes of Title X are set forth in
Dodd-Frank Act section 1021(a),\743\ 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.''
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\743\ 12 U.S.C. 5511(a).
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The objectives of Title X are set forth in Dodd-Frank Act section
1021(b).\744\ Section 1021(b) of the Dodd-Frank Act authorizes the
Bureau to 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'' (see Dodd-Frank Act section 1021(b)(1)); \745\
(2) consumers ``are protected from unfair, deceptive, or abusive acts
and practices and from discrimination'' (see Dodd-
[[Page 48041]]
Frank Act section 1021(b)(2)); \746\ (3) ``outdated, unnecessary, or
unduly burdensome regulations are regularly identified and addressed in
order to reduce unwarranted regulatory burdens'' (see Dodd-Frank Act
section 1021(b)(3)); \747\ (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 completion'' (see
Dodd-Frank Act section 1021(b)(4)); \748\ and ``markets for consumer
financial products and services operate transparently and efficiently
to facilitate access and innovation'' (see Dodd-Frank Act section
1021(b)(5)).\749\
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\744\ 12 U.S.C. 5511(b).
\745\ 12 U.S.C. 5511(b)(1).
\746\ 12 U.S.C. 5511(b)(2).
\747\ 12 U.S.C. 5511(b)(3).
\748\ 12 U.S.C. 5511(b)(4).
\749\ 12 U.S.C. 5511(b)(5).
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When issuing an exemption under Dodd-Frank Act section
1022(b)(3)(A), the Bureau is required under Dodd-Frank Act section
1022(b)(3)(B) to take into consideration, as appropriate, three
factors. These enumerated factors are: (1) The total assets of the
class of covered persons; \750\ (2) the volume of transactions
involving consumer financial products or services in which the class of
covered persons engages; \751\ 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.\752\
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\750\ 12 U.S.C. 5512(b)(3)(B)(i).
\751\ 12 U.S.C. 5512(b)(3)(B)(ii).
\752\ 12 U.S.C. 5512(b)(3)(B)(iii).
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In general, the Bureau believes that providing a conditional
exemption from proposed Sec. Sec. 1041.8, 1041.9, 1041.10, and
1041.15(b) for certain covered longer-term loans sharing the features
of certain loans made through accommodation lending programs would help
preserve access to credit in this market for consumers while providing
important protections for consumers. The proposed conditional exemption
would be a partial exemption meaning that loans under Sec. 1041.12
would still be subject to all other provisions of the Bureau's proposed
rule; for example, lenders would still be required to comply with the
limitation on payment transfer attempts in proposed Sec. 1041.14, the
consumer rights notice in proposed Sec. 1041.15(d), and the compliance
program and record retention requirements in proposed Sec. 1041.18.
The Bureau believes that proposed Sec. 1041.12 would reduce the
cost of compliance with the Bureau's proposal, if finalized, for
lenders that would make covered longer-term loans meeting the proposed
conditions by relieving lenders of the obligation to satisfy the
requirements of proposed Sec. Sec. 1041.9, 1041.10, and 1041.15(b).
The Bureau believes that the conditional exemption in proposed Sec.
1041.12 is necessary or appropriate to carry out the purposes and
objectives of Title X of the Dodd-Frank Act, including ensuring that
``all consumers have access to markets for consumer financial products
and services'' and that these markets ``operate transparently and
efficiently to facilitate access and innovation.'' \753\ Specifically,
the proposed conditional exemption is designed to facilitate access to
credit by permitting lenders an alternative option for making covered
longer-term loans, subject to important structural, cost, and borrowing
history limitations.\754\
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\753\ 12 U.S.C. 5511(a), (b)(5).
\754\ The Bureau has taken the statutory factors listed in 12
U.S.C. 5512(b)(3)(B) into consideration. The Bureau has concluded
that it is not able, in this instance, to incorporate the first two
of these factors into its justification for the proposed exemption
because these factors are relevant to an exemption of a class of
covered persons, whereas proposed Sec. 1041.12 would exempt a class
of transactions from certain requirements of the proposed rule. The
third factor is not materially relevant because the Bureau is
unaware of existing law that provides adequate protections for
consumers similar to those provided in proposed Sec. 1041.12.
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The Bureau believes that these loans are a lower-cost, safer
alternative in the market for payday, vehicle title, and installment
loans and that many of these loans, while likely affordable to the
consumer, are underwritten based on the financial institution's
understanding of a consumer's financial situation without using a
process that would satisfy the proposed ability-to-repay requirements
under Sec. Sec. 1041.9 and 1041.10. These loans, while covered longer-
term loans under the Bureau's proposal, generally would be on the
border of the cost threshold for coverage and contain important
structural protections. In addition, the Bureau has not observed
evidence that lenders making such accommodation loans participate in
widespread questionable payment practices that warrant the proposed
payment notice requirement in Sec. 1041.15(b). The Bureau therefore
believes that a conditional exemption for underwritten loans subject to
certain structural, cost, and borrowing history limitations is
necessary or appropriate to carry out the purposes and objectives of
Title X of the Dodd-Frank Act, including the objective of making credit
available to consumers in a fair and transparent manner.
In consideration of these factors, the Bureau is proposing in Sec.
1041.12 to provide lenders with an additional degree of flexibility to
make these loans using the lender's own underwriting procedures, if the
lender's loan portfolio meets specified outcomes. In particular, the
Bureau proposes to provide an exemption from Sec. Sec. 1041.8, 1041.9,
1041.10, and 1041.15(b) for covered longer-term loans repaid in even
and amortizing payments, meeting other conditions and requirements as
to loan terms, borrowing history, and collection methods, subject to
cost limitations, and underwritten with a methodology that produces low
portfolio default rates.
The Bureau seeks comment on whether the Bureau should rely upon the
Bureau's statutory exemption authority under Dodd-Frank Act section
1022(b)(3)(A) to exempt loans that satisfy the requirements of proposed
Sec. 1041.12 from the unfair and abusive practice identified in
proposed Sec. 1041.8, the ability-to-repay requirements proposed under
Sec. Sec. 1041.9 and 1041.10, and the payment notice requirement
proposed under Sec. 1041.15(b). Alternatively, the Bureau seeks
comment on whether the requirements under proposed Sec. 1041.12 should
instead be based on the Bureau's authority under Dodd-Frank Act section
1031(b) to prescribe rules identifying as unlawful unfair, deceptive,
or abusive practices and to include in such rules requirements for the
purpose of preventing such acts or practices. In particular, the Bureau
requests comment on whether loans made under proposed Sec. 1041.12
should be expressly excluded from the identification of the unfair and
abusive practice rather than exempted therefrom or whether the
requirements for loans made under proposed Sec. 1041.12 should be
considered requirements for preventing unfair and abusive practices.
12(a) Conditional Exemption for Certain Covered Longer-Term Loans
Proposed Sec. 1041.12(a) would provide a conditional exemption
from Sec. Sec. 1041.8, 1041.9, 1041.10, and 1041.15(b) for covered
longer-term loans satisfying the conditions and requirements in Sec.
1041.12(b) through (f). Proposed Sec. 1041.12(a) would not provide an
exemption from any other provision of law. For example, proposed Sec.
1041.12(a) would not permit loans to servicemembers and their
dependents that would violate the Military Lending Act and its
implementing regulations.
Proposed comment 12(a)-1 clarifies that, subject to the
requirements of other applicable laws, Sec. 1041.12(a) would permit
all lenders to make loans under Sec. 1041.12. Proposed comment 12(a)-1
further clarifies that Sec. 1041.12(a) applies
[[Page 48042]]
only to covered longer-term loans and so loans under Sec. 1041.12
would have a duration of more than 45 days.
The Bureau is concerned that, given the financial circumstances of
many borrowers, it may be difficult for many borrowers to repay a
covered short-term loan without the need to reborrow in short order.
The Bureau is proposing a separate alternative path for covered short-
term loans under proposed Sec. 1041.7, which would permit borrowers to
obtain up to three back-to-back covered short-term loans with gradual
reduction of the loan principal. The Bureau believes that restricting
the availability of the proposed conditional exemption under Sec.
1041.12 to covered longer-term loans would permit lenders an
alternative way to make relatively lower-cost loans without disrupting
the core features of the Bureau's proposed framework for regulation in
the affected markets.
12(b) Loan Term Conditions
Proposed Sec. 1041.12(b) would require loans under Sec. 1041.12
to meet certain conditions as to the loan terms. Each proposed
condition for a loan under Sec. 1041.12 is described below. The Bureau
solicits comment on all aspects of the loan term conditions, including
on the burden such conditions, if finalized, would impose on lenders,
including small entities, making loans under Sec. 1041.12. The Bureau
also seeks comment on whether other or additional loan term conditions
would be appropriate to carry out the objectives of Title X of the
Dodd-Frank Act, including the consumer protection and access to credit
objectives. Additionally, the Bureau solicits comment on whether to
prohibit lenders from taking a vehicle security interest in connection
with a covered longer-term loan that would be exempt from Sec. Sec.
1041.8, 1041.9, 1041.10, and 1041.15(b) under proposed Sec. 1041.12.
12(b)(1)
Proposed Sec. 1041.12(b)(1) would provide that the loan not be
structured as open-end credit. The Bureau believes that the
accommodation lending occurring today is designed to enable borrowers
to spread the cost of a specific expense over a period of time and
therefore generally takes the form of a closed-end loan. Furthermore,
as with the alternative path to making covered longer-term loans under
proposed Sec. 1041.11, the Bureau believes that attempting to develop
restrictions for open-end credit in proposed Sec. 1041.12 would add
undue complexity without providing appreciable benefit for consumers
and that limiting the proposed conditional exemption from the ability-
to-repay and payment notice requirements to closed-end loans would
result in a simpler and more transparent transaction for both consumers
and lenders. The Bureau therefore believes that this limitation would
help ensure that, among other things, this market operates fairly and
transparently.
The Bureau solicits comment on whether to permit open-end loans to
be made under this conditional exemption; whether lenders would choose
to make open-end loans under this conditional exemption if permitted to
do so; and what the benefit for consumers would be of permitting such
loans and what additional conditions then may be appropriate for
proposed Sec. 1041.12.
12(b)(2)
Proposed Sec. 1041.12(b)(2) would limit the conditional exemption
to covered longer-term loans with a duration of not more than 24
months. The Bureau believes that this is consistent with current
practice among lenders that make accommodation loans to existing
customers and would help ensure that, among other things, consumers are
protected from unfair or abusive practices and this market operates
efficiently to facilitate access to credit. The Bureau also notes that
the proposed durational limitation for loans under Sec. 1041.12 would
permit lenders to make considerably longer loans than the maximum six
month loans that would be permitted under proposed Sec. 1041.11.
The Bureau solicits comment on whether to include a maximum
duration for loans under Sec. 1041.12 and, if so, whether 24 months is
an appropriate maximum duration or, alternatively, what the
justification would be for a longer or shorter period of time. The
Bureau further solicits comment on whether the maximum duration
condition would affect whether lenders would make loans under Sec.
1041.12.
12(b)(3)
Proposed Sec. 1041.12(b)(3) would limit the conditional exemption
to loans that are repayable in two or more payments due no less
frequently than monthly, due in substantially equal amounts, and due in
substantially equal intervals. The Bureau is concerned that consumers
may struggle to repay a loan due in a single payment, therefore
suffering harms from becoming delinquent or defaulting on the loan or
taking steps to avoid default on the covered loan and jeopardizing
their ability to meet other financial obligations or basic living
expenses.
Proposed comment 12(b)(3)-1 clarifies that payments may be due with
greater frequency, such as biweekly. Proposed comment 12(b)(3)-2
clarifies that payments would be substantially equal in amount if each
scheduled payment is equal to or within a small variation of the
others. Proposed comment 12(b)(3)-3 clarifies that the intervals for
scheduled payments would be substantially equal if the payment schedule
requires repayment on the same date each month or in the same number of
days and also that lenders may disregard the effects of slight changes
in the calendar. Proposed comment 12(b)(3)-3 further clarifies that
proposed Sec. 1041.12(b)(3) would not prohibit a lender from accepting
prepayment on a loan made under Sec. 1041.12.
Extended periods without a scheduled payment could subject the
consumer to a payment shock when the eventual payment does come due,
potentially prompting the need to reborrow, default, or suffer
collateral harms from unaffordable payments. In contrast, monthly
payments, when amortizing as discussed below, may facilitate repayment
of the debt over the contractual term. Regularity of payments is
particularly important given the exemption from the payment notice
requirement of proposed Sec. 1041.15(b).
Additionally, as discussed in the section-by-section analysis of
proposed Sec. 1041.9(b)(2)(ii), the Bureau believes that loans with
balloon payments pose particular risk to consumers. For example, the
Bureau found that vehicle title loans with a balloon payment are much
more likely to end in default compared to amortizing installment
vehicle title loans and that the approach of the balloon payment coming
due is associated with significant reborrowing.\755\ Given these
considerations, the Bureau proposes to restrict the conditional
exemption from the proposed ability-to-repay and payment notice
requirements to loans that have two or more payments due no less
frequently than monthly and that do not have a balloon payment. The
Bureau believes that the conditions in proposed Sec. 1041.12(b)(3) may
be appropriate to reduce the risk of injury from an inability to
satisfy payment obligations or loss of budgeting control associated
with a loan under Sec. 1041.12. Accordingly, the Bureau believes that
the proposed limitation would help ensure that, among other things,
consumers are protected from unfair or abusive practices.
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\755\ CFPB Report on Supplemental Findings, at 30-34.
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[[Page 48043]]
The Bureau solicits comment on whether the repayment structure
requirements are appropriate for this conditional exemption. In
particular, the Bureau solicits comment on whether two is the
appropriate minimum number of payments; and, if not, what would be the
justification for more or fewer minimum payments. Additionally, the
Bureau solicits comment on whether the proposed standards for
substantially equal payments and substantially equal intervals provide
sufficient guidance to lenders.
12(b)(4)
Proposed Sec. 1041.12(b)(4) would limit the conditional exemption
to loans that amortize completely over the loan term and would define
the manner in which lenders must allocate consumer payments to amounts
owed. The Bureau believes this limitation is consistent with current
practice among community banks and credit unions making what would be
covered longer-term loans as an accommodation to existing customers.
Proposed comment 12(b)(4)-1 clarifies that the interest portion of each
payment would need to be computed by applying a periodic interest rate
to the outstanding balance due.
A fully amortizing loan facilitates consumer repayment of the loan
principal from the beginning of repayment. This progress toward
repayment means that a consumer who later faces difficulty making
payments on such a loan will be better positioned to refinance on
favorable terms or eventually retire the debt than would a consumer who
had not made any progress repaying the loan principal. The Bureau
believes that the amortization requirement would provide an important
protection for loans conditionally exempt from the proposed ability-to-
repay and payment notice requirements: a steady amortization structure
that applies a portion of each payment to principal and to interest and
fees as they accrue and for which interest is calculated only by
applying a fixed periodic rate to the outstanding balance of the loan
facilitates consumer repayment of the loan and minimizes the risk of
harm to a consumer in the event that a loan is unaffordable.
Accordingly, the Bureau believes that the proposed limitation would
help ensure that, among other things, consumers are protected from
unfair or abusive practices.
The Bureau solicits comment on whether an amortization requirement
in proposed Sec. 1041.12 is appropriate; if so, whether the
amortization method that the Bureau would require in proposed Sec.
1041.12(b)(4) is appropriate for this conditional exemption; and, if
not, what alternative method or methods should be required for loans
made under proposed Sec. 1041.12.
12(b)(5)
Proposed Sec. 1041.12(b)(5) would limit the conditional exemption
to loans that carry a modified total cost of credit of less than or
equal to an annual rate of 36 percent. Proposed Sec. 1041.12(b)(5)
would specify that the modified total cost of credit is calculated in
the same manner as total cost of credit in Sec. 1041.2(a)(18)(iii)(A),
excluding from the calculation a single origination fee meeting the
criteria in Sec. 1041.12(b)(5)(i) or (ii). Under these provisions, the
lender could exclude either a single origination fee that represents a
reasonable proportion of the lender's cost of underwriting loans under
Sec. 1041.12 or a single origination fee of no more than $50,
regardless of the lender's actual costs of underwriting loans under
Sec. 1041.12. Proposed comment 12(b)(5)-1 describes the effects of the
proposed cost limitation in Sec. 1041.12(b)(5) and clarifies that
loans meeting the criteria for covered longer-term loans under Sec.
1041.3(b)(2) and that have a modified total cost of credit in
compliance with Sec. 1041.12(b)(5) remain covered longer-term loans.
The proposed cost condition for loans under Sec. 1041.12 would not
establish a Federal usury limit, as the Bureau is not proposing to
prohibit charging interest rates or APRs above the demarcation in
proposed Sec. 1041.12(b)(5). Rather, covered longer-term loans
carrying a modified total cost of credit more than the cost in proposed
Sec. 1041.12(b)(5) could be made under proposed Sec. 1041.9, and
comply with proposed Sec. Sec. 1041.10 and 1041.15(b). The Bureau
believes that the proposed limitation of the conditional exemption
would help ensure that, among other things, consumers are protected
from unfair or abusive practices and this market operates efficiently
to facilitate access to credit.
The proposed cost structure in Sec. 1041.12(b)(5) is intended to
accommodate existing market practices related to offsetting the cost of
underwriting while providing lenders with certainty about permissible
costs in order to facilitate lending under proposed Sec. 1041.12.
Through its market monitoring and outreach activities, the Bureau has
observed that lenders that today make what would be covered longer-term
loans as an accommodation to existing customers generally charge an
origination fee on top of a relatively low periodic interest rate. To
the extent that the total cost of credit, including the origination fee
and the interest rate, as well as any other costs associated with the
loan, would be lower than 36 percent, such loans would not be covered
longer-term loans under proposed Sec. 1041.3(b)(2). However, at least
for loans with shorter terms and smaller amounts, the origination fee
may cause the total cost of credit to exceed 36 percent,
notwithstanding the relatively low periodic interest rate. Such loans
would be covered longer-term loans if the lender also obtains a
leveraged payment mechanism or vehicle security.
The Bureau considered whether, for purposes of proposed Sec.
1041.12(b)(5), to also exclude from the calculation of modified total
cost of credit the cost of insurance products with respect to the
lender's vehicle security interest. The Bureau understands that some
community banks, credit unions, and other installment lenders may
require consumers to pay for such insurance products when extending an
installment loan secured by a consumer's vehicle. The Bureau believes,
however, that if the consumer is required to purchase an insurance
product as well as pay an origination fee on the loan, the risks that
the loan will be unaffordable increase and that excluding the costs of
ancillary insurance products from the modified total cost of credit
under Sec. 1041.12(b)(5) is not appropriate.
The proposed conditional exemption in Sec. 1041.12 would allow
lenders offering relatively low-cost loans as a customer accommodation
to continue to do so while still having a mechanism to recover their
costs without having to create a fundamentally different pricing
structure. In consideration of these factors, the Bureau proposes in
Sec. 1041.12(b)(5) to permit lenders greater flexibility to make a
covered longer-term loan without satisfying the proposed ability-to-
repay and payment notice requirements if the loan meets important
limitations on cost. The Bureau believes that limiting the conditional
exemption in this way may help reduce the risk of consumer injury from
potentially unaffordable loans.
The Bureau solicits comment on whether to limit the conditional
exemption to loans meeting certain cost criteria; and, if so, whether
the proposed pricing structure for loans eligible for the proposed
exemption in Sec. 1041.12 is appropriate to achieve the objectives of
Title X of the Dodd-Frank Act, including the consumer protection and
access to credit objectives, or what alternative pricing structure
should be required for loans made under proposed
[[Page 48044]]
Sec. 1041.12. Additionally, the Bureau solicits comment on whether to
exclude from the calculation of modified total cost of credit the cost
of an insurance product associated with a loan made under Sec.
1041.12. The Bureau further solicits comment on what alternative
requirements would provide sufficient consumer protection for loans
under Sec. 1041.12 if the cost limitation is not included.
The Bureau's understanding about existing fee structures is based
on its market monitoring and engagement activities and does not cover
the entirety of the market for loan products that may be accommodated
under proposed Sec. 1041.12. In this regard, the Bureau solicits
feedback on origination fees on loans made through accommodation
lending programs and the individual cost components reflected in those
fees, including, among others, labor costs, document preparation costs,
and any costs of using the applicable underwriting methodology.
12(b)(5)(i)
Proposed Sec. 1041.12(b)(5)(i) would permit a lender to exclude
from the modified total cost of credit a single origination fee that
represents a reasonable proportion of the lender's costs of
underwriting loans made under Sec. 1041.12. Proposed comment
12(b)(5)(i)-1 clarifies the standards for an origination fee to be a
reasonable proportion of the lender's costs of underwriting, including
specifying that the origination fee must reflect the lender's costs of
underwriting loans made under Sec. 1041.12 and that the lender may
make a single determination of underwriting costs for all loans made
under Sec. 1041.12.
The Bureau solicits comment on the proposed standards for an
origination fee to be a reasonable proportion of the lender's costs of
underwriting.
12(b)(5)(ii)
Proposed Sec. 1041.12(b)(5)(ii) would provide a safe harbor for a
lender to exclude from the modified total cost of credit a single
origination fee of $50. Proposed comment 12(b)(5)(ii)-1 clarifies that
a lender may impose a single origination fee of not more than $50
without determining the costs associated with underwriting loans made
under Sec. 1041.12.
The Bureau believes that lenders are more likely to make loans
under Sec. 1041.12 if regulatory uncertainty about the permissible
origination fee is minimized. Providing a safe harbor for a single
origination fee of up to $50 may therefore be appropriate to advance
the objectives of Title X of the Dodd-Frank Act. The Bureau notes that
for loans under $1,000, $50 was the median fee reported in the
community bank survey described in part II.
The Bureau solicits comment on the proposed safe harbor for a
single origination fee of $50, including whether such a safe harbor is
appropriate and, if so, whether $50 is the appropriate amount for such
a safe harbor.
12(c) Borrowing History Condition
Proposed Sec. 1041.12(c) would exclude from the conditional
exemption a loan that would otherwise satisfy the conditions of
proposed Sec. 1041.12 if the loan would result in the consumer being
indebted on more than two outstanding loans made under Sec. 1041.12
from the lender or its affiliates within a period of 180 days. Proposed
Sec. 1041.12(c) would require a lender to review its own records and
the records of its affiliates prior to making a loan under proposed
Sec. 1041.12 to determine that the loan would not result in the
consumer being indebted on more than two outstanding loans made under
Sec. 1041.12 from the lender or its affiliates within a period of 180
days.
Proposed comment 12(c)-1 clarifies that a lender needs to review
only its own records and the records of its affiliates to determine the
consumer's borrowing history on covered longer-term loans made under
Sec. 1041.12 and does not need to obtain information from other,
unaffiliated lenders or a consumer report from an information system
currently registered pursuant to Sec. 1041.17(c)(2) or (d)(2).
Proposed comment 12(c)-2 clarifies the manner in which a lender must
calculate the 180-day period for the purposes of proposed Sec.
1041.12(c). Proposed comment 12(c)-3 clarifies that proposed Sec.
1041.12(c) would not limit the ability of lenders to make additional
covered loans subject to the proposed ability-to-repay requirements or
to one of the other proposed conditional exemptions. Proposed comment
12(c)-4 provides an illustrative example.
The Bureau believes that the borrowing history condition and the
180-day condition appropriately protects consumers against the risk of
injury from potentially unaffordable loans under proposed Sec.
1041.12. The Bureau believes that if a consumer seeks more than two
loans made under Sec. 1041.12 within a period of six months, such
circumstances suggest that the prior loans may not have been
affordable. In such circumstances, the Bureau believes it would be
inappropriate to allow the lender to continue to make covered longer-
term loans under Sec. 1041.12, without making an ability-to-repay
determination pursuant to proposed Sec. Sec. 1041.9 and 1041.10 and
providing the payment notice required by proposed Sec. 1041.15(b).
Furthermore, in the Bureau's view, two origination fees in a six-month
period would sufficiently address the costs that a lender may incur in
underwriting a loan under Sec. 1041.12, making it possible for the
lender to continue to make additional loans without charging additional
originations fees. In such an instance, assuming the lender does not
increase the total cost of credit, such loans would not be covered
longer-term loans.
In proposed Sec. 1041.11, the Bureau proposes to permit lenders to
make three loans under that conditional exemption within a 180-day
period, rather than the two loan limit in proposed Sec. 1041.12(c).
The requirement in proposed Sec. 1041.11 is intended to reflect the
requirement of the NCUA Payday Alternative Loan program. Further,
proposed Sec. 1041.11 would be limited to loans with a smaller
application fee than the origination fee that would be permitted under
Sec. 1041.12(b)(5) and with a lower periodic interest rate.
Accordingly, the Bureau believes that it may be appropriate to permit
more loans with greater frequency under proposed Sec. 1041.11 than
under proposed Sec. 1041.12.
During the SBREFA process, Bureau considered, and included in the
Small Business Review Panel Outline with regard to the maximum payment-
to-income alternative, prohibiting lenders from making a loan under
Sec. 1041.12 to a consumer if the consumer had any other covered loan
outstanding. The Bureau believes that measures to minimize the burden
on lenders making loans under Sec. 1041.12 may further the purposes of
this proposed conditional exemption, which is intended to facilitate
access to credit that is relatively lower-cost than other credit that
would be covered by the Bureau's proposals. To that end, the Bureau
believes that limiting the number of loans under Sec. 1041.12 from the
same lender or its affiliates--rather than from all lenders--would
appropriately balance the consumer protection and access to credit
objectives for this conditional exemption.
The Bureau solicits comment on whether the borrowing history
condition in proposed Sec. 1041.12(c) is appropriate; whether two
loans in a 180-day period achieves the objectives of Title X of the
Dodd-Frank Act, including the consumer protection and access to credit
objectives; and whether
[[Page 48045]]
a different limitation, such as one loan in a 180-day period or two
loans in a 365-day period, would better achieve those objectives.
Additionally, the Bureau solicits comment on whether to also
include other borrowing history conditions. In particular, the Bureau
solicits comment on whether to prohibit lenders from making concurrent
loans under Sec. 1041.12; whether to prohibit lenders from making a
loan under Sec. 1041.12 to a consumer with an outstanding covered loan
of any type, either with the same lender or its affiliates or with any
lender. In this regard, the Bureau solicits comment on whether to
require lenders to obtain a consumer report from an information system
currently registered pursuant to Sec. 1041.17(c)(2) or (d)(2) prior to
making a loan under Sec. 1041.12 and on the costs that such a
requirement if finalized, would impose on lenders, including small
entities, making loans under the conditional exemption.
12(d) Underwriting Method
Proposed Sec. 1041.12(d) would require that lenders maintain and
comply with their own policies and procedures for effectuating a method
of underwriting loans made under Sec. 1041.12 designed to result in a
portfolio default rate of less than or equal to 5 percent per year on
their portfolio of covered longer-term loans under Sec. 1041.12.
Proposed Sec. 1041.12(d) would not specify the nature of the
underwriting that a lender would be required to do; proposed comment
12(d)-1 clarifies that a lender's underwriting method may be based on
the lender's prior experience or a lender's projections. Proposed Sec.
1041.12(d)(1) would require lenders to calculate the portfolio default
rate at least once every 12 months on an ongoing basis for loans made
under Sec. 1041.12. Proposed Sec. 1041.12(d)(2) would require that if
a lender's portfolio default rate for such loans exceeds 5 percent, the
lender provides a timely refund of the origination fees charged on any
loans included within the portfolio.
As discussed above, the Bureau understands that a variety of
lenders--in particular, community banks and credit unions--regularly
make to their existing customers loans that would be covered longer-
term loans, generally underwrite such loans based on a variety of
factors related to the lender's risk criteria and familiarity with the
consumer, and that these loans are generally affordable to consumers,
with low default and loss rates on those loans.\756\ The Bureau
believes that permitting lenders to make underwritten covered longer-
term loans without determining the consumer's ability to repay in
accordance with proposed Sec. Sec. 1041.9 and 1041.10 but with certain
other protective conditions in place may be appropriate in the event
that the lender maintains and complies with an underwriting method
designed to yield a low portfolio default rate.
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\756\ For example, the charge-off rates among ICBA members for
loans that would be covered by the Bureau's proposals average
between 0.54 and 1.02 percent. ICBA Letter October 6, 2015.
Similarly, the American Bankers Association reports that 34 percent
of their member banks that made ``small dollar loans'' charged-off
no such loans in 2014 and that another 64 percent charged-off no
more than 3 percent of such loans in the same year. ABA Letter
December 1, 2015.
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The Bureau believes that for a conditional exemption to the general
requirement to determine ability to repay, setting a portfolio default
rate at a low threshold is appropriate in order to prevent the
conditional exemption to be used for loans likely to create significant
risk of consumer harm. Further, the lenders that have described to the
Bureau their current accommodation lending programs have all reported
that they achieve portfolio default rates well below at 5 percent. The
Bureau therefore believes that 5 percent would be an appropriate
portfolio default rate threshold for the purposes of the conditional
exemption in Sec. 1041.12.
As an important back-end protection, proposed Sec. 1041.12(d)
would also require that lenders provide a refund of origination fees if
the lender's portfolio default rate exceeds 5 percent. The Bureau
believes that this requirement would discourage attempts by lenders to
avoid the 5 percent portfolio default rate limit and would provide a
predictable remedy for poorly-performing portfolios. In addition, the
Bureau believes that this requirement provides a relatively simple
mechanism to mitigate consumer injury in the event that a lender's
underwriting methodology does not meet the proposed parameters of Sec.
1041.12. In developing proposed Sec. 1041.12(d), the Bureau considered
including substantially more complicated metrics and remedial
provisions. The Bureau decided not to propose such provisions based on
several concerns, including a concern that other remedial provisions
would be less effective at mitigating an incentive for lenders to
exploit the conditional exemption in Sec. 1041.12 in ways not intended
by the Bureau and a concern that these would be unduly burdensome for
lenders and the Bureau alike to administer. The Bureau believes that
the proposed refund requirement would be sufficient to prevent abuse
under proposed Sec. 1041.12.
The Bureau solicits comment on all aspects of proposed Sec.
1041.12(d). In particular, the Bureau solicits comment on whether the
requirement that lenders maintain and comply with policies and
procedures for effectuating an underwriting method is sufficiently
clear to provide lenders with guidance as to their obligations under
Sec. 1041.12(d); and, if not, what would be an alternative
underwriting requirement for loans under Sec. 1041.12. The Bureau also
solicits comment on whether lenders that fail to achieve a portfolio
default rate of not more than 5 percent should be required to refund
the origination fee charged to all consumers with outstanding loans
under Sec. 1041.12 and whether any additional remedial measures should
be required. Further, the Bureau solicits comment on whether lenders
who exceed the targeted portfolio default rate should be prevented from
making loans under Sec. 1041.12 for a subsequent period; and, if so,
what such a period would be and what would be the justification for
such a prohibition.
12(d)(1)
Proposed Sec. 1041.12(d)(1) would require lenders making loans
under Sec. 1041.12 to calculate the lender's portfolio default rate
for such loans at least once every 12 months. The portfolio default
rate for each period would cover all loans made under Sec. 1041.12
that were outstanding at any time during the preceding year. The Bureau
believes that requiring lenders to calculate portfolio default rates
for loans under Sec. 1041.12 on an annual basis would provide a ready
means of determining whether loans that were made under proposed Sec.
1041.12 were the type contemplated by this conditional exemption.
Proposed comment 12(d)(1)-1 clarifies that lenders must use the method
set forth in Sec. 1041.12(e) to calculate the portfolio default rate.
The Bureau solicits comment on whether an annual calculation is
sufficient to achieve the objectives of proposed Sec. 1041.12; and, if
not, what an alternative period would be for regular calculation of the
portfolio default rate. Further, the Bureau solicits comment on the
burdens that proposed Sec. 1041.12(d)(1), if finalized, would impose
on lenders, including small entities, making loans under the
conditional exemption.
[[Page 48046]]
12(d)(2)
Proposed Sec. 1041.12(d)(2) would require that lenders with a
portfolio default rate exceeding 5 percent per year refund to each
consumer with a loan included in the portfolio any origination fee
excluded from the modified total cost of credit pursuant to proposed
Sec. 1041.12(b)(5). Lenders would be required to provide such refunds
within 30 calendar days of identifying the excessive portfolio default
rate; a lender would be deemed to have timely refunded the fee to a
consumer if the lender delivers payment to the consumer or places
payment in the mail to the consumer within 30 calendar days. Failure to
provide the timely refund required by proposed Sec. 1041.12(d)(2)
would result in a violation of proposed Sec. 1041 with respect to
those loans. Proposed comment 12(d)(2)-1 clarifies that a lender may
satisfy the refund requirement by, at the consumer's election,
depositing the refund into the consumer's deposit account. Proposed
comment 12(d)(2)-2 clarifies that a lender that failed in a prior 12-
month period to achieve a portfolio default rate of not more than 5
percent would not be prevented from making loans under Sec. 1041.12
for a subsequent 12-month period, provided that the lender provides a
timely refund of origination fees pursuant to proposed Sec.
1041.12(d)(2).
The Bureau is concerned that absent this refund requirement, the
conditional exemption contained in proposed Sec. 1041.12 could be
subject to abuse as lenders could claim that their underwriting methods
were calibrated to achieve a portfolio default rate of not more than 5
percent per year on loans under Sec. 1041.12 without ever achieving
that threshold. The refund requirement is designed to eliminate an
incentive that might otherwise exist for a lender to invoke proposed
Sec. 1041.12 to make covered longer-term loans conditionally exempt
from proposed Sec. Sec. 1041.8, 1041.9, 1041.10, and 1041.15(b) but
without actually underwriting the loans. The Bureau believes that such
a back-end protection may be appropriate to ensure that the Sec.
1041.12 exemption is available only where there is robust, lender-
driven underwriting. The proposed timing components in Sec.
1041.12(d)(2) are similar to the cure provisions in the Bureau's
Regulation X, 12 CFR 1024.7(i). The Bureau believes that the timing
requirements may be suitable for refunds provided in the context of
proposed Sec. 1041.12.
The Bureau solicits comment on whether a back-end consumer
protection is appropriate for loans under Sec. 1041.12; if so, whether
the proposed refund requirement in Sec. 1041.12(d)(2) would advance
the consumer protection and access to credit objectives for proposed
Sec. 1041.12; and whether an alternative back-end requirement may be
more appropriate. In particular, the Bureau solicits comment on whether
an alternative requirement would better target the potential consumer
injury from the lender's underwriting failure; for example, whether the
Bureau should require lenders to cease all collections activities on
delinquent or defaulted loans that are in a portfolio with a portfolio
default rate exceeding 5 percent. Further, the Bureau seeks comment on
whether other requirements would be necessary for the administration of
the proposed refund requirement, including, for example, disgorgement
of the amount of undelivered and uncashed refund checks. The Bureau
also solicits comment on the proposed timing requirement, including
whether 30 calendar days provides adequate time for lenders to process
refund payments and whether it is appropriate to deem consumers to have
timely received payment if the lender places payment in the mail by the
required date. In addition, the Bureau solicits comment on the costs
that proposed Sec. 1041.12(d)(2), if finalized, would impose on
lenders, including small entities, making loans under Sec. 1041.12.
12(e) Calculation of Portfolio Default Rate
Proposed Sec. 1041.12(e) would prescribe the required method for
calculating the portfolio default rate for loans made under Sec.
1041.12. Proposed comment 12(e)-1 clarifies that lenders must use the
method of calculation in proposed Sec. 1041.12(e) regardless of the
lender's own accounting methods. The Bureau believes that a
standardized calculation of portfolio default rate is appropriate to
measure compliance with the conditions of Sec. 1041.12 and also would
minimize the burden of such calculation on lenders that make loans
under Sec. 1041.12. Loss ratios are typically calculated as a
percentage of average outstanding balances for a period of time, and
the proposed definition follows this convention; rather than requiring
that lenders calculate average daily balance, as many lenders do, the
Bureau's proposed definition uses a simpler methodology to calculate
the average outstanding balance by permitting lenders to take a simple
average of month-end balances at the end of each month in the 12-month
period.
The Bureau solicits comment on all aspects of the proposed
methodology for calculating portfolio default rate. In particular, the
Bureau seeks comment on whether requiring lenders to include loans that
were either charged-off or that were delinquent for a consecutive
period of 120 days or more during the 12-month period would
appropriately capture the portfolio default rate and what would be the
justification for selecting some other threshold for portfolio loans.
The Bureau also solicits comment on whether to include in the
calculation of portfolio default rates loans under Sec. 1041.12 that
have been refinanced and, if so, how best to accomplish this
calculation. The Bureau further solicits comment on whether to permit
lenders the option of using either average daily balances or, as
proposed, average month-end balances, in the calculation. Additionally,
the Bureau seeks comment on the timing requirements of proposed Sec.
1041.12(e), including the frequency with which portfolio default rate
must be calculated and the amount of time permitted to calculate the
portfolio default rate following the last day of the applicable period.
12(e)(1)
Proposed Sec. 1041.12(e)(1) would define portfolio default rate as
the sum of the unpaid dollar amount on loans made under Sec. 1041.12
that were either charged-off during the 12 months of the calculation
period or were delinquent for a consecutive period of 120 days or more
during the 12-month period for which the rate is being calculated,
divided by the average month-end outstanding balances for all loans
made under Sec. 1041.12 for each month of the 12-month period.
12(e)(1)(i)
Proposed Sec. 1041.12(e)(1)(i) would define the lender's numerator
for the calculation of portfolio default rate as the sum of dollar
amounts owed on all covered longer-term loans made under Sec. 1041.12
that meet the criteria in either Sec. 1041.12(e)(1)(i)(A) or (B).
12(e)(1)(i)(A)
Proposed Sec. 1041.12(e)(1)(i)(A) would include in the sum for
Sec. 1041.12(e)(1)(i) dollar amounts owed on loans that were
delinquent for a period of 120 consecutive days or more during the 12-
month period for which the portfolio default rate is being calculated.
Under the Federal Financial Institutions Examination Council's
uniform charge-off policy, depository institutions are generally
required to charge-off closed-end credit at 120 days
[[Page 48047]]
of delinquency.\757\ Non-depositories are under no similar obligation
and their practices in charging off loans may vary. To achieve a
uniform metric and a level playing field, the proposal would require
that those loans that were delinquent for a consecutive 120 days or
more be included in the calculation of the portfolio default rate,
without regard to whether the loan was actually charged off by the
lender.
---------------------------------------------------------------------------
\757\ 64 FR 6655, 6658 (Feb. 10, 1999).
---------------------------------------------------------------------------
12(e)(1)(i)(B)
Proposed Sec. 1041.12(e)(1)(i)(B) would include in the sum for
Sec. 1041.12(e)(1)(i) dollar amounts owed on loans that the lender
charged off during the 12-month period for which the portfolio default
rate is being calculated, even if the loan was charged off by the
lender before reaching the 120-day mark.
12(e)(1)(ii)
Proposed Sec. 1041.12(e)(1)(ii) would define the lender's
denominator for the portfolio default rate calculation as average of
month-end outstanding balances owed on all covered longer-term loans
made under Sec. 1041.12 for each month of the 12-month period included
in the calculation.
12(e)(2)
Proposed Sec. 1041.12(e)(2) would require lenders to include in
the calculation of the portfolio default rate all loans made under
Sec. 1041.12 that are outstanding at any point during the 12-month
period for which the rate is calculated; proposed comment 12(e)(2)-1
clarifies that the relevant portfolio of loans includes loans
originated by the lender for which assets are held off the lender's
balance sheet, as well as on-balance sheet loans.
12(e)(3)
Proposed Sec. 1041.12(e)(3) would specify that a loan is
considered 120 days delinquent even if the loan is re-aged by the
lender--i.e., the lender has changed the delinquency status of the
loan--prior to the 120th day, unless the consumer has made at least one
full payment and the re-aging is for a period equivalent to the period
for which the consumer made the payment.
12(e)(4)
Proposed Sec. 1041.12(e)(4) would require lenders to make the
portfolio default rate calculation within 90 days of the end of the 12-
month period reflected in the portfolio. Proposed comment 12(e)(4)-1
clarifies the timing of the required calculation.
12(f) Additional requirements
Proposed Sec. 1041.12(f) would impose additional requirements
related to loans made under Sec. 1041.12. The Bureau solicits comment
on each of the requirements described below, including on the burden
such requirements, if finalized, would impose on lenders, including
small entities, making loans under Sec. 1041.12. The Bureau also seeks
comment on whether other or additional requirements would be
appropriate for loans under Sec. 1041.12 in order to fulfill the
objectives of Title X of the Dodd-Frank Act, including the objectives
related to consumer protection and access to credit.
12(f)(1)
Proposed Sec. 1041.12(f)(1) would prohibit lenders from taking
certain additional actions with regard to a loan made under Sec.
1041.12. The Bureau solicits comment on whether the prohibitions are
appropriate to advance the objectives of Title X of the Dodd-Frank Act
and whether other actions should also be prohibited in connection with
loans made under Sec. 1041.12.
12(f)(1)(i)
Proposed Sec. 1041.12(f)(1)(i) would prohibit lenders from
imposing a prepayment penalty in connection with a loan made under
Sec. 1041.12. The Bureau is not proposing in this rulemaking to
determine all instances in which prepayment penalties may raise
consumer protection concerns. However, the Bureau believes that for
loans qualifying for a conditional exemption under proposed Sec.
1041.12, penalizing a consumer for prepaying a loan would be
inconsistent with the consumer's expectation for the loan and may
prevent consumers from repaying debt that they otherwise would be able
to retire.
The Bureau also believes that this proposed restriction is
consistent with the current practice of community banks and credit
unions. From outreach to these lenders, the Bureau understands that
lenders that make what would be covered longer-term loans as an
accommodation often do so to help existing customers address a
particular financial need and are interested in having their customers
repay as soon as they are able. In light of these considerations, the
Bureau believes that the proposed condition would help ensure that,
among other things, consumers are protected from unfair or abusive
practices.
The Bureau solicits comment on the extent to which the requirement
in proposed Sec. 1041.12(f)(1)(i) is appropriate and on any
alternative ways of defining the prohibited conduct that would provide
adequate protection to consumers while encouraging access to credit.
12(f)(1)(ii)
Proposed Sec. 1041.12(f)(1)(ii) would prohibit lenders that hold a
consumer's finds on deposit from, in response to an actual or expected
delinquency or default on the loan made under proposed Sec. 1041.12,
sweeping the account to a negative balance, exercising a right of set-
off to collect on the loan, or closing the account. Proposed comment
12(f)(1)(ii)-1 clarifies that the prohibition in Sec.
1041.12(f)(1)(ii) applies regardless of the type of account in which
the consumer's funds are held and also clarifies that the prohibition
does not apply to transactions in which the lender does not hold any
funds on deposit for the consumer. Proposed comment 12(f)(1)(ii)-2
clarifies that the prohibition in Sec. 1041.12(f)(1)(ii) does not
affect the ability of the lender to pursue other generally-available
legal remedies; the proposed clarification is similar to a provision in
the Bureau's Regulation Z, 1026.12(d)(2).
Because loans under Sec. 1041.12 would be exempt from the proposed
ability-to-repay and payment notice requirements, the Bureau is
concerned that in the event that a lender holds a consumer's funds on
deposit and the loan turns out to be unaffordable to the consumer, the
potential injury to a consumer could be exacerbated if the lender takes
actions that cause the consumer's account to go to a negative balance
or closes the consumer's account. Accordingly, the Bureau believes that
the proposed prohibition would help ensure that, among other things,
consumers are protected from unfair or abusive practices.
The Bureau solicits comment on whether the prohibition in proposed
Sec. 1041.12(f)(1)(ii) would be appropriate, and, alternatively,
whether other restrictions related to treatment of a consumer's account
by a lender that makes a loan under Sec. 1041.12 to the consumer would
be appropriate. The Bureau also solicits comment, in particular from
banks and credit unions or other lenders that hold consumer funds, on
current practices taken in response to actual or expected delinquency
or default related to sweeping consumer accounts to negative,
exercising a right of set-off to collect on a loan, and closing
consumer accounts. The Bureau also solicits comment on whether the
proposed condition would create safety and
[[Page 48048]]
soundness concerns for depository institutions. Additionally, the
Bureau solicits comment on whether the same or similar condition would
be appropriate for transactions in which a lender does not hold a
consumer's funds on deposit.
12(f)(2)
Proposed Sec. 1041.12(f)(2) would require lenders to furnish
information concerning a loan made under Sec. 1041.12 either to each
information system described in Sec. 1041.16(b) or to a consumer
reporting agency that compiles and maintains files on consumers on a
nationwide basis. Lenders could select which type of furnishing to do.
During the SBREFA process and in outreach with industry and others,
the Bureau received feedback about requiring lenders that would make
covered longer-term loans under a conditional exemption to the ability-
to-repay requirements to obtain a consumer report from and furnish loan
information to a specialty consumer reporting agency as a condition of
making such loans. Lenders noted that the then-contemplated furnishing
obligations would be a substantial burden and pose a barrier to making
relatively lower-cost loans. From outreach with community banks and
credit unions, the Bureau understands that many financial institutions
with accommodation lending programs currently furnish loan information
to a nationwide consumer reporting agency. However, the Bureau
understands that these institutions generally do not furnish
information concerning the loan to or obtain consumer reports from
specialty consumer reporting agencies.
As proposed in Sec. 1041.12(f)(2), lenders would not be required
to furnish information about loans made under Sec. 1041.12 to
information systems described in proposed Sec. 1041.16(b) if the
lender instead furnishes information about that loan to a consumer
reporting agency that compiles and maintains files on consumers on a
nationwide basis. The Bureau believes that this furnishing requirement
strikes the appropriate balance between minimizing burden on lenders
that would make loans under Sec. 1041.12 and establishing a reasonably
comprehensive record of a consumer's borrowing history with respect to
these loans, which would be useful for the other provisions of the
Bureau's proposed rule that require assessing the amount and timing of
a consumer's debt payments. In light of these considerations, the
Bureau believes that the proposed requirement would help ensure that,
among other things, this market operates efficiently to facilitate
access to credit.
The Bureau solicits comment on the proposed furnishing requirement
in Sec. 1041.12(f)(2) and on the costs that the proposed requirement
would impose, if finalized, on lenders, including small entities. In
particular, the Bureau solicits comment on whether to require lenders
to furnish in the manner set forth in proposed Sec. 1041.12(f)(2) or
whether to relieve lenders from a requirement to furnish information
concerning loans made under Sec. 1041.12. In addition, the Bureau
solicits comment on whether to require lenders to furnish to multiple
consumer reporting agencies that compile and maintain files on
consumers on a nationwide basis rather than only one. The Bureau also
solicits comment on the extent to which lenders that currently make
loans similar to those that would be permitted under proposed Sec.
1041.12 currently furnish information to nationwide consumer reporting
agencies or to specialty consumer reporting agencies.
12(f)(2)(i)
Proposed Sec. 1041.12(f)(2)(i) would permit lenders to satisfy the
requirement in Sec. 1041.12(f)(2) by furnishing information concerning
a loan made under Sec. 1041.12 to each information system described in
Sec. 1041.16(b). Lenders furnishing in the manner provided for in
proposed Sec. 1041.12(f)(2)(i) would be required to furnish the loan
information described in proposed Sec. 1041.16(c).
12(f)(2)(ii)
Proposed Sec. 1041.12(f)(2)(ii) would permit lenders to satisfy
the requirement in Sec. 1041.12(f)(2) by furnishing information
concerning a loan made under Sec. 1041.12 at the time of the lender's
next regularly-scheduled furnishing of information to a consumer
reporting agency that compiles and maintains files on consumers on a
nationwide basis or within 30 days of consummation, whichever is
earlier. Proposed Sec. 1041.12(f)(2)(ii) would further provide that
``consumer reporting agency that compiles and maintains files on a
consumers on a nationwide basis'' has the same meaning as in section
603(p) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(p).
Subpart D--Payment Practices
In proposed Sec. 1041.13, the Bureau proposes 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.
Proposed Sec. 1041.14 would prevent 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. Proposed Sec. 1041.14
also includes 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.
Proposed Sec. 1041.15 would provide a complementary set of
interventions to require lenders to provide a notice to a consumer
prior to initiating a payment withdrawal from the consumer's account.
Proposed Sec. 1041.15 also would require lenders to provide a alerting
consumers to the fact that two consecutive payment withdrawal attempts
to their accounts have failed--thus triggering operation of the
requirements in proposed Sec. 1041.14(b)--so that consumers can better
understand their repayment options and obligations in light of their
accounts' severely distressed condition. The two payments-related
sections thus complement and reinforce each other.
The predicate for the proposed identification of an unfair and
abusive act or practice in proposed Sec. 1041.13--and thus for the
prevention requirements contained in proposed Sec. 1041.14--is 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 are set forth below in Market Concerns--Payments.
After laying out these preliminary findings, the Bureau sets forth its
reasons for proposing to identify as unfair and abusive the practice
described in proposed Sec. 1041.13. The Bureau seeks comment on all
aspects of this subpart, including the intersection of the proposed
interventions with existing State, tribal, and local laws and whether
additional or alternative
[[Page 48049]]
protections should be considered to address the core harms discussed
below.
Market Concerns--Payments
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, including authorization for payment methods like
paper checks, ACH transfers, and debit and prepaid cards. 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 if the authorizations are not
executed as expected. Indeed, Congress has recognized that such
authorizations can give lenders a special kind of leverage over
borrowers, for instance by prohibiting in the Electronic Fund Transfer
Act the conditioning of credit on the consumer granting authorizations
for a series of recurring electronic transfers over time.\758\
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\758\ Electronic Fund Transfer Act, 15 U.S.C. 1693k(1);
Regulation E, 12 CFR 1005.10(e).
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This section reviews the available evidence on the outcomes that
consumers experience when payday and payday installment lenders obtain
and use the ability to initiate withdrawals from consumers' accounts.
As detailed below, the Bureau is concerned 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 is concerned that, in practice, consumers have little
ability to protect themselves from these practices, and that private
network attempts to restrict these behaviors are limited in various
ways.
The Bureau's research with respect to payments practices has
focused on online payday and payday installment loans. The Bureau has
done so because, with an online loan, payment attempts generally occur
through the ACH network and thus can be readily tracked at the account
and lender level by using descriptive information in the ACH file.
Other publicly available data 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.
In brief, the Bureau preliminarily finds:
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 non-sufficient funds fees as a result.
When a particular withdrawal attempt fails, lenders in
these markets often make repeated attempts at re-presentment, thereby
further exacerbating the fees imposed on consumers.
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.
Consumers have little practicable ability to protect
themselves from these practices.
Private network protections necessarily have limited reach
and impact, and are subject to change.
1. Variation in Timing, Frequency, and Amount of Payments
As discussed above in part II D, 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 can in fact 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 consumers' agreement to
receive the funds electronically.\759\ 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, for instance by using internal transfers from a
consumer's deposit account to collect loan payments.
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\759\ 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.
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Once lenders have obtained the authorizations, there is significant
evidence that 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 is often
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 amount.\760\
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\760\ 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.
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These various practices increase the risk that the payment attempt
will be made in a way that triggers fees on a consumer's account. As
discussed in part II D., unsuccessful payment attempts typically
trigger bank fees. According to deposit account agreements, banks
charge a non-sufficient funds fee of approximately $34 for returned ACH
and check payments.\761\ Some prepaid card providers charge fees for
returned or declined payments.\762\ Even if the payment goes through,
the payment may exceed the funds available in the consumer's account,
thereby triggering an overdraft fee of 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.\763\ These failed payment fees charged to the consumer's deposit
[[Page 48050]]
account may be exacerbated by returned payment and late fees charged by
lenders, since many lenders also charge a returned-item fee for any
returned check, returned electronic payment, or other returned payment
device.\764\ 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.\765\
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\761\ CFPB Study of Overdraft Programs White Paper, at 52.
\762\ There does not appear to be a standard charge for returned
and declined payments by prepaid card providers, although the fees
currently appear to be lower than those on depository accounts. The
Bureau has observed fees ranging from 45 cents to $5.
\763\ CFPB Study of Overdraft Programs White Paper. Some
extended overdraft fees are charged repeatedly if the overdraft is
not cleared.
\764\ 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 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, 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.
\765\ 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 non-sufficient
funds 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 a non-
sufficient funds fee.), available at http://files.consumerfinance.gov/f/201504_cfpb_consent-order_regions-bank.pdf.
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Despite these potential risks to consumers, many lenders vary the
timing, frequency, and amount of presentments 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. Lenders also appear to use account access to collect
fees in addition to regular loan payments. 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 to 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 of such attempts in
situations when a payment attempt has previously failed.\766\
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\766\ CFPB Online Payday Loan Payments, at 16-17 figs.2-3.
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Same-Day Attempts
Some lenders make multiple attempts to collect payment on the same
day or over a period of time, 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
\767\ 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, all attempts will trigger NSF or overdraft fees. In
the Bureau's analysis of online ACH payments, approximately 35 percent
\768\ of the payments were attempted on the same day as another payment
attempt. This includes situations in which a lender breaks down a
payment into three attempts in 1 day (4 percent of payments observed)
and four or more attempts in 1 day (2 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 making nine payment attempts in a single day.
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\767\ See CFPB 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.
\768\ 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 a payday lender, the payment attempts usually all
succeed (76 percent) or all fail (21 percent), leaving only 3 percent
of cases where one but not all attempts succeed.\769\ In other words,
multiple presentments are seven times more likely to result in multiple
NSF events for the consumer than to result in a partial collection by
the lender.
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\769\ Id. at 21 tbl.4.
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Re-Presentment
Moreover, when a lender's presentment or multiple presentments on a
single day fail, lenders typically attempt to collect payment again
multiple times on subsequent days.\770\ According to CFPB analysis of
online ACH payments, 75 percent of ACH payments presented by online
payday lenders that initially fail are re-presented by the lender.\771\
After a second failed attempt, 66 percent of failed payments are re-
presented, 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 2 month period.\772\
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\770\ 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'').
\771\ 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.
\772\ This consumer reported that their bank account was
ultimately closed with charges of $1,390 in bank fees.
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Lenders appear more likely to deviate from the payment schedule
after there has been a failed payment attempt. According to Bureau
analysis, 60 percent of payment attempts following a failed payment
came within 1-7 days of the initial failed attempt, compared with only
3 percent of payment attempts following a successful payment.\773\ The
Bureau observed a lender that, after a returned payment, made a payment
presentment every week for several weeks. Some lenders present again
after 30 or 90 days.
---------------------------------------------------------------------------
\773\ CFPB Online Payday Loan Payments, at 16.
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In addition to deviations from the payment schedule, some lenders
adopt
[[Page 48051]]
other divergent practices to collect post-failure payments. For
example, the Bureau found 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.\774\ Approximately 80 percent
of these smaller attempts resulted in all three presentments being
returned for non-sufficient funds.
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\774\ CFPB Consent Order, EZCORP.
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2. 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
non-sufficient funds, 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 problems in the underlying
practices to obtain consumer authorization \775\ and that the industry
is causing a disproportionate amount of harm relative to other markets.
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\775\ 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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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.\776\ 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.\777\ The institution observed individual lender return rates
ranging from 5 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.\778\
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\776\ JP Morgan 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.
\777\ 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).
\778\ 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. Storefront lenders, for
example, report failure rates of approximately 60 to 80 percent when
they deposit consumers' post-dated checks or initiate ACH transfers
from consumers' accounts in situations in which the consumer has not
come into the store to repay in cash.\779\ 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.\780\ Moreover, of the 30 percent
of second attempts and 27 percent of third attempts that ``succeed,''
Bureau research indicates that approximately a third do so only by
overdrafting the consumer's account.\781\
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\779\ 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).
\780\ Bureau analysis of ACH payments by online lenders shows an
initial ACH payment failure rate due to NSFs of 6 percent. However,
among the ``successful'' payments, Bureau research indicates that
approximately 6 percent are paid only by overdrafting 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
part II D., many payments to storefront lenders are provided in
person in the store. The fact that the consumer has not shown up in
the store is a sign that the consumer may be having difficulty
making the payment. In contrast, online lenders generally collect
all payments electronically, and have more success 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.
\781\ CFPB Online Payday Loan Payments, at 13, tbl. 1.
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Account Fees
Bureau analysis, consumer complaints, and public litigation
documents show that the damage from these payment attempts can be
substantial.\782\ Fifty percent of online borrowers in the Bureau's
analysis of online payday and payday installment loans incurred at
least one overdraft or non-sufficient funds return in connection with
their loans, with average fees for these consumers at
[[Page 48052]]
$185.\783\ Indeed, 10 percent of accounts experienced at least 10
payment withdrawal attempts that result in an overdraft or non-
sufficient funds return over an 18 month period.\784\ A small but
significant percentage of consumers suffer extreme incidences of
overdraft and non-sufficient funds fees on their accounts; for
consumers with at least one online payday attempt that resulted in an
overdraft or non-sufficient funds return, 10 percent were charged at
least $432 in related account fees over the 18 month sample
period.\785\
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\782\ 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 $1523 in
non-sufficient funds, overdraft, and service fees).
\783\ CFPB Online Payday Loan Payments, at 10-11.
\784\ Id. at 10.
\785\ 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 accounts of
borrowers who use loans from online payday lenders are more likely to
be closed than accounts generally (17 percent versus 3 percent,
respectively).\786\ 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 four
times greater than the closure rate for accounts with online loans that
only had NSFs from non-payday transactions. 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 non-sufficient funds return triggered by an online
payday or payday installment lender.\787\ 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.\788\
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\786\ Id. at 24 tbl.5.
\787\ Id. at 23.
\788\ 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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3. Limited Consumer Control
Consumers' ability to protect their accounts from these types of
presentment 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 consumers'
depository institutions in connection with attempting to stop
presentment attempts, and operational limits of individual payment
methods. In some cases, revocation 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
The Bureau believes that lenders and account-holding institutions
may make it difficult for consumers to revoke account access or stop
withdrawals.\789\ One way 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 who 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.\790\ Some lenders require consumers to mail a
written revocation several days before the effective date of
revocation.\791\ These same lenders automatically debit payments
through another method, such as 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.\792\ For
example, one lender Web site states that ACH revocation is not allowed
for its single-payment online loans.\793\ Other lenders may never have
obtained proper authorization in the first place \794\ or take broad
authorizations to debit any account associated with the consumer.\795\
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\789\ 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.
\790\ 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 ach@castlepayday.com 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.'').
\791\ See id.
\792\ 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.'').
\793\ 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).
\794\ 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).
\795\ 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 payday
lenders. 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 roughly
9 percent of the more than 12,200 payday loan complaints the Bureau has
handled since November 2013.\796\ Although the
[[Page 48053]]
Bureau does not specifically collect information from consumers on the
frequency of these issues in the nearly 24,000 debt-collection
complaints related to payday loans or in the more than 9,700
installment loan complaints the Bureau has also handled, review of
those complaints and complaints submitted by consumers about deposit
accounts suggest that many consumers who labeled their complaints as
falling under those categories also experience difficulties
anticipating and stopping payment attempts by payday and payday
installment lenders.
---------------------------------------------------------------------------
\796\ Another seven percent of consumers selected ``payment to
account not credited.''
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The other option for consumers is to direct their bank to stop
payment, but this too can be challenging. Depository institutions
typically charge a fee of approximately $32 for processing a stop
payment order, making this a costly option for consumers.\797\ In
addition, some lenders charge returned-item fees if the stop payment
order successfully blocks an attempt.\798\ The Bureau has received
complaints from consumers 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
refuse to refund these charges.
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\797\ 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.
\798\ 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 $1523 in
non-sufficient funds, overdraft, and service fees); CFPB Online
Payday Loan Payments.
---------------------------------------------------------------------------
The odds of successfully stopping a payment also vary by channel.
To execute a stop payment order on a check, banks usually use the check
number provided by the consumer. Since ACH payments do not have a
number equivalent to a check number for the bank to identify them, ACH
payments are particularly 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, abbreviated
name, or vary names based on factors like branch location. Some lenders
use the name of their third party payment processor. Bank systems with
limited searching capabilities may have difficulty finding these
transactions and executing an ACH stop payment order.
Moreover, remotely created checks and remotely created payment
orders 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.\799\ 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 information to stop the payment--such as check number and
payment amount--are generated by the lender or its payment processor.
Moreover, consumers may not realize that a payment will be processed as
a RCC, so they may not know to ask their bank to look for a payment
processed as a check rather than as an ACH payment.
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\799\ 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.\800\ Others require consumers to provide the
merchant identification code that the lender used in the ACH file.\801\
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,
lenders may vary this code when they are debiting the same consumer
account.\802\ During the Bureau's outreach, some depository
institutions indicated that some 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, 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 issue a stop
payment on an ACH item.\803\
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\800\ 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).
\801\ 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.'').
\802\ Through market outreach, the Bureau has learned that ACH
used to only be allowed for recurring authorizations. Future
transactions could be stopped relatively easily because the bank
could use the merchant identification information (in this case, the
name 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) are gaming the system by changing merchant
identifiers to work around stop payments.
\803\ 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 believes that there is also some risk that bank staff
may misinform consumers about their rights. During outreach, the Bureau
has learned that some bank ACH operations staff 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 the same effect.\804\ Recent Federal court cases
and information from legal aid organizations \805\ also provide
evidence that bank staff may not correctly
[[Page 48054]]
implement consumer payment rights in all cases.\806\
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\804\ 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.
\805\ 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.'').
\806\ 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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4. Private Network Protections Have Limited Impact
Finally, while payday industry presentment practices are so severe
that they have prompted recent actions by the private rulemaking body
that governs the ACH network, the Bureau is concerned that these
efforts will be insufficient to solve the problems discussed above. As
discussed above in part II B., the private NACHA rules provide some
protections in addition to those currently provided by law.
Specifically, the NACHA rules limit 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. However, the narrow scope of these rules,
limited private network monitoring and enforcement capabilities over
them, and applicability to only one payment method mean that they are
unlikely to entirely solve problematic practices in the payday and
payday installment industries.
Reinitiation Cap
NACHA rules have historically provided a reinitiation cap, which
limits re-presentment of a failed payment to two additional attempts.
Compliance with this requirement is difficult to monitor and
enforce.\807\ Although ACH files are supposed to distinguish between
collection of a new payment and reinitiation of a prior one, some
originators do not comply with this requirement to label reinitiated
transactions.\808\ Since 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 reinitiations (and potential NACHA rule violations) from
the next installment payment. Unless a lender labels the attempt as a
reinitiation, the ACH system cannot otherwise distinguish between,
e.g., the second attempt to collect a payment for January 1 and the
first attempt to collect the next payment due on February 1.\809\
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\807\ 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.'').
\808\ 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 reinitiation. . . . 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.'').
\809\ NACHA explicitly excludes scheduled payments from its
reinitiation rule. See explanation in 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.'').
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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
reinitiation and does not count toward the cap. For example, each month
that a monthly loan payment does not go through, NACHA rules allow that
payment to be presented a total of three times with three fees to the
consumer. And then the following payment due during the next month can
proceed despite any prior failures. Bureau analysis suggests that
online lenders are re-submitting ACH payment attempts soon after a
failure rather than simply waiting for the next scheduled payment date
to attempt to collect.\810\
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\810\ CFPB Online Payday Loan Payments, at 16-18 figs. 2-4.
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Total Return Rate Level
According to a NACHA rule that went into effect in September 2015,
originators \811\ with a total return rate of 15 percent or above are
subject to an inquiry process by NACHA.\812\ This return rate includes
returns for reasons such as non-sufficient funds, authorization revoked
by consumer, administrative issues (such as an invalid account number),
and stop payment orders. It does not include 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 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.\813\ During this process,
the ODFI may be able to justify a high return rate depending on the
lender's business model and other factors.\814\ 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.\815\
[[Page 48055]]
However, the Bureau is concerned that lenders can adopt problematic
payment practices and remain below this inquiry level; in the Bureau's
analysis of ACH payments attempts by online payday and payday
installment lenders, the Bureau observed an overall lender NSF return
rate of 10.1 percent.\816\ At the time that NACHA first proposed this
limit, the overall rate of returns for debit transactions in the ACH
system was 1.5 percent.\817\
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\811\ 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'');
\812\ 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.'').
\813\ See NACHA Rule 2.17.2.
\814\ 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.
\815\ 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.'').
\816\ 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 overall return rate level rule went
into effect in September 2015.
\817\ NACHA, Request for Comment and Request for Information--
ACH Network Risk and Enforcement Topics, at 5.
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Monitoring and Enforcement of the New Total Return Rate Level
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 originating
depository financial institutions that are processing the transactions,
rather than at the level of the individual lenders that is accessing
the ACH network. Since lenders sometimes use multiple ODFI
relationships to process their payments,\818\ the returns used in the
NACHA threshold may not provide a full picture of a lender's 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 provides it with a basis to
investigate further and request more detailed payment reports.
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\818\ 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.
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As discussed in part II B., the Bureau is aware that lenders often
obtain access to multiple payment methods, such as check, ACH, and
debit card. Since 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, both of which are not covered by
the NACHA rules.\819\
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\819\ See, e.g., FTC Final Amendments to Telemarketing Sales
Rule, 80 FR 77520, 77532 (Dec. 14, 2015) (discussing marketing by
payment processors).
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Particularly in light of payday lenders' past behavior, the Bureau
believes that substantial risk to consumers remains. Although private
network rules may improve lender practices in some respects, they have
gaps and limited consequences--there is no systematic way to monitor
lender payment practices in the current ACH system, or more broadly for
practices across all payment channels. In addition, because NACHA rules
are private, there is no guarantee for the public that they will exist
in the same, or an improved, form in the future. For all of these
reasons, the private ACH network rules are unlikely to fully solve the
problematic practices in this market.
Section 1041.13 Identification of Unfair and Abusive Practice--Payments
As discussed above, it is a common practice for lenders in various
types of credit markets to obtain consumers' authorizations to withdraw
payment from their bank accounts with no further action required from
the consumer after initially granting authorization. One common example
of this practice is for creditors to obtain a consumer's authorization
in advance to initiate a series of recurring electronic fund transfers
from the consumer's bank account. The Bureau believes that this
practice often can be beneficial for creditors and consumers alike by
providing a relatively speedy, predictable, and low-cost means of
repayment. Nonetheless, based on the evidence summarized in Market
Concerns--Payments, the Bureau also believes 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 nonsufficient funds. As detailed below, the Bureau
believes this evidence appears to support both a regulation that would
alert consumers in advance of upcoming payment withdrawal attempts and
a regulation that would provide specific consumer protections against
unfair and abusive lender conduct when past payment withdrawal attempts
have failed.
Based on the evidence described in Market Concerns--Payments and
pursuant to its authority under section 1031 of the Dodd-Frank Act, the
Bureau is proposing in Sec. 1041.13 to identify it as both 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 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''
means 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: Electronic fund transfers (including
preauthorized electronic fund transfers), 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's basis for this proposed identification is
discussed in detail below.
a. Unfair Practice
Under Sec. 1031(c)(1) of the Dodd-Frank Act, the Bureau shall have
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
[[Page 48056]]
reasonably avoidable injury ``is not outweighed by countervailing
benefits to consumers or to competition.'' The Bureau believes that it
may be an unfair act and 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 obtains the consumer's new and specific authorization
to make further withdrawals from the account.
1. Causes or Is Likely To Cause Substantial Injury
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.\820\ Under these authorities, as
discussed in part IV, 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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\820\ 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 (March 1, 1984) (codified at 16 CFR 444). The D.C. Circuit
upheld the FTC 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 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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In this case, 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. As discussed above, each additional attempt by the lender is
likely to trigger substantial additional fees for the consumer but
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, in addition to
the cumulative fees that the consumers owe both to the lender and their
account-holding institution, increasing the risk that the consumers
will experience account closure.
Specifically, the Bureau conducted analysis of online lenders'
attempts to collect payments through the ACH system on covered loans
with various payment structures, including traditional 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 indicates 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.\821\ 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.\822\
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.\823\
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\821\ 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 18 fig.4. The Bureau believes that 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.
\822\ Indeed, as discussed in Market Concerns--Payments,
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.
\823\ As discussed in Market Concerns--Payments, 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 and fees on payments related to its small dollar loan
product.
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Consumers who are subject to the lender practice of attempting to
withdraw payment from an account after two consecutive attempts have
failed are likely to have incurred two NSF fees from their account-
holding institution \824\ 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 additional returned-item fees charged by the lender.
Indeed, the Bureau's evidence suggests that 73 percent of consumers who
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,
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). The addition of a lender's
returned-item fees can double these costs. These fees are 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
[[Page 48057]]
likely to have been charged an overdraft fee of approximately $34.\825\
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\824\ Although lenders do not directly charge these particular
fees, their actions cause the fees to be charged. Furthermore,
lenders know that consumers generally will incur fees from their
account-holding institutions for failed payments.
\825\ Thus, even when the consumer does not incur NSF fees from
her account-holding institution as a result of a lender payment
withdrawal attempt made in connection with a covered loan after two
consecutive attempts have failed, the consumer still has a roughly
one-in-three chance of incurring an overdraft fee as a result of the
subsequent lender attempt. Moreover, at the time lenders choose to
make further attempts to withdraw payment from the account, the
lenders should be on notice that the account is severely distressed
(as evidenced by the prior two consecutive returns) and that
additional attempts thus are likely to cause further injury to the
consumer, be it from NSF fees, lender-charged returned-item fees,
or, as the Bureau's analysis indicates, overdraft fees charged by
the consumer's account-holding institution.
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In addition to incurring these types of fees, 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 3 percent of accounts
generally.\826\
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\826\ CFPB Report on Supplemental Findings, at ch. 6.
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2. Injury Not Reasonably Avoidable
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. The Bureau believes 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.
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 for many consumers this is not a reasonable or even
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, 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
would 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.\827\
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\827\ As discussed in the section-by-section analysis of
proposed Sec. 1041.15, the Bureau is proposing as part of this
rulemaking to require lenders to provide a notice to consumers in
advance of each payment withdrawal attempt. The Bureau believes that
the proposed notice will 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. However, as discussed
above, the Bureau believes that consumers who are subject to the
specific lender practice of making payment withdrawal attempts after
two consecutive attempts have failed no longer have the practicable
or reasonable means to avoid the harms from the further attempts.
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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.\828\ Although the
Bureau's consumer testing indicates that consumers generally have a
strong commitment to repaying their legal obligation,\829\ a consumer
who has already experienced two consecutive failed payment attempts and
incurred well over $100 in related fees may at that point consider
either closing down the account or attempting to stop payment or revoke
authorization as the only other options to avoid further fee-related
injury. Given that consumers use their asset accounts to conduct most
of their household financial transactions, the Bureau does not
interpret voluntarily closing down the account as being a reasonable
means for consumers to avoid injury.
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\828\ The Bureau believes 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. As noted
above, the Bureau's analysis of ACH payment withdrawal attempts made
by online payday and payday installment lenders 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.
\829\ FMG Report, at 53.
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Further, as discussed in Market Concerns--Payments, there are
several reasons that the option of attempting to stop payment or revoke
authorization is not a reasonable means of avoiding the injuries,
either. First, 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 electronic fund transfers 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 to stop payment
on.
Various lender practices exacerbate these challenges. As discussed
above, 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
authorization, the lender has the ability to continue making payment
collection attempts using the other 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 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 discussed above, 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 (including an RCC or RCPO), a single electronic fund transfer, or
all future electronic fund transfers authorized by
[[Page 48058]]
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 fee or overdraft fee that the consumer would be
charged by the institution if the payment withdrawal attempt that the
consumer is seeking to stop were made. Thus, even if the consumer
successfully stops payment, the consumer would not avoid this
particular fee-related injury but rather would be exchanging the cost
of one 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 above, lenders often
require consumers to provide written revocation by mail several days in
advance of the next scheduled payment withdrawal attempt. If a consumer
who wishes to revoke authorization took out the loan online, she may
have difficulty even identifying the lender that holds the
authorization, especially if she 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 in
general, but can create particular difficulties for consumers who wish
to revoke authorizations for repayment by recurring electronic fund
transfers under Regulation E, given that the consumer's account-holding
institution is permitted under Regulation E to require the consumer to
confirm the consumer has informed the lender of the revocation (for
example, by requiring a copy of the consumer's revocation as written
confirmation to be provided within 14 days of an oral notification). If
the institution does not receive the required written confirmation
within the 14-day period, it may honor subsequent debits to the
account.\830\
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\830\ Consumers incur lender-charged fees from which they cannot
protect themselves even when their 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. In addition,
consumers sometimes incur lender-charged fees for successfully
stopping payment or revoking authorization.
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3. Injury Not Outweighed by Countervailing Benefits to Consumers or
Competition
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, it generally
is 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
benefits and costs.
The Bureau proposes to find that the lender act or practice of
making additional payment withdrawal attempts from a consumer's account
in connection with a covered loan after two consecutive attempts have
failed, unless the lender obtains the consumer's new and specific
authorization to make further withdrawals from the account, generates
benefits to consumers or competition that outweigh the injuries caused
by the practice. As discussed above, the substantial majority of
additional attempts are likely to fail. Indeed, the Bureau's analysis
of ACH payment withdrawal attempts made by online payday and payday
installment lenders finds that the failure rate on the third attempt is
73 percent, and that failure rates increase 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.
When a third or subsequent attempt to withdraw payment does
succeed, the consumer making the payment may experience some benefit--
but only if the payment does not overdraw the consumer's account and
the amount collected is sufficient to bring the consumer's loan current
or pay off all of what is owed, thereby permitting the consumer to
avoid further payment withdrawal attempts or collections activity. It
is unclear how often this combination of events occurs for this set of
consumers. In any event, the Bureau believes that to the extent that
there are some consumers who, after two consecutive failed attempts,
are able to muster sufficient funds to make the required payment or
payments, these consumers would be able to arrange to make their
payment or payments even if lenders were prohibited from making
additional payment attempts absent a new and specific authorization
from the consumer, such as by paying in cash, mailing in a money order,
or making one or more ACH ``push'' payments from their accounts.
Turning to the potential benefits of the practice to competition,
the Bureau recognizes that to the extent that payment withdrawal
attempts succeed when made after two consecutive failed attempts,
lenders may collect larger payments or may collect payments at a lower
cost than they would if they were required to seek payment directly
from the consumer rather than from the consumer's account. 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 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. Furthermore, as noted above, the Bureau believes 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, seek a new and specific
authorization from the consumer to make further payment withdrawal
attempts. Indeed, coordinating with the
[[Page 48059]]
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 does not believe that any incremental revenue benefit to lenders
from subsequent attempts, including revenue from fees charged for
failed attempts, translates into more competitive pricing or, put
differently, that prohibiting such attempts would adversely affect
pricing. In sum, the substantial injuries that consumers incur as a
result of the practice, as discussed above, are not outweighed by the
minimal benefits that this practice generates for consumers or
competition.
b. Abusive Practice
Under Sec. 1031(d)(2)(A) and (B) of the Dodd-Frank Act, the Bureau
shall have no authority to declare an act or practice abusive unless 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.'' Based on the evidence discussed in
Market Concerns--Payments, the Bureau proposes to find 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 failed attempts, unless the
lender obtains the consumer's new and specific authorization to make
further withdrawals from the account.
1. Consumers Lack Understanding of Material Risks and Costs
The Bureau believes that consumers understand generally when
granting an authorization to withdraw payment from their account that
they may incur an NSF fee from their account-holding institution and a
lender-charged returned-item fee if a payment is returned, on either a
single-payment or installment loan, or a fee from their account-holding
institution if the institution is also the lender. However, the Bureau
does not believe that such a generalized understanding suffices to
establish that consumers understand the material costs and risks of a
product or service. Rather, the Bureau believes 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 cost may be incurred as a
result of using the product. For example, consumers may not understand
that 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 advanced
authorizations to withdraw payment is so widespread across markets for
other credit products and non-credit products and services, the Bureau
believes that consumers lack understanding of how the risk they are
exposing themselves to by granting authorizations to lenders making
proposed covered loans. Rather, consumers are likely to expect payment
withdrawals made pursuant to their authorizations to operate in a
convenient and predictable manner, similar to the way such
authorizations operate when granted to other types of lenders and in a
wide variety of other markets. Consumers' general understanding that
granting authorization can sometimes result in their incurring such
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 condition, and that they thereby will be exposed to
substantially increased 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 to 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.
2. Consumers Are Unable To Protect Their Interests
The Bureau proposes to find that it takes unreasonable advantage of
consumers' inability to protect their interests when a lender attempts
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. Once consumers discover that lenders are using their
authorizations in this manner, it is too late for them to take
effective action. While consumers could try to protect themselves from
the harms of additional payment withdrawal attempts by closing down
their accounts entirely, the Bureau does 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. Accordingly, as discussed
above, 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.\831\ However, consumers often face
considerable challenges and barriers when trying to stop payment or
revoke authorization, both with their lenders and their account-holding
institutions. These challenges and barriers make this option an
impracticable means for consumers to protect themselves from the harms
of further payment withdrawal attempts.
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\831\ As discussed above, 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. In addition, the Bureau believes that even
when consumers have agreed to make a series of payments on an
installment loan, consumers are unable to protect their interests.
As noted above, the Bureau's analysis of ACH payment withdrawal
attempts made by online payday and payday installment lenders
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.
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As discussed above, lenders may discourage consumers from stopping
payment or revoking authorization by including language in loan
agreements purporting to prohibit revocation. Some lenders may charge
consumers a substantial fee for stopping payment with their account-
holding institutions. Lenders' procedures for revoking authorizations
directly with the lender 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. Some consumers may even have
[[Page 48060]]
difficulty identifying the lender that holds the authorization,
particularly if the consumers took out the loan online and were 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 under Regulation E,
given that a consumer's account-holding institution is permitted under
Regulation E to confirm the consumer has informed the lender of the
revocation (for example, by requiring a copy of the consumer's
revocation as written confirmation to be provided within 14 days of an
oral notification). If the institution does not receive the required
written confirmation within the 14-day period, it may honor subsequent
debits to the account.
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 electronic fund
transfers. 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 RCC
or RCPO, given account-holding institutions' difficulties in
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 payment
effectively.
Further, the fees charged by consumers' account-holding
institutions for stopping payment are often comparable to the NSF fees
or overdraft fees from which the consumers are trying to protect
themselves. Depending on their account-institution's policies, 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 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 going through. 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.\832\
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\832\ 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.
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3. Practice Takes Unreasonable Advantage of Consumer Vulnerabilities
Under section 1031 of the Dodd-Frank Act, an act or practice is
abusive if it takes ``unreasonable advantage'' of consumers' lack of
understanding of the material risks, costs, or conditions of consumer
financial product or service or inability to protect their interests in
selecting or using such a product or service. The Bureau believes 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, as discussed above, and is
therefore abusive.
The Bureau recognizes 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 consumers' lack of understanding or inability to protect
their interest becomes unreasonable advantage-taking and thus is
potentially abusive.\833\
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\833\ 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.
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The Dodd-Frank Act delegates to the Bureau the responsibility for
determining when that line has been crossed. The Bureau believes that
such determinations are best made with respect to any particular act or
practice by taking into account all of the facts and circumstances that
are relevant to assessing whether such an act or practice takes
unreasonable advantage of consumers' lack of understanding or of
consumers' inability to protect their interests. The Bureau recognizes
that taking a consumer's authorization to withdraw funds from the
consumer's 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 proposes to conclude, based on the
evidence discussed in this section and in Markets Concerns--Payments,
that when lenders use such authorizations to make a payment withdrawal
attempt after two consecutive attempts have failed, lenders take
unreasonable advantage of consumers' lacking 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, thus permitting lenders to re-present, often repeatedly, 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
[[Page 48061]]
installment lenders 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, lenders continue to re-
present, further suggesting that the consumers' payment authorizations
have ceased at this point to serve their primary convenience purpose
but instead have become a means for the lenders to extract small
amounts of revenues from consumers any way they can.\834\ In addition,
as discussed above, lenders often charge consumers a returned-item fee
for each failed attempt.\835\ This provides lenders with an additional
incentive to continue attempting to withdraw payment from consumers'
accounts even after two consecutive attempts have failed. Although
lenders are not able to collect such fees immediately, the fees are
added to the consumer's overall debt and thus can be collected through
the debt collection process. The Bureau believes 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, seek a new and specific authorization
from consumers to make further payment withdrawal attempts. Indeed, the
Bureau believes 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 in distress.
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\834\ The Bureau believes that even when lenders have a
contractual right to withdraw a series of payments on an installment
loan, lenders still take unreasonable advantage when they attempt to
withdraw payment after two consecutive failed attempts. As noted
above, the Bureau's analysis of ACH payment withdrawal attempts made
by online payday and payday installment lenders 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.
\835\ In addition, as discussed in Market Concerns--Payments,
the Bureau is aware of some depository institutions that have
charged NSF fees 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 small dollar loan product.
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The Bureau seeks comment on the evidence and proposed findings and
conclusions in proposed Sec. 1041.13 and Market Concerns--Payments
above.
Section 1041.14 Prohibited Payment Transfer Attempts
As discussed in the section-by-section analysis of Sec. 1041.13,
the Bureau is proposing to identify 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 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 in such rules requirements for the
purpose of preventing unfair, deceptive, or abusive acts or practices.
The Bureau is proposing to identify and prevent the unfair and abusive
practice described above by including in proposed Sec. 1041.14
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 proposing two provisions--Sec.
1041.14(c)(3)(ii) and (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 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.'' 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.
In addition to the proposed provisions in Sec. 1041.14, the Bureau
is proposing in Sec. 1041.15 a complementary set of requirements
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. The Bureau believes
that these disclosures, by informing consumers in advance of the
timing, amount, and channel of upcoming withdrawal attempts, will help
consumers to detect errors or problems with upcoming payments and to
contact their lenders or account-holding institutions to resolve them
in a timely manner, as well as to take steps to ensure that their
accounts contain enough money to cover the payments, when taking such
steps is feasible for consumers. Proposed Sec. 1041.15 also provides
for a notice that lenders would be 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 proposed Sec. 1041.14(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.
Specifically, proposed Sec. 1041.14 would include four main sets
of provisions. First, proposed Sec. 1041.14(a) would establish
definitions used throughout Sec. Sec. 1041.14 and 1041.15. Second,
proposed Sec. 1041.14(b) would establish requirements for determining
when the prohibition on making further attempts to withdraw payment
from a consumer's account applies. Third, proposed Sec. 1041.14(c)
would set forth the requirements for the first of two exceptions to the
prohibition in Sec. 1041.14(b). Under this exception, a lender would
be permitted to make further payment withdrawals from a consumer's
account if the lender obtains the consumer's new and specific
authorization for the terms of the withdrawals, as specified in the
proposed rule. Last, proposed Sec. 1041.14(d) would set forth the
requirements for a second exception to the prohibition. Under this
exception, a lender would be permitted to make further payment
withdrawals on a one-time basis within one business day after the
consumer authorizes the withdrawal, subject to certain requirements and
conditions. Each of these provisions of proposed Sec. 1041.14 is
discussed in detail, below.
[[Page 48062]]
14(a) Definitions
Proposed Sec. 1041.14(a) would establish defined terms used
throughout Sec. Sec. 1041.14 and 1041.15. The central defined term in
both of these proposed sections is ``payment transfer.'' This term
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. As discussed more fully below, the Bureau believes a
single, broadly-applicable term would help to ensure uniform
application of the payments-related consumer protections and reduce
complexity in the proposed rule. All of the proposed definitions in
Sec. 1041.14(a) are discussed in detail, below.
14(a)(1) Payment Transfer
Proposed Sec. 1041.14(a)(1) would define 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. To illustrate the definition's
application to existing payment methods, proposed Sec. 1041.14(a)(1)
further provides 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.
Specifically, proposed Sec. 1041.14(a)(1)(i) through (v) provide that
the term includes a debit or withdrawal initiated through: (1) An
electronic fund transfer, including a preauthorized electronic fund
transfer 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);
and (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 believes that a broad payment transfer definition that
focuses on the collection purpose of the debit or withdrawal, rather
than on the particular method by which the debit or withdrawal is made,
would help to ensure uniform application of the proposed rule's
payments-related consumer protections. As discussed in Market
Concerns--Payments, 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.
In addition, the Bureau believes that, for a proposed rule designed
to apply across multiple payment methods and channels, a single defined
term is necessary to avoid the considerable complexity that would
result if the proposed rule merely adopted existing terminology for
every specific method and channel. Defining payment transfer in this
way would enable the proposed rule to provide for the required payment
notices in proposed Sec. 1041.15 to be given to consumers regardless
of the payment method or channel used to make a debit or withdrawal.
Similarly, this proposed definition ensures 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 explains that a transfer of funds
meeting the general definition is a payment transfer regardless of
whether it is initiated by an instrument, order, or means not specified
in Sec. 1041.14(a)(1). Proposed comment 14(a)(1)-2 explains 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 provides examples to illustrate how the proposed
definition applies to a debit or withdrawal for any amount due in
connection with a covered loan. Specifically, proposed comments
14(a)(1)-3.i through -3.iv explain, respectively, that the definition
applies 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 clarifies that the proposed definition
applies even when the transfer is for an amount that the consumer
disputes or does not legally owe. Proposed comment 14(a)(1)-5 provides
three examples of covered loan payments that, while made with funds
transferred or withdrawn from a consumer's account, would not be
covered by the proposed definition of a payment transfer. The first two
examples, provided in proposed comments 14(a)(1)-5.i and -5.ii, are 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, clarifies that the definition does 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.\836\
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\836\ The Bureau is not intending to address concerns about
account or wage garnishment in markets for proposed covered loans in
this rulemaking; however, the Bureau is seeking comment on such
concerns in the Accompanying RFI published concurrently with this
proposal.
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Additionally, proposed comments relating to Sec. 1041.14(a)(1)(i),
(ii), and (v) clarify how the proposed payment transfer definition
applies to particular payment methods. Specifically, proposed comment
14(a)(1)(i)-1 explains that the general definition of a payment
transfer would apply to any electronic fund transfer, including but not
limited to an electronic fund transfer initiated by a debit card or a
prepaid card. Proposed comment 14(a)(1)(ii)-1 provides 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. Last, proposed comment
14(a)(1)(v)-1 clarifies, 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 depository advance product.
The Bureau seeks comment on all aspects of the proposed definition
of a payment transfer. In particular, the Bureau seeks comment on
whether the scope of the definition is appropriate and whether the use
of a single defined term in the manner proposed would achieve the
objectives discussed above. In addition, the Bureau seeks comment on
whether the rule should provide additional examples of methods for
debiting or withdrawing funds from consumers' accounts to which the
definition applies and, if so, what types
[[Page 48063]]
of examples. Further, the Bureau recognizes that the proposed
definition could apply to instances when a lender that is the
consumer's account-holding institution exercises a right of set-off in
connection with a covered loan--if, for example, in exercising that
right, the lender initiates an internal transfer from the consumer's
account. The Bureau seeks comment on the extent to which the proposed
definition would apply to exercising a right of set-off, on whether and
why the definition should apply to such instances, and on what
additional provisions may be needed to clarify the definition's
application in this context.
14(a)(2) Single Immediate Payment Transfer at the Consumer's Request
Proposed Sec. 1041.14(a)(2) would set forth the definition of a
single immediate payment transfer at the consumer's request as,
generally, a payment transfer that is initiated by a one-time
electronic fund transfer 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, as discussed further below.
The principal characteristic of a single immediate payment transfer
at the consumer's request is that it is initiated at or near the time
that 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 section-by-section analysis of proposed Sec. 1041.15,
stakeholders expressed concerns primarily about the potential
impracticability and undue burden of providing a notice of an upcoming
withdrawal under proposed Sec. 1041.15(b) in advance of executing the
consumer's payment instructions in these circumstances. More generally,
the SERs and industry stakeholders also 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 days or
more in advance, given that the consumer presumably makes the request
based on firsthand knowledge of his or her account balance.
The Bureau believes that applying fewer requirements to payment
transfers initiated immediately after consumers request the debit or
withdrawal is both warranted and consistent with the important policy
goal of providing consumers 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.
The first prong of proposed Sec. 1041.14(a)(2) would provide 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 would apply specifically to payment transfers
initiated via a one-time electronic fund transfer. Proposed Sec.
1041.14(a)(2)(i) would generally define the term as a one-time
electronic fund transfer initiated within one business day after the
consumer authorizes the transfer. The Bureau believes that a one-
business-day timeframe 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 explains that for purposes of the definition's
timing condition, a one-time electronic fund transfer is initiated at
the time that the transfer is sent out of the lender's control and that
the electronic fund transfer thus is initiated at the time that 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 provides an
illustrative example of this concept.
The second prong of the definition, in proposed Sec.
1041.14(a)(2)(ii), would apply 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 explain 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 explains 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-references comment 14(a)(2)(i)-1 for an
illustrative example of how this concept applies in the context of
initiating a one-time electronic fund transfer. Proposed comment
14(a)(2)(ii)-2 clarifies that, for purposes of the timing condition in
Sec. 1041.14(a)(2)(ii), in cases 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 electronic fund
transfer in proposed Sec. 1041.14(a)(2)(i), the Bureau believes 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 notes
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 that it be used to execute an immediate payment. The
Bureau believes that this condition is 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. These criteria are not met when the lender already holds the
consumer's post-dated check. The Bureau seeks comment on all aspects of
the proposed definition of single immediate payment transfer at the
consumer's request. In particular, the Bureau seeks comment on whether
it would be practicable for lenders to initiate an electronic fund
transfer or deposit a check within the proposed 24-hour timeframe. In
addition, the Bureau seeks comment on whether the definition should
include single immediate payment transfers initiated through other
means of withdrawing payment and, if so, which means and why.
14(b) Prohibition on Initiating Payment Transfers From a Consumer's
Account After Two Consecutive Failed Payment Transfers
Proposed Sec. 1041.14(b) would prohibit a lender from attempting
to withdraw payment from a consumer's account in connection with a
covered loan when two consecutive attempts have been
[[Page 48064]]
returned due to a lack of sufficient funds. The Bureau is proposing
Sec. 1041.14(b) pursuant to section 1031(b) of the Dodd-Frank Act,
which provides that ``the Bureau may prescribe rules applicable to a
covered person or service provider identifying as unlawful unfair,
deceptive, or abusive acts or practices.'' The Bureau's rules under
section 1031(b) may include requirements for the purpose of preventing
unfair, deceptive, or abusive acts or practices. As discussed in the
section-by-section analysis of proposed Sec. 1041.13, it appears that,
in connection with a covered loan, it is 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 apply to any lender-
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.
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 electronic
fund transfers, 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 has considered a number of potential
interventions. As detailed in Market Concerns--Payments, 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 an unfair, deceptive, or abusive act or practice.
The Bureau believes, however, 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 will continue to use its supervisory
and enforcement authorities to address such aggressive practices as
appropriate, the Bureau is proposing in this rulemaking to address a
specific practice that the Bureau preliminarily believes to be unfair
and abusive, and is proposing requirements to prevent that practice
which will provide significant consumer protections 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. For another example, as applied to checks, a lender
could resubmit a returned check no more than once, regardless of the
channel used, before triggering the prohibition.
The Bureau seeks comment on all aspects of the proposed approach to
restricting lenders from making repeated failed attempts to withdraw
payment from consumers' accounts. In particular, the Bureau seeks
comment on whether the proposed approach is an appropriate and
effective way to prevent consumer harms from the aggressive payment
practices described above. Further, the Bureau seeks comment on whether
there are potentially harmful payment practices in markets for covered
loans that would not be addressed by the proposed approach and, if so,
what additional provisions may be needed to address those practices.
The Bureau has 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 believes 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 believes that applying the prohibition in this manner may
help to protect consumers from harmful practices in which such
depository lenders may sometimes engage. As discussed in Market
Concerns--Payments, for example, the Bureau 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.
The Bureau seeks comment on whether depository institutions'
greater visibility into consumers' accounts warrants modifying the
proposed approach for applying the prohibition to such lenders. In
particular, the Bureau seeks comment on whether and how frequently such
lenders make repeated payment withdrawal attempts through their
internal systems in connection with proposed covered loans in ways that
can be harmful to consumers and, if so, whether the proposed approach
is appropriate to address those practices, or whether (and what types
of) modified approaches are appropriate. For example, the Bureau seeks
comment on whether triggering the proposed prohibition upon the failure
of a second consecutive failed payment transfer attempt should be
modified for such lenders in light of the fact that depository
institutions are better situated to predict the outcomes of their
attempts than are lenders that do not hold consumers' accounts.
[[Page 48065]]
Proposed comment 14(b)-1 explains the general scope of the
prohibition. Specifically, it explains that a lender is restricted
under the prohibition from initiating any further payment transfers
from the consumer's account in connection with the covered loan, unless
the requirements and conditions in either Sec. 1041.14(c) or (d) are
satisfied. (Proposed Sec. 1041.14(c) and (d), which would permit a
lender to initiate payment transfers authorized by the consumer after
the prohibition has applied if certain requirements and conditions are
satisfied, are discussed in detail below.) To clarify the ongoing
application of the prohibition, proposed comment 14(b)-1 further
explains, by way of example, that a lender is restricted from
initiating transfers to collect payments that later fall due or to
collect late fees or returned item fees. The Bureau believes it is
important to clarify that the proposed restriction on further
transfers, in contrast to restrictions in existing laws and rules (such
as the NACHA cap on re-presentments), would not merely limit the number
of times a lender can attempt to collect a single failed payment. Last,
proposed comment 14(b)-1 explains that the prohibition applies
regardless of whether the lender holds an authorization or instrument
from the consumer that is otherwise valid under applicable law, such as
an authorization to collect payments via preauthorized electronic fund
transfers under Regulation E or a post-dated check.
Proposed comment 14(b)-2 clarifies 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 has not attempted
to initiate two consecutive failed payment transfers in connection with
the bona fide subsequent covered loan. The Bureau believes that
limiting the restriction in this manner may be appropriate to assure
that a consumer who has benefitted from the restriction at one time is
not effectively foreclosed from taking out a covered loan with the
lender in the future, after her financial situation has improved.
The Bureau seeks comment on what additional provisions may be
appropriate to clarify the concept of a bona fide subsequent covered
loan, including provisions clarifying how the concept applies in the
context of a refinancing. In addition, the Bureau seeks comment on what
additional provisions may be appropriate to clarify how the proposed
prohibition on further payment transfers applies when a consumer has
more than one outstanding loan with a lender, including to situations
in which a lender makes two failed payment transfer attempts when
alternating between covered loans.
14(b)(1) General
Proposed Sec. 1041.14(b)(1) would provide 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 that covered loan. A payment transfer would
be defined in Sec. 1041.14(a)(1), as discussed above. Proposed Sec.
1041.14(b)(1) would further specify that a payment transfer is deemed
to have failed when it results in a return indicating that the account
lacks sufficient funds or, for a lender that is the consumer's account-
holding institution, it results in the collection of less than the
amount for which the payment transfer is initiated because the account
lacks sufficient funds. The specific provision for an account-holding
institution thus would apply when such a lender elects to initiate a
payment transfer that results in the collection of either no funds or a
partial payment.
Proposed comments 14(b)(1)-1 through -4 provide clarification on
when a payment transfer is deemed to have failed. Specifically,
proposed comment 14(b)(1)-1 explains that for purposes of the
prohibition, a failed payment transfer includes but is not limited to
debit or withdrawal that is returned unpaid or is declined due to
nonsufficient funds in the consumer's account. This proposed comment
clarifies, among other things, that the prohibition applies to declined
debit card transactions. Proposed comment 14(b)(1)-2 clarifies that the
prohibition 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 transfer is
initiated. The Bureau believes that a lender that is the consumer's
account-holding institution, in contrast to other lenders, has or
should have the ability to know before a transfer is even initiated (or
immediately thereafter, at the latest) that the account lacks
sufficient funds. Proposed comment 14(b)(1)-3 clarifies that a transfer
that results in a return for a reason other than a lack of sufficient
funds is not a failed transfer for purposes of the prohibition and
provides, as an example, a transfer that is returned due to an
incorrectly entered account number. Last, proposed comment 14(b)(1)-4
clarifies how the concept of a failed payment transfer applies to a
transfer initiated by a lender that is the consumer's account-holding
institution. Specifically, the proposed comment explains that when a
lender that is the consumer's account-holding institution initiates a
payment transfer that results in the collection of less than the amount
for which the payment transfer is initiated because the account lacks
sufficient funds, the payment transfer is a failed payment transfer for
purposes of the prohibition, regardless of whether the result is
classified or coded in the lender's internal procedures, processes, or
systems as a return for nonsufficient funds. The Bureau believes that,
unlike other lenders, such a lender has 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,'' classified as such, or on a
commonly understood reason code. Proposed comment 14(b)(1)-4 further
clarifies that a lender that is the consumer's account-holding
institution does not initiate a failed payment transfer if the lender
merely defers or forgoes debiting or withdrawing payment from an
account based on the lender's observation that the account lacks
sufficient funds. For such lenders, the Bureau believes it is important
to clarify that the concept of a failed payment transfer incorporates
the proposed payment transfer definition's central concept 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.
The Bureau seeks comment on all aspects of the proposed provisions
relating to when a payment transfer is deemed to have failed. In
particular, the Bureau seeks comment on whether the provisions
appropriately address situations in which lenders that are the
consumers' account-holding institutions initiate payment transfers that
result in nonpayment or partial payment, or whether additional
provisions may be appropriate, and, if so, what types of provisions. In
addition, the Bureau seeks comment on whether such lenders assess
account-related fees (that is, fees other than bona fide late fees
under the loan agreement) even when they defer or forego collecting
payment based on their observation that the account lacks sufficient
funds, and, if so, what types of fees and how frequently such fees are
[[Page 48066]]
assessed, and what additional provisions may be appropriate to clarify
how the concept of a failed payment transfer applies in such
circumstances. Further, the Bureau seeks comment on whether such
lenders assess overdraft fees when their attempts to withdraw payment
in connection with proposed covered loans result in the collection of
the full payment amount and, if so, how frequently and what additional
provisions may be appropriate to apply the concept of a failed payment
transfer to such circumstances.
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 declined
debit card transaction. The Bureau understands that depository
institutions generally do not charge consumers NSF fees or declined
authorization fees for declined debit card transactions, although the
Bureau is aware that such fees are charged by some issuers of prepaid
cards. The Bureau thus recognizes that debit card transactions present
somewhat less risk of harm to consumers. For a number of reasons,
however, the Bureau does not believe that this potential effect is
sufficient to propose excluding such transactions from the rule. First,
the recommended approach does 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., the attempt made after the lender has sufficient information
indicating that the account is severely distressed--up to one-third are
paid out of overdraft coverage. Second, the Bureau believes that the
recommended approach would be impracticable to comply with and enforce,
given that 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 is concerned that lenders might respond to
such an approach by re-characterizing their fees in some other manner.
Accordingly, the Bureau believes that it is not appropriate to propose
carving out of the rule payment withdrawal attempts by debit cards or
prepaid cards, given the narrow circumstances in which the carve-out
would apply, administrative challenges, and residual risk to consumers.
The Bureau seeks comment on this proposed approach and on whether
payment withdrawal attempts by debit cards or prepaid cards pose other
consumer protection concerns. In addition, the Bureau seeks comment on
whether and, if so, what types of specific modified approaches to the
restriction on payment transfer attempts in Sec. 1041.14(b) may be
appropriate to address consumer harms from repeated payment withdrawal
attempts made by debit cards or prepaid cards.
In addition to the feedback discussed above, during the SBREFA
process the Bureau received two other recommendations in connection
with the proposed restrictions on payment withdrawal attempts. One SER
suggested that the Bureau delay imposing any restrictions until the
full effects of NACHA's recently imposed 15 percent return rate
threshold rule can be observed. As discussed in Markets Background--
Payments, that rule, which 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 does 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 above, anecdotal evidence suggests that lenders are
already shifting to withdrawing payments through other channels to
avoid the NACHA rule's restrictions. Further, exceeding the threshold
merely triggers closer scrutiny by NACHA. To the extent that lenders
that make proposed covered loans become subject to the review process,
the Bureau believes that they may be able to justify higher return
rates by arguing that their rates are consistent with the rates for
their market as a whole. However, the Bureau seeks comment on the
effects of the NACHA rule on lender practices in submitting payment
withdrawal attempts in connection with proposed covered loans through
the ACH system and on return rates in that system with respect to such
loans.
Another SER recommended that lenders should be permitted to make up
to four payment collection attempts per month when a loan is in
default. As discussed in Market Concerns--Payments, the Bureau's
evidence indicates that for the proposed covered loans studied, after a
second consecutive attempt to collect payment fails, the third and
subsequent attempts are very likely to fail. The Bureau therefore
believes that two consecutive failed payment attempts, rather than four
presentment attempts per month, is the appropriate point at which to
trigger the rule's payment protections. In addition, the Bureau
believes that in many cases in which the proposed prohibition would
apply, the consumer may technically be in default on the loan, given
that the lender's payment attempts will have been unsuccessful. Thus,
the suggestion to permit a large number of payment withdrawal attempts
when a loan is in default could effectively swallow the rule being
proposed.
14(b)(2) Consecutive Failed Payment Transfers
Proposed Sec. 1041.14(b)(2) would define a first failed payment
transfer and a second consecutive failed payment transfer for purposes
determining when the prohibition in proposed Sec. 1041.14(b) applies.
Each of these proposed definitions is discussed in detail directly
below.
14(b)(2)(i) First Failed Payment Transfers
Proposed Sec. 1041.14(b)(2)(i) would provide that a failed
transfer is the first failed transfer if it meets any of three
conditions. First, proposed Sec. 1041.14(b)(2)(i)(A) would provide
that a transfer is the first failed payment transfer if the lender has
initiated no other transfer from the consumer's account in connection
with the covered loan. This applies to the scenario in which a lender's
very first attempt to collect payment on a covered loan fails. Second,
proposed Sec. 1041.14(b)(2)(i)(B) would provide that, generally, a
failed payment transfer is a first failed payment transfer if the
immediately preceding payment transfer was successful, regardless of
whether the lender has previously initiated a first failed payment
transfer. This proposed provision sets forth the general principle that
any failed payment transfer that follows a successful payment transfer
is the first failed payment transfer for the purposes of the
prohibition in proposed Sec. 1041.14(b). Put another way, an
intervening successful payment transfer generally
[[Page 48067]]
has the effect of resetting the failed payment transfer count to zero.
Last, proposed Sec. 1041.14(b)(2)(i)(C) would provide that a payment
transfer is a first failed payment transfer if it is the first failed
attempt after the lender obtains the consumer's authorization for
additional payment transfers pursuant to Sec. 1041.14(c). As discussed
in detail below, once the proposed prohibition on future transfers
applies, a lender would be permitted under proposed Sec. 1041.14(c) to
authorize additional payment transfers authorized by the consumer in
accordance with certain requirements and conditions.
Proposed comment 14(b)(2)(i)-1 provides two illustrative examples
of a first failed payment transfer.
14(b)(2)(ii) Second Consecutive Failed Payment Transfer
Proposed Sec. 1041.14(b)(2)(ii) would provide that a failed
payment transfer is the second consecutive failed payment transfer if
the previous payment transfer was a first failed transfer, and would
define 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 provides an
illustrative example of the general concept of a second consecutive
failed payment transfer, while proposed comment 14(b)(2)(ii)-2 provides
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 discussed in Market Concerns--Payments, the Bureau
believes it is important to clarify that the prohibition is triggered
when two payment transfers initiated on the same day, including
concurrently, fail. The Bureau seeks comment on what additional
provisions may be appropriate to clarify how the prohibition applies
when a lender initiates multiple payment transfers on the same day or
concurrently and two of those payment transfers fail. In particular,
the Bureau seeks comment on what provisions may be appropriate to
address situations in which a lender elects to initiate more than two
payment transfers so close together in time that the lender may not
receive the two returns indicating that the prohibition has been
triggered prior to initiating further payment transfers.
In addition to the comments discussed above, proposed comment
14(b)(2)(ii)-3 clarifies that when a lender initiates a single
immediate payment transfer at the consumer's request pursuant to the
exception in Sec. 1041.14(d), the failed transfer count remains at
two, regardless of whether the transfer succeeds or fails. Thus, as the
proposed comment further provides, the exception is limited to the
single transfer authorized by the consumer, and, accordingly, if a
payment transfer initiated pursuant to the exception fails, the lender
would not be 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. 1041.14(c) or (d). The Bureau believes this
limitation is necessary, given that the authorization for an immediate
transfer is based on the consumer's understanding of her account's
condition only at that specific moment in time, as opposed to its
condition in the future.
In addition to the requests for comment above, the Bureau seeks
comment on all aspects of the proposed provisions for determining when
a failed payment transfer is the second consecutive failed payment
transfer for purposes of the prohibition in Sec. 1041.14(b). In
particular, the Bureau seeks comment on whether the rule should include
provisions to address situations in which lenders, after a first failed
payment transfer, initiate a payment transfer or series of payment
transfers for a substantially smaller amount. As discussed in the
section-by-section analysis of proposed Sec. 1041.19, the proposed
rule includes an illustrative example of how, given certain facts and
circumstances, initiating a payment transfer for only a nominal amount
after a first failed payment transfer--thereby resetting the failed
payment transfer count--could constitute an evasion of the prohibition
on further payment transfers in proposed Sec. 1041.14(b). In addition
to this proposed anti-evasion example, the Bureau seeks comment on
whether the rule should specifically provide that, after a first failed
payment transfer, initiating a successful payment transfer or series of
payment transfers for a substantially smaller amount (but larger than a
nominal amount) tolls the failed payment transfer count at one, rather
than resetting it to zero, given that such an amount may not
sufficiently indicate that the consumer's account is no longer in
distress. If so, the Bureau also seeks comment on what amount may be
appropriate for a substantially smaller amount, such as any amount up
to 10 percent of the first failed payment transfer's amount, or whether
a higher amount threshold up to 25 percent or more is needed to
indicate to the lender that the account is no longer distressed.
14(b)(2)(iii) Different Payment Channel
Proposed Sec. 1041.14(b)(2)(iii) would establish the principle
that alternating between payment channels does not reset the failed
payment transfer count. Specifically, it would provide 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 would provide an
illustrative example of this concept.
14(c) Exception for Additional Payment Transfers Authorized by the
Consumer
As discussed above, proposed Sec. 1041.13 would provide that, in
connection with a covered loan, it is 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 has failed due to a lack of sufficient funds, unless the
lender obtains the consumer's new and specific authorization to make
further payment withdrawals from the account. Whereas proposed Sec.
1041.14(b) would establish the prohibition on further payment
withdrawals, proposed Sec. 1041.14(c) and (d) would establish
requirements for obtaining the consumer's new and specific
authorization to make further payment withdrawals. Proposed Sec.
1041.14(c) would be 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. (Proposed Sec. 1041.14(d),
discussed in detail below, would establish a second exception for
payment withdrawals that would otherwise fall within the scope of the
preliminarily identified unfair and abusive practice; that exception
would apply when the consumer authorizes, and the lender initiates, a
transfer meeting the definition of a single immediate payment transfer
at the consumer's request, subject to certain requirements and
conditions.)
As noted in the discussion of proposed Sec. 1041.14(b)(2)(i)(C), a
new authorization obtained pursuant to 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 Sec. 1041.14(c) to initiate
[[Page 48068]]
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. Thus, for example, when the
prohibition in Sec. 1041.14(b) has been triggered and the lender
subsequently obtains under the exception the consumer's authorization
to debit the consumer's account on a recurring basis, the lender could
rely on that authorization to initiate additional payment transfers in
accordance with the terms agreed to by the consumer, until and unless
the lender initiates two consecutive failed payment transfers, thereby
triggering the prohibition again.
The proposed authorization requirements and conditions in Sec.
1041.14(c) are designed to assure that, before a lender initiates
another payment transfer (if any) after triggering the prohibition, the
consumer does in fact want the lender to resume making payment
transfers and that the consumer understands and agrees to the specific
date, amount, and payment channel for those succeeding payment
transfers. As discussed in detail in connection with each proposed
provision, below, the Bureau believes that requiring that the key terms
of each transfer be clearly communicated to the consumer before the
consumer decides whether to grant authorization will help to 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 believes that, when this assurance is 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 initiates two consecutive failed
payment transfers pursuant to the new authorization.
The Bureau recognizes 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 authorized prior to the two consecutive failed attempts. In
other cases, lenders and consumers may want to establish a new
authorization to accommodate a change in the payment schedule--as might
be the case, for example, when the consumer enters into a workout
agreement with the lender. Accordingly, the proposed exception is
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 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, 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. Last, 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 provides a summary of the exception's main
provisions and note the availability of the exception in Sec.
1041.14(d).
The Bureau seeks comment on all aspects of the proposed exception
in Sec. 1041.14(c).
14(c)(1) General
Proposed Sec. 1041.14(c)(1) would provide that, notwithstanding
the prohibition in Sec. 1041.14(b), a lender is permitted to initiate
additional payment transfers from a consumer's account after two
consecutive transfers by the lender have failed if the transfers are
authorized by the consumer in accordance with the requirements and
conditions of Sec. 1041.14(c), or if the lender executes a single
immediate payment transfer at the consumer's request under Sec.
1041.14(d). Proposed comment 14(c)(1)-1 explains that the consumer's
authorization required by Sec. 1041.14(c) is 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
notes, for example, that an authorization obtained pursuant to proposed
Sec. 1041.14(c) would not take the place of an authorization that a
lender is required to obtain under applicable laws to collect payments
via RCCs, if the lender and consumer wish to resume payment transfers
using that method. However, in cases where lenders and consumers wish
to resume payment transfers via preauthorized electronic fund transfers
as that term is defined in Regulation E, the Bureau believes 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. The Bureau seeks
comment on whether and, if so, what types of additional provisions may
be appropriate to clarify whether and how an authorization obtained
pursuant to proposed Sec. 1041.14(c) would satisfy the authorization
requirements for preauthorized electronic fund transfers in Regulation
E. In addition, the Bureau seeks comment on whether additional
provisions may be appropriate to clarify how the authorization
requirements in proposed Sec. 1041.14(c) apply in circumstances where
the lender and consumer wish to resume payment transfers using a
payment method other than preauthorized electronic fund transfers, and,
if so, what types of provisions.
14(c)(2) General Authorization Requirements and Conditions
14(c)(2)(i) Required Transfer Terms
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 believes that requiring lenders to explain these key terms of
each transfer to consumers when seeking authorization will help to
ensure that consumers can make an informed decision as between granting
authorization for additional payment transfers and other convenient
repayment options, such as payments by cash or money order, ``push''
bill payment services, and single immediate payment transfers
authorized pursuant to proposed Sec. 1041.14(d), and thus help
consumers avoid future failed payment transfers.
In addition, if a lender wishes to obtain permission to initiate
ongoing payment transfers from a consumer whose account has already
been subject to two consecutive failed attempts, the Bureau believes it
is important to require the lender 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
[[Page 48069]]
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 believes 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 can afford to do so and to
make choices that may minimize the attempt's impact on their accounts
when the timing of a payment is not aligned with their finances.
However, the Bureau believes that consumers whose accounts have already
experienced two failed payment withdrawal attempts in succession would
have demonstrated a degree of financial distress that makes it unlikely
that a notice of another payment attempt would enable them to avoid
further harm.
The Bureau seeks comment on all aspects of the proposed exception's
core requirement that the date, amount, and payment channel of each
additional payment transfer be authorized by the consumer. In
particular, the Bureau seeks comment on whether less prescriptive
authorization requirements may provide adequate consumer protections
and, if so, what types of less prescriptive requirements may be
appropriate.
Proposed comment 14(c)(2)(i)-1 explains the general requirement
that the terms of each additional payment transfer must be authorized
by the consumer. It further clarifies that for the exception to apply
to an additional payment transfer, these required terms must be
included in the signed authorization that the lender is required to
obtain from the consumer under Sec. 1041.14(c)(3)(iii).
Proposed comment 14(c)(2)(i)-2 clarifies that the requirement that
the specific date of each additional transfer be expressly authorized
is satisfied if the consumer authorizes the month, day, and year of the
transfer.
Proposed comment 14(c)(2)(i)-3 clarifies that the exception does
not apply if the lender initiates an additional payment transfer for an
amount larger than the amount authorized by the consumer, unless it
satisfies 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. (The requirements and
conditions in proposed Sec. 1041.14(c)(2)(iii)(B) are discussed in
detail, below.)
Proposed comment 14(c)(2)(i)-4 clarifies that a payment transfer
initiated pursuant to Sec. 1041.14(c) is initiated for the specific
amount authorized by the consumer if its amount is equal to or smaller
than the authorized amount. The Bureau recognizes that in certain
circumstances it may be necessary for the lender to initiate transfers
for a smaller amount than specifically authorized, including, for
example, when the lender needs to exclude from the transfer the amount
of a partial prepayment. In addition, the Bureau believes that this
provision may 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 may 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 has 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.
The Bureau seeks comment on this provision for smaller amounts. In
particular, the Bureau seeks comment on whether this provision
inappropriately weakens the consumer protections accorded by the
requirement that the specific transfer amount be authorized by the
consumer, and, if so, what types of additional protections should be
included to ensure greater protections in a manner that addresses the
practical considerations noted above. In addition, the Bureau seeks
comment on whether the provision sufficiently addresses the specific-
amount requirement's application in instances where the consumer has
credit available on a line of credit, or whether specific provisions
should be included to clarify the requirement's application in these
instances and, if so, what types of provisions.
14(c)(2)(ii) Application of Specific Date Requirement to Re-Initiating
a Returned Payment Transfer
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 is permitted to re-present the transfer on or after the date
authorized by the consumer, provided that the returned transfer has not
triggered the prohibition on further payment transfers in Sec.
1041.14(b). The Bureau believes that this narrow exception would
accommodate practical considerations in payment processing and notes
that the prohibition in proposed Sec. 1041.14(b) will protect the
consumer if the re-initiation fails.
14(c)(2)(iii) Special Authorization Requirements and Conditions for
Payment Transfers to Collect a Late Fee or Returned Item Fee
Proposed Sec. 1041.14(c)(2)(iii) contains 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 are 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, has informed the consumer of the fact that individual
payment transfers to collect a late fee or returned item fee may be
initiated and has 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) includes a statement, in terms that are clear
and readily understandable to the consumer, that the lender may
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 believes this required
statement may be appropriate to help ensure that the consumer is aware
of key information about such transfers--particularly the highest
possible amount--when the consumer is deciding whether to grant an
authorization.
[[Page 48070]]
Proposed comment 14(c)(2)(iii)(A)-1 clarifies that the consumer's
authorization for an additional payment transfer solely to collect a
late fee or returned item fee need 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
provides, as an example, that the requirement to specify to highest
possible amount that may be charged for a fee is satisfied if the
required statement specifies the maximum amount permissible under the
loan agreement. Proposed comment 14(c)(2)(iii)(A)-3 provides that if a
fee may vary due to remaining loan balance or other factors, the lender
must assume the factors that result in the highest possible amount in
calculating the specified amount.
The second provision, proposed Sec. 1041.14(c)(2)(iii)(B), would
permit 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 has informed the
consumer of the fact that such transfers for combined amounts may be
initiated and has obtained the consumer's general authorization for
such transfers in advance. Specifically, the lender could initiate
transfers for such combined amounts only if the consumer's
authorization includes a statement, in terms that are clear and readily
understandable to the consumer, that the amount of one late fee or one
returned item fee may 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. As with the similar requirement
in proposed Sec. 1041.14(c)(iii)(A), the Bureau believes this required
statement may be appropriate to ensure that the consumer is aware of
key information about such transfers--particularly the highest possible
amount--when the consumer is deciding whether to grant an
authorization.
Proposed comment 14(c)(2)(iii)(B)-1 clarifies that the exception in
Sec. 1041.14(c) does not apply to an additional payment transfer that
includes the additional amount of a late fee or returned item fee
unless the consumer authorizes the transfer in accordance with the
requirements and conditions in Sec. 1041.14(c)(2)(iii)(B). Proposed
comment 14(c)(2)(iii)(B)-2 cross-references comments 14(c)(2)(iii)(A)-2
and -3 for guidance on how to satisfy the requirement to specify the
highest possible amount of a fee.
The Bureau seeks comment all aspects of these proposed provisions
for additional payment transfers to collect unanticipated late fees and
returned item fees. In particular, the Bureau seeks comment on whether
the requirements provide adequate protections from consumer harms that
may result from such additional payment transfers. In addition, the
Bureau seeks comment on whether including model statements in the rule
would facilitate compliance and more effective disclosure of the
required information.
14(c)(3) Requirements and Conditions for Obtaining the Consumer's
Authorization
14(c)(3)(i) General
Proposed Sec. 1041.14(c)(3) would establish 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) would provide that, for
an authorization to be valid under the exception, the lender must
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 would be permitted to obtain the
consumer's signature in writing or electronically, provided the E-Sign
Act requirements for electronic records and signatures are met. This is
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 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 it is in a retainable
form. Each of these three provisions for obtaining the consumer's
authorization is discussed in detail, below.
In developing this three-step approach, the Bureau is endeavoring
to ensure that the precise terms of the additional transfers for which
a lender seeks authorization are effectively communicated to the
consumer during each step of the process and that the consumer has the
ability to decline authorizing any payment transfers with terms that
the consumer believes are likely to 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,'' electronic fund transfers under
Regulation E. Accordingly, the proposed procedures generally are
designed to mirror existing requirements in Regulation E, 12 CFR
1005.10(b). Regulation E requires that preauthorized electronic fund
transfers from a consumer's account be authorized ``only by a writing
signed or similarly authenticated by the consumer.'' \837\ Under EFTA
and Regulation E, companies can obtain the required consumer
authorizations for preauthorized electronic fund transfers 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.'' \838\
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.\839\ In
addition,
[[Page 48071]]
Regulation E requires persons that obtain authorizations for
preauthorized electronic fund transfers to provide a copy of the terms
of the authorization to the consumer.\840\ The copy of the terms of the
authorization must be provided in paper form or electronically.\841\
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.
---------------------------------------------------------------------------
\837\ See 12 CFR 1005.10(b).
\838\ 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.'' Id.
7006(4).
\839\ 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).
\840\ See 12 CFR 1005.10(b).
\841\ See 12 CFR part 1005, Supp. I, comment 10(b)-5.
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During the SBREFA process, a small entity representative
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
electronic fund transfers under Regulation E. The Bureau believes 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 is designed to achieve this
goal.
The Bureau seeks comment on all aspects of the proposed approach
for obtaining authorizations. In particular, the Bureau seeks comment
on whether the proposed approach would provide adequate protections to
consumers and whether it would achieve the intended goal of reducing
lender costs and burdens by being compatible with existing systems and
procedures.
14(c)(3)(ii) Provision of Transfer Terms to Consumer
Proposed Sec. 1041.14(c)(3)(ii) would establish requirements and
conditions for providing to the consumer the required terms of each
additional payment transfer for purposes of requesting the consumer's
authorization. The Bureau is proposing these provisions pursuant to its
authority under section 1032(a) of the Dodd-Frank Act to 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 addition to
its authority pursuant to its authority under section 1031(b) of the
Act to include in its rules identifying unfair, abusive, or deceptive
acts or practices requirements for the purpose of preventing such acts
or practices.
The Bureau has designed the process for requesting authorization to
work in tandem with the requirements in proposed Sec. 1041.15(d) for
providing to consumers a consumer rights notice informing them that the
restriction on further payment transfers has been triggered, and
contemplates that lenders may often send the notice and the request for
authorization together. However, if lenders choose to bifurcate the
notice and authorization process, proposed Sec. 1041.14(c)(3)(ii)
would provide that the request for authorization can be made no earlier
than the date on which the notice is provided. Further, proposed Sec.
1041.14(c)(3)(iii) would provide that the consumer's authorization can
be obtained no earlier than when the consumer is considered to receive
the notice, as specified in the proposed rule. In addition to these
requirements, proposed Sec. 1041.14(c)(3)(ii) would require that the
request for authorization contain the required payment transfer terms
and certain other required elements, and would permit the request to be
made through a number of different means of communication. The Bureau
believes that the provisions in proposed Sec. 1041.14(c)(3)(ii) would
help to ensure that consumers make fully informed decisions whether to
grant a new authorization, including by requiring that consumers first
be informed of their rights under the proposed restriction on further
payment withdrawals and by helping to ensure that consumers can make an
informed decision as between granting authorization for additional
payment transfers and other convenient repayment options, such as
payments by cash or money order, ``push'' bill payment services, and
single immediate payment transfers authorized pursuant to proposed
Sec. 1041.14(d).
Specifically, under proposed Sec. 1041.14(c)(3)(ii), a lender
would be required to request authorization by providing the payment
transfer terms required by Sec. 1041.14(c)(2)(i) (i.e., the specific
date, amount, and payment channel of each transfer) and, if applicable,
the statements required by Sec. 1041.14(c)(2)(iii)(A) or (B) (i.e.,
for purposes of seeking the consumer's authorization for payment
transfers to collect certain fees) no earlier than the date on which
the lender provides to the consumer the consumer rights notice required
by Sec. 1041.15(d). (As discussed in detail, below, a lender would be
required to provide the notice to the consumer no later than three
business days after the prohibition on further payment transfers is
triggered.) As noted above, while the lender would be permitted to
request the consumer's authorization on the same day that the lender
provides the consumer rights notice, the authorization would not be
valid unless it is signed or otherwise agreed to by the consumer after
the consumer is considered to receive the notice as specified in
proposed Sec. 1041.14(c)(3)(iii), discussed in detail below.
Proposed comment 14(c)(3)(ii)-1 explains that while a lender is
permitted to request authorization on or after the day that the lender
provides the consumer rights notice to the consumer, the exception in
Sec. 1041.14(c) does not apply unless the consumer's signed
authorization is obtained no earlier than the date on which the
consumer is considered to have received the notice, as specified in
Sec. 1041.14(c)(3)(iii).
Proposed comment 14(c)(3)(ii)-2 clarifies that a lender is not
prohibited under the provisions from providing different options for
the consumer to select from with respect to the date, amount, and
payment channel of each additional payment transfer when requesting the
consumer's authorization. It further clarifies that the lender is not
prohibited under the provisions from making a follow-up request by
providing a different set of terms for the consumer to consider. Last,
as an example, it provides that if the consumer declines an initial
request to authorize two recurring transfers for a particular amount,
the lender may make a follow-up request for the consumer to authorize
three recurring transfers for a smaller amount. The Bureau believes it
is important to emphasize that the approach in proposed Sec.
1041.14(c) is designed to ensure that when lenders seek authorization,
consumers are not simply dictated the terms of additional payment
transfers but rather are able to make an informed decision whether to
grant authorization based on their own understanding of the
consequences that may flow from their decision to do so.
With respect to how the request for authorization can be conveyed
to the consumer, proposed Sec. 1041.14(c)(3)(ii) would permit the
lender to provide the required terms and statements to the consumer as
a predicate to requesting authorization by any one of three specified
means. First, proposed Sec. 1041.14(c)(3)(ii)(A) would permit the
lender to provide the terms and statements in writing, either in person
or by mail. Second, proposed Sec. 1041.14(c)(3)(ii)(A) also would
permit the lender to provide the terms and
[[Page 48072]]
statements in a retainable form by email if the consumer has consented
to receive electronic disclosures in this manner under Sec.
1041.15(a)(4) or agrees to receive the terms and statements by email in
the course of a communication initiated by the consumer in response to
the consumer rights notice required by Sec. 1041.15(d). Third, under
proposed Sec. 1041.14(c)(3)(ii)(B), lenders could request
authorization by oral telephone communication in certain limited
circumstances.
Accordingly, when a lender is already providing the payments-
related notices in Sec. 1041.15(d) to the consumer by email in
accordance with the consumer's valid consent, the lender could request
authorization in that manner under proposed Sec. 1041.14(c)(3)(ii)(A)
without having to go through a second email-delivery consent process.
In addition, a lender could provide the terms and statements by email
when the lender has not previously obtained the consumer's consent to
receive disclosures in that manner, provided that the consumer agrees
in the course of a communication initiated by the consumer in response
to the consumer rights notice required by Sec. 1041.15(d). Proposed
comment 14(c)(3)(ii)(A)-1 provides an illustrative example of how a
consumer agrees to receive the request for authorization by email in
the course of a communication initiated by the consumer in response to
the consumer rights notice.
The Bureau believes that permitting lenders to request
authorization by email if the consumer agrees when affirmatively
responding to the consumer rights notice would ensure that consumers
are able to discuss with lender their options for repaying in a timely
manner, and, in addition, help to ensure that when deciding whether to
authorize additional payment transfers, consumers are aware of their
rights as stated in the notice, including the protections accorded them
by the limitation on additional payment transfers. The Bureau notes
that email would be the only electronic means of requesting
authorization permitted under proposed Sec. 1041.14(c)(3)(ii)(A).
Accordingly, lenders could not transmit the payment transfer terms and
statements to the consumer by text message or mobile application for
purposes of requesting authorization, even if the consumer has
consented to receive electronic disclosures by text or mobile
application for purposes of receiving the payment withdrawal notices
under proposed Sec. 1014.15(b). For the payment withdrawal notices,
the Bureau is proposing a two-part disclosure whereby the consumer
would receive a truncated notice by text or mobile application and then
click through to get the full notice. With regard to requests for new
authorizations, however, the Bureau believes that it may be important
for consumers to be able to access the entire request in the first
instance without having to click through and without having to contend
with, when viewing the request, the character limitations and screen
space restrictions that typically apply to communications by text
message or mobile application. The Bureau is therefore proposing to
permit electronic requests for authorization to be provided to
consumers only by email (except for electronic requests made by oral
telephone communication in certain limited circumstances). However, the
Bureau seeks comment on this proposed approach. In particular, the
Bureau seeks comment on whether the rule should include provisions
permitting lenders to provide electronic requests for authorization via
text message or mobile application, and on what specific requirements
as to access and formatting may be appropriate for electronic requests,
including whether it may be appropriate to adopt a two-part disclosure
similar to what the Bureau is proposing for the payment withdrawal
notices.
Last, proposed Sec. 1041.14(c)(3)(ii)(B) would permit the lender
to provide the terms and statements to the consumer by oral telephone
communication in certain limited circumstances. Specifically, it would
permit the lender to provide the terms and statements by oral telephone
communication if the consumer affirmatively contacts the lender in that
manner in response to the consumer rights notice required by Sec.
1041.15(d) and agrees to receive the terms and statements in that
manner in the course of, and as part of, the same communication.
(Relatedly, proposed Sec. 1041.14(c)(iii)(B), discussed below, would
provide that, if the consumer grants authorization in the course of an
oral telephone communication, the lender must record the call and
retain the recording.) The Bureau is aware that some lenders currently
obtain consumers' authorizations for preauthorized electronic fund
transfers under Regulation E via recorded telephone conversations. This
provision is designed to be compatible with such practices. However, by
limiting such authorizations only to situations in which the consumer
has affirmatively contacted the lender by telephone in response to the
required notice, the provision also is designed to ensure that such
authorizations are obtained from the consumer only when the consumer
has sought out the lender, rather than in the course of a collections
call that the lender makes to the consumer.
Proposed comment 14(c)(3)(ii)(A)-2 clarifies that the required
payment transfer terms and statements may be provided to the consumer
electronically in accordance with the requirements for requesting the
consumer's authorization in Sec. 1041.14(c)(2)(ii) without regard to
the E-Sign Act. The proposed comment further clarifies, however, that
in cases where the consumer responds to the request with an electronic
authorization, the authorization is valid under Sec.
1041.14(c)(3)(iii) only if it is signed in accordance with the
signature requirements in the E-Sign Act. In addition, the comment
cross-references Sec. 1041.14(c)(3)(iii) and comment 14(c)(3)(iii)-1
for additional guidance.
Proposed comment 14(c)(3)(ii)(A)-3 clarifies that a lender could
make the request for authorization in writing or by email in tandem
with providing the consumer rights notice in Sec. 1041.15(d), subject
to certain requirements and conditions. Specifically, the proposed
comment clarifies that a lender is not prohibited under the provisions
in Sec. 1041.14(c)(3)(ii)(A) from requesting authorization and
providing the consumer rights notice in the same communication, such as
in a single written mailing or a single email to the consumer. It
further clarifies, however, that the consumer rights notice still must
be provided in accordance with the requirements and conditions in Sec.
1041.15(d), including, but not limited to, the segregation requirements
that apply to the notice. The proposed comment further provides, as an
example, that if a lender mails the request for 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.
1041.15(d).
The Bureau seeks comment on all aspects of the proposed provisions
for providing the payment transfer terms and statements to the consumer
as a predicate to requesting the consumer's authorization. In
particular, the Bureau seeks on comment on whether for purposes of
requesting authorization, lenders should be permitted to provide the
required terms and statements by oral telephone communication. In
addition, the Bureau seeks comment on whether including model
statements or forms in the rule would facilitate compliance and enable
more effective disclosure of the required terms and statements.
[[Page 48073]]
14(c)(3)(iii) Signed Authorization Required
Proposed Sec. 1041.14(c)(3)(iii) would establish requirements and
conditions that the lender must satisfy for a consumer's authorization
to be valid under the exception.
14(c)(3)(iii)(A) General
Specifically, proposed Sec. 1041.14(c)(3)(iii)(A) would provide
that for an authorization to be valid, it must be signed or otherwise
agreed to by the consumer in a format that memorializes the required
payment transfer terms and, if applicable, required statements to which
the consumer has agreed. In addition, proposed Sec.
1041.14(c)(3)(iii)(A) would provide that the signed authorization must
be obtained no earlier than the date on which the consumer receives the
consumer rights notice required by Sec. 1041.15(d). It would further
provide that, for purposes of the provision, the consumer is considered
to receive the notice at the time it is provided 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.
The Bureau believes that these requirements would help to ensure
that consumers' decisions to authorize additional payment transfers are
made in full awareness of their rights as stated in the notice,
including their protections under the restriction on additional payment
transfers. The Bureau further believes that these requirements would
accommodate situations in which the consumer wishes to authorize
additional payment transfers promptly, given that in many instances the
lender could obtain the consumer's authorization on the same day that
the notice is provided and received, particularly when the notice is
provided in person or electronically.
Proposed comment 14(c)(3)(iii)(A)-1 explains that, 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. The E-Sign Act establishes that electronic
signatures and electronic records are valid if they meet certain
criteria.\842\ 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.'' \843\ An electronic record is ``a contract or other
record created, generated, sent, communicated, received, or stored by
electronic means.'' \844\ The proposed comment further provides, as two
examples, that 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.
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\842\ See 15 U.S.C. 7001(a)(1).
\843\ 15 U.S.C. 7006(5).
\844\ 15 U.S.C. 7006(4).
---------------------------------------------------------------------------
Proposed comment 14(c)(3)(iii)(A)-2 explains that a consumer
affirmatively responds to the consumer rights notice that was provided
by mail when the consumer calls the lender on the telephone to discuss
repayment options after receiving the notice.
14(c)(3)(iii)(B) Special Requirements for Authorization Obtained by
Oral Telephone Communication
Proposed Sec. 1041.14(c)(3)(iii)(B) would require that, if the
consumer's authorization is granted in the course of an oral telephone
communication, the lender must record the call and retain the
recording. The Bureau is proposing this requirement for compliance
purposes. The Bureau is aware that most lenders already record and
retain calls for purposes of obtaining consumers' authorizations under
Regulation E or for servicing and collections purposes, and thus
believes that lenders already have in place the technology and systems
necessary to comply with this requirement. Nonetheless, the Bureau
seeks comment on the burdens, costs, or other challenges of complying
with this requirement.
14(c)(3)(iii)(C) Memorialization Required
Proposed Sec. 1041.14(c)(3)(iii)(C) would establish procedures for
providing a memorialization of the authorization to the consumer when
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 Bureau is proposing these provisions
pursuant to its authority under section 1032(a) of the Dodd-Frank Act
to 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
addition to its authority under section 1031(b) of the Act to include
in its rules identifying unfair, abusive, or deceptive acts or
practices requirements for the purpose of preventing such acts or
practices.
Specifically, in such circumstances, proposed Sec.
1041.14(c)(3)(iii) would require lenders to provide to the consumer a
memorialization in a retainable form no later than the date on which
the first payment transfer authorized by the consumer is initiated.
These requirements are intended to ensure that the terms of the payment
transfers authorized by consumers are provided to them in a manner that
permits them to review authorizations for consistency with their
understanding of the terms and, when necessary, contact the lender to
request clarification or discuss potential errors. In addition, for
consumers' future reference and planning purposes, the copy would
provide a record of all additional payment transfers that the lender
may initiate pursuant to the authorization. Proposed Sec.
1041.14(c)(3)(iii)(C) would further provide that the memorialization
may be provided to the consumer by email in accordance with the
requirements and conditions in Sec. 1041.14(c)(3)(ii)(A). Accordingly,
lenders could provide the memorialization by email if the consumer has
consented to receive disclosures in that manner under Sec.
1041.15(a)(4) or has so agreed in the course of a communication
initiated by the consumer in response to the consumer rights notice
required by Sec. 1041.15(d). This provision is designed to ensure that
consumers receive the copy in the timeliest possible manner and to
reduce the burden on lenders of providing the copy.
Proposed comment 14(c)(3)(iii)(C)-1 clarifies that the copy is
deemed to be provided to the consumer on the date it is mailed or
transmitted. Proposed comment 14(c)(3)(iii)(C)-2 clarifies that the
requirement that the memorialization be provided in a retainable form
is not satisfied by a copy of recorded telephone call, notwithstanding
that the authorization was obtained in that manner. Proposed comment
14(c)(3)(iv)(C)-3 clarifies that a lender is permitted under the
provision to the provide the memorialization to the consumer by email
in accordance with the requirements and conditions in Sec.
1041.14(c)(3)(ii)(A), regardless of whether the lender requested the
consumer's authorization in that manner. It further clarifies, by
providing an example, that if the lender requested the consumer's
authorization by telephone but also has obtained the
[[Page 48074]]
consumer's consent to receive electronic disclosures by email under
proposed Sec. 1041.15(a)(4), the lender is permitted under the
provision to provide the copy to the consumer by email, as specified in
proposed Sec. 1041.14(c)(3)(ii)(A).
The Bureau seeks comment on all aspects of this proposed provision.
In particular, the Bureau seeks comment on whether the consumer should
be accorded a specified period of time to review the terms of the
authorization as set forth in the memorialization before the lender
initiates the first payment transfer pursuant to the authorization. In
addition, the Bureau seeks comment on the burdens and costs for lenders
of providing the memorialization.
14(c)(4) Expiration of Authorization
Proposed Sec. 1041.14(c)(4) specifies 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) provides that a consumer's
authorization becomes null and void for purposes of the exception if
the lender obtains a subsequent new authorization from the consumer
pursuant to the exception. This provision is intended to ensure that,
when necessary, lenders can 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)
provides that a consumer's authorization becomes null and void for
purposes of the exception if two consecutive payment transfers
initiated pursuant to the consumer's authorization have failed, as
specified in proposed Sec. 1041.14(b). The Bureau is proposing this
provision for clarification purposes.
14(d) Exception for Initiating a Single Immediate Payment Transfer at
the Consumer's Request
Proposed Sec. 1041.14(d) would set forth a second exception to the
prohibition on initiating further payment transfers from a consumer's
account in Sec. 1041.14(b). In contrast to the exception available
under proposed Sec. 1041.14(c), which would allow lenders to initiate
multiple, recurring additional 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 is designed to facilitate
the collection of payments that are 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 have
the option to continue making payments, one payment at a time, after
the prohibition in proposed Sec. 1041.14(b) has been triggered,
without having to provide lenders broader, ongoing access to their
accounts.
Specifically, 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 has been triggered,
without obtaining the consumer's authorization for additional payment
transfers in accordance with proposed Sec. 1041.14(c), if the consumer
authorizes a one-time electronic fund transfer or proffers 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
electronic fund transfer or deposit the check within one business day
after receipt.
In addition, proposed Sec. 1041.14(d)(2) would provide that, for
the exception to apply, the consumer must authorize the underlying one-
time electronic fund transfer or provide 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
proposed Sec. 1041.15(d) or on the date that the consumer
affirmatively contacts the lender to discuss repayment options,
whichever date is earlier. The Bureau believes that many consumers who
elect to authorize only a single transfer under this exception will do
so in part because they have already received the notice, have been
informed of their rights, and have chosen to explore their options with
the lender. The Bureau also believes that in some cases, consumers may
contact the lender after discovering that the lender has made two
failed payment attempts (such as by reviewing their online bank
statements) before the lender has 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 her account on an ongoing basis. Accordingly, the
Bureau believes it is unnecessary to propose requirements similar to
those proposed for the broader exception in proposed Sec. 1041.14(c),
as discussed above, to ensure that consumers have received the notice
informing them of their rights at the time of authorization.
Proposed comment 14(d)-1 cross-references proposed Sec.
1041.14(b)(a)(2) and accompanying commentary for guidance on payment
transfers that meet the definition of a single immediate payment
transfer at the consumer's request. Proposed comment 14(d)-2 clarifies
how the prohibition on further payment transfers in proposed Sec.
1041.14(b) continues to apply when a lender initiates a payment
transfer pursuant to the exception in proposed Sec. 1041.14(d).
Specifically, the proposed comment clarifies that a lender is permitted
under the exception to initiate the single payment transfer requested
by the consumer only once and thus is prohibited under Sec. 1041.14(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. 1041.14(c) or (d). The proposed comment
further clarifies that a lender is permitted to initiate any number of
payment transfers from a consumer's account pursuant to the exception
in Sec. 1041.14(d), provided that the requirements and conditions are
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) has been triggered, as long as
each payment transfer is authorized and initiated in accordance with
the proposed exception's timing and other requirements. In addition,
the proposed comment cross-references comment 14(b)(2)(ii)-3 for
further guidance on how the prohibition in Sec. 1041.14(b) applies to
the exception in Sec. 1041.14(d).
Proposed comment 14(d)-3 explains, by providing an example, that a
consumer affirmatively contacts the lender when 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.
The Bureau believes that the proposed requirements and conditions
in 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 believes that consumers who authorize such transfers will do so
based on their firsthand
[[Page 48075]]
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 believes there is a significantly reduced risk that the transfer
will fail.
The Bureau seeks comment on all aspects of the exception in
proposed Sec. 1041.14(d). In particular, the Bureau seeks comment on
whether the rule should include provisions to ensure that consumers
have received the required notice informing them of their rights at the
time of authorization.
Section 1041.15 Disclosure of Payment Transfer Attempts
Overview
As discussed above in Market Concerns--Short-term Loans and Market
Concerns--Long-Term Loans, consumers who use 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 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 is proposing in Sec. 1041.15 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 presentment practices in connection with covered
loans. While the interventions in Sec. 1041.14 are designed to protect
consumers who are already experiencing severe financial distress in
connection with their loans and depository accounts, the primary
intervention in Sec. 1041.15 is designed to give all covered loan
borrowers 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 require lenders to
provide consumers with a payment notice before initiating each payment
transfer on a covered loan. This notice is 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. 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, the notice would
specifically alert the consumer to the change. For situations when a
lender obtains 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.
In addition, proposed Sec. 1041.15(d) would complement the
intervention in Sec. 1041.14 by requiring lenders to provide a
consumer rights notice after a lender has 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
believes 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. As
discussed further below, the Bureau is seeking to facilitate electronic
delivery of the notices wherever practicable because it believes that
such methods would make the disclosures more timely, more effective,
and less expensive for all parties. However, the Bureau believes it is
also important to ensure that consumers without electronic access would
receive the benefits of the disclosures. Given that electronic delivery
may be the most timely and convenient method of delivery for many
consumers, the Bureau believes that facilitating electronic delivery is
consistent with the Bureau's 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.
The Bureau is proposing model clauses and forms in proposed Sec.
1041.15(a)(7). These proposed model clauses and forms 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 are located in appendix A. 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.\845\
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\845\ FMG Report.
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Legal Authority
The payment notice, consumer rights notice, and short electronic
notices in proposed Sec. 1041.15 are being proposed 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.'' 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.
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.'' Accordingly, in
[[Page 48076]]
developing the proposed rule under Dodd-Frank Act section 1032(a), the
Bureau has 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. The
Bureau has also considered the evidence developed through its consumer
testing as discussed in Market Concerns--Payments and in the FMG
Report.
Section 1032(b)(1) also provides that ``any final rule prescribed
by the Bureau under this [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.\846\ Section
1032(b)(2) provides that any model form the Bureau issues pursuant to
section 1032(b) shall be validated through consumer testing. The Bureau
conducted two rounds of qualitative consumer testing in September and
October of 2015. The testing results are provided in the FMG Report.
Section 1032(d) provides that ``any covered person that uses a model
form included with a rule issued under this [section 1032] shall be
deemed to be in compliance with the disclosure requirements of this
section with respect to such model form.''
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\846\ Dodd-Frank Act section 1032(b)(2); 12 U.S.C. 5532(b)(2).
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15(a) General Form of Disclosures
Proposed section Sec. 1041.15(a) would establish basic rules
regarding the format and delivery for all notices required under Sec.
1041.15 and establish 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 parallel
the format requirements for other disclosures related certain covered
short-term loans as provided in proposed Sec. 1041.7, as discussed
above, except that Sec. 1041.15(a) would permit certain disclosures by
text message or mobile application while proposed Sec. 1041.7 would
not. Here, the 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 required under proposed Sec.
1041.15(b) for each upcoming withdrawal attempt and under proposed
Sec. 1041.15(d) where the lender's two consecutive failed withdrawal
attempts have triggered the protections of Sec. 1041.14.
Because the disclosures in proposed Sec. 1041.15 involve the
initiation of one or more payment transfers in connection with existing
loans, the Bureau believes, as discussed below, that electronic
disclosures would generally be more timely, more effective, and less
expensive for consumers and lenders than paper notices. At the same
time, the Bureau recognizes that there are technical and practical
challenges with regard to electronic channels. The two-stage process is
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. The
Bureau seeks comment on all aspects of its approach to the form of
disclosures and in particular to electronic delivery of the notices, as
discussed further below.
15(a)(1) Clear and Conspicuous
Proposed Sec. 1041.15(a)(1) would provide that the disclosures
required by proposed Sec. 1041.15 must be clear and conspicuous. The
section would further provide that the disclosures may use commonly
accepted or readily understandable abbreviations. Proposed comment
15(a)(1)-1 clarifies that disclosures are clear and conspicuous if they
are readily understandable and their location and type size are readily
noticeable to consumers. This clear and conspicuous standard is based
on the standard used in other consumer financial services laws and
their implementing regulations, including Regulation E subpart B Sec.
1005.31(a)(1). Requiring that the disclosures 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.
The Bureau seeks comment on the appropriateness of proposing this
general standard and whether additional guidance would be useful in the
context of these specific disclosures, particularly including its
applicability to electronic delivery on mobile devices.
15(a)(2) In Writing or Electronic Delivery
Proposed Sec. 1041.15(a)(2) would require 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 paragraph 15(a)(4) are
satisfied. The disclosures must 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) could not be satisfied by being provided orally or
through a recorded message. Proposed comment 15(a)(2) explains that the
disclosures that would be required by proposed Sec. 1041.15 may be
provided electronically as long as the requirements of Sec.
1041.15(a)(4) are satisfied, without regard to the E-Sign Act, 15
U.S.C. 7001 et seq.
The Bureau is proposing to allow electronic delivery because
electronic communications are more convenient than paper communications
for some lenders and consumers. The Bureau has therefore proposed a
tailored regime that it believes would encourage lenders and consumers
to identify an appropriate method of electronic delivery where
consumers have electronic access.
The Bureau understands that some lenders already contact their
borrowers through electronic means such as text message and email.\847\
Lenders that currently provide electronic notices have 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
[[Page 48077]]
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.\848\ 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 disclosure
information may provide the most utility to consumers when it is
provided through electronic methods.
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\847\ During the SBREFA process, several of the 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.'').
\848\ Cmty. Choice Fin. Inc., 2014 Annual Report (Form 10-K), at
4 (Mar. 30, 2015), available at https://www.sec.gov/Archives/edgar/data/1528061/000110465915023986/a14-26759_110k.htm. At the time of
the filing, most (about half) of Community Choice's revenue was from
short-term loans. Id. at 6. Both short-term loans and long-term
installment loans were being offered online. Id. at 6-7.
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The Bureau believes 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. Given 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 believes that
oral disclosures would not provide consumers with a sufficient
opportunity to understand and use the disclosure information.
The Bureau seeks comment on the benefits and risks to consumers of
providing these disclosures through electronic delivery. The Bureau
requests comment on the electronic delivery requirements in proposed
Sec. 1041.15(a)(2), including the extent that they protect consumers'
interests, whether they appropriately encourage electronic delivery,
and whether they should incorporate specific elements of the E-Sign
Act. For circumstances when lenders deliver the notices required by
Sec. 1041.15 through electronic delivery in accordance with the
requirements in proposed Sec. 1041.15(a)(4), the Bureau specifically
seeks comment on whether lenders should be required to format the full
notice so that it is viewable across all screen sizes. The Bureau seeks
comment on the burdens and benefits of providing the notice in form
that responds to the screen size it is being viewed on while still
meeting the other formatting and content provisions proposed in Sec.
1041.15. The Bureau also seeks comment on situations where consumers
would be provided with a paper notice. The Bureau specifically seeks
comment on the burdens of providing these notices through paper, the
utility of paper notices to consumers, and additional ways that this
provision can encourage electronic delivery.
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 under Sec. 1041.15(c) or (e) that are
delivered through mobile application or text message and explained
below. Electronic short notices provided by email would still be
subject to the retainability requirement. Proposed comment 15(a)(3)
explains that electronic notices are considered retainable if they are
in a format that is capable of being printed, saved, or emailed by the
consumer.
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 disclosures to more effectively
disclose the features of the product to consumers. The Bureau is not
proposing to require that text messages and messages within mobile
applications be permanently retainable because of concerns that
technical limitations beyond the lender's control may make retention
difficult. However, the Bureau anticipates 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 retainability. A lender
would also be required to maintain policies, procedures, and records to
ensure compliance with the notice requirement under proposed Sec.
1041.18.
The Bureau seeks comment on whether to allow for an exception to
the requirement that notices be retainable for text messages and
messages within mobile applications and whether other requirements
should be placed on these delivery methods, such as a requirement that
the URL link stay active for certain period of time. The Bureau
specifically seeks comment on whether the notices should warn consumers
that they should save or print the full notice given that URL link will
not be maintained indefinitely.
15(a)(4) Electronic Delivery
Proposed Sec. 1041.15(a)(4) would contain various requirements
that are designed to facilitate delivery of the notices required under
proposed Sec. 1041.15 through electronic channels, while appropriately
balancing concerns about consumer consent, technology access, and
preferences for different modes of electronic communication. As
detailed further below, the proposed rule would provide that
disclosures may be provided through electronic delivery if the consumer
affirmatively consents in writing or electronically to the particular
electronic delivery method. Lenders may obtain this consent in writing
or electronically. The proposed rule would require that lenders provide
email as an electronic delivery option if they also offer 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.
15(a)(4)(i) Consumer Consent
Proposed Sec. 1041.15(a)(4)(i) would specify the consumer consent
requirements for provision of the disclosures through electronic
delivery. 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 believes
it is important for consumers to be able to choose a method of delivery
to which they have access and that will best facilitate their use of
the disclosures, and that viewable documentation would facilitate both
informed consumer choice and supervision of lender compliance. The
Bureau is concerned that consumers could receive disclosures through a
method that they do not prefer or that is not useful to them if they
are automatically defaulted into an electronic delivery method.
Similarly, the Bureau is concerned that a consumer may receive
disclosures through a method that they do not expect if they are
provided with a broad electronic delivery option rather than an option
that specifies the method of electronic delivery.
The Bureau requests comment on this proposed affirmative consent
requirement. The Bureau is aware that during the origination process
lenders obtain consumer consent for other terms, such as authorization
for
[[Page 48078]]
preauthorized electronic fund transfers under Regulation E Sec.
1005.10(b), and seeks comment on whether obtaining consumer consent to
electronic delivery in writing or electronically would introduce any
significant marginal burden. The Bureau seeks comment on whether
lenders should be permitted to obtain consent orally.
15(a)(4)(i)(B) Email Option Required
Proposed Sec. 1041.15(4)(i)(B) would require that when obtaining
consumer consent to electronic delivery, 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. Proposed comment
15(a)(4)(i)(B) explains that the lender may choose to offer email as
the only method of electronic delivery.
The Bureau believes that such an approach would facilitate
consumers' choice of the electronic delivery channel that is 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 may be the most convenient and timely
option. However, there are some potential tradeoffs. For example,
consumers may incur costs when receiving text messages and may 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. These negative
reactions included privacy concerns about someone being able to see
that they were receiving a notice related to a financial matter when it
came in the form of a text message. The Bureau believes that mobile
application messages may create similar privacy concerns since such
messages may generate alerts or banners on a consumer's mobile device.
However, the Bureau believes that receiving notices by text message
may 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.\849\ 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 believes that text
message delivery should be allowed as long as consumers have the option
to choose email delivery, which for some consumers may be a strongly
preferred method of disclosure delivery. The Bureau believes that
requiring an email option may 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. The Bureau
seeks comment on this proposed email requirement, including the
relative burden on lenders of delivering notices through email in
comparison to other methods such as text message and paper mail. The
Bureau also seeks comment on whether it should require lenders to use
free-to-end-user text messages if text messaging is provided as an
option and selected by consumers.
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\849\ Bd. of Governors of the Federal Reserve System, Consumers
and Mobile Financial Services, at 2, 5 (2015), available at http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201503.pdf.
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15(a)(4)(ii) Subsequent Loss of Consent
Proposed Sec. 1041.15(a)(4)(ii) would prohibit a lender from
providing the notices required by proposed Sec. 1041.15 through a
particular electronic delivery method if there is subsequent loss of
consent as provided in proposed Sec. 1041.15(a)(4)(ii), either because
the consumer revokes consent pursuant to proposed Sec.
1041.15(a)(4)(ii)(A) or the lender receives notification that the
consumer is 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 explains that the prohibition applies to each
particular electronic delivery method. It provides that 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 proposed Sec. 1041.15(a)(4)
are satisfied. Proposed comment 15(a)(4)(ii)(B)-2 clarifies that the
loss of consent applies to all notices required under proposed Sec.
1041.15. For example, if a consumer revokes consent in response to the
electronic short notice text message delivered along with the payment
notice under proposed Sec. 1041.15(c), 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 are two consecutive failed withdrawal attempts that trigger
the protections of Sec. 1041.14.
15(a)(4)(ii)(A)
Proposed Sec. 1041.15(a)(4)(ii)(A) would prohibit a lender from
providing the notices required by proposed Sec. 1041.15 through a
particular electronic delivery method if the consumer revokes consent
to receive electronic disclosures through that method. Proposed comment
15(a)(4)(ii)(A)-1 clarifies that a consumer may revoke consent for any
reason and by any reasonable means of communication. The comment
provides that examples of a reasonable means of communication 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 to a text message sent by the
lender.
The Bureau is 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 believes it is appropriate to require that
consent is revoked and lenders cannot provide the notices through a
particular electronic delivery method if the consumer revokes consent
through that method. The Bureau seeks comment on all aspects of this
revocation requirement and on whether additional safeguards or
clarifications would be useful. The Bureau seeks comment on whether
certain methods of revocation are particularly burdensome for lenders
to receive and whether the Bureau should further limit methods of
revocation, and whether certain methods of revocation are particularly
valuable to consumers.
15(a)(4)(ii)(B)
Proposed Sec. 1041.15(a)(4)(ii)(B) would prohibit a lender from
providing the notices required by proposed Sec. 1041.15 through a
particular electronic delivery method if the lender receives notice
that the consumer is 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 provides examples of notice,
including a returned email, returned text message, and statement from
the consumer.
[[Page 48079]]
The Bureau believes that this is an important safeguard to ensure
that consumers have ongoing access to the notices required under
proposed Sec. 1041.15. This requirement to change delivery methods
after consent has been lost helps ensure that the disclosure
information is fully and effectively disclosed to consumers, consistent
with the Bureau's authority under section 1032. As discussed further
below, in the event that the lender receives such a notice, it would be
required under proposed Sec. 1041.15(b)(3) to deliver notices for any
future payment attempts through alternate means, such as another method
of electronic delivery that the consumer has consented to, in person
delivery, or paper mail. The Bureau requests comment on this loss of
consent provision, including whether there are other methods of loss of
consent that should be discussed in the rule, and how frequently
lenders who use electronic communication methods today receive such
returns.
15(a)(5) Segregation Requirements for Notices
Proposed Sec. 1041.15(a)(5) would provide that all notices
required by proposed Sec. 1041.15 must be segregated from all other
written materials and contain only the information required by Sec.
1041.15, other than information necessary for product identification,
branding, and navigation. Segregated additional content that is not
required by proposed Sec. 1041.15 must not be displayed above, below,
or around the required content. Proposed comment 15(a)(5)-1 clarifies
that additional, non-required content may be delivered through a
separate form, such as a separate piece of paper or Web page.
In order to increase the likelihood that consumers would notice and
read the written and electronic disclosures required by proposed Sec.
1041.15, the Bureau is proposing that the notices should be provided in
a stand-alone format that is segregated from other lender
communications. This requirement would ensure that the disclosure
contents are 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. The Bureau solicits comment on these segregation
requirements, including whether they provide enough specificity.
15(a)(6) Machine Readable Text in Notices Provided Through Electronic
Delivery
Proposed Sec. 1041.15(a)(5) would require, if provided through
electronic delivery, that the payment notice required by proposed Sec.
1041.15 (b) and the consumer rights notice required by proposed Sec.
1041.15(d) must use machine readable text that is accessible via both
Web browsers and screen readers. Graphical representations of textual
content cannot be accessed by assistive technology used by the blind
and visually impaired. The Bureau believes that providing the
electronically-delivered disclosures with machine readable text, rather
than as a graphic image file, would help ensure that consumers with a
variety of electronic devices and consumers that utilize screen
readers, such as consumers with disabilities, can access the disclosure
information. The Bureau seeks comment on this requirement, including
its benefits to consumers, the burden it would impose on lenders, and
on how lenders currently format content delivered through a Web page.
15(a)(7) Model Forms
Proposed Sec. 1041.15(a)(7) would require all notices in proposed
Sec. 1041.15 to be substantially similar to the model forms and
clauses proposed by the Bureau. Proposed comment 15(a)(7)-1 explains
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. Proposed Sec.
1041.15(a)(7)(i) would require that the content, order, and format of
the payment notice be substantially similar to the Models Forms A-3
through A-5 in appendix A. Under proposed Sec. 1041.15(a)(7)(ii), the
consumer rights notice would have to be substantially similar to Model
Form A-5 in appendix A. Similarly, proposed Sec. 1041.15(a)(7)(iii)
would mandate that the electronic short notices required under proposed
Sec. 1041.15(c) and (e) must be substantially similar to the Model
Clauses A-6 through A-8 provided in appendix A.
The model forms developed through consumer testing may 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 believes that its proposed model forms use plain
language comprehensible to consumers, contain a clear format and
design, such as an easily readable type font, and succinctly explain
the information that much be communicated to the consumer. As described
in the FMG Report, and as discussed above, the Bureau has considered
evidence developed through its testing of model forms pursuant to
section 1032(b)(3). The Bureau believes that providing these model
forms would help ensure that the disclosures are effectively provided
to consumers, while also leaving space for lenders to adapt the
disclosures to their loan products and preferences. The Bureau seeks
comment on the content, format, and design of these model forms.
15(a)(8) Foreign Language Disclosures
Proposed Sec. 1041.15(a)(8) would allow lenders to provide the
disclosures required by proposed Sec. 1041.15 in a language other than
English, provided that the disclosures are made available in English
upon the consumer's request.
The Bureau seeks comment in general on this foreign language
requirement, including whether lenders should be required to obtain
written consumer consent before for sending the disclosures in proposed
Sec. 1041.15 in a language other than English and whether lenders
should be required to provide the disclosure in English along with the
foreign language disclosure. The Bureau also seeks comment on whether
there are any circumstances in which lenders should be required to
provide the disclosures in a foreign language and, if so, what
circumstance should trigger such a requirement.
15(b) Payment Notice
Proposed Sec. 1041.15(b) would generally require that lenders
provide to consumers a payment notice before initiating a payment
transfer from a consumer's account with respect to a covered loan,
other than loans made pursuant to proposed Sec. 1041.11 and proposed
Sec. 1041.12. As defined in proposed Sec. 1041.14(a), a payment
transfer is any transfer of funds from a consumer's account that is
initiated by a lender for the purpose of collecting any amount due or
purported to be due in connection with a covered loan. The notice would
contain special wording alerting the consumer when the upcoming
withdrawal would involve changes in amount, timing, or channel from
what the consumer would otherwise be expecting. The timing requirements
would vary depending on the method of delivery, with the earliest date
being six to 10 business days prior to the intended withdrawal for
notices delivered by mail.
[[Page 48080]]
As discussed 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 payment or
late fee. These fees can materially increase the amount the consumer is
required to pay. Moreover, returned payments appear to increase the
likelihood that the consumer's account will be closed.
The Bureau believes 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 information consumers
may need to follow up with lenders or their depository institutions if
there is a problem with the upcoming withdrawal or if the consumer
anticipates difficulty in covering the payment transfer.
The Bureau believes 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 is
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
Section 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 has received complaints from consumers that have
incurred bank account fees after payday and payday installment lenders
attempted to collect payment on a different date from what was
scheduled. The Bureau is 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 is aware that these notices would impose some cost on
lenders, particularly the payment notice which, under proposed Sec.
1041.15(c), would be sent before each payment transfer. The Bureau
considered proposing to require the payment notice only when the
payment transfer would qualify as unusual, such as when there is a
change in the amount, date, or payment channel. However, the Bureau
believes that once lenders have built the infrastructure to send the
unusual payment notices, the marginal costs of sending notices for all
upcoming payments is likely to be relatively minimal. The Bureau notes
that a number of lenders already have a similar infrastructure for
sending payment reminders. Indeed, a trade association representing
online payday and payday installment lenders has expressed support for
upcoming payment reminders.\850\ 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
electronic fund transfers 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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\850\ ``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, Online
Lenders Alliance, OLA Releases Statement in Response to CFPB Online
Loan Payment Study, (Apr. 20, 2016), http://onlinelendersalliance.org/ola-releases-statement-in-response-to-cfpb-online-loan-payment-study/.
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The Bureau seeks comment on whether the payment notice could be
provided in another manner that would address the policy concerns
discussed in this section. The Small Business Review Panel Report also
recommended that the Bureau solicit feedback on whether there were ways
to address the Bureau's policy concerns without requiring an upcoming
payment disclosure before payment transfers that are consistent with
the date and amount authorized by the consumer. The Bureau seeks
comment on both the incremental burden and incremental benefit of
providing the payment notice before all upcoming payment transfers,
rather than just before unusual attempts. The Bureau also seeks comment
on the extent lenders currently have the infrastructure to provide
notices through text message, email, mobile application, and by mail.
The Bureau invites comment on how lenders currently comply with the
Regulation E requirement to provide notice of transfers varying in
amount, including whether most lenders obtain authorizations for a wide
range of amounts with the result of sending notices only when a
transfer falls outside a specified range or only when a transfer
differs from the most recent transfer by more than an agreed-upon
amount and whether consumers are informed of their right to receive
this notice in accordance with Regulation E Sec. 1005.10(d)(2).
The Bureau also invites comment on the burdens and benefits from
regular versus unusual notices. The Bureau particularly seeks comment
on whether there would be some risk of desensitizing consumers to the
notice by sending a version of it in connection with routine payments.
Given this potential desensitization and that some consumers may prefer
not to receive these regular upcoming payment notices, particularly for
long-term loans that require many payment transfers, the Bureau seeks
comment on whether this notice should provide a method for consumers to
opt-out of receiving future upcoming payment notices. The Bureau also
seeks comment on the burdens and benefits of providing a payment notice
for a loan which is scheduled to be repaid in a single-payment due
shortly after the loan is consummated, such as a two-week payday loan.
Proposed Sec. 1041.15(b)(1) would set forth the basic disclosure
requirement, while proposed Sec. 1041.15(b)(2) would provide
exceptions. Proposed Sec. 1041.15(b)(3) would define timing
requirements for this payment notice, including mailing paper notices
10 to six business days before initiating the payment transfer and
sending notices by electronic delivery seven to three business days
before initiating the transfer. Proposed Sec. 1041.15(b)(4) would
define content requirements for this payment notice, including transfer
terms and payment breakdown. Proposed Sec. 1041.15(b)(5) would provide
additional content requirements for unusual payment transfers,
including a statement describing why the transfer is unusual. Proposed
Sec. 1041.15(c) would provide content requirements for the electronic
short form, which is required in situations where the lender is
providing this payment notice through a method of electronic delivery.
15(b)(1) General
Except as provided in proposed Sec. 1041.15(b)(2), proposed Sec.
1041.15(b)(1) would require lenders to send a payment notice to a
consumer prior to initiating a payment transfer from the consumer's
account.
[[Page 48081]]
15(b)(2) Exceptions
15(b)(2)(i)
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 has limited evidence that
lenders making payday alternative loans like those covered by Sec.
1041.11 participate 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, it may be
particularly difficult to build the cost of providing the payment
disclosure into the cost of the loan. The Bureau is concerned that
lenders may be unable to continue offering payday alternative loans or
the loans encompassed by proposed Sec. 1041.12 if the disclosure
requirement is applied.
The Bureau seeks comment on these proposed exceptions. The Bureau
invites comment on whether lenders currently offering payday
alternative loans or relationship loans of the type covered by proposed
Sec. 1041.12 already provide a payment reminder to consumers and
whether such an exception is necessary.
15(b)(2)(ii)
Proposed Sec. 1041.15(b)(2)(ii) would provide 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), regardless of whether any of the conditions
in Sec. 1041.15(b)(5) apply. As discussed above, proposed Sec.
1041.14 would generally require 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)(2)(ii) 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 clarifies that this exception applies even if
the transfer would otherwise trigger the additional disclosure
requirements for unusual attempts under proposed Sec. 1041.15(b)(5).
Proposed comment 15(b)(2)(ii)-2 explains that, when a consumer has
affirmatively consented to multiple transfers in advance, this
exception applies only to the first transfer.
Because the lender must provide precise information about the
payment to be deducted from the account prior to obtaining the
consumer's affirmative consent, the Bureau believes requiring a payment
notice before executing the first funds transfer that the consumer has
consented to would generally be unnecessary. This exception would apply
only to the first transfer made under the consumer's new and specific
consent in order to ensure that after the first payment, the consumer
receives the benefits of the payment notices to minimize the risk that
a payment transfer will adversely impact the consumer. This is
especially important if the first attempt fails, so that the consumer
has notice of the means by which the lender may attempt a second funds
transfer.
The Bureau seeks comment on this proposed exception, including
whether the exception is necessary and whether other exceptions might
be appropriate for situations where the consumer has provided
affirmative consent. The Bureau specifically seeks comment on whether
this exception should not apply if fee has been added to the scheduled
payment amount, or if the payment is otherwise for a varying amount as
provided under proposed Sec. 1041.15(b)(5)(i).
15(b)(2)(iii)
Proposed Sec. 1041.15(b)(2)(iii) would provide an exception for an
immediate single payment transfer initiated at the consumer's request
as defined in 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 has expressed concern that, unless these payments are
excepted from the requirement, lenders could be prohibited from
deducting payments from consumers' accounts for several days in
situations in which consumers have specifically directed the lender to
deduct an extra payment or have 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 believes that these are valid policy concerns
and accordingly is proposing to except an immediate single payment
transfer made at the consumer's request. The Bureau also believes that
because this category of payments involves situations in which the
consumer's affirmative request to initiate a transfer is processed
within a business day of receiving the request, the consumer is
unlikely to be surprised or unprepared for the subsequent withdrawal.
The Bureau seeks comment on this proposed exception. In particular, the
Bureau invites comment on whether this proposed exception is too broad
and includes some transfers that should be subject to the payment
disclosure.
15(b)(3) Timing
Proposed Sec. 1041.15(b)(3) would provide the tailored timing
requirements applicable to each of the three methods through which the
payment notice can be delivered, which are 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.
In proposing these requirements, the Bureau is balancing several
competing considerations about how timing may impact consumers and
lenders. First, the Bureau believes 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 are 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 may 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 is 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 believes that electronic delivery may be the least costly and
most reliable method of delivery for many consumers and lenders.
However, some consumers do not have access to an electronic means of
receiving notices, so a paper option would be the only way for these
consumers to receive the notices required under proposed
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Sec. 1041.15(b). In light of these considerations, the Bureau believes
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.
The Bureau seeks comment on the proposed timing of the payment
notice for each delivery method specified below and whether other
delivery methods should be considered. The Bureau invites comment on
whether the payment notice should be required to be delivered within a
timeframe that allows consumers additional time to utilize their
Regulation E stop payment rights if they choose to do so, such as a
requirement to send the payment notice through electronic delivery no
later than five days before the payment will be initiated, or whether
the benefit of extra time would be outweighed by having consumers
receive the notice relatively close to the payment date. The Bureau
seeks comment on whether an earlier timeframe should be provided for
notices delivered by mail, such as a timeframe of 8 to 12 days, to
accommodate mail delays. The Bureau also invites comment on whether
synchronizing the timing requirement for proposed Sec. 1041.15(b)(3)
with Regulation E Sec. 1005.10(d) requirement that notice of transfers
of varying amounts be delivered at least 10 days before the transfer
date would ease compliance burden on lenders.
15(b)(3)(i) Mail
Proposed Sec. 1041.15(b)(3)(i) 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 clarifies that the six-business-day period begins when
the lender places the notice in the mail, rather than when the consumer
receives the notice.
For a payment notice sent by mail, there may be a gap of a few days
between when the lender sends the notice and when the consumer receives
it. The Bureau expects that in most cases this would result in the
consumer receiving the notice between seven business days and three
business days prior to the date on which the lender intends to initiate
the transfer. This expectation is consistent with certain provisions of
Regulation Z, 12 CFR part 1026, which assume that consumers are
considered to have received disclosures delivered by mail three
business days after they are placed in the mail.
15(b)(3)(ii) Electronic Delivery
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 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 clarifies that the three-business-
day period begins when the lender sends the notice, rather than when
the consumer receives or is deemed to have received the notice.
Proposed Sec. 1041.15(b)(3)(ii)(B) would require that if, after
providing the payment notice through electronic delivery pursuant to
the timing requirements in proposed Sec. 1041.15(b)(3)(ii)(A), the
lender loses a consumer's consent to receive notices through a
particular electronic delivery method, the lender must provide the
notice for any future payment attempt, if applicable, through alternate
means. Proposed comment 15(b)(3)(ii)(B)-1 clarifies that in
circumstances when the lender receives the consumer's loss of consent
for a particular electronic delivery method after the notice has
already been provided, the lender may initiate the payment transfer as
scheduled. If the lender is scheduled to make any payment attempts
following the one that was disclosed in the previously provided notice,
the lender must 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
explains that alternate means may 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 provides examples of actions
that would satisfy the proposed requirements in proposed Sec.
1041.15(b)(3)(ii)(B).
The Bureau is 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 receives a response indicating that the consumer's
phone number is out of service, 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)(i). Although it would be preferable that consumers
received the notice before any transfer in all circumstances, on
balance the Bureau believes that the potential harms of causing payment
delays outweighs the benefits of requiring that the notice be delivered
through another method. The Bureau is concerned that even if lenders
were required to deliver the notice through another means, such as
mail, that alternative means also may not successfully deliver the
notice to the consumer. The Bureau seeks comment on this approach,
which would allow lenders to initiate a payment transfer as scheduled
in situations when the lender learns of revocation or loss of consent
for a particular electronic delivery method after the notice has
already been provided. The Bureau also seeks comment on alternative
approaches to this payment transfer delay issue.
15(b)(3)(iii) In Person
If a lender provides the payment notice in person, 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)(iii) would provide that if the lender
provides the 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.
The Bureau seeks comment on whether a broader time window should be
provided for in-person notices in order to accommodate short-term,
single payment loans. The Bureau is aware that for loans with terms of
less than two weeks the date of the payment transfer is not far from
the origination date. The Bureau seeks comment on whether allowing an
in-person notice to be provided up to 14 days before the payment
transfer date would ease lender burden requirements and whether
extending the time frame would decrease the benefit of the notice to
consumers.
15(b)(4) Content Requirements
Proposed Sec. 1041.15(b)(4) would specify 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
[[Page 48083]]
of how the payment is applied to principal and fees, and lender contact
information. When the payment transfer has changed in a manner that
makes the attempt unusual, proposed Sec. 1041.15(b)(4) would require
the disclosure title to reflect that the attempt is unusual.
The Bureau believes that this content would enable consumers to
understand the costs and risks associated with each loan payment,
consistent with the Bureau's authority under section 1032 of the Dodd-
Frank Act. The Bureau is aware that providing too much or overly
complicated information on the notice may prevent consumers from
reading and understanding the notice. To maximize the likelihood that
consumers would read the notice and retain the most importance pieces
of information about an upcoming payment, the Bureau believes 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 electronic
fund transfers, but has 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.
The Bureau seeks comment on these content requirements as
individually detailed below, in particular the inclusion of consumer
account information, annual percentage rate or another measure of cost,
and the manner of disclosing payment breakdown. The Bureau specifically
seeks comment on whether the upcoming payment notice should advise
consumers to notify their lender or financial institution immediately
if the payment appears to have an error or be otherwise unauthorized.
The Bureau also seeks comment about whether information about the CFPB
should be required on the notice, such as a link to CFPB web content on
payday loans.
15(b)(4)(i) Identifying Statement
Proposed Sec. 1041.15(b)(4)(i) would require an identifying
statement to alert the consumer to the upcoming payment transfer,
whether the transfer is unusual, and the name of the lender initiating
the transfer. Specifically, proposed Sec. 1041.15(b)(4)(i)(A) would
require, in situations that do not qualify as unusual according to
proposed Sec. 1041.15(b)(5), that the payment notice contain the
identifying statement ``Upcoming Withdrawal Notice,'' using that
phrase, and, in the same statement, the name of the lender. If the
unusual attempt scenarios outlined in proposed Sec. 1041.15(b)(5)
apply, proposed Sec. 1041.15(b)(4)(i)(B) would require that the
payment notice contain the identifying statement ``Alert: Unusual
Withdrawal,'' using that phrase, and, in the same statement, the name
of the lender. In both cases, the language would have to be
substantially similar to the language provided in proposed Model Forms
A-3 and A-4 in appendix A.
The Bureau believes that this basic information identifying the
purpose of the notice and the lender providing the notice would avoid
information overload, help show the legitimacy of the notice, and
provide a strong motivation for consumers to read the disclosures. The
Bureau seeks comment on whether other information is sufficiently
critical to consumer awareness that it should be required in the
heading.
15(b)(4)(ii) Transfer Terms
15(b)(4)(ii)(A) Date
Proposed Sec. 1041.15(b)(4)(ii)(A) would require the payment
notice to include the date that the lender will initiate the transfer.
Proposed comment 15(b)(4)(ii)(A)-1 clarifies that 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
that the lender or its agent--such as a payment processor--sends the
payment to be processed by a third party.
The Bureau realizes that different payment channels have different
processing times, and that communications between parties in the chain
can also affect timelines. On balance, the Bureau believes that notice
of the date that the payment will be initiated would provide the
consumer with the best reasonable and consistent estimate across
different payment channels of the date by which the consumer must have
funds in the account in order for the payment to go through and also
would allow the consumer greater opportunity to mitigate potential
harms from an unauthorized or unanticipated debit attempt from the
consumer's account. The Bureau believes that, in general, lenders
making covered loans initiate payments in accordance with the terms of
the loans. In cases when lenders initiate payment in accordance with
the terms of the loans, the notice would provide a valuable reminder
that could enable the consumer to have funds available if the consumer
is able to do so or to contact the lender to make alternative
arrangements if the consumer would not be able to cover the payment.
At the same time, as discussed in Market Concerns--Payments,
consumer complaints, Bureau analysis of online lender ACH payments and
supervisory information show that some lenders may debit a consumer's
account at irregular times resulting in early collection of funds,
overdraft fees, or fees for returned payments. Lenders also may debit a
consumer's account soon after an initial attempt fails--sometimes
making multiple attempts over a short period of time--or months after
the original payment attempt failed. Providing the date of the
initiation in the payment notice would alert consumers when this
occurs.
The Bureau solicits comment on requiring the lender to include the
date that the lender will initiate the transfer in the notice and
whether there is an alternative date that would be more useful for
consumers and knowable to lenders. For example, the Bureau solicits
comment on whether the lender should include in the notice the
initiation date, the date the lender expects the payment transfer to
reach the consumer's depository institution, or the earliest possible
date that funds may be taken out of the consumer's account.
15(b)(4)(ii)(B) Amount
Proposed Sec. 1041.15(b)(4)(ii)(B) would require the payment
notice to include the dollar amount of the transfer. Proposed comment
15(b)(4)(ii)(B)-1 explains that the amount of the transfer is the total
amount of money that the lender will seek to transfer from the
consumer's account, regardless of whether the total corresponds to the
amount of a regularly scheduled payment.
The Bureau believes that disclosing the amount of the transfer
would help consumers to arrange their finances, check for accuracy, and
take action if there is an error. Consumers may not anticipate the
amount of the payment. Consumers sometimes forget about recurring
payments and preauthorized debits. Sometimes the consumer may not be
able to anticipate the payment amount because the lender changes it
unexpectedly, makes an error, or never received authorization. Many
loan agreements provide the lender the right to collect payments for
amounts that vary within a range authorized by the consumer. As
discussed above in Market Concerns--Payments, Bureau
[[Page 48084]]
analysis of online lender ACH payments, consumer complaints,
enforcement actions, and publicly available data demonstrate that
payment amounts on a single loan can fluctuate widely, with some
lenders breaking down payments into small pieces, collecting a large
amount with the addition of fees or other charges, or trying different
amounts over a short period of time. Consumers need to know the amount
of a payment transfer to assess whether the amount is erroneous or
unauthorized and, if so, how best to respond, and to take any steps
they can to ensure that sufficient funds are in the account. Given that
banks typically require the consumer to identify an exact payment
amount in order to place a stop payment order, these disclosing the
exact amount of the payment transfer would enable consumers to
understand the cost and take appropriate actions.
15(b)(4)(ii)(C) Consumer Account
Proposed Sec. 1041.15(b)(4)(ii)(C) would require the payment
notice to include sufficient information to permit the consumer to
identify the account from which the funds will be transferred, but, to
address privacy concerns, would expressly prohibit the lender from
providing the complete account number of the consumer. A truncated
account number similar to the one used in Model Form A-3 in appendix A
to proposed part 1041 would be permissible.
The Bureau believes that information that identifies the account
that the payment would be initiated from, such as the last 4 digits of
the account number, may help consumers evaluate the legitimacy of the
notice and take appropriate action such as making a deposit in the
affected account as warranted. During the Bureau's consumer testing,
participants repeatedly pointed to the account information as a reason
to believe that the notice was legitimate. The Bureau expects that most
often the account information would reference the account to which the
consumer provided authorization. However, the Bureau is aware that some
lenders take authorization to debit any account associated with a
consumer and would initiate payments from an account different from the
one the consumer initially authorized. The Bureau believes that
providing some account identification information would help consumers
determine the legitimacy of the notice and show whether the account
being used is the one that they expected. However, the Bureau is also
aware that the consumer's full account number is sensitive information
that can be used to initiate fund transfers from a consumer's account.
The Bureau believes that providing the last four digits of the account
number, as provided in the Model Form, would provide sufficient
identification information while protecting the sensitive nature of the
account number.
The Bureau seeks comment on whether the truncated format of the
account number would sufficiently protect the consumer's account and
whether this information should be disclosed in another manner. The
Bureau also seeks comment on whether it should prohibit lenders from
providing the entire account number in the disclosure.
15(b)(4)(ii)(D) Loan Identification Information
Proposed Sec. 1041.15(b)(4)(ii)(D) would require the payment
notice to include sufficient information to permit the consumer to
identify the covered loan associated with the transfer. As observed in
the Bureau's consumer testing, information identifying the loan number
that the payment will be applied to could help consumers evaluate the
legitimacy of the notice. This information also may be useful if the
consumer contacts the lender about the payment. Since a loan number
cannot be used to transfer funds out of a consumer's depository
account, the Bureau does not believe that the loan number is likely to
raise the same kind of privacy concerns as the consumer's deposit
account number. The Bureau seeks comment on the scope and degree of any
such concerns and whether a truncated number would be more appropriate.
15(b)(4)(ii)(E) Payment Channel
Proposed Sec. 1041.15(b)(4)(ii)(E) would require that the payment
notice include the payment channel of the transfer. Proposed comment
15(b)(4)(ii)(E)-1 clarifies that payment channel refers to the specific
network that the payment is initiated through, such as the ACH network.
Proposed comment 15(b)(4)(ii)(E)-2 provides examples of payment
channel, including ACH transfer, check, remotely created payment order,
internal transfer, and debit card payment.
The information required to be provided by proposed Sec.
1041.15(b)(4)(ii), as discussed above, would provide the consumer with
the information needed to assess whether the transfer the lender
intends to initiate is an authorized transfer that accords with the
terms of the consumer's loan. If the consumer determines this is not
the case, the consumer may wish to instruct her bank to withhold
payment. However, the consumer may not know which payment channel the
lender will use for a particular attempt, information that determines
certain rights afforded to the consumer and that is required to stop
payment. For example, it may sometimes be unclear to consumers whether
a post-dated check will be processed as in its original form as a
signature check or used as a source document for an ACH transfer or
remotely created check. As discussed above in part II.D., some lenders
take authorizations for multiple payment types and alternate methods
throughout the life of the loan.
The Bureau seeks comment on the definition of payment channel. The
Bureau invites comment on whether more examples are needed and whether
specific language for disclosing each payment channel should be
required. The Bureau specifically seeks comment on whether consumers
would benefit from being provided with greater detail in regards to
debit card payments, such as whether the payment is being submitted
through the PIN debit network or the credit card network.
15(b)(4)(ii)(F) Check Number
For signature or paper checks, remotely created checks, and
remotely created payment orders, proposed Sec. 1041.15(b)(4)(ii)(F)
would require that the payment notice include the check number of the
transfer.
Check numbers for RCCs and RCPOs are generated by the lender or its
payment processor. Consumers currently cannot know the RCC or RCPO
check number until after the payment has been processed. These payments
are particularly difficult for a consumer's bank to stop because the
bank needs a check number to block the debit on an automated basis.
Providing the check number to the consumer would allow the consumer a
better opportunity to stop payment on RCCs and RCPOs where, for
example, the consumer believes that the payment the lender will be
attempting is unauthorized. A consumer also may forget the number of
the paper check provided to the lender, so the check number for
signature checks could be valuable information for consumers seeking to
stop those payments.
15(b)(4)(iii) Annual Percentage Rate
Proposed Sec. 1041.15(b)(4)(iii) would require that the payment
notice contain the annual percentage rate of the covered loan, unless
the transfer is for an unusual attempt described in proposed Sec.
1041.15(b)(5).
[[Page 48085]]
The Bureau believes 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 recognizes that consumers generally do not have
a clear understanding of APR. This was confirmed by the consumer
testing of these model forms. 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.
Furthermore, because the APR is disclosed at consummation, disclosing a
different metric with the payment notices could create consumer
confusion.
The Bureau is not proposing to require the disclosure of the APR in
a notice alerting consumer to an unusual payment attempt. Given that
the purpose of the unusual payment notice is to alert consumers that
the payment has changed in a way that they might not expect, the Bureau
believes that the APR information may distract consumers from the more
important and time-sensitive message.
The Bureau seeks comment on this APR requirement, including whether
this content should be required and whether a different measure of cost
should be included.
15(b)(4)(iv) Payment Breakdown
Proposed Sec. 1041.15(b)(4)(iv) would require that the payment
notice show, in a tabular form, the heading ``payment breakdown,''
principal, interest, fees (if applicable), other charges (if
applicable), and total payment amount. For an interest only or
negatively amortizing payment, proposed Sec. 1041.15(b)(4)(iv)(G)
would also require 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.''
Proposed comment 15(b)(4)(iv)(B)-1 explains that 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. In contrast,
proposed comment 15(b)(4)(iv)(D)-1 clarifies that the field for
``fees'' 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. The comment further provides
that a lender may use its own term to describe the fee, such as ``late
payment fee.'' Similarly, proposed comment 15(b)(4)(iv)(E)-1 clarifies
that a field for ``other charges'' 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.''
The Bureau is aware that some consumers do not realize how their
payments are being applied to their outstanding loan balance. Consumer
complaints indicate that there is particular confusion about loans with
uneven amortization structures, such as loans that start with interest-
only payments and later switch to amortizing payments. Some consumers
with such loans have complained that they did not understand that their
payments were being applied in this manner. During the Bureau's
consumer testing, an example of an interest-only payment was provided
to participants. Although participants were not asked directly about
the amortization structure of the loan, several noticed the interest-
only application and expressed alarm. Providing information about the
application of the payment to principal, interest, fees, and other
charges, along with a statement indicating if a payment will not reduce
principal, could help consumers understand the amortization structure
of their loans and determine whether they may want to change their
payments on the loan, such as by pre-paying the loan balance. This
requirement is similar to the explanation of amount due provision for
periodic statements under Regulations Z 12 CFR 1026.41(d)(2). The
Bureau believes that showing fees, interest, and other charges
separately may help consumers more accurately understand how their
payment is being applied to their loan balance. The Bureau believes
that this information could more effectively disclose the costs of the
loan, consistent with the Bureau's authority under section 1032(a) of
the Dodd-Frank Act.
The Bureau seeks comment on this payment breakdown table, including
the benefits and burdens of providing each individual field. The Bureau
specifically seeks comment on both the compliance burden involved in
requiring the information to be provided in tabular format and the
potential benefits and risks to consumer understanding in using such a
format. As discussed in more detail below, the Bureau is proposing in
connection with electronic delivery of notices that the table
information would not be required for the electronic short notices
delivered by text message, mobile application, or email, in part
because of concerns that the formatting would not be practicable for
all channels.
15(b)(4)(v) Lender Name and Contact Information
Proposed Sec. 1041.15(b)(4)(v) would require the payment notice to
include the 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.
Lender name and contact information may support the legitimacy of
the notice and may be useful if consumers wish to contact the lender
about a payment attempt. Other rules require the disclosure of two
methods of contact information, such as the mailing address and
telephone number requirement in Regulation E Sec. 1005.7(b)(2) in the
context of providing consumer assistance with unauthorized transfers.
During the Bureau's consumer testing, participants cited the lender
contact information and name as a mark of legitimacy. Lender contact
information would also be helpful to consumers if they believe they
will have difficulty covering the payment, if they believe that there
is an error, or if they want to ask questions relating to managing the
costs and risks of their covered loan. Indeed, when asked what they
would do if they had questions, testing participants often explained
that they would contact the lender using the information provided on
the notice. Some participants expressed a preference for contacting the
lender by telephone.
The Bureau seeks comment on all aspects of this contact information
requirement. The Bureau specifically seeks comment on whether
additional or specific methods of contact information should be
required and whether lenders currently operate with or without having
all of these methods of contact available to their customers.
15(b)(5) Additional Content Requirements for Unusual Attempts
If the payment transfer is unusual according to the circumstances
described in proposed Sec. 1041.15(b)(5), proposed Sec. 1041.15(b)(5)
would require the payment notice to contain both the content provided
in proposed Sec. 1041.15(b)(4) (other than disclosure of
[[Page 48086]]
the APR) along with the content required by Sec. 1041.15(b)(5).
Specifically, proposed Sec. 1041.15(b)(5)(i) would require the notice
to state, if the amount differs from the amount of the regularly
scheduled payment, that the transfer will be for a larger or smaller
amount than the regularly scheduled payment, as applicable. Proposed
Sec. 1041.15(b)(5)(ii) 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)(iii) would require a statement that the transfer will be
initiated through a different payment channel and require the lender to
state the channel used for the previous payment attempt. Finally, if
the transfer is for the purpose of re-initiating a returned transfer,
proposed Sec. 1041.15(b)(5)(iv) would require the notice to state that
it is 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 explains if the payment transfer is
unusual according to the circumstances described in proposed Sec.
1041.15(b)(5), the payment notice must contain both the content
required by proposed Sec. 1041.15(b)(4), except for APR, and the
content required by proposed Sec. 1041.15(b)(5). Proposed comment
15(b)(5)(i)-1 explains that the varying amount content requirement
applies when a transfer is for the purpose of collecting a payment that
is not specified by amount on the payment schedule or 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. Proposed comment 15(b)(5)(ii)-1 explains that
the date other than due date content requirement applies when a
transfer is for the purpose of collecting a payment that is not
specified by date on the payment schedule or when the transfer is for
the purpose of collecting a regularly scheduled payment on a date that
differs from regularly scheduled payment date according to the payment
schedule.
The Bureau believes that all four of these circumstances--varying
amount, date, payment channel and re-initiating a returned transfer--
may 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 is initiating a payment that differs
from the regularly scheduled payment amount authorized by the consumer,
the payment is more likely to vary from consumer expectations and pose
greater risk of triggering overdraft or non-sufficient funds fees. The
Bureau believes 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. The
Bureau believes that changes in the date and channel of the payment may
also be important information for the consumer to prepare for the
withdrawal and take steps as necessary. In order to effectively and
fully understand their current loan status and alert to consumers to a
series of repeat attempts over a short period of time, the Bureau
believes that it is also important for the consumer to know if the past
payment attempt failed and the lender is attempting to re-initiate a
returned transfer.
The Bureau invites comment on whether additional situations should
qualify as unusual under proposed Sec. 1041.15(b)(5). The Bureau also
seeks comment on whether, in circumstances when the payment amount is
different from the regularly scheduled payment amount, the unusual
payment notice should state the amount of the regularly scheduled
payment that the transfer deviates from.
15(c) Electronic Short Notice
15(c)(1) General
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. This notice must 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
proposed Sec. 1041.15(b)(4) and proposed Sec. 1041.15(b)(5).
To maximize the utility of notices for consumers and minimize the
burden on lenders, the Bureau believes that the electronic short
notices proposed by Sec. 1041.15(c) should be formatted in
consideration of their delivery method. These requirements for tailored
content and formatting are consistent with the Bureau's authority under
section 1032 of the Dodd-Frank Act to prescribe rules that ensure that
the loan features are effectively disclosed to consumers. The Bureau
has attempted to tailor the proposed requirements both in light of
format limitations for such electronic delivery channels that may be
beyond the lenders' control, as well as considerations regarding the
ways in which consumers may access email, text messages, and mobile
applications that affect privacy considerations, their preferences for
particular usage settings, and other issues. For example, text messages
and email messages that are read on a mobile device would not have much
screen space to show the notice content. Format limitations may make
disclosure of information in a tabular format particularly difficult
and character limits for text messages could require the full notice
content to be broken into multiple chunks for delivery in a way that
would substantially decrease the usefulness of the information to
consumers while potentially increasing costs for both consumers and
lenders.
While these concerns are most extreme with regard to text
messaging, the Bureau believes that they may also carry over to email
where consumers access their email via mobile device. Accordingly, the
Bureau is proposing to limit the content of notices delivered by email
to maximize screen readability without requiring the consumer to
repeatedly scroll across or down. In addition, email providers may have
access to consumer emails and may scrape the email content for
potential advertising or other services; the Bureau believes that
limiting the email content would help minimize such access.
For all of these reasons, the Bureau believes that it is
appropriate for the electronic short notice to contain less information
than the full payment notice given that it links to the full notice. As
discussed further below, the Bureau believes 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. The
Bureau seeks comment on this proposed electronic short notice,
including whether additional information should be excluded from the
truncated notice. The Bureau seeks comment in particular on whether the
readability and privacy concerns for email are outweighed by concerns
that requiring consumers to click through to the Web site to access the
full notice information will make it less likely that consumers receive
the full benefit of the information.
[[Page 48087]]
15(c)(2) Content
The electronic short notice would contain an abbreviated version of
the payment notice content in proposed Sec. 1041.15(b)(4). The
electronic short notice 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.
15(c)(2)(i) Identifying Statement
Proposed Sec. 1041.15(c)(2)(i) would require the electronic short
notice to contain an identifying statement that describes the purpose
of the notice and the sender of the notice, as described in proposed
Sec. 1041.15(b)(4)(i). Proposed comment 15(c)(2)-1 explains that when
a lender provides the electronic short notice by email, the identifying
statement must be provided in both the subject line and the body of the
email.
15(c)(2)(ii) Transfer Terms
The electronic short notice contains less information about the
specific elements of the transfer terms than the payment notice content
provided in proposed Sec. 1041.15(b)(4). Proposed Sec.
1041.15(c)(2)(ii) would require the electronic short notice to show the
date of the transfer, amount of the transfer, and consumer account
information. These terms are described for the full payment notice in
proposed Sec. 1041.15(b)(4)(ii)(A), (B), and (C).
The Bureau believes that the date and the amount of the transfer
are the most important pieces of information for the consumer to
understand the costs and risks of the forthcoming payment transfer and
take appropriate action. Additionally, participants in the Bureau's
consumer testing expressed comfort with the legitimacy of the notice
due to its inclusion of the consumer's account information.
Accordingly, the Bureau believes that this should be required as well
in the electronic short notice. Consumers would be able to obtain all
of the information contained in the full disclosure by accessing the
link contained in the electronic short notice. The Bureau seeks comment
on the information included in the electronic short notice.
15(c)(2)(iii) Web Site URL
Proposed Sec. 1041.15(c)(2)(iv) would require the electronic short
notice to provide a unique Web site URL that the consumer may use to
access to the full payment notice described in proposed Sec.
1041.15(b).
The Bureau believes that consumers should have access to the full
notice content, but also understands the format restrictions of mobile
devices and text message may limit the utility of providing all of this
information through electronic delivery. Through this proposed two-step
electronic delivery process, the Bureau is attempting to balance
information access with these format considerations. However, the
Bureau realizes that this proposed solution may not perfectly
accommodate all consumers. The Bureau is aware that some consumers may
not have internet capability on their phones and may not be able to
open up the Web site when they receive a text message. Some of these
consumers may have other means of accessing the internet and thus will
be able to use the URL to access the full disclosure on some other
device. For those consumers with no means of internet access (and who
nonetheless consent to receive electronic disclosures), the Bureau
believes that the truncated payment notice information, which takes
into account the formatting and character limits of text messages,
still provides useful information. If the information in the electronic
short notice is inconsistent with the consumer's expectations, the
consumer could reach out to the lender for additional information or
assistance.
The Bureau understands that the unique Web site URL contains
limited privacy and security 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 does not contain sensitive information
such as the consumer's name or full account number. The Bureau seeks
comment on the burden on lenders of hosting, posting, and taking down
notices on a Web page. It also seeks comment on alternative methods of
electronic delivery that may be less burdensome.
The Bureau invites comment on the proposed two-step disclosure
process for electronic delivery, including whether the Web site link to
the full payment notice introduces significant privacy concerns and
whether more secure options for electronic delivery are available. The
Bureau requests comment on whether, in the interest of consumer
privacy, it should prohibit lenders from providing the consumer's name
on the full notice when it is provided through a linked URL. The Bureau
is aware that there may be additional methods of providing the
disclosures required by Sec. 1041.15. The Bureau specifically seeks
comment on whether it should allow lenders to provide the full notice
through an email attachment or text message attachment to the short
electronic notice, rather than using the linked URL process.
15(c)(3) Additional Content Requirements
If the electronic short notice is being provided under an unusual
attempt scenario, as described in proposed Sec. 1041.15(b)(5), the
notice would have to state what makes the payment attempt unusual.
Proposed Sec. 1041.15(c)(3) would require the electronic short notice
to contain information about whether the amount, date, or payment
channel has changed. These terms are described for the full payment
notice in Sec. 1041.15(b)(5) (i) through (iv).
The Bureau believes that the explanation of how the transfer may
differ from the consumers' expectation is important information that
needs to be included in the electronic short notice in order for the
notice to be effective, pursuant to section 1032 of the Dodd-Frank Act.
As discussed above, when a payment differs from the consumer's
expectations, the payment may pose greater risk of triggering overdraft
or non-sufficient funds fees.
15(d) Consumer Rights Notice
15(d)(1) General
Proposed Sec. 1041.15(d) would require 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 proposed Sec. 1041.14(b). Proposed Sec.
1041.15(d)(2) would provide timing requirements for this consumer
rights notice, which would be triggered when the lender receives
information that the lender's second consecutive payment attempt has
failed. Proposed Sec. 1041.15(d)(3) details content requirements.
Proposed Sec. 1041.15(e) would provide content requirements for the
electronic short form of the notice, which would be required in
situations where the lender is providing this consumer rights notice
through a method of electronic delivery.
As described above, proposed Sec. 1041.14 would limit 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 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. The Bureau believes that consumers should be informed
when a
[[Page 48088]]
lender has triggered proposed Sec. 1041.14 so that consumers are made
aware of the failed attempts and of the fact that by operation of law
further attempts will cease even though consumers remain obligated to
make continuing loan payments. The Bureau is also concerned that some
lenders would pressure consumers to provide affirmative consent and
could present the reasons behind the re-initiation limit in an
incomplete manner. Requiring disclosure of prior failed payments and
consumer rights under proposed Sec. 1041.14 would ensure that the
costs, benefits, and risks, of the loan and associated payments are
effectively disclosed to consumers, consistent with the Bureau's
authority under section 1032 of the Dodd-Frank Act. Due to these policy
considerations, the Bureau believes that a lender should be required to
provide a standardized consumer rights notice after it has initiated
two consecutive failed withdrawals.
The Bureau seeks comment on the proposed content and timing
requirements of the consumer rights notice.
15(d)(2) Timing
Proposed Sec. 1041.15(d)(2) would require a lender to send the
consumer rights notice no later than three business days after the
lender receives information that the second consecutive attempt has
failed. Proposed comment 15(d)(2) clarifies that this timing
requirement is triggered whenever the lender or its agent, such as a
payment processor, receives information that the payment transfer has
failed.
When a lender has initiated two consecutive failed payment
transfers and triggers the protections provided by proposed Sec.
1041.14(b), a consumer may not be aware that the lender is no longer
permitted to initiate payment from the consumer's account. In the
meantime, some loans may accrue interest or fees while the balance
remains unpaid. For these reasons, the Bureau believes that the
consumer rights notice should be provided shortly after the second
attempt fails. However, the Bureau is 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 is proposing that the lender be
required to send the consumer rights notice within three business days
after the lender receives information that the payment transfer has
failed.
The Bureau seeks comment on this timing requirement, including
whether it is appropriate in length and whether it accommodates all
payment channels. The Bureau invites comment on whether this timing
requirement should be included, or whether the requirement for lenders
to provide the consumer rights notice before obtaining a consumer's
reauthorization under proposed Sec. 1041.14(b) would provide
sufficient consumer protection.
15(d)(3) Content Requirements
Proposed Sec. 1041.15(d)(3) would provide the content requirements
for the consumer rights notice. The Bureau believes that a consumer
should know 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. The Bureau believes that it may be important to
inform consumers that Federal law prohibits the lender from initiating
payments. Given that proposed Sec. 1041.14 would prohibit the lender
from initiating another payment attempt without a new consumer
authorization, the Bureau believes it would also be useful to note that
the lender may be contacting the consumer to 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 and may help prevent consumer confusion
or misinformation about why the lender cannot initiate another payment,
helping to ensure that this information is effectively, accurately, and
fully disclosed to the consumer.
15(d)(3)(i) Identifying Statement
Proposed Sec. 1041.15(d)(3)(i) would require a statement that the
lender, identified by name, is no longer permitted to withdraw loan
payments from the consumer's account. The Bureau believes that a
heading explaining that a lender is no longer permitted to withdraw
payments would inform a consumer both that there is an issue with their
payment and that the lender has an external requirement to stop any
further attempts.
15(d)(3)(ii) Last Two Attempts Were Returned
Proposed Sec. 1041.15(d)(3)(ii) would require a statement that the
lender's last two attempts to withdraw payment from the consumer's
account were returned due to non-sufficient funds. The Bureau believes
that this information should be provided to the consumer early on in
the notice because it provides context for why the consumer is
receiving the notice.
15(d)(3)(iii) Consumer Account
Proposed Sec. 1041.15(d)(3)(iii) would require the notice to
include sufficient information to permit the consumer to identify the
account from which the unsuccessful payment attempts were made, but
would expressly prohibit the lender from providing the complete account
number of the consumer to address privacy concerns. A truncated account
number similar to the one used in Model Form A-5 in appendix A to
proposed part 1041 would be permissible.
As discussed in the analysis of proposed Sec.
1041.15(b)(4)(ii)(C), the Bureau believes that providing some consumer
account information, such as the last four digits of the account, would
be helpful for consumers to recognize the legitimacy of a notice. This
information may also be useful for checking that the correct account
was debited. However, the Bureau is also aware that the consumer's full
account number is sensitive information. The Bureau believes that
providing the last four digits of the account number, as provided in
the Model Forms, would provide sufficient information for the consumer
to identify the account while protecting the sensitive nature of the
account number.
The Bureau seeks comment on the truncated format of the account
number and the benefits and burdens of providing consumers with account
identifying information after two payment attempts have failed.
15(d)(3)(iv) Loan Identification Information
Proposed Sec. 1041.15(d)(3)(iv) would require the consumer rights
notice to include sufficient information to permit the consumer to
identify the covered loan associated with the unsuccessful payment
attempts. Information that identifies the loan number may help
consumers evaluate the legitimacy of the notice and also may be useful
if the consumer contacts the lender about the information in the
notice.
15(d)(3)(v) Statement of Federal Law Prohibition
Proposed Sec. 1041.15 (d)(3)(v) would require the consumer rights
notice to state, 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.
The Bureau believes that explaining how this re-initiation limit is
a requirement under Federal law will help clarify the reason behind the
notice, including how this limit is being
[[Page 48089]]
imposed as a consumer protection. This information would help ensure
that certain risks of the loan and associated payments are consistently
and accurately disclosed to consumers, according to the Bureau's
authority under section 1032 of the Dodd-Frank Act. The Bureau seeks
comment on this proposed statement of Federal law prohibition,
including the breadth and benefit of the statement and its location
within the consumer rights notice.
15(d)(3)(vi) Contact About Choices
Proposed Sec. 1041.15(d)(3)(vi) would require a statement that the
lender may contact the consumer to discuss payment choices going
forward. The Bureau believes that a statement that the lender may
contact the consumer about payment choices would prepare the consumer
for future contact from the lender.
15(d)(3)(vii) Previous Unsuccessful Payment Attempts
Proposed Sec. 1041.15(d)(3)(vii) would require that the consumer
rights notice show, in a tabular form, the heading ``previous payment
attempts,'' the scheduled due date of each previous unsuccessful
payment transfer attempt, the date each previous unsuccessful payment
transfer attempt was initiated by the lender, the amount of each
previous unsuccessful payment transfer attempt, and any lender-charged
fees associated with each unsuccessful attempt, if applicable, with an
indication that these fees were charged by the lender.
The Bureau believes that showing the information about the prior
unsuccessful attempts would provide context for why consumers are
receiving the notice and help consumers identify errors. For example,
the consumer could compare this table to the payment notices to see
whether the prior attempts were initiated for the correct amount. The
Bureau seeks comment on the inclusion of this information, including
whether more or less information about the prior unsuccessful attempts
should be included in the notice.
15(d)(3)(viii) CFPB information
Proposed Sec. 1041.15(d)(3)(v) would require the consumer rights
notice to include information about the Consumer Financial Protection
Bureau. The notice would be required to provide a statement, using that
phrase, that the CFPB created this notice, a statement that the CFPB is
a Federal government agency, and the URL to the relevant portion of the
CFPB Web site. This statement must be the last piece of information
provided in the notice. The Bureau believes that providing information
about the CFPB would help show that the notice is meant to inform
consumers of their rights and that the lender is not independently
choosing to stop initiating payment from the consumer's account. During
the Bureau's consumer testing, some participants reviewing forms that
places CFPB information adjacent to the loan information believed that
the loan was guaranteed by or otherwise provided by the government.
Providing this statement at the end of the notice would help prevent
consumer confusion between the lender and the CFPB. The Bureau seeks
comment about this CFPB content, including whether more or less
information about the Bureau would be useful to consumers receiving
this consumer rights notice.
15(e) Electronic Short Notice
15(e)(1) General
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. This notice would contain a truncated version of the
content in proposed Sec. 1041.15(d)(3), along with 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
Sec. 1041.15(c), the Bureau believes 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. The
Bureau seeks comment on the information in the electronic short notice,
including whether information about the consumer's account would be
helpful and whether less information should be included. The Bureau
also seeks comment on whether lenders should be required to provide the
full consumer rights notice, rather the two-step electronic short
notice, when email is the method of electronic delivery.
15(e)(2) Content
Proposed Sec. 1041.15(e)(2) would require that the electronic
short notice 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 Model
Form A-8 in appendix A to proposed part 1041. These terms are 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 clarifies that when a
lender provides the electronic short notice by email, the email must
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 understands 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. The Bureau seeks comment on the
burden on lenders of providing this notice through a Web site and on
alternative methods of electronic delivery that may be less burdensome.
The Bureau invites comment on the two-step disclosure process for
electronic delivery, including whether more secure options for
electronic delivery are available. The Bureau specifically seeks
comment on whether it should allow lenders to provide the full notice
through an email attachment or text message attachment to the short
electronic notice, rather than using the linked URL process. The Bureau
seeks comment on the content of this electronic short notice, including
whether all of this information should be required.
Subpart E--Information Furnishing, Recordkeeping, Anti-Evasion, and
Severability
Sections 1041.16 Information Furnishing Requirements and 1041.17
Registered Information Systems
Overview of Sections 1041.16 and 1041.17
As described in proposed Sec. Sec. 1041.4 and 1041.8, the Bureau
believes that it may be an unfair and abusive practice to make a
covered loan without reasonably determining that the consumer has the
ability to repay the loan. The Bureau proposes to prevent the abusive
and unfair practice by, among other things, including in this
[[Page 48090]]
proposal requirements for how a lender may reasonably determine that a
consumer has the ability to repay a loan.
The Bureau believes 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. For the most part, however,
lenders currently making loans that would be covered under the proposal
do not furnish to consumer reporting agencies, either at all \851\ or
consistently,\852\ information concerning loans that would be covered
short-term loans or concerning a large portion of loans that would be
covered longer-term loans, so that a lender's access to information
about a consumer's borrowing history with other lenders is limited. As
discussed above in part II, online borrowers appear especially likely
to move from lender to lender, making it particularly important for
online lenders to have access to information about loans made by other
lenders in order to assess properly a consumer's eligibility for a loan
under the proposal. Fourteen States require lenders to provide
information about certain loans to statewide databases in order to
address these information gaps and ensure that lenders have information
necessary to comply with various State restrictions concerning lending,
but only lenders licensed in those States furnish information to those
databases.
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\851\ During the SBREFA process, SERs provided feedback that, in
general, they do not furnish information to consumer reporting
agencies. Credit union SERs and some of the SERs extending longer-
term loans stated that they furnish information to consumer
reporting agencies, however.
\852\ Based on its outreach, the Bureau understands that many
lenders making loans the Bureau proposes to cover under this rule
that do currently furnish information to consumer reporting agencies
do not furnish information about all loans made by a consumer, but
only furnish if the borrower is new or returning after an extended
absence from the lender's records and then only furnish information
concerning the first loan made to the consumer. The Bureau further
understands that some lenders furnish only negative information
concerning loans made whereas others furnish both negative and
positive information.
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To ensure that lenders making loans that would be covered under
this proposal 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 certain information about most covered loans \853\ to each
information system registered with the Bureau pursuant to proposed
Sec. 1041.17.\854\ This requirement would be in addition to any
furnishing requirements existing under other Federal or State law.
These registered information systems would be consumer reporting
agencies within the meaning of section 603(f) of the FCRA,\855\ and
lenders furnishing information to these systems as required 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.\856\ 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. Under the
proposal, 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.\857\
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\853\ As discussed further below, the proposal would also permit
loans made under proposed Sec. Sec. 1041.11 and 1041.12 to be
furnished pursuant to proposed Sec. 1041.16.
\854\ As discussed further below, proposed Sec. 1041.17
provides for both provisional registration and registration. Under
the proposal, entities seeking to become registered information
systems after the effective date of proposed Sec. 1041.16 would
first need to be provisionally registered for a period of time.
\855\ 15 U.S.C. 1681a(f).
\856\ 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
furnishing requirements that would be imposed under the proposal aim
to ensure that lenders making most loans covered under the proposal
would have access to information necessary to enable compliance with
the provisions of this proposal. These proposed requirements would
not supersede any requirements imposed upon furnishers by the FCRA.
\857\ Lenders using consumer reports as required under this
proposal would be required to comply with the provisions of the FCRA
and its implementing regulations applicable to users, including, for
example, the requirement to provide a consumer a notice when taking
adverse action with respect to the consumer that is based in whole
or in part on information contained in a consumer report. See, e.g.,
15 U.S.C. 1681m(a).
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The Bureau considered an alternative approach to ensure that
lenders could obtain reasonably comprehensive information about
consumers' 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.\858\ The Bureau
believes that this approach would likely be more costly for lenders
than the proposed approach to require that lenders obtain a report from
only one entity, however, as lenders potentially would need to obtain
several consumer reports for every application for a covered short-term
loan made under proposed Sec. 1041.5, a covered short-term loan made
under proposed Sec. 1041.7, or a covered longer-term loan made under
proposed Sec. 1041.9. The Bureau recognizes that there are also costs
involved in furnishing to multiple entities, but, as discussed below,
anticipates that those costs could be reduced substantially with
appropriate coordination concerning data standards. The Bureau believes
on balance that the furnishing costs would be less expensive overall,
and thus is proposing that approach. The Bureau solicits comment on
whether the proposed approach reflects the most appropriate way to
ensure that lenders can obtain consumers' borrowing history across
lenders, or whether there are other approaches the Bureau should
consider.
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\858\ If lenders were required to furnish information to only
one consumer reporting agency, the Bureau believes there would be 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.
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The Bureau also 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. Such an approach might be similar to the approaches of the
14 States previously referenced. However, the Bureau believes that
these functions are likely better performed by the private sector and
that the proposed approach would permit faster implementation of this
rule. Further, there may be legal or practical obstacles to this
alternative approach. The Bureau solicits comment on this alternative.
The Bureau solicits comment on whether the burdens associated with
obtaining consumer reports from registered information systems and
furnishing information about covered loans as would be required under
proposed Sec. 1041.16 are justified and whether there are alternative
ways to ensure that lenders have access to information about a
consumer's
[[Page 48091]]
borrowing history necessary to achieve the consumer protection goals of
proposed part 1041, including not establishing a program for
registering information systems and instead relying on lenders' own
records, the records of their affiliates, and existing consumer
reporting markets.
The proposal would require that the Bureau identify the particular
consumer reporting agencies to which lenders must furnish information
pursuant to proposed Sec. 1041.16 and from which lenders may obtain
consumer reports to satisfy their obligations under proposed Sec. Sec.
1041.5 through 1041.7, 1041.9, and 1041.10. As described in more detail
below, proposed Sec. 1041.17 would provide that the Bureau identify
these consumer reporting agencies by registering them with the Bureau
as information systems. Lenders that obtain a consumer report from any
registered information system thus would be assured of obtaining a
reasonably comprehensive account of a consumer's relevant borrowing
history across lenders. Requiring registration with the Bureau would
provide certainty to lenders concerning both the information systems to
which they would be required to furnish information under proposed
Sec. 1041.16 and the information systems from which they would be
required to obtain a consumer report to satisfy their obligations under
proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10.
Proposed Sec. 1041.17 sets forth proposed processes for
registering information systems before and after the furnishing
obligations under proposed Sec. 1041.16 take effect and proposed
conditions that an entity would be required to satisfy in order to
become a registered information system. These proposed conditions,
described in detail below, aim to ensure that registered information
systems would enable lender compliance with proposed Sec. Sec. 1041.5
through 1041.7, 1041.9, and 1041.10 so as to achieve the consumer
protections of proposed part 1041, and to confirm that the systems
themselves maintain compliance programs reasonably designed to ensure
compliance with applicable laws, including those laws designed to
protect sensitive consumer information. Based on its outreach, the
Bureau believes that there are several consumer reporting agencies
currently serving the lending markets covered by this proposed rule
that are interested in becoming registered information systems and
would be eligible to do so.
Legal Authority for Sections 1041.16 and 1041.17
The Bureau is proposing Sec. Sec. 1041.16 and 1041.17 pursuant to
section 1031(b) of the Dodd-Frank Act, which provides that the Bureau's
rules may include requirements for the purpose of preventing unfair or
abusive acts or practices. As discussed above, the Bureau believes that
it may be an unfair and abusive practice to make a covered loan without
determining that the consumer has the ability to repay the loan.
Accordingly, proposed Sec. Sec. 1041.5 and 1041.9 would require
lenders to make a reasonable determination that a consumer has the
ability to repay the loan. Proposed Sec. Sec. 1041.6 and 1041.10 would
augment the basic ability-to-repay determinations required by proposed
Sec. Sec. 1041.5 and 1041.9 in circumstances in which the consumer's
recent borrowing history or current difficulty repaying an outstanding
loan provides important evidence with respect to the consumer's
financial capacity to afford a new covered loan. In these
circumstances, proposed Sec. Sec. 1041.6 and 1041.10 would require the
lender to factor this evidence into the ability-to-repay determination.
Proposed Sec. 1041.7 would provide a limited conditional exemption
from the requirement to assess consumers' ability to repay covered
short-term loans, based on compliance with certain requirements and
conditions that also factor in borrowing history in a number of
respects.
The provisions of proposed Sec. Sec. 1041.16 and 1041.17 are
designed to ensure that lenders have access to information to achieve
the consumer protections of proposed Sec. Sec. 1041.5 through 1041.7,
1041.9, and 1041.10. The Bureau believes that to prevent the apparent
abusive or unfair practices identified in this proposed rule, it is
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. The Bureau
believes that 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, which would in turn ensure that
consumers receive the benefit of the protections imposed by proposed
Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10. The Bureau thus
proposes Sec. Sec. 1041.16 and 1041.17 to prevent the apparent unfair
or abusive practices identified and the consumer injury that results
from them.
Proposed Sec. Sec. 1041.16 and 1041.17 are also authorized by
section 1024 of the Dodd-Frank Act. Section 1024 includes the authority
in section 1024(b)(7) to: (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.'' \859\ The provisions in proposed Sec. 1041.17--including
the criteria governing when the Bureau may register or provisionally
register information systems, suspend or revoke such registration, or
deny applications for registration--are designed to facilitate
supervision and the assessment and detection of risks to consumers, and
to ensure that information systems that choose to register are
legitimate entities and able to perform their obligations to consumers.
These criteria would also ensure that registered information systems
provide information to the Bureau about their activities and compliance
systems or procedures. In developing proposed Sec. Sec. 1041.16 and
1041.17, the Bureau consulted with agencies from States that require
lenders to provide information about certain loans to statewide
databases and intends to continue to do so where appropriate.\860\
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\859\ 12 U.S.C. 5514(b)(7)(A) through (C).
\860\ See 12 U.S.C. 5514(b)(7)(D).
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The Bureau also believes proposed Sec. Sec. 1041.16 and 1041.17
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,'' pursuant to section
1022(b)(1) of the Dodd-Frank Act.\861\ In addition to being appropriate
to carry out the purposes and objectives of this proposed rule,
proposed Sec. Sec. 1041.16 and 1041.17 would help ensure that
``consumers are protected from unfair, deceptive, or abusive acts and
practices,'' and ``markets for consumer financial products and services
operate
[[Page 48092]]
transparently and efficiently to facilitate access and innovation.''
\862\
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\861\ 12 U.S.C. 5512(b)(1).
\862\ 12 U.S.C. 5511(b)(2) and (b)(5). Proposed Sec.
1041.16(b)(2), which provides that the Bureau will publish in the
Federal Register and maintain on the Bureau's Web site a current
list of registered and provisionally registered information systems,
is authorized by section 1021(c)(3) of the Dodd-Frank Act, which
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.'' 12 U.S.C. 5511(c)(3).
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Proposed Sec. 1041.17 would permit the Bureau to provisionally
register or to 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.\863\ Under section 1024 of the Dodd-Frank Act,
the Bureau has 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.\864\ The Bureau has promulgated a final rule defining larger
participants of the market for consumer reporting.\865\ The Bureau
believes that entities that choose to become provisionally registered
and registered information systems under proposed Sec. 1041.17 would
be non-depository institutions and would qualify as larger participants
in the market for consumer reporting, and their acknowledgment would
reflect that status. However, other entities may consent to the
Bureau's supervisory authority as well.\866\
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\863\ 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'').
\864\ 12 U.S.C. 5514(a)(1)(B) and (a)(2).
\865\ 12 CFR part 1090; Defining Larger Participants of the
Consumer Reporting Market, 77 FR 42873 (July 20, 2012).
\866\ For example, 12 CFR 1091.110(a) provides that,
``[n]otwithstanding any other provision, pursuant to a consent
agreement agreed to by the Bureau, a person may voluntarily consent
to the Bureau's supervisory authority under 12 U.S.C. 5514, and such
voluntary consent agreement shall not be subject to any right of
judicial review.''
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The provisions in proposed Sec. Sec. 1041.16 and 1041.17 also
would be authorized by section 1022(c)(7) of the Dodd-Frank Act, which
provides that the Bureau ``may prescribe rules regarding registration
requirements applicable to a covered person, other than an insured
depository institution, insured credit union, or related person.''
Proposed Sec. 1041.17 would provide rules governing the registration
of information systems with the Bureau.
Effective Date of Proposed Sec. Sec. 1041.16 and 1041.17
Building a reasonably comprehensive record of recent and current
borrowing would take some time and raise a number of transition issues.
For entities that want to become registered information systems before
the requirements to obtain a consumer report from a registered
information system under proposed Sec. Sec. 1041.5 through 1041.7,
1041.9, and 1041.10 take effect, the Bureau is proposing 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 be operative. Interested entities would submit to the Bureau an
application for preliminary approval for registration, and then a full
application for registration after receiving preliminary approval and
obtaining certain written assessments from third parties concerning
their compliance programs. After an entity becomes a registered
information system, the proposal would provide at least 120 days for
lenders to onboard to the information system and prepare for furnishing
before furnishing is required under proposed Sec. 1041.16 or permitted
under proposed Sec. Sec. 1041.11 and 1041.12. As described in more
detail in the section-by-section analysis of proposed Sec. 1041.17,
the Bureau is proposing a timeline for these steps that it believes
would ensure that information systems would be registered and lenders
ready to furnish at the time the furnishing obligation in proposed
Sec. 1041.16 takes effect.
As described above, the Bureau is proposing to allow 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. However, the Bureau has considered whether an
additional period would be needed between the date that furnishing to
registered information systems would begin and the date that the
requirements to obtain a consumer report from a registered information
system under proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and
1041.10 would apply.
The Bureau has considered two general approaches to addressing this
question. Under one approach, Sec. 1041.16 would become effective on
the same date as proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and
1041.10. The result of these simultaneous effective dates would be
that, for a period immediately after these sections of the rule go into
effect, the information in a consumer report obtained from a registered
system would not be as comprehensive as it would be after longer
periods of required furnishing. For example, if lenders are required to
furnish information to a registered information system pursuant to
proposed Sec. 1041.16 beginning on January 1, a consumer report
obtained by a lender from the registered information system on January
15 would contain 15 days' worth of the consumer's borrowing history. To
the extent a new loan was originated to the consumer during that
period, the report would be useful for purposes of the proposed rule
and would achieve its consumer protections, but the passage of time
would increase the degree of utility these reports provide to the
consumer protection goals of proposed part 1041.
Another general approach would be to stagger the effective dates of
the furnishing obligation and the obligation to obtain a consumer
report from a registered information system. One option under this
approach would be to have the furnishing requirement in proposed Sec.
1041.16 go into effect 30 days (or some other longer time period)
before the effective dates of proposed Sec. Sec. 1041.5 through
1041.7, 1041.9, and 1041.10. Another option would be to have proposed
Sec. 1041.16 go into effect at the same time as proposed Sec. Sec.
1041.5 through 1041.7, 1041.9, and 1041.10, but to delay the
requirements that lenders obtain a consumer report from a registered
information system before originating a covered loan under those
proposed sections. Staggering effective dates in one of these ways may
increase to some degree the utility of the consumer reports that
lenders would be required to obtain at the point that the requirements
become effective, but may add complexity to implementation of the rule
and would involve other tradeoffs. For example, having the furnishing
requirement in proposed Sec. 1041.16 go into effect before the
effective dates of proposed Sec. Sec. 1041.5 through 1041.7, 1041.9,
and 1041.10 might provide lenders a period of time to focus solely on
the rule's furnishing requirements, but it would mean that the
information furnished during that period would be limited in some
respects.\867\ And delaying the
[[Page 48093]]
requirement to obtain a consumer report from a registered information
system until furnishing had been underway for a period of time would
mean that lenders would be able to make covered loans under proposed
Sec. Sec. 1041.5, 1041.6, 1041.9, and 1041.10 without access to the
consumer borrowing history information.
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\867\ For example, proposed Sec. 1041.16(c)(1)(iv) would
require that lenders furnish information concerning whether the loan
is made under Sec. 1041.5, Sec. 1041.7, or Sec. 1041.9, as
applicable, which information would not be available if those
sections were not yet in effect at the time of the furnishing.
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The Bureau believes the question of how to ensure early lender
access to borrowing history is particularly critical for purposes of
proposed Sec. 1041.7, which would permit lenders to make certain
covered short-term loans without conducting a full ability to repay
analysis. Because a detailed financial analysis is not required under
proposed Sec. 1041.7 and because the operation of certain other
protective features of proposed Sec. 1041.7 hinge on borrowing
history, the Bureau is proposing to provide that such loans can only be
made after obtaining and considering a consumer report from a
registered information system.\868\ In contrast, lenders would be
permitted to make loans pursuant to proposed Sec. 1041.5 or Sec.
1041.9 without obtaining a consumer report from a registered
information system, if such a report is not available. Lenders also
would not be required to obtain a consumer report from a registered
information system before making loans under proposed Sec. Sec.
1041.11 or 1041.12.
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\868\ See proposed comment 7(a)-2.
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The Bureau solicits comment on these effective date options and on
alternative ways to populate each registered information systems'
database to hasten the utility of consumer reports provided by a
registered information system, in furtherance of the consumer
protections of proposed part 1041. For example, although the proposal
would require that lenders furnish information only about loans
consummated on or after the furnishing obligation takes effect, the
Bureau has considered whether it should also require lenders to furnish
information concerning loans that are outstanding loans at the time the
furnishing obligation takes effect and that satisfy the definition of a
covered loan under the rule. The Bureau is not proposing such a
requirement, however, due to concerns that, at least with respect to
furnishing to information systems registered as of the effective date
of proposed Sec. 1041.16, such a requirement would be burdensome to
lenders and may result in poor data quality.
Although it does not impact the effective dates of the various
sections, the Bureau notes that similar transition issues are raised
with regard to the population of the database of any entity that
becomes a registered information system after the effective date of
proposed Sec. 1041.16. As detailed below, the Bureau is proposing a
process for those entities that would require that, prior to becoming a
registered information system, such entities must first become
``provisionally registered'' information systems. Under the proposal,
lenders would be required to furnish information to provisionally
registered information systems, but would not be permitted to rely on
consumer reports generated by such a system to satisfy their
obligations under proposed Sec. Sec. 1041.5 through 1041.7, 1041.9,
and 1041.10 until the system becomes fully registered. The Bureau
contemplates that this furnishing-only stage would last for 60 days,
following a 120-day period to allow onboarding. The Bureau believes
that this would ensure that at the point at which an information system
becomes registered after the effective date of the proposed Sec.
1041.16, it would be able to supply reports to lenders with reasonably
comprehensive information about consumers' recent borrowing histories.
The Bureau expects that information systems will be registered
prior to the effective date of proposed Sec. 1041.16, and, assuming
this is the case, believes that it would be preferable for lenders to
obtain reports from these established systems until new information
systems registered after the effective date have built a reasonably
comprehensive database of furnished information concerning covered
loans. For this reason, although the Bureau is considering no delay
between the lender's obligation to furnish information to and obtain a
report from an information registered before the effective date of
proposed Sec. 1016.16, as described above, it is proposing a 60-day
delay between the lender's obligation to furnish information to and
obtain a report from an information system registered after the
effective date of proposed Sec. 1016.16.
The Bureau notes that proposed Sec. 1041.16 is referenced in
several places in the regulation text of proposed Sec. 1041.17. If
proposed Sec. 1041.17 takes effect prior to proposed Sec. 1041.16, as
the Bureau expects, these references will be replaced in the final rule
with the appropriate dates and content from proposed Sec. 1041.16. For
purposes of this notice of proposed rulemaking, the Bureau includes the
cross-references to Sec. 1041.16 in proposed Sec. 1041.17 to clarify
how these proposed sections would interact.
16(a) Loans Subject to Furnishing Requirement
Proposed Sec. 1041.16(a) would require that, for each covered loan
a lender makes other than a covered longer-term that is made under
proposed Sec. 1041.11 or Sec. 1041.12, the lender furnish the
information concerning the loan described in Sec. 1041.16(c) to each
information system described in Sec. 1041.16(b). Proposed comment
1041.16(a)-1 clarifies that, with respect to loans made under proposed
Sec. Sec. 1041.11 and 1041.12, a lender may furnish information
concerning the loan described in proposed Sec. 1041.16(c) to each
information system described in proposed Sec. 1041.16(b) in order to
satisfy proposed Sec. 1041.11(e)(2) or Sec. 1041.12(f)(2), as
applicable. As described above, the purpose of the proposed furnishing
requirement is to enable a registered information system to generate a
consumer report containing relevant information about a consumer's
borrowing history, regardless of which lender has made a covered loan
to the consumer previously. The Bureau believes that requiring lenders
to furnish information about most covered loans would achieve this
result and, accordingly, the consumer protections of proposed part
1041.
Nonetheless, the Bureau acknowledges the burden that would be
imposed by this proposed requirement to furnish information to each
registered and provisionally registered information system. During the
SBREFA process, the SERs expressed concern about the costs associated
with furnishing information to commercially available consumer
reporting agencies, and the Small Business Review Panel Report
recommended that the Bureau consider streamlining the requirements
related to furnishing information about the use of covered loans,
including ways to standardize data to be furnished pursuant to the
proposal.
The Bureau believes that the development of common data standards
across information systems would benefit lenders and information
systems and the Bureau intends to foster the development of such common
data standards where possible to minimize burdens on furnishers. 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, but it solicits comment on whether
it should require
[[Page 48094]]
that information is furnished using particular formats or data
standards or in a manner consistent with a particular existing data
standard. The Bureau also seeks comment on whether it should consider
restrictions related to fees or charges information systems might
impose in connection with the proposed furnishing requirement, and
whether any such restrictions should apply to all fees or charges or
only to certain types of fees or charges.
The Bureau believes that the burdens associated with the proposed
furnishing obligation would be justified by the need to ensure that
lenders making loans pursuant to proposed Sec. Sec. 1041.5 through
1041.7, 1041.9, and 1041.10 have access to information sufficient to
enable compliance with those provisions, in furtherance of the consumer
protections of proposed part 1041. The Bureau solicits comment on
whether the burdens of furnishing information about covered loans as
would be required under proposed Sec. 1041.16 are justified and
whether there are alternative ways to ensure that lenders have access
to information about a consumer's borrowing history necessary to
achieve the consumer protection goals of proposed part 1041.
As discussed in the section-by-section analyses of proposed
Sec. Sec. 1041.11 and 1041.12, a lender making a covered longer-term
loan under the alternative requirements in one of these sections would
not be required to furnish information pursuant to proposed Sec.
1041.16 if the lender instead furnishes information about the loan to a
consumer reporting agency that compiles and maintains files on
consumers on a nationwide basis. The Bureau believes that this
furnishing requirement strikes the appropriate balance between
minimizing burden on lenders that would make loans pursuant to these
proposed sections and facilitating access to a reasonably comprehensive
record of consumers' borrowing histories with respect to these loans.
16(b) Information Systems To Which Information Must Be Furnished
16(b)(1)
Proposed Sec. 1041.16(b)(1) would require that a lender furnish
the information required in proposed Sec. 1041.16(a) and (c) to each
information system registered pursuant to Sec. 1041.17(c)(2) and
(d)(2) and provisionally registered pursuant to Sec.
1041.17(d)(1).\869\ The proposal would delay the furnishing obligation
with regard to newly registered and provisionally registered systems by
requiring that lenders furnish information about a loan to such systems
only if the system has been registered for 120 days or more as of the
date the loan is consummated. This 120-day delay is designed to allow
both lenders and the information systems time to prepare for furnishing
to begin.
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\869\ As described above, under the proposal lenders would be
required to furnish information to provisionally registered
information systems, but would not be permitted to rely on consumer
reports generated by such a system to satisfy their obligations
under proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10
until the system becomes fully registered.
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The Bureau recognizes that lenders, especially those that do not
currently furnish loan information to a consumer reporting agency,
would need to engage in a variety of activities in order to prepare for
compliance with proposed Sec. 1041.16, including onboarding to a
provisionally registered or registered information system's platform,
developing and implementing policies and procedures to ensure accurate
and timely furnishing of information, and training relevant employees.
However, the Bureau believes that the time required for these
activities would decrease after lenders have begun furnishing to the
first registered information system because the Bureau expects the core
components of furnishing pursuant to proposed Sec. 1041.16 to be the
same across information systems. The Bureau believes that 120 days
would allow lenders sufficient time to prepare for compliance with
proposed Sec. 1041.16 and would allow an information system sufficient
time to onboard all lenders that would be required to furnish to the
information system. The Bureau solicits comment on whether 120 days
provides sufficient time for these activities or whether additional
time would be needed. Assuming that information systems are registered
before the effective date of the furnishing obligation, as the Bureau
expects will be the case, the Bureau further solicits comment on
whether less time would be required for these activities with respect
to information systems provisionally registered after the effective
date of the furnishing obligation.
As proposed, Sec. 1041.16(b)(1) would require lenders to furnish
information about a covered loan only to information systems that are
provisionally registered or registered at the time the loan is
consummated. For example, if an information system were registered
pursuant to proposed Sec. 1041.17(c)(2) 120 days before the effective
date of proposed Sec. 1041.16, a lender would be required to furnish
the information required under proposed Sec. 1041.16 to that
information system beginning on the effective date of proposed Sec.
1041.16 for covered loans consummated on or after that date. Proposed
comment 16(b)-1 provides an example to illustrate when information
concerning a loan must be furnished to a particular information system.
Proposed comment 16(b)-2 clarifies that lenders are not required to
furnish information to entities that have received preliminary approval
for registration pursuant to proposed Sec. 1041.16(c)(1) but are not
registered pursuant to proposed Sec. 1041.16(c)(2).
As discussed above, the Bureau has also considered whether to
propose a requirement that lenders report outstanding loans in addition
to new originations at the point that furnishing begins. While the
Bureau is concerned that such a requirement could impose significant
burden during the initial implementation period for the rule because
lenders would have to compile and report data on loans that may never
have been previously reported, the impacts may be less once lenders are
already reporting originations to some registered information systems
on an ongoing basis. Accordingly, in addition to the general request
for comment above, the Bureau solicits comment specifically on whether
lenders should be required to furnish information on outstanding
covered loans when they first onboard to the platforms of provisionally
registered information systems, after the effective date of the
furnishing requirement in proposed Sec. 1041.16. Such an approach
would improve the comprehensiveness of the consumer reports that these
systems would generate once they were registered pursuant to proposed
Sec. 1041.17(d)(2), since it would allow them to include data going
back not just for the preceding 60 days as under the proposed rule, but
for several months prior. This would particularly improve the resulting
reports with respect to information about covered longer-term loans.
The Bureau believes that requiring the reporting of outstanding loans
to provisionally registered information systems may impose additional
burden on lenders compared to the proposal,\870\ however, and solicits
[[Page 48095]]
comment on whether such a requirement would be appropriate.
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\870\ Such additional burden may be incremental. The Bureau
expects that, at the time a new information system is provisionally
registered, lenders will have already furnished many or most of
their then outstanding covered loans to a previously registered
information system. Especially assuming that registered and
provisionally registered information systems develop common data
standards, the development of which the Bureau intends to foster
where possible, the burden of furnishing information previously
furnished to another information system may not be significant.
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16(b)(2)
Proposed Sec. 1041.16(b)(2) would require that the Bureau 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)
would provide that, for purposes of proposed Sec. 1041.16(b)(1), an
information system is provisionally registered or registered, and its
provisional registration or registration suspended or revoked, on the
date that the Bureau publishes notice of such provisional registration,
registration, suspension, or revocation on its Web site. Proposed Sec.
1041.16(b)(2) further provides that the Bureau would maintain on the
Bureau's 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).
The date that an information system is provisionally registered
pursuant to proposed Sec. 1041.17(d)(1) or registered pursuant to
proposed Sec. 1041.17(c)(2) would be the date that triggers the 120-
day period at the end of which lenders would be obligated to furnish
information to the information system pursuant to proposed Sec.
1041.16. 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
trigger an additional obligation on the part of a lender; rather, as
explained further below, the significance of the registration of a
provisionally registered system would be that lenders may rely on a
consumer report from the system to comply with their obligations under
proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10.\871\
Under the proposal, as a result of the suspension or revocation of an
entity's provisional registration or registration pursuant to proposed
Sec. 1041.16(g), lenders would no longer be required to furnish
information to the information system pursuant to proposed Sec.
1041.16 or, with respect to registered information systems, permitted
to rely on a consumer report generated by the consumer reporting agency
to comply with their obligations under proposed Sec. Sec. 1041.5
through 1041.7, 1041.9, and 1041.10.
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\871\ Under the proposal, lenders would be required to furnish
to such a system beginning 120 days from the date of the system's
provisional registration and to continue to do so after the system
becomes registered.
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The Bureau believes that publication of a notice on its Web site
may be the most effective way to ensure that lenders receive notice of
an information system's provisional registration or registration, or
the suspension or revocation of its provisional registration or
registration. Accordingly, for purposes of proposed Sec.
1041.16(b)(1),\872\ the Bureau proposes 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 Bureau also proposes to publish notice of any
provisional registration, registration, or suspension or revocation of
provisional registration or registration in the Federal Register. If
proposed Sec. 1041.16 is adopted, the Bureau expects that it would
establish a means by which lenders could sign up to receive email
notifications if and when a new information system is provisionally
registered or registered or an information system has had its
provisional registration or registration suspended or revoked. The
Bureau also expects that it would conduct outreach with trade
associations and otherwise take steps to ensure that lenders covered by
the rule are aware when an information system is provisionally
registered or registered, or when provisional registration or
registration is suspended or revoked.
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\872\ For the reasons discussed in the section-by-section
analysis of proposed Sec. 1041.17(g), for purposes of proposed
Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10, which would
require a lender to obtain a consumer report from a registered
information system, the Bureau is proposing that a suspension or
revocation of registration be effective five days after the Bureau
publishes notice of the suspension or revocation on its Web site.
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Proposed Sec. 1041.16(b)(2) also provides that the Bureau would
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). The Bureau intends that its
Web site would clearly identify all provisionally registered and
registered information systems, the dates that they were provisionally
registered or registered with the Bureau, and the dates by which
lenders must furnish information to each pursuant to Sec. 1041.16(b).
The Bureau solicits comment on additional ways it might inform lenders
when information systems are first provisionally registered or
registered, or when provisional registration or registration is
suspended or revoked, should proposed Sec. Sec. 1041.16 and 1041.17 be
adopted.
16(c) Information To Be Furnished
Proposed Sec. 1041.16(c) identifies the information a lender must
furnish concerning each covered loan as required by proposed Sec.
1041.16(a) and (b). As discussed below, proposed Sec. 1041.16(c) would
require lenders to furnish information when the loan is consummated and
again when it ceases to be an outstanding loan. If there is any update
to information previously furnished pursuant to proposed Sec. 1041.16
while the loan is outstanding, proposed Sec. 1041.16(c)(2) would
require lenders to furnish the update within a reasonable period of the
event that causes the information previously furnished to be out of
date. However, the proposal would not require a lender to furnish an
update to reflect that a payment was made; a lender would only be
required to furnish an update if such payment caused information
previously furnished to be out of date. Under proposed Sec.
1041.16(c)(1) and (3), lenders must furnish information no later than
the date of consummation, or the date the loan ceases to be
outstanding, as applicable, or as close in time as feasible to the
applicable date. Proposed comment 16(c)-1 clarifies that, under
proposed Sec. 1041.16(c)(1) and (3), if it is feasible to report on
the applicable date, the applicable date is the date by which the
information must be furnished.
Proposed Sec. 1041.16(c) would require that a lender furnish the
required information in a format acceptable to each information system
to which it must furnish information. Proposed Sec. 1041.17(b)(1)
would require that, to be eligible for provisional registration or
registration, an information system must use 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.\873\ As discussed above and below, the Bureau
solicits comment on whether it should require that information is
furnished using particular formats or data standards or in a manner
consistent with a particular existing data standard.
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\873\ Among other things, these standards must facilitate lender
and information system compliance with the provisions of the FCRA
and its implementing regulations concerning the accuracy of
information furnished.
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[[Page 48096]]
As noted above, compliance with the FCRA may require that
information in addition to that specified under the proposal is
furnished to information systems. The furnishing requirements that
would be imposed under this proposal aim to ensure that lenders making
most loans covered under the proposal would have access to information
necessary to enable compliance with the provisions of this proposal.
These proposed requirements would not supersede any requirements
imposed upon furnishers by the FCRA.
16(c)(1) Information To Be Furnished at Loan Consummation
Proposed Sec. 1041.16(c)(1) specifies the information a lender
would be required to furnish at loan consummation. The Bureau proposes
that lenders furnish this information for the reasons specified below
and to ensure that lenders using consumer reports generated by
registered information systems would have access to information
sufficient to enable them to meet their obligations under proposed
Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10. In addition to
soliciting comment on the specific information that would be required
under proposed Sec. 1041.16(c)(1)(i) through (viii), the Bureau
generally solicits comment on whether proposed Sec. 1041.16(c)(1) is
reasonable and appropriate, including whether the information lenders
would be required to furnish at loan consummation under the proposal is
sufficient to ensure that lenders using consumer reports obtained from
a registered information system would have sufficient information to
comply with their obligations under the proposal and achieve the
consumer protections of proposed part 1041. The Bureau also solicits
comment on whether lender access to any additional information
concerning a consumer's borrowing history would further the consumer
protections of proposed part 1041 and, if so, the specific potential
burdens and costs of requiring such information to be furnished.
As proposed, Sec. 1041.16(c)(1) would require that a lender
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.
Although the Bureau recognizes that some installment lenders may
furnish loan information in batches on a periodic basis to consumer
reporting agencies, the Bureau believes that at least some lenders that
would be covered under this proposed rule have experience in furnishing
loan information in real time or close to real time and on a loan-by-
loan basis, rather than a batch basis. For example, based on its
outreach, the Bureau understands that at least some lenders making
loans that would be covered under this proposal already furnish
information concerning those loans to specialty consumer reporting
agencies on an individual loan basis and in real time or close in time
to the particular event furnished, such as when final payment on a loan
is made.\874\
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\874\ Based on its consultation with the relevant State
agencies, the Bureau understands that most of the State databases to
which lenders must furnish information pursuant to State law, as
described above, require data furnishing in real time or close to
real time.
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The Bureau believes that a real-time or close to real-time
furnishing requirement may be appropriate to achieve the consumer
protections of proposed part 1041. Such a requirement would ensure that
lenders using consumer reports from a registered information system
have timely information about most covered loans made by other lenders
to a consumer. This is especially important with respect to covered
short-term loans. One of the core purposes of proposed Sec. Sec.
1041.5 through 1041.7, as discussed above, is to protect consumers from
the harms associated with repeated reborrowing. The Bureau believes
that, to achieve that end, lenders contemplating making covered loans
under these provisions need timely information with respect to the
consumer's recent borrowing history. Batch reporting on a lagged basis
would not yield such information, and would thus be inconsistent with
the objective of those provisions. For example, if lenders were to
report on a monthly basis even one day after the end of the month, a
lender contemplating making a covered loan to a consumer that obtains a
report from a registered information system at the end of a month might
not learn of two prior short-term loans made to the consumer during the
course of the month.
The Bureau recognizes that real-time furnishing offers the best
chance that a consumer report generated by a registered information
system would capture all prior and outstanding covered loans made to
the consumer but believes that the burdens of requiring real-time
furnishing may be outweighed by what may be an incremental benefit.
Accordingly, although the Bureau would encourage lenders to furnish
information concerning covered loans on a real-time basis, the proposal
would permit lenders to furnish the required information on a daily
basis or as close in time to consummation as feasible. The Bureau
solicits comment on whether the time period within which information
would be required to be furnished under proposed Sec. 1041.16(c)(1) is
reasonable or whether an alternative period is more appropriate. The
Bureau further solicits comment on specific circumstances under which
furnishing information no later than the date a loan is consummated may
not be feasible.
16(c)(1)(i)
Proposed Sec. 1041.16(c)(1)(i) would require lenders to furnish
information necessary to allow the lender and each provisionally
registered and registered information system to uniquely identify the
covered loan. This information would be necessary to ensure that
updated information concerning the loan furnished pursuant to proposed
Sec. 1041.16(c)(2) and (3) would be attributed to the correct loan by
the lender furnishing the information and by the provisionally
registered or registered information system. The Bureau anticipates
that information furnished to satisfy proposed Sec. 1041.16(c)(1)(i)
would likely be the loan number assigned to the loan by the lender, but
proposed Sec. 1041.16(c)(1)(i) would defer to lenders and information
systems to determine what information is necessary or appropriate for
this purpose. The Bureau solicits comment on this proposal, including
whether it should specify the type of information lenders must furnish
to ensure that updates to a covered loan are properly attributed.
16(c)(1)(ii)
Proposed Sec. 1041.16(c)(1)(ii) would require lenders to furnish
information necessary to allow the provisionally registered or
registered information system to identify the specific consumer(s)
responsible for the loan. This information would be necessary to enable
a registered information system to provide to a lender a consumer
report that accurately reflects a particular consumer's covered loan
history across all lenders, which would enable lenders to comply with
proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10. This
information would also be necessary to allow registered information
systems to comply with their obligations under the FCRA.\875\
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\875\ See, e.g., 15 U.S.C. 1681e(b), which requires that,
``[w]henever 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.''
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Proposed Sec. 1041.16(c)(1)(ii) would defer to each information
system concerning the specific items of
[[Page 48097]]
identifying information necessary to identify the specific consumer(s)
responsible for the loan. The Bureau seeks comment on whether it should
require the furnishing of particular items of information in proposed
Sec. 1041.16(c)(1)(ii) to accomplish the goals of this paragraph.
16(c)(1)(iii)
Proposed Sec. 1041.16(c)(1)(iii) would require lenders to furnish
information concerning whether the loan is a covered short-term loan, a
covered longer-term loan, or a covered longer-term balloon-payment
loan, as those terms are defined in proposed Sec. 1041.2. Proposed
comment 16(c)(1)-1 clarifies that compliance with proposed Sec.
1041.16(c)(1)(iii) would require a lender to identify the covered loan
as one of these types of loans and provides an example. This
information would enable a registered information system to generate a
consumer report that allows a lender to distinguish between types of
loans, which would enable lender compliance with, for example, proposed
Sec. 1041.6(c).
16(c)(1)(iv)
Proposed Sec. 1041.16(c)(1)(iv) would require lenders to furnish
information concerning whether the loan is made under proposed Sec.
1041.5, Sec. 1041.7, or Sec. 1041.9, as applicable. Proposed comment
16(c)(1)-2 clarifies that compliance with proposed Sec.
1041.16(c)(1)(iv) would require a lender to identify the covered loan
as made under one of these sections and provides an example. This
information would enable a registered information system to generate a
consumer report that allows a lender to distinguish between loans made
pursuant to these provisions, which would enable the lender to comply
with, for example, proposed Sec. 1041.7(c). Proposed comment 16(c)(1)-
2 also clarifies that a lender furnishing information concerning a
covered loan that is made under Sec. 1041.11 or Sec. 1041.12 would
not be required to furnish information that identifies the covered loan
as made under one of these sections. Under the proposal, lenders would
not need to distinguish between loans made pursuant to these provisions
when contemplating making a new covered loan.
16(c)(1)(v)
Proposed Sec. 1041.16(c)(1)(v) would require lenders to furnish,
for a covered short-term loan, the loan consummation date. This
information would enable a registered information system to generate a
consumer report that would 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 would enable the lender to comply
with several provisions under proposed Sec. Sec. 1041.6 and 1041.7. A
loan sequence is defined in proposed Sec. 1041.2(a)(12), in part, 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 of the consumer having a previous outstanding covered short-
term loan. A lender contemplating a new covered loan would require
information concerning the consummation date of outstanding or prior
loans to determine whether an outstanding loan or prior loan is or was
part of a loan sequence and, if so, the chronology of the outstanding
loan or prior loan within the sequence (for example, whether the
outstanding prior loan was the second or third loan in the sequence).
16(c)(1)(vi)
Proposed Sec. 1041.16(c)(1)(vi) would require lenders to furnish,
for a loan made under proposed Sec. 1041.7, the principal amount
borrowed. This information would enable a registered information system
to generate a consumer report that allows a lender to determine whether
a contemplated loan would satisfy the principal amount limitations set
forth in proposed Sec. 1041.7(b)(1), which would enable the lender to
comply with that section.
16(c)(1)(vii)
Proposed Sec. 1041.16(c)(1)(vii) would require lenders to furnish,
for a loan that is closed-end credit, the fact that the loan is closed-
end credit, the date that each payment on the loan is due, and the
amount due on each payment date. This information would allow a
registered information system to generate a consumer report that
enables a lender to make a reasonable projection of the amount and
timing of payments due under a consumer's debt obligations, in
compliance with, for example, proposed Sec. Sec. 1041.5(c) and
1041.9(c).
As proposed, information furnished pursuant to Sec.
1041.16(c)(1)(vii) would reflect the amount and timing of payments due
under the terms of the loan as of the loan's consummation. As discussed
below, proposed Sec. 1041.16(c)(2) would require lenders to furnish
any update to information previously furnished under proposed Sec.
1041.16(c) within a reasonable period of the event that causes the
information previously furnished to be out of date. Proposed comment
16(c)(2)-1 explains that, for example, 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, proposed Sec.
1041.16(c)(2) would not require the lender to furnish an update to
information furnished pursuant to proposed to proposed Sec.
1041.16(c)(1)(vii). If, however, the lender extends the term of the
loan, proposed Sec. 1041.16(c)(2) would require the lender to furnish
an update to the date that each payment on the loan is due and the
amount due on each payment date to reflect the updated payment dates
and amounts.
16(c)(1)(viii)
Proposed Sec. 1041.16(c)(1)(viii) would require lenders to
furnish, for a loan that is open-end credit, the fact that the loan is
open-end credit, the credit limit on the loan, the date that each
payment on the loan is due, and the minimum amount due on each payment
date. As with information about loans that are closed-end credit
required to be furnished pursuant to proposed Sec. 1041.16(c)(1)(vii),
information about loans that are open-end credit required to be
furnished under proposed Sec. 1041.16(c)(1)(viii) would allow a
registered information system to generate a consumer report that
enables a lender to make a reasonable projection of the amount and
timing of payments due under a consumer's debt obligations, in
compliance with, for example, proposed Sec. Sec. 1041.5(c) and
1041.9(c).
Unlike with closed-end loans, where the terms of the loan set the
amount and timing of payments at the outset, the terms of open-end
credit allow for significant variation in the amounts of a consumer's
payments, depending largely on the consumer's use of the available
credit. As discussed below, proposed Sec. 1041.16(c)(2) would require
lenders to furnish any update to information previously furnished under
proposed Sec. 1041.16(c) within a reasonable period of the event that
causes the information previously furnished to be out of date.
Accordingly, for example, if the minimum amount due on future payment
dates changes because a consumer increases the amount drawn from an
open-end loan or pays more or less than the minimum amount due on a
particular payment date, proposed Sec. 1041.16(c)(2) would require the
lender to furnish an update to the information concerning the minimum
amount due on each payment previously furnished pursuant to proposed
Sec. 1041.16(c)(1)(viii)(D) to
[[Page 48098]]
reflect the new minimum amount due on each future payment date. In the
event a consumer does not draw on an open-end loan at consummation and
the lender cannot calculate the date that each payment on the loan is
due or the minimum amount due on each payment date at the time it
furnishes information as required under proposed Sec.
1041.16(c)(1)(viii), the Bureau anticipates that the lender would
satisfy proposed Sec. 1041.16 by furnishing null values for these
fields at consummation, as applicable, and then furnishing updates as
necessary based on, for example, the consumer's use of and payments on
the loan.
16(c)(2) Information To Be Furnished While Loan Is an Outstanding Loan
Proposed Sec. 1041.16(c)(2) would require 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 causes the information previously
furnished to be out of date. Proposed comment 16(c)(2)-1 provides
examples of scenarios under which proposed Sec. 1041.16(c)(2) would
require a lender to furnish an update to information previously
furnished. Proposed comment 16(c)(2)-2 clarifies that the requirement
to furnish an update to information previously furnished extends to
information furnished pursuant to proposed Sec. 1041.16(c)(2).
As described above, each item of information the proposal would
require lenders to furnish under Sec. 1041.16(c)(1) is information
that strengthens 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. Therefore the Bureau believes that
such updates should be reflected in a timely manner on a consumer
report a lender obtains from a registered information system. However,
the Bureau believes that, to the extent furnishing updates would impose
burden on lenders, a more flexible timing requirement may be
appropriate for furnishing an update than for furnishing information at
consummation or when a covered loan ceases to be outstanding. As
discussed above and below, the Bureau is proposing that, when a covered
loan is originated or ceases to be outstanding, information is
furnished no later than the date on which the loan is consummated or
ceases to be outstanding, or as close in time as feasible to the
specified date. The Bureau believes that, to achieve the consumer
protections that are the goals of proposed part 1041, lenders
contemplating making covered loans need timely information with respect
to the consumer's recent borrowing history, especially concerning
whether another covered loan is outstanding. The Bureau believes that a
delay in furnishing information reflecting the existence of an
outstanding loan of even a short period would be inconsistent with the
goals of proposed part 1041. As reflected in comment 16(c)(2)-1,
however, the Bureau anticipates that most updates furnished pursuant to
proposed Sec. 1041.16(c)(2) will reflect changes to the amount and
timing of future payments on a loan. The Bureau believes that providing
lenders a reasonable period after the event that causes this type of
information previously furnished to be out of date may be appropriate.
The Bureau solicits comment on whether the time period within which
information would be required to be furnished under proposed Sec.
1041.16(c)(2) is reasonable or whether an alternative period is more
appropriate.
The Bureau has considered whether, in addition to requiring updates
to information previously furnished, the Bureau should require under
this proposal that lenders furnish information regarding payments made
on a covered loan while it is outstanding. The Bureau is aware, for
example, that lenders that furnish to consumer reporting agencies
typically provide periodic updates in account status, including amount
paid and current status. In particular, the Bureau has considered
whether it should require under this proposal that lenders furnish
information concerning any amounts past due on an outstanding covered
loan.
Proposed Sec. Sec. 1041.5(c) and 1041.9(c) would require that a
lender make a reasonable projection of the amount and timing of
payments due under a consumer's debt obligations. The Bureau believes
that requiring the furnishing of information concerning payments made
on a covered loan, and especially amounts past due on an outstanding
loan, may permit a more precise assessment of a consumer's ability to
repay a contemplated loan for purposes of this proposal than the
schedule of future payments that would be furnished pursuant to the
proposal, and solicits comment on whether this is the case and whether
a more precise assessment is needed for purposes of the proposed
rule.\876\ The Bureau is concerned that requiring lenders to furnish
such additional payment information under this proposal could increase
furnishing burdens on lenders imposed by the proposal.
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\876\ The Bureau notes that, depending on how a lender treats a
missed payment, an amount past due may be reflected in an update to
the amount due on a future payment date; for example, if the lender
agrees to defer the consumer's obligation to make the payment until
the next payment date.
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The Bureau solicits comment on whether it should require that
lenders furnish any additional information about a loan while it is
outstanding, including information concerning payments made on the
loan. The Bureau also solicits comment on whether, if it were to
require such additional furnishing, it should delay the effective date
of such a requirement to permit lenders, many of whom would be
furnishing information to a consumer reporting agency for the first
time pursuant to the proposed rule, additional time to adjust to the
requirement to furnish information as proposed.
16(c)(3) Information To Be Furnished When Loan Ceases To Be an
Outstanding Loan
Proposed Sec. 1041.16(c)(3) would require 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 that the
loan ceases to be an outstanding loan. In addition to soliciting
comment on the specific information required under proposed Sec.
1041.16(c)(3)(i) and (ii), the Bureau generally solicits comment on
whether proposed Sec. 1041.16(c)(3) is reasonable and appropriate,
including whether the information lenders would be required to furnish
when a loan ceases to be an outstanding loan is sufficient to ensure
that lenders using consumer reports obtained from registered
information systems would have sufficient information to comply with
their obligations under the proposal and achieve the consumer
protections of proposed part 1041.\877\ The Bureau also solicits
comment on whether lender access to any additional information
concerning a loan at the time it ceases to be an outstanding loan would
further
[[Page 48099]]
the consumer protections of proposed part 1041.
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\877\ As noted above, compliance with the FCRA may require that
information in addition to that specified under the proposal is
furnished to registered and provisionally registered information
systems. For example, section 623(a)(5) of the FCRA, 15 U.S.C.
1681s-2(a)(5), requires that a person who furnishes information to a
consumer reporting agency regarding a delinquent account being
placed for collection, charged to profit or loss, or subjected to
any similar action shall, not later than 90 days after furnishing
the information, notify the agency of the date of delinquency on the
account.
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As discussed above with respect to the timing of furnishing at
consummation, the Bureau believes that a real-time or close to real-
time furnishing requirement when a loan ceases to be an outstanding
loan may be appropriate to achieve the consumer protections of proposed
part 1041. Such a requirement would ensure that lenders using consumer
reports from a registered information system have timely information
about most covered loans made by other lenders to a consumer. Although
the Bureau would encourage lenders to furnish information concerning
covered loans on a real-time or close to real-time basis, the proposal
would permit lenders to furnish the required information on a daily
basis or as close in time as feasible to the date the loan ceases to be
outstanding. The Bureau solicits comment on whether the time period
within which information would be required to be furnished under
proposed Sec. 1041.16(c)(3) is reasonable or whether an alternative
period is more appropriate. The Bureau further solicits comment on
specific circumstances under which furnishing information no later than
the date a loan ceases to be an outstanding loan may not be feasible.
16(c)(3)(i)
Proposed Sec. 1041.16(c)(3)(i) would require lenders to furnish
the date as of which the loan ceased to be an outstanding loan. This
information would enable a registered information system to generate a
consumer report that allows a lender to determine whether a prior loan
is outstanding, which would enable a lender to comply with, for
example, proposed Sec. Sec. 1041.5(c) and 1041.9(c). This information
would also enable a registered information system to generate a
consumer report that allows a lender to determine whether a loan the
lender is contemplating is part of a loan sequence and the chronology
of prior loans within a sequence, which would enable a lender to comply
with, for example, several provisions under proposed Sec. Sec. 1041.6
and 1041.7. A loan sequence is defined in proposed Sec. 1041.2(a)(12),
in part, 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 of the
consumer having a previous outstanding covered short-term loan. A
lender would need to have information concerning whether a loan is
outstanding and the date as of which a prior loan was no longer
outstanding to determine whether a contemplated new loan would be part
of a loan sequence and, if so, the chronology of the outstanding or
prior loan within the sequence (for example, whether the outstanding
loan is or prior loan was the second or third loan in the sequence).
16(c)(3)(ii)
Proposed Sec. 1041.16(c)(3)(ii) would require lenders to furnish
for a covered short-term loan, when the loan ceases to be an
outstanding loan, whether all amounts owed in connection with the loan
were paid in full, including the amount financed, charges included in
the total cost of credit, and charges excluded from the total cost of
credit, and, if all amounts owed in connection with the loan were paid
in full, the amount paid on the loan, including the amount financed and
charges included in the total cost of credit but excluding any charges
excluded from the total cost of credit. This information would enable a
registered information system to generate a consumer report that allows
a lender to determine whether the exception to a presumption against a
consumer's ability to repay the second and any subsequent loans in a
loan sequence, provided in proposed Sec. 1041.6(b)(2), applies.
Section 1041.17 Registered Information Systems
As discussed in more detail in the overview of proposed Sec. Sec.
1041.16 and 1041.17 above, the Bureau is proposing Sec. Sec. 1041.16
and 1041.17 to ensure that lenders making most covered loans under this
proposal 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
provisionally registered or registered with the Bureau pursuant to
proposed Sec. 1041.17. 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. Under the proposal, a lender contemplating
making most covered loans 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, in furtherance of the
consumer protections of proposed part 1041.
The proposal would require that the Bureau identify the particular
consumer reporting agencies to which lenders must furnish information
pursuant to Sec. 1041.16 and from which lenders may obtain consumer
reports to satisfy their obligations under proposed Sec. Sec. 1041.5
through 1041.7, 1041.9, and 1041.10. Proposed Sec. 1041.17 would
provide that the Bureau identify these consumer reporting agencies by
registering them with the Bureau as ``information systems.'' As
described in more detail below, proposed Sec. 1041.17 sets forth
proposed processes for registering information systems before and after
the furnishing obligations under proposed Sec. 1041.16 take effect and
proposed conditions that an entity must satisfy in order to become a
registered information system.
17(a) Definitions
17(a)(1) Consumer Report
Proposed Sec. 1041.17(a)(1) would define consumer report by
reference to the definition of consumer report in the FCRA.\878\
Defining consumer report by reference to the FCRA accurately reflects
how the FCRA would apply to provisionally registered and registered
information systems, to lenders that furnish information about covered
loans to provisionally registered and registered information systems
pursuant to proposed Sec. 1041.16, and to lenders that use consumer
reports obtained from registered information systems. As discussed
above, proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10
would require a lender contemplating making most covered loans to a
consumer to obtain a consumer report concerning the consumer from a
registered information system to enable the lender to determine whether
a given loan may be made. Registered information systems providing
consumer reports to such lenders would be consumer reporting agencies
within the meaning of the FCRA \879\ and thus would be subject to all
applicable provisions of that statute and its implementing
regulations.\880\ Lenders obtaining consumer reports from registered
information systems would be required to comply with provisions of the
FCRA applicable to users of consumer reports, including, for example,
the requirement to provide a consumer a notice when taking adverse
action with respect to the consumer that is based in whole or in part
on information contained in a consumer
[[Page 48100]]
report.\881\ Lenders providing information to provisionally registered
and registered information systems as required under proposed Sec.
1041.16 also would be required to comply with the FCRA provisions
applicable to furnishers of information to consumer reporting agencies,
including a number of requirements relating to the accuracy of
information furnished.\882\ The Bureau solicits comment on whether
defining consumer report by reference to the definition of consumer
report in the FCRA is appropriate.
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\878\ 15 U.S.C. 1681a(d).
\879\ See 15 U.S.C. 1681a(f).
\880\ See 12 CFR part 1022, 16 CFR part 682.
\881\ 15 U.S.C. 1681m(a).
\882\ See, e.g., 15 U.S.C. 1681s-2(a), (b); 12 CFR 1022.42 and
1022.43.
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17(a)(2) Federal Consumer Financial Law
Proposed Sec. 1041.17(a)(2) would define 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 be or
may be applicable to information systems, including the FCRA. Proposed
Sec. 1041.17(b)(4) would require information systems to develop,
implement, and maintain a program reasonably designed to ensure
compliance with all applicable Federal consumer financial laws. The
Bureau believes that defining this term to include all such applicable
laws would ensure that information systems have appropriate policies
and procedures in place to prevent consumer harms that could result
from these systems' collection, maintenance, and disclosure of
potentially sensitive consumer information concerning covered loans.
The Bureau solicits comment on whether this proposed definition is
appropriate.
17(b) Eligibility Criteria for Information Systems
Proposed Sec. 1041.17(b) sets forth conditions that would be
required to be satisfied in order for an entity to become a registered
or provisionally registered information system pursuant to Sec.
1041.17(c) or (d). These proposed conditions aim to ensure that
information systems would enable lender compliance with obligations
under with proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and
1041.10 so as to achieve the consumer protections of proposed part 1041
and to confirm that the systems themselves would maintain compliance
programs reasonably designed to ensure compliance with applicable laws,
including those designed to protect sensitive consumer information. The
Bureau solicits comment on the reasonableness and appropriateness of
each of the eligibility criteria proposed and also solicits comment on
whether the Bureau should require that additional criteria be satisfied
before an entity may become a registered or provisionally registered
information system pursuant to proposed Sec. 1041.17(b).
During outreach, some consumer advocates have suggested that the
Bureau should require, as an eligibility criterion, that an information
system may not provide information furnished pursuant to this proposed
rule to lenders for purposes of prescreening consumers for eligibility
to receive a firm offer of credit.\883\ The FCRA imposes various
consumer protections relating to consumer report information, including
limiting the sale and use of such information to specific permissible
purposes. The FCRA and its implementing regulations also codify
procedures that must be followed by consumer reporting agencies when
providing (and creditors and insurers when using) consumer reports to
make unsolicited firm offers of credit or insurance to consumers, and
permit consumers to elect to have their names excluded from lists of
names provided by a consumer reporting agency for this purpose.\884\
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\883\ See 15 U.S.C. 1681b(c) (permitting a consumer reporting
agency to provide a consumer report in connection with a credit or
insurance transaction that is not initiated by the consumer only if
the transaction consists of a firm offer of credit or insurance and
other conditions are satisfied). In particular, advocates have
raised concerns that this information would be provided to loan lead
generators. Because lead generators do not make firm offers of
credit, a provisionally registered or registered information system
that provided a consumer report to a lead generator would be in
violation of the FCRA.
\884\ See 15 U.S.C.1681b(e); 12 CFR 1022.54.
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The Bureau recognizes that an information system's provision of
prescreened lists based on information furnished pursuant to this
proposal may create a risk that an unscrupulous provider of risky
credit-related products might use such a list to target potentially
vulnerable consumers. At the same time, the Bureau believes that
prescreening could prove useful to certain consumers to the extent they
needed credit and received firm offers of affordable credit. The Bureau
solicits comment on whether to impose restrictions on the use of
information furnished pursuant to proposed part 1041 beyond the
restrictions contained in the FCRA.
17(b)(1) Receiving Capability
Proposed Sec. 1041.17(b)(1) would require that, in order for an
entity to be eligible to be a provisionally registered or registered
information system, the Bureau must determine that it possesses the
technical capability to receive information lenders must furnish
pursuant to Sec. 1041.16 immediately upon the furnishing of such
information. Proposed Sec. 1041.17(b)(1) would require that, when any
lender furnishes information as required under proposed Sec.
1041.16(c), the information system is able to immediately receive the
information from the lender.
Proposed Sec. 1041.17(b)(1) also would require that, in order for
an entity to be eligible to be a provisionally registered or registered
information system, the Bureau must determine that it 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.\885\ The Bureau believes that the
development of common data standards across information systems would
benefit lenders and information systems and intends to foster the
development of such common data standards where possible. 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, but solicits comment on whether proposed Sec. 1041.17(b)(1)
should require that information systems use particular data standards
or transmit and process information furnished in a manner consistent
with any particular existing standard.
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\885\ Among other things, these standards must facilitate lender
and information system compliance with the provisions of the FCRA
and its implementing regulations concerning the accuracy of
information furnished.
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17(b)(2) Reporting Capability
Proposed Sec. 1041.17(b)(2) would require that, in order for an
entity to be eligible to be a provisionally registered or registered
information system, the Bureau must determine that it possesses the
technical capability to generate a consumer report containing, as
applicable for each unique consumer, all information described in Sec.
1041.16 substantially simultaneous to receiving the information from a
lender. Pursuant to the FCRA, an information system preparing a
consumer report pursuant to this proposal would be required to ``follow
reasonable procedures to assure
[[Page 48101]]
maximum possible accuracy of the information concerning the individual
about whom the report relates.'' \886\ Proposed comment 17(b)(2)-1
clarifies that technological limitations may cause some slight delay in
the appearance of furnished information on a consumer report, but that
any delay must reasonable.
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\886\ 15 U.S.C. 1681e(b).
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17(b)(3) Performance
Proposed Sec. 1041.17(b)(3) would require that, in order for an
entity to be eligible to be a provisionally registered or registered
information system, the Bureau must determine that it will perform or
performs in a manner that facilitates compliance with and furthers the
purposes of proposed part 1041. As discussed in more detail above, the
Bureau believes that it appears to be an unfair and abusive practice
for a lender to make a covered loan without reasonably determining that
the consumer has the ability to repay the loan. The Bureau proposes to
prevent the abusive and unfair practice by including in this proposal
requirements for how a lender must reasonably determine that a consumer
has the ability to repay a loan. The Bureau believes 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 most covered loans made to the
consumer by other lenders, on a real-time or close to real-time basis.
In furtherance of these purposes, proposed Sec. 1041.16 would
require that lenders furnish information to provisionally registered
and registered information systems, and provisions of proposed
Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10 would require
that lenders obtain consumer reports from registered information
systems when contemplating making most covered loans. Satisfaction of
the eligibility criteria set forth in proposed Sec. 1041.17(b)(3)
would require that an information system receive information furnished
by lenders and provide consumer reports in a manner that facilitates
compliance with and furthers the purposes of this proposal. Proposed
comment 17(b)(3)-1 clarifies that the Bureau does not intend that the
requirement in proposed Sec. 1041.17(b)(3) would supersede consumer
protection obligations imposed upon a provisionally registered or
registered information system by other Federal law or regulation and
provides an example concerning the FCRA.
17(b)(4) Federal Consumer Financial Law Compliance Program
Proposed Sec. 1041.17(b)(4) would require that, in order for an
entity to be eligible to be a provisionally registered or registered
information system, the Bureau must determine that it has developed,
implemented, and maintains a program reasonably designed to ensure
compliance with all applicable Federal consumer financial laws. This
compliance program must include written policies and procedures,
comprehensive training, and monitoring to detect and promptly correct
compliance weaknesses. Proposed comments 17(b)(4)-1 through -3 provide
examples of the policies and procedures, training, and monitoring that
would be required under proposed Sec. 1041.17(b)(4).
As discussed above, Federal consumer financial law is defined to
include several laws that the Bureau believes would be or may be
applicable to information systems, including the FCRA. The details of
proposed Sec. 1041.17(b)(4) and the associated commentary are based on
the Compliance Management Review examination procedures contained in
the Bureau's Supervision and Examination Manual.\887\ Proposed Sec.
1041.17(b)(4) aims to ensure that information systems have appropriate
policies and procedures in place to comply with applicable Federal
consumer financial laws and prevent related consumer harms that could
result from the systems' activities under this proposal.\888\
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\887\ Office of Supervision, Bureau of Consumer Fin. Prot.,
Supervision and Examination Manual--Version 2.0, CMR 5-10 (2012),
available at http://files.consumerfinance.gov/f/201210_cfpb_supervision-and-examination-manual-v2.pdf. The Bureau's
Supervision and Examination Manual is subject to periodic update.
\888\ The Bureau expects that an information system also would
operate in compliance with all applicable State and local laws, but
does not propose to consider such compliance programs as part of the
proposed registration requirement.
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17(b)(5) Independent Assessment of Federal Consumer Financial Law
Compliance Program
Proposed Sec. 1041.17(b)(5) would require that, in order for an
entity to be eligible to be a provisionally registered or registered
information system, the entity must provide to the Bureau in its
application for provisional registration or registration a written
assessment of the Federal consumer financial law compliance program
described in proposed Sec. 1041.17(b)(4) and that such assessment
satisfies certain criteria. The assessment must set forth a detailed
summary of the Federal consumer financial law compliance program that
the entity has implemented and maintains; explain 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; and certify 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. The assessment
must further certify that it 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.
Proposed comment 17(b)(5)-1 provides additional information
concerning individuals and entities that are qualified to conduct the
assessment required under proposed Sec. 1041.17(b)(5). Proposed
comment 17(b)(5)-2 clarifies that the written assessment described in
proposed Sec. 1041.17(b)(5) need not conform to any particular format
or style as long as it succinctly and accurately conveys the required
information.
The written assessment of an entity's Federal consumer financial
law compliance program required under proposed Sec. 1041.17(b)(5)
would 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). This written assessment would
not be required to be included in an entity's application for
preliminary approval for registration pursuant to Sec. 1041.17(c)(1)
or provided to the Bureau when a provisionally registered information
system becomes registered pursuant to Sec. 1041.17(d)(2). As described
further below, information systems would be subject to the Bureau's
supervision authority, and the Bureau may periodically review an
information system's Federal consumer financial law compliance program
pursuant to that authority. The Bureau believes that requiring a
written assessment to be submitted with an application for registration
pursuant to Sec. 1041.17(c)(2) or provisional registration pursuant to
Sec. 1041.17(d)(1) would provide some flexibility for applicants in
terms of assessing and
[[Page 48102]]
presenting their compliance programs at the application stage and would
allow for a more streamlined application process. Based on these
consideration and the time sensitivity of an application for
registration before the effective date of proposed Sec. 1041.16, the
Bureau believes that a written assessment by a qualified, objective,
independent third-party individual or entity would be a reasonable and
appropriate means to ensure that the eligibility criteria in proposed
Sec. 1041.17(b)(4) are satisfied at the application stage.
As discussed below, with respect to entities seeking to become
registered prior to the effective date of proposed Sec. 1041.16, the
Bureau is proposing to allow an entity 90 days from the date
preliminary approval is granted to prepare its application for
registration, including obtaining the written assessment required
pursuant to proposed Sec. 1041.17(b)(5). The Bureau solicits comment
on the proposed requirement for an independent assessment, including
the scope of the proposed assessment, the criteria for the assessor,
and the timing for obtaining the assessment.
17(b)(6) Information Security Program
Proposed Sec. 1041.17(b)(6) would require that, in order for an
entity to be eligible to be a provisionally registered or registered
information system, the Bureau must determine that it has developed,
implemented, and maintains a comprehensive information security program
that complies with the Standards for Safeguarding Customer Information,
16 CFR part 314. 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.\889\
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\889\ 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). 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,
however.
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In performing their functions under this proposal, information
systems would be collecting, maintaining, and disclosing potentially
sensitive consumer information. The security, confidentiality, and
integrity of this information are of utmost importance and are
essential to the proper functioning of the information sharing
framework the Bureau is proposing.\890\ An information system that is
registered with the Bureau and performing the functions of a registered
information system described in this proposal would be subject to the
Safeguards Rule, and thus would be required to develop, implement, and
maintain reasonable administrative, technical, and physical safeguards
to protect the security, confidentiality, and integrity of customer
information.\891\
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\890\ For example, proposed Sec. 1041.17(b)(6) is designed in
part to provide assurance to lenders that the customer information
they furnish to information systems will be appropriately protected.
\891\ Based on the Bureau's outreach to consumer reporting
agencies that may be interested in becoming registered information
systems and our understanding of the other activities in which they
are engaged or plan to be engaged, the Bureau believes it highly
unlikely that any provisionally registered information system would
not be covered by the Safeguards Rule. Moreover, as noted above,
inadequate data security practices may constitute unfair, deceptive,
or abusive acts or practices under the Dodd-Frank Act.
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Proposed Sec. 1041.17(b)(6) would help ensure that information
systems have adequate policies and procedures in place to comply with
the Safeguards Rule and prevent related consumer harms that could
result from the systems' activities under this proposal.
17(b)(7) Independent Assessment of Information Security Program
Proposed Sec. 1041.17(b)(7)(i) would require that, in order for an
entity to be eligible to be a provisionally registered or registered
information system, the entity must 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. 1041.16(b)(6).
Proposed Sec. 1041.17(b)(7)(ii) provides that each written assessment
obtained and provided to the Bureau on at least a biennial basis
pursuant to proposed Sec. 1041.17(b)(7)(i) must be completed and
provided to the Bureau within 60 days after the end of the period to
which the assessment applies.
Each assessment would be required to set forth the administrative,
technical, and physical safeguards that the entity has implemented and
maintains; explain 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; explain how the
safeguards that have been implemented meet or exceed the protections
required by the Standards for Safeguarding Customer Information, 16 CFR
part 314; and certify 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. The assessment would be required to further certify
that it 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.
Proposed comment 17(b)(7)-1 clarifies that the time period covered
by each assessment obtained and provided to the Bureau on at least a
biennial basis must commence on the day after the last day of the
period covered by the previous assessment provided to the Bureau.
Proposed comment 17(b)(7)-2 provides examples of individuals and
entities that would be qualified to conduct the assessment required
under proposed Sec. 1041.17(b)(7). Proposed comment 17(b)(7)-3
clarifies that the written assessment described in Sec. 1041.17(b)(7)
need not conform to any particular format or style as long as it
succinctly and accurately conveys the required information.
The Bureau believes that initial and periodic assessments of an
information system's compliance with the Safeguards Rule would help
ensure that the potentially sensitive consumer information collected,
maintained, and disclosed by the information system is and continues to
be appropriately protected. As noted above, the Safeguards Rule is
enforced by the FTC. Accordingly, the Bureau expects to consult with
the FTC in evaluating assessments submitted to the Bureau pursuant to
proposed Sec. 1041.16(b)(7). Although the Bureau does not have
supervision authority with respect to the Safeguards Rule, acts and
practices that violate the Safeguards Rule may also constitute unfair,
deceptive, or abusive acts or practices under the Dodd-Frank Act. The
Bureau believes that a written assessment by a qualified, objective,
independent third-party individual or entity may be a reasonable and
appropriate means to help ensure that the eligibility criteria in
proposed
[[Page 48103]]
Sec. 1041.17(b)(6) are satisfied at application and on an ongoing
basis.
As discussed below, with respect to entities seeking to become
registered prior to the effective date of Sec. 1041.16, the Bureau is
proposing to allow an entity 90 days from the date preliminary approval
is granted to prepare its application for registration, including
obtaining the written assessment required pursuant to proposed Sec.
1041.17(b)(7). The Bureau solicits comment on the proposed requirement
for an independent assessment, including the scope of the proposed
assessment, the criteria for the assessor, and the timing for obtaining
the assessment.
17(b)(8) Bureau Supervisory Authority
Proposed Sec. 1041.17(b)(8) would require that, in order for an
entity to be eligible to be a provisionally registered or registered
information system, the Bureau must determine that the entity
acknowledges it is, or consents to being, subject to the Bureau's
supervisory authority. As discussed above, the Bureau has supervisory
authority under section 1024 of the Dodd-Frank Act over ``larger
participant[s] of a market for other consumer financial products or
services,'' as the Bureau defines by rule.\892\ The Bureau has
promulgated a final rule defining larger participants of the market for
consumer reporting.\893\ The Bureau believes that entities that choose
to become provisionally registered and registered information systems
would be non-depository institutions and would qualify as larger
participants in the market for consumer reporting, and their
acknowledgment would reflect that status. However, other entities may
consent to the Bureau's supervisory authority as well.
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\892\ 12 U.S.C. 5514(a)(1)(B) and (a)(2).
\893\ 12 CFR part 1090; Defining Larger Participants of the
Consumer Reporting Market, 77 FR 42873 (July 20, 2012).
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Proposed Sec. 1041.17(b)(8) is designed to facilitate the
assessment and detection of risks to consumers that may be posed by
provisionally registered and registered information systems, and to
ensure that these systems are legitimate entities and are able to
perform their obligations to consumers. The Bureau solicits comments on
this proposed requirement and on whether any additional eligibility
criteria would be appropriate.
17(c) Registration of Information Systems Prior to the Effective Date
of Sec. 1041.16
Proposed Sec. 1041.17(c) describes the proposed process for the
registration of information systems before the effective date of
proposed Sec. 1041.16. Under the proposal, lenders would furnish
information to a system that has been registered pursuant to proposed
Sec. 1041.17(c)(2) for 120 days or more \894\ and would be required to
obtain a consumer report from any system registered pursuant to
proposed Sec. 1041.17(c)(2) to satisfy their obligations under
proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10. The
Bureau is proposing to create a two-stage process to become registered
prior to the effective date of proposed Sec. 1041.16: interested
entities first would submit to the Bureau an initial application for
preliminary approval for registration, and then would submit a full
application for registration after receiving preliminary approval and
obtaining certain written assessments from third parties concerning
their compliance programs.
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\894\ See proposed Sec. 1041.16(b)(1)(i).
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The deadlines proposed for submission of applications for
preliminary approval for registration pursuant to proposed Sec.
1041.17(c)(1) and to be registered pursuant to proposed Sec.
1041.17(c)(2) are designed to ensure that, on the date that proposed
Sec. 1041.16 is effective, there are information systems that have
been registered for at least 120 days.
17(c)(1) Preliminary Approval
Proposed Sec. 1041.17(c)(1) provides that, prior to the effective
date of proposed Sec. 1041.16, 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
proposed Sec. 1041.17(c)(3)(i) containing information sufficient for
the Bureau to determine that the entity is reasonably likely to satisfy
the conditions set forth in proposed Sec. 1041.17(b) by the deadline
set forth in proposed Sec. 1041.17(c)(3)(ii). Proposed Sec.
1041.17(c)(3)(i) provides that the deadline to submit an application
for preliminary approval for registration pursuant to proposed Sec.
1041.17(c)(1) is 30 days from the effective date of proposed Sec.
1041.17. This application does not need to include the written
assessments required under proposed Sec. 1041.17(b)(5) and (b)(7).
Proposed comment 17(c)(1)-1 provides that an application for
preliminary approval must describe the steps the entity plans to take
to satisfy the conditions set forth in proposed Sec. 1041.17(b) as of
the deadline to submit its application for registration and the
entity's anticipated timeline for such steps. Proposed comment
17(c)(1)-1 also clarifies that the entity's plan must be reasonable and
achievable.
The Bureau proposes to require that an entity seeking to be
registered prior to the effective date of Sec. 1041.16 first obtain
preliminary approval for registration so the Bureau may determine
whether the entity is likely to satisfy the criteria set forth in
proposed Sec. 1041.17(b) before the entity expends resources to obtain
the written assessments required for the application for registration
pursuant to proposed Sec. 1041.17(c)(2). The preliminary approval step
would also allow the Bureau to engage with entities seeking
registration before the effective date at an early stage in the
registration process, which would help the Bureau gauge resources
needed to ensure that information systems are registered sufficiently
in advance of the effective date of proposed Sec. 1041.16 to allow
furnishing pursuant to proposed Sec. 1041.16 to commence on the
effective date of that section. The Bureau believes this kind of
interaction would provide more predictability in the process for both
applicants and the Bureau.
The Bureau is proposing to set the deadline to submit an
application for preliminary approval for registration under proposed
Sec. 1041.17(c)(3)(i) at 30 days after the effective date of proposed
Sec. 1041.17, or 90 days after the publication of the final rule in
the Federal Register. The Bureau believes that, considering the content
of the application for preliminary approval, including that the
application need not include the written assessments described in
proposed Sec. 1041.17(b)(5) and (b)(7), this deadline would provide
sufficient time for interested entities to prepare an application for
preliminary approval. The Bureau solicits comment on proposed Sec.
1041.17(c)(1), including whether 90 days from the publication of the
final rule would be sufficient time to prepare an application for
preliminary approval.
17(c)(2) Registration
Proposed Sec. 1041.17(c)(2) provides that, prior to the effective
date of Sec. 1041.16, the Bureau may approve the application of an
entity to be a registered information system only if the entity
received preliminary approval pursuant to proposed Sec. 1041.17(c)(1)
and the entity submits an application to be a registered information
system to the Bureau by the deadline set forth in proposed Sec.
1041.17(c)(3)(ii) that contains information sufficient for the Bureau
to determine that the entity satisfies the conditions set forth in
proposed Sec. 1041.17(b). Proposed
[[Page 48104]]
Sec. 1041.17(c)(2) further provides that 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. The Bureau expects that
it would require as part of an entity's application for registration
information concerning any recent judgment, ruling, administrative
finding, or other determination that the entity has not operated in
compliance with all applicable consumer protection laws. The Bureau
solicits comment on whether there are other specific items of
information it should require as part of an application.
Proposed Sec. 1041.17(c)(3)(ii) provides that the deadline to
submit an application to be a registered information system pursuant to
proposed Sec. 1041.17(c)(2) is 90 days from the date preliminary
approval for registration is granted. Proposed comment 17(c)(2)-1
provides that the application for registration must succinctly and
accurately convey the required information, and must include the
written assessments described in proposed Sec. Sec. 1041.17(b)(5) and
(b)(7).
The Bureau solicits comment on proposed Sec. 1041.17(c)(2),
including on whether 90 days is sufficient time to obtain the written
assessments described in proposed Sec. Sec. 1041.17(b)(5) and (b)(7).
17(c)(3) Deadlines
Proposed Sec. 1041.17(c)(3)(i) and (ii) provide that the deadline
to submit an application for preliminary approval for registration
pursuant to proposed Sec. 1041.17(c)(1) is 30 days from the effective
date of proposed Sec. 1041.17 and that the deadline to submit an
application to be a registered information system pursuant to proposed
Sec. 1041.17(c)(2) is 90 days from the date preliminary approval for
registration is granted. Proposed Sec. 1041.17(c)(3)(iii) provides
that the Bureau may waive the deadlines set forth in proposed Sec.
1041.17(c)(3). The proposed deadlines are designed to allow entities
seeking to become registered prior to the effective date of proposed
Sec. 1041.16 adequate time to prepare their applications, and the
Bureau adequate time to review applications, so that information
systems may be registered sufficiently in advance of the effective date
of proposed Sec. 1041.16 to allow furnishing pursuant to that section
to begin as soon as that section is effective. As discussed above, the
proposed deadlines are based on the Bureau's proposal to provide a 15-
month implementation period between publication of the final rule and
the effective date of proposed Sec. 1041.16. The Bureau solicits
comment on whether the deadlines under proposed Sec. 1041.17(c)(3) are
reasonable and achievable.
17(d) Registration of Information Systems on or After the Effective
Date of Sec. 1041.16
Proposed Sec. 1041.17(d) describes the proposed process for the
registration of information systems on or after the effective date of
proposed Sec. 1041.16. The process would involve two steps: An entity
first would be required apply to become a provisionally registered
information system and then, after it had been provisionally registered
for a period of time, it automatically would become a fully registered
information system. Under the proposal, lenders would be required to
furnish information to a system that has been provisionally registered
pursuant to proposed Sec. 1041.17(d)(1) for 120 days or more or
subsequently has become registered pursuant to proposed Sec.
1041.17(d)(2),\895\ but could not rely on consumer reports from a
provisionally registered system to satisfy their obligations under
proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10 until
the system has become 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.
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\895\ See proposed Sec. 1041.16(b)(1)(ii).
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Proposed Sec. 1041.17(d) does not set forth any application
deadlines; entities seeking to become registered on or after the
effective date of Sec. 1041.16 could apply to do so at any time.
However, in order to permit lenders time to adjust to furnishing to
information systems that are registered pursuant to proposed Sec.
1041.17(c)(2), before the effective date of proposed Sec. 1041.16, the
Bureau anticipates that it would not provisionally register any
information systems during the first year that proposed Sec. 1041.16
is in effect. The Bureau solicits comment on whether such a pause on
provisional registration would be appropriate and whether one year is
an appropriate length of time for such a pause.
17(d)(1) Provisional Registration
Proposed Sec. 1041.17(d)(1) provides that, on or after the
effective date of Sec. 1041.16, the Bureau may approve the application
of an entity to be a provisionally registered information system only
if the entity submits an application to the Bureau that contains
information sufficient for the Bureau to determine that the entity
satisfies the conditions set forth in proposed Sec. 1041.17(b).
Proposed Sec. 1041.17(d)(1) further provides that the Bureau may
require additional information and documentation to facilitate this
determination or otherwise assess whether provisional registration of
the entity would pose an unreasonable risk to consumers. The Bureau
expects that it would require as part of an entity's application for
provisional registration information concerning any recent judgment,
ruling, administrative finding, or other determination that the entity
has not operated in compliance with all applicable consumer protection
laws. The Bureau solicits comment on whether there are other specific
items of information it should require as part of an application.
Proposed comment 17(d)(1)-1 provides that the application for
registration must succinctly and accurately convey the required
information, and must include the written assessments described in
proposed Sec. 1041.17(b)(5) and (b)(7).
The Bureau solicits comment on proposed Sec. 1041.17(d)(1),
including on whether an entity seeking to be provisionally registered
on or after the effective date of proposed Sec. 1041.16 should have
the option of first obtaining preliminary approval to be provisionally
registered or pursuing an alternative procedure that would allow the
entity to receive feedback from the Bureau as to whether the Bureau
believes the entity is likely to satisfy the criteria set forth in
proposed Sec. 1041.17(b) before the entity expends resources to obtain
the written assessments required to be submitted with the application
for provisional registration pursuant to proposed Sec. 1041.17(d)(1).
17(d)(2) Registration
Proposed Sec. 1041.17(d)(2) provides that an information system
that is provisionally registered pursuant to proposed Sec.
1041.17(d)(1) would automatically become a registered information
system pursuant to Sec. 1041.17(d)(2) upon the expiration of the 180-
day period commencing on the date the information system is
provisionally registered. Once a system is registered pursuant to
proposed Sec. 1041.17(d)(2), lenders would be permitted to rely on a
consumer report generated by the system to satisfy their obligations
under proposed Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10.
Proposed Sec. 1041.17(d)(2) provides that, for purposes of Sec.
1041.17(d), an information system is provisionally registered on the
date that the Bureau
[[Page 48105]]
publishes notice of such provisional registration on the Bureau's Web
site.
17(e) Denial of Application
Proposed Sec. 1041.17(e) provides that the Bureau will 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 determines that: The entity
does not satisfy the conditions set forth in proposed Sec. 1041.17(b),
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 proposed Sec. 1041.17(c)(3)(ii); the
entity's application is untimely or materially inaccurate or
incomplete; or preliminary approval, provisional registration, or
registration would pose an unreasonable risk to consumers.
The Bureau solicits comment on proposed Sec. 1041.17(e), including
on whether an application should be denied on any additional grounds.
Specifically, the Bureau solicits comment on whether an application
should be denied if the Bureau determines that, based on the number of
information systems registered and provisionally registered at the time
an application is received, provisional registration or registration of
the entity would impose unwarranted cost or burden on lenders.
17(f) Notice of Material Change
Proposed Sec. 1041.17(f) would require that an entity that is a
provisionally registered or registered information system provide to
the Bureau in writing a 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 such change.
As described above, the eligibility criteria set forth in proposed
Sec. 1041.17(b) aim to ensure that information systems would enable
lender compliance with this proposal and to confirm that the systems
themselves maintain compliance programs reasonably designed to ensure
compliance with applicable laws, including those designed to protect
sensitive consumer information. Information contained in an application
for provisional registration or registration would be relied upon by
the Bureau in determining whether the applicant satisfies the
conditions set forth in proposed Sec. 1041.17(b). Accordingly, the
Bureau believes it may be appropriate to require that it be notified in
writing of any material change in such information within a reasonable
period of time. The Bureau solicits comment on whether 14 days is a
reasonable period of time to provide such notice.
17(g) Revocation
Proposed Sec. 1041.17(g)(2) would provide that the Bureau would
suspend or revoke an entity's preliminary approval for registration,
provisional registration, or registration, if it determines: that the
entity has not satisfied or no longer satisfies the conditions
described in proposed Sec. 1041.17(b) or has not complied with the
requirement described in proposed Sec. 1041.17(f); or that preliminary
approval, provisional registration, or registration of the entity poses
an unreasonable risk to consumers. Proposed Sec. 1041.17(g)(2) would
provide that the Bureau may require additional information and
documentation from an entity if it has reason to believe suspension or
revocation under proposed Sec. 1041.17(g)(1) may be warranted.
Proposed Sec. 1041.17(g)(3) would provide that, except in cases of
willfulness or those in which the public interest requires otherwise,
prior to suspension or revocation under proposed Sec. 1041.17(g)(1),
the Bureau would provide written notice of the facts or conduct that
may warrant the suspension or revocation and 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 provide that the Bureau also would 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.
Proposed Sec. 1041.17(g)(5) would provide that, for purposes of
sections Sec. Sec. 1041.5 through 1041.7, 1041.9, and 1041.10, which
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 be effective
five days after the date that the Bureau publishes notice of the
suspension or revocation on the Bureau's Web site. The Bureau believes
that a delay of five days between the date that the Bureau publishes on
its Web site notice of the suspension or revocation of an information
system's registration and the effective date of the revocation for
purposes of the proposed provisions requiring lenders to obtain and
consider a consumer report from a registered information system is
appropriate to ensure that lenders receive sufficient notice of the
suspension or revocation to arrange to obtain consumer reports from
another registered information system. Proposed Sec. 1041.17(g)(5)
would also provide 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 publishes notice of the revocation on the Bureau's Web site.
Finally, proposed Sec. 1041.17(g)(5) provides that the Bureau would
also publish notice of a suspension or revocation in the Federal
Register.
As discussed above, the Bureau believes that publication of a
notice on its Web site may be the most effective way to ensure that
lenders receive notice of the suspension or revocation of an
information system's provisional registration or registration. If
proposed Sec. 1041.17(g) is adopted, the Bureau expects that it would
establish a means by which lenders could sign up to receive email
notifications if and when an information system has had its provisional
registration or registration revoked. The Bureau also expects that it
would do outreach to trade associations and otherwise take steps to
ensure that lenders covered by the rule are aware when an information
system's provisional registration or registration is revoked. Also,
pursuant to proposed Sec. 1041.16(b)(2), the Bureau would maintain on
its Web site a current list of provisionally registered and registered
information systems.
The Bureau solicits comment on proposed Sec. 1041.17(g), including
on whether the Bureau should revoke preliminary approval, provisional
registration, or registration on any additional grounds. The Bureau
also solicits comment on additional ways it might inform lenders when
an information system's provisional registration or registration is
revoked.
Section 1041.18 Compliance Program and Record Retention
The Bureau proposes 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 proposed 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
[[Page 48106]]
also proposes to require a lender to retain evidence of compliance with
the requirements in proposed part 1041 for 36 months after the date a
covered loan ceases to be an outstanding loan. Specifically, the Bureau
proposes to require a lender to retain several types of documentation
and loan-level records. The Bureau is proposing both requirements
pursuant to 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 believes that the proposed requirement to develop and
follow written policies and procedures would help foster compliance
with proposed part 1041.\896\ Proposed part 1041 sets forth detailed
ability-to-repay and payment collection requirements that are generally
more comprehensive than the requirements in States that permit lenders
to make covered loans.\897\ To make covered loans that comply with
proposed part 1041 when they are originated and when they are
outstanding, lenders would need 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 the requirements in proposed part 1041, the proposed
compliance program requirements would help to prevent the identified
unfair and abusive acts and practices in proposed part 1041.
---------------------------------------------------------------------------
\896\ A written policies and procedures requirement is a
requirement in other Bureau rules. E.g., Regulation E, 12 CFR
1005.33(g)(1).
\897\ See discussion of current regulatory environment by
product type in part II above.
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Based on the Bureau's supervisory experience to date in examining
certain payday lenders and general market outreach, the Bureau believes
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 phrased in more general terms.\898\ 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.\899\
Particularly given that ability-to-repay determinations would likely
involve different levels of automation and analysis from lender to
lender, the Bureau believes that providing an itemized framework
listening the nature and format of records that must be retained would
help to reduce regulatory uncertainty and to facilitate supervision by
the Bureau and other regulators. The Bureau notes that the level of
detail in the proposed record retention requirements is similar to the
level of detail in the recordkeeping obligations in the small-dollar
lending statutes and regulations of some States.\900\
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\898\ Record retention necessary to prove compliance with a rule
is a common requirement across many of the Bureau's rules. E.g.,
Regulation B, 12 CFR 1002.12; Regulation Z, 12 CFR 1026.25.
\899\ 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.'').
\900\ See, e.g., Colo. Code Regs. Sec. 902-1-10; Wash. Admin.
Code Sec. 208-630-610.
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Given that proposed part 1041 would impose 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 believes
the proposed record retention requirements in Sec. 1041.18(b) would
assist a lender in complying with the requirements in proposed part
1041. By providing a non-exhaustive list of records that would need to
be retained in proposed Sec. 1041.18(b)(1) through (b)(5), proposed
Sec. 1041.18(b) would help covered persons determine whether a
contemplated covered loan would comply with the requirements in
proposed part 1041 and aid covered persons in complying with the record
retention requirements in proposed Sec. 1041.18(b). Furthermore, the
proposed record retention requirements would support the external
supervision of lenders for compliance with proposed part 1041. In
facilitating lender compliance and helping the Bureau and other
regulators assess compliance with the requirements in proposed part
1041, the proposed record retention requirements would help prevent and
deter the identified unfair and abusive acts and practices in proposed
part 1041.
In the Small Business Review Panel Outline, the Bureau was
considering whether to propose requiring lenders to make periodic
reports on reborrowing and default rates for their covered loan
portfolios. After further consideration, the Bureau has decided not to
include such a reporting requirement in this proposal. The Bureau
believes that individual regulators, including the Bureau, may want
different information for different supervisory and monitoring purposes
and may prefer to wait until the proposal has been finalized and even
taken effect before imposing a reporting requirement. As such, the
Bureau believes it would be premature to establish a reporting
requirement in proposed Sec. 1041.18.
The Bureau seeks comment generally on benefits for lender
compliance and external supervision from proposed Sec. 1041.18 and
also the costs and other burdens that would be imposed on lenders,
including small entities, by proposed Sec. 1041.18. The Bureau also
seeks comment on the specific requirements under proposed Sec.
1041.18, as discussed in more detail in the section-by-section analysis
below. Furthermore, the Bureau seeks comment on current reporting
requirements under State, local, or tribal laws and regulations for
lenders that make covered loans, including on the scope and frequency
of such requirements.
18(a) Compliance Program
The Bureau proposes to require a lender making a covered loan to
develop and follow written policies and procedures that are reasonably
designed to ensure compliance with proposed 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
comment 18(a)-1 clarifies the proposed requirement to develop and
follow written policies and procedures that are reasonably designed to
ensure a lender's compliance with the requirements in proposed part
1041. Proposed comment 18(a)-2 presents examples of written policies
and procedures a lender would need to develop and follow based on the
particular types of covered loans it makes.
Given that proposed part 1041 would set forth broad requirements
for making covered loans and attempting to withdraw funds from
consumers' accounts, the Bureau believes that a lender would need to
develop written policies and procedures that are tailored to the
business model of the lender and its affiliates in order to comply with
the proposed requirements. These written policies and procedures would
help to ensure that the lender's staff understands and follows the
applicable requirements in proposed part 1041. The Bureau believes that
appropriate written policies and procedures would help prevent the
identified unfair and abusive practices. Lenders would review the
requirements of the rule that are applicable to them and formulate
written policies and procedures appropriate for their mix of covered
loans in order to comply with the rule. In complying with these written
policies and procedures, lenders would reduce the likelihood of
committing the unfair
[[Page 48107]]
and abusive acts identified in proposed part 1041.
The Bureau expects that a lender would need to develop and follow
reasonable policies and procedures reasonably designed to achieve
compliance, as applicable, with the ability-to-repay requirements in
proposed Sec. Sec. 1041.5 and 1041.6 and proposed Sec. Sec. 1041.9
and 1041.10; conditional exemptions for certain covered loans in
proposed Sec. Sec. 1041.7, 1041.11, and 1041.12; payments requirements
in proposed Sec. Sec. 1041.14 and 1041.15; and requirements on
furnishing loan information to registered and provisionally registered
information systems in proposed Sec. 1041.16. The Bureau believes that
a lender that makes several types of covered loans would have to
develop and follow broader and more sophisticated written policies and
procedures than a lender that makes only one type of covered loan. For
example, a lender that makes covered loans only under the conditional
exemption in proposed Sec. 1041.7 would have to develop and follow
policies and procedures reasonably designed to achieve compliance with
the requirements in proposed Sec. 1041.7, in addition to written
policies and procedures for other applicable requirements in proposed
part 1041 such as the requirements in proposed Sec. Sec. 1041.14,
1041.15, and 1041.16. Such a lender, however, would not have to develop
and follow policies and procedures reasonably designed to achieve
compliance with the ability-to-repay requirements for covered short-
term loans in proposed Sec. Sec. 1041.5 and 1041.6.
The Bureau seeks comment on current compliance programs among
lenders that make covered loans, including on the level of detail in
written policies and procedures and on training and other programs to
ensure that lender staff understands and complies with these written
policies and procedures. The Bureau also seeks comment on the benefits
and costs and other burdens of the proposed requirement for a lender to
develop and follow written policies and procedures that are reasonably
designed to ensure compliance with proposed part 1041. Furthermore, the
Bureau seeks comment on whether a lender should be required to develop
a compliance management system or other such system that would enhance
internal compliance processes.
18(b) Record Retention
Proposed Sec. 1041.18(b) would require a lender to retain evidence
of compliance with proposed part 1041 for 36 months after the date a
covered loan ceases to be an outstanding loan. The Bureau believes, in
general, that the proposed record retention period is an appropriate
one. The proposed retention period 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 and help prevent and deter the identified unfair and
abusive acts in proposed part 1041. The proposed requirement to retain
records for 36 months after a covered loan ceases to be an outstanding
loan would also not appear to impose an undue burden on a lender. The
Bureau believes that the proposed record retention requirements would
promote effective and efficient enforcement and supervision of proposed
part 1041, thereby deterring and preventing the unfair and abusive acts
the Bureau has proposed to identify.
As detailed further below, the Bureau is proposing to specify
requirements as to the format in which certain records are retained. In
particular, the proposed approach would provide more 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 external supervisors. The Bureau is
attempting 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 and regulators. For example, the proposed requirements would
allow lenders to create multiple spreadsheets or databases to capture
related sets of information, so long as the materials could be cross-
linked through unique loan and consumer identifiers.
The Bureau seeks comment on the appropriateness of requiring
lenders to retain loan-level records for 36 months after the date a
covered loan ceases to be an outstanding loan. Specifically, the Bureau
seeks comment on the incremental benefits and costs of having a longer
or shorter period of retention for loan-level records. The Bureau also
seeks comment on the proposed prescriptive approach to record retention
and whether a general record retention requirement, as in Regulation
Z,\901\ would be more appropriate. Furthermore, the Bureau seeks
comment on whether and how, if at all, the record retention
requirements in proposed Sec. 1041.18(b) should be modified for
lenders that would rely on a third-party service provider to determine,
for example, a consumer's ability to repay a covered short-term loan
under the ability-to-repay requirements in proposed Sec. Sec. 1041.5
and 1041.6. The Bureau seeks comment on existing record retention
practices among lenders that make covered loans, including lenders'
current practices as to retaining such records today, including the
systems used, the retention periods, and their current ability to
analyze such information. The Bureau also seeks comment on existing
record retention practices among lenders that are subject to reporting
requirements at the State, local, or tribal level. The Bureau also
seeks comment on the record retention practices among lenders that
currently evaluate a consumer's ability to repay on covered loans.
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\901\ Regulation Z, 12 CFR 1026.25.
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18(b)(1) Retention of Loan Agreement and Documentation Obtained in
Connection With a Covered Loan
Proposed Sec. 1041.18(b)(1) would require a lender for a covered
loan either to retain the original version or to be able to reproduce
an image of the loan agreement and certain documentation obtained from
the consumer or third parties in connection with a covered loan,
including, as applicable, the items listed in Sec. 1041.18(b)(1)(i)
through (v). Under proposed Sec. 1041.18(b)(1)(i), a lender would have
to retain a consumer report obtained from an information system
registered pursuant to proposed Sec. 1041.17(c)(2) or (d)(2). Under
proposed Sec. 1041.18(b)(1)(ii), a lender would have to retain
verification evidence, as described in proposed Sec. Sec.
1041.5(c)(3)(ii) and 1041.9(c)(3)(ii). Under proposed Sec.
1041.18(b)(1)(iii), a lender would have to retain any written statement
obtained from the consumer, as described in Sec. 1041.5(c)(3)(i) and
Sec. 1041.9(c)(3)(i). Under proposed Sec. 1041.18(b)(1)(iv), a lender
would have to retain authorization of an additional payment transfer,
as described in Sec. 1041.14(c)(3)(iii). Under proposed Sec.
1041.18(b)(1)(v), a lender would have to retain an underlying one-time
electronic transfer authorization or underlying signature check, as
described in Sec. 1041.14(d)(2).
Proposed comment 18(b)(1)-1 states that the listed items are non-
exhaustive
[[Page 48108]]
and that the lender may need to retain additional documentation to show
compliance with the requirements in proposed part 1041. Proposed
comment 18(b)(1)-2 describes the acceptable forms of retaining the loan
agreement and documentation obtained when making a covered loan and
provides examples of what would constitute compliance with proposed
Sec. 1041.18(b)(1). Proposed comment 18(b)(1)(ii)-1 clarifies the
requirement under proposed Sec. 1041.18(b)(1)(ii) and provides a
cross-reference to comments in proposed Sec. Sec. 1041.5(c)(3)(ii) and
1041.9(c)(3)(ii) that list types of evidence that can be used to verify
the amount and timing of a consumer's net income and payments for major
financial obligations. Proposed comment 18(b)(1)(ii)-2 clarifies the
application of proposed Sec. 1041.18(b)(1)(ii) to a covered loan made
under either proposed Sec. 1041.5 or proposed Sec. 1041.9 for which a
lender relies on an estimated housing expense for the consumer.
The Bureau believes that retention of these items in paper or
electronic form would facilitate lender compliance and aid external
supervision of lenders. Retention of these items would allow the Bureau
to determine whether a lender has complied with the requirements in
proposed part 1041, including by sampling a lender's electronic,
tabular records to see if selected records under proposed Sec.
1041.18(b)(2) and (b)(3) match the information in the verification
evidence that the lender obtained from the consumer or a third party.
The record retention requirements in proposed Sec. 1041.18(b)(1) would
thereby help prevent and deter the identified unfair and abusive
practices in proposed part 1041.
At the same time, particularly given that most of the items listed
would be provided initially to the lender by the consumer or a third
party in a variety of formats, the Bureau believes that it is important
to provide lenders with flexibility as to the form in which they retain
the material. For example, the proposed approach would not require that
lenders convert paper documentation received from a consumer or a third
party into electronic form. The Bureau considered mandating a
particular format, but believes that requiring a lender to retain the
loan agreement and documentation in electronic form, searchable or
otherwise, would add compliance burdens for lenders without necessarily
providing significant benefits for supervision and enforcement
activities.
The Bureau believes that requiring a lender to retain copies of the
notices provided under the requirements in proposed Sec. 1041.7, with
regard to the features of certain covered short-term loans, and the
requirements in proposed Sec. 1041.15, with regard to upcoming payment
withdrawal attempts and prohibitions on further payment withdrawal
attempts, would impose significant compliance burdens on lenders. At
the same time, the Bureau believes that retention of these notices
would provide limited benefits in facilitating the Bureau's supervision
and enforcement activities. For purposes of this proposed Sec.
1041.18(b)(1), the Bureau has not proposed the retention of each
individual notice provided to consumers. However, under proposed Sec.
1041.18(a), a lender that makes covered loans subject to the
requirements in proposed Sec. 1041.7 or proposed Sec. 1041.15 would
have to develop and follow written policies and procedures that ensure
that consumers were provided the required disclosures.
The Bureau seeks comment on proposed Sec. 1041.18(b)(1), including
on the benefits and costs and other burdens of retaining the loan
agreement and documentation obtained in connection with a covered loan.
The Bureau also seeks comment on what additional costs and other
burdens a requirement to retain the loan agreement and documentation
obtained in connection with a covered loan in electronic form or
searchable electronic form, such as PDF, would impose on a lender. The
Bureau also seeks comment specifically on whether a lender should be
required to retain notices provided to consumers under the requirements
in proposed Sec. Sec. 1041.7 and 1041.15 and initial authorizations of
payment transfers obtained from the consumer.
18(b)(2) Electronic Records in Tabular Format Regarding Origination
Calculations and Determinations for a Covered Loan
Proposed Sec. 1041.18(b)(2) would require a lender to retain
electronic records in tabular format of certain calculations and
determinations that it would be required to make in the process of
making a covered loan. A lender would, at a minimum, be required to
retain the records listed in proposed Sec. 1041.18(b)(2). Proposed
Sec. 1041.18(b)(2)(i) and (b)(2)(ii) would provide that for a covered
loan subject to the ability-to-repay requirements in proposed
Sec. Sec. 1041.5 and 1041.6 and Sec. Sec. 1041.9 and 1041.10,
respectively, a lender would have to retain a record of the projections
that the lender made of the consumer's net income and major financial
obligations, calculated residual income during the relevant time
period, and the lender's estimated basic living expenses for the
consumer. Proposed Sec. 1041.18(b)(2)(iii) would provide that a lender
would have to retain a record of any non-covered bridge loan made to
the consumer in the 30 days preceding the new covered loan.
Proposed comment 18(b)(2)-1 states that the listed records are non-
exhaustive and that the lender may need to retain additional records to
show compliance with the requirements in proposed part 1041. Proposed
comment 18(b)(2)-2 explains the meaning of retaining records in
electronic, tabular format and also explains that the records required
in proposed Sec. 1041.18(b)(2) would not have to be retained in a
single, combined spreadsheet or database with the records required in
proposed Sec. 1041.18(b)(3) through (b)(5). Proposed comment 18(b)(2)-
2 also clarifies that proposed Sec. 1041.18(b)(2) would require a
lender to be able to associate the records for a covered loan in
proposed Sec. 1041.18(b)(2) with unique loan and consumer identifiers
in proposed Sec. 1041.18(b)(4).
The Bureau believes that retention of these records would
facilitate lender compliance and also be essential for examining a
lender's compliance with, among other proposed requirements, the
ability-to-repay requirements in proposed Sec. Sec. 1041.5 and 1041.6
and Sec. Sec. 1041.9 and 1041.10. A consumer's projected net income
and major financial obligations are central to the ability-to-repay
requirements in proposed Sec. Sec. 1041.5 and 1041.6 and Sec. Sec.
1041.9 and 1041.10. Retention of these records in electronic, tabular
format would support lender compliance with the requirements in
proposed part 1041 and also permit the Bureau to evaluate, among other
things, whether a lender made a reasonable determination of a
consumer's ability to repay a loan. The Bureau believes it would be
relatively simple for lenders to retain these records in a spreadsheet
or other electronic, tabular format, and that such a format would
facilitate lender compliance and external supervision. The record
retention requirements in proposed Sec. 1041.18(b)(2) would thereby
help prevent and deter the identified unfair and abusive practices in
proposed part 1041.
The Bureau seeks comment on proposed Sec. 1041.18(b)(2), including
on the benefits and costs and other burdens of retaining the proposed
records on origination calculations and determinations for a covered
loan. The Bureau also seeks comment on the
[[Page 48109]]
benefits and costs and other burdens of retaining these records in
electronic, tabular format.
18(b)(3) Electronic Records in Tabular Format for a Consumer Who
Qualifies for an Exception to or Overcomes a Presumption of
Unaffordability for a Covered Loan
Proposed Sec. 1041.18(b)(3) would require 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 Sec. 1041.6 or Sec. 1041.10. A lender would, at a
minimum, be required to retain the records listed in proposed Sec.
1041.18(b)(3).
For a consumer who qualifies for the exception in proposed Sec.
1041.6(b)(2) to the presumption of unaffordability in Sec.
1041.6(b)(1) for a sequence of covered short-term loans, proposed Sec.
1041.18(b)(3)(i) would require a lender to retain records on the
percentage difference between the amount to be paid in connection with
the new covered short-term loan (including the amount financed, charges
included in the total cost of credit, and charges excluded from the
total cost of credit) and either the amount paid in full on the prior
covered short-term loan (including the amount financed and charges
included in the total cost of credit, but excluding any charges
excluded from the total cost of credit) or the amount the consumer paid
on the prior covered short-term loan that is being rolled over or
renewed (including the amount financed and charges included in the
total cost of credit but excluding any charges that are excluded from
the total cost of credit), the loan term in days of the new covered
short-term loan, and the term in days of the period over which the
consumer made payment or payments on the prior covered short-term loan.
For a consumer who overcomes a presumption of unaffordability in
proposed Sec. 1041.6 for a covered short-term loan, proposed Sec.
1041.18(b)(3)(ii) would require a lender to retain records of the
dollar difference between the consumer's financial capacity projected
for the new covered short-term loan and the consumer's financial
capacity since obtaining the prior loan.
For a consumer who qualifies for the exception in proposed Sec.
1041.10(b)(2) to the presumption of unaffordability in Sec.
1041.10(b)(1) for a covered longer-term loan following a covered short-
term or covered longer-term balloon-payment loan, proposed Sec.
1041.18(b)(3)(iii) would require a lender to retain records on the
percentage difference between the size of the largest payment on the
covered longer-term loan and the largest payment on the prior covered
short-term or covered balloon-payment loan. For a consumer who
qualifies for the exception in proposed Sec. 1041.10(c)(2) to the
presumption of unaffordability in Sec. 1041.10(c)(1) for a covered
longer-term loan during an unaffordable outstanding loan, proposed
Sec. 1041.18(b)(3)(iv) would require a lender to retain records on the
percentage difference between the size of the largest payment on the
covered longer-term loan and the size of the smallest payment on the
outstanding loan and the percentage difference between the total cost
of credit on the covered longer-term loan and the total cost of credit
on the outstanding loan. For a consumer who overcomes a presumption of
unaffordability in proposed Sec. 1041.10 for a covered longer-term
loan, proposed Sec. 1041.18(b)(3)(v) would require a lender to retain
records of the dollar difference between the consumer's financial
capacity projected for the new covered longer-term loan and the
consumer's financial capacity during the 30 days prior to the lender's
determination.
Proposed comment 18(b)(3)-1 states that the listed records are non-
exhaustive and that the lender may need to retain additional records to
show compliance with the requirements in proposed part 1041. Proposed
comment 18(b)(3)-2 provides a cross-reference to proposed comment
18(b)(2)-2, which explains the meaning of retaining records in
electronic, tabular format, and also states that the records required
in proposed Sec. 1041.18(b)(3) would not have to be retained in a
single, combined spreadsheet or database with the records required in
proposed Sec. Sec. 1041.18(b)(2), 1041.18(b)(4), and 1041.18(b)(5).
Proposed comment 18(b)(3)-2 also clarifies that proposed Sec.
1041.18(b)(3) would require a lender to be able to associate the
records for a covered loan in proposed Sec. 1041.18(b)(3) with unique
loan and consumer identifiers in proposed Sec. 1041.18(b)(4).
The Bureau believes that retention of these records would
facilitate lender compliance and also be essential for examining a
lender's compliance with the requirements in proposed Sec. Sec. 1041.6
and 1041.10. Changes in loan terms and to a consumer's projected
residual income are central to the requirements in proposed Sec. Sec.
1041.6 and 1041.10. Retention of these records in electronic, tabular
format would support lender compliance with the requirements in
proposed Sec. Sec. 1041.6 and 1041.10 and also permit the Bureau to
evaluate whether a lender complied with the requirements in proposed
Sec. Sec. 1041.6 and 1041.10. The Bureau believes it would be
relatively simple for lenders to keep these records in a spreadsheet or
other electronic, tabular format, and that such a format would
facilitate lender compliance and external supervision. The record
retention requirements in proposed Sec. 1041.18(b)(3) would thereby
help prevent and deter the identified unfair and abusive practices in
proposed part 1041.
The Bureau seeks comment on proposed Sec. 1041.18(b)(3), including
the benefits and costs and other burdens of retaining the proposed
records for a consumer who qualifies for an exception to or overcomes a
presumption of unaffordability for a covered loan. The Bureau also
seeks comment on the benefits and costs and other burdens of retaining
these records in electronic, tabular format.
18(b)(4) Electronic Records in Tabular Format Regarding Loan Type and
Terms
Proposed Sec. 1041.18(b)(4) would require a lender to retain
electronic records in tabular format on a covered loan's type and
terms. A lender would, at a minimum, be required to retain the records
listed in proposed Sec. 1041.18(b)(4). The proposed records include,
as applicable, the information listed in proposed Sec.
1041.16(c)(1)(i) through (iii), including information to uniquely
identify the loan and to identify the consumer, Sec. 1041.16(c)(1)(v)
through (viii), and Sec. 1041.16(c)(2). These items listed in proposed
Sec. 1041.16 would also have to be furnished to registered and
provisionally registered information systems for certain covered loans.
In addition, a lender would have to retain records on whether the
covered loan is made under proposed Sec. 1041.5, proposed Sec.
1041.7, proposed Sec. 1041.9, proposed Sec. 1041.11, or proposed
Sec. 1041.12. Furthermore, a lender would have to retain records on
the leveraged payment mechanism(s) it obtained from the consumer,
whether the lender obtained vehicle security from the consumer, and the
loan number in a loan sequence for a covered short-term loan made under
either proposed Sec. 1041.5 or proposed Sec. 1041.7. Proposed comment
18(b)(4)-1 states that the listed records are non-exhaustive and that a
lender may need to retain additional records to show compliance with
the requirements in proposed part 1041. Proposed comment 18(b)(4)-2
provides a cross-reference to proposed comment 18(b)(2)-2, which
explains the meaning of retaining records in electronic, tabular form,
and also states that the records required in proposed Sec.
1041.18(b)(4) would not have to be
[[Page 48110]]
retained in a single, combined spreadsheet or database with the records
required in proposed Sec. 1041.18(b)(2), (b)(3), and (b)(5).
The Bureau believes that retention of these records would
facilitate lender compliance and also be essential for evaluating a
lender's compliance with the requirements in proposed part 1041. The
Bureau believes that these records on loan type and terms would support
lender compliance with the requirements in proposed part 1041 and also
aid the Bureau's supervision and enforcement activities, including
through the review of records on individual loans and the possible
computation of loan performance metrics by covered loan type as
described in the section-by-section analysis of proposed Sec.
1041.18(b)(5). The record retention requirements in proposed Sec.
1041.18(b)(4) would thereby help prevent and deter the identified
unfair and abusive practices in proposed part 1041.
The Bureau seeks comment on proposed Sec. 1041.18(b)(4), including
the benefits and costs and other burdens of retaining the proposed
records on loan type and terms. The Bureau also seeks comment on the
benefits and costs and other burdens of retaining these records in
electronic, tabular format. The Bureau also seeks comment on whether
the requirements in proposed Sec. 1041.18(b)(4), in particular the
proposed requirement to retain information listed in proposed Sec.
1041.16(c)(1)(i) through (iii), Sec. 1041.16(c)(1)(v) through (viii),
and Sec. 1041.16(c)(2), should be modified for a covered longer-term
loan made under either proposed Sec. 1041.11 or Sec. 1041.12 for
which information is furnished to a consumer reporting agency that
compiles and maintains files on consumers on a nationwide basis instead
of registered and provisionally registered information systems.
18(b)(5) Electronic Records in Tabular Format Regarding Payment History
and Loan Performance
Proposed Sec. 1041.18(b)(5) would require 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, be
required to retain the records listed in proposed Sec. 1041.18(b)(5).
Proposed Sec. 1041.18(b)(5)(i) would require a lender to retain
records on the date a payment was received from the consumer or a
payment transfer, as defined in Sec. 1041.14(a)(1), was attempted by
the lender, the amount of the payment due, the amount of the attempted
payment transfer, the amount of payment received or transferred, and
the payment channel used for the attempted payment transfer. Proposed
Sec. 1041.18(b)(5)(ii) would require a lender to retain records if
reauthorization to initiate a payment transfer is obtained from
consumer in accordance with requirements in Sec. 1041.14(c) or (d) for
an attempt to transfer funds from a consumer's account subject to the
prohibition in Sec. 1041.14(b). Proposed Sec. 1041.18(b)(5)(iii)
would require a lender to retain records on the maximum number of days,
up to 180 days, any full payment, including the amount financed,
charges included in the total cost of credit, and charges excluded from
the cost of credit, was past due. Proposed Sec. 1041.18(b)(5)(iv)
would require a lender to retain records on whether a covered longer-
term loan made under proposed Sec. 1041.12 was charged off. Proposed
Sec. 1041.18(b)(5)(v) would require a lender to retain records if
repossession of a vehicle was initiated on a covered loan with vehicle
security. Proposed Sec. 1041.18(b)(5)(vi) would require a lender to
retain records on the date of the last or final payment received.
Proposed Sec. 1041.18(b)(5)(vii) would require a lender to retain
records for the information listed in proposed Sec. 1041.16(c)(3)(i)
and (ii), which would also have to be furnished to registered and
provisionally registered information systems for certain covered loans.
Proposed comment 18(b)(5)-1 states that the listed records are non-
exhaustive and that the lender may need to retain additional records to
show compliance with the requirements in the proposed part. Proposed
comment 18(b)(5)-2 provides a cross-reference to proposed comment
18(b)(2)-2, which explains the meaning of retaining records in
electronic, tabular format, and also states that the records required
in proposed Sec. 1041.18(b)(5) would not have to be retained in a
single, combined spreadsheet or database with the records required in
proposed Sec. Sec. 1041.18(b)(2), 1041.18(b)(3), and 1041.18(b)(4).
Proposed comment 18(b)(5)-2 also clarifies that Sec. 1041.18(b)(5)
would require a lender to be able to associate the records for a
covered loan in proposed Sec. 1041.18(b)(5) with unique loan and
consumer identifiers in proposed Sec. 1041.18(b)(4). Proposed comment
18(b)(5)(iv)-1 explains how a lender would have to retain records on
the maximum number of days, up to 180 days, any full payment was past
due on a covered loan. Proposed comment 18(b)(5)(v)-1 clarifies that
initiation of vehicle repossession would cover actions that deprive or
commence the process of depriving the consumer of the use of the
consumer's vehicle, including the activation of a lender-installed
device that disables the vehicle or a notice that the device will be
activated on or after a particular date.
The Bureau believes that these records would facilitate lender
compliance and also be essential for evaluating a lender's compliance
with the requirements in proposed part 1041 in general and compliance
with the requirements in proposed Sec. Sec. 1041.5 and 1041.6,
Sec. Sec. 1041.9 and 1041.10, Sec. 1041.12, Sec. 1041.14, and Sec.
1041.15 in particular. Proposed Sec. 1041.18(b)(5) would ensure that a
lender retained the loan-level records necessary to compute a number of
possible performance metrics for each type of loan made. Using the
proposed loan-level records, the Bureau could compute measures such as
the percentage of covered longer-term loans made under proposed Sec.
1041.9 in a particular period of time that had 90-day delinquencies
and, for covered short-term loans that are vehicle title loans, the
percentage of such loans in a particular period of time that resulted
in the initiation of vehicle repossession. Such performance metrics
could be useful measures for the Bureau in conducting enforcement and
supervision functions. In particular, the Bureau would be able to
evaluate the reasonableness of a lender's ability-to-repay
determinations under the requirements in proposed Sec. Sec. 1041.5 and
1041.6 and proposed Sec. Sec. 1041.9 and 1041.10. In addition, the
proposed record retention requirement would allow a lender to calculate
the portfolio default rate calculations required for covered longer-
term loans made under proposed Sec. 1041.12. The Bureau believes it
would be relatively simple for lenders to keep these records in a
spreadsheet or other electronic, tabular format, and that such a format
would facilitate lender compliance and external supervision. The Bureau
recognizes that substantial parts of these records may be provided by
vendors who assist lenders with payment processing functions, but
believes that these vendors would likely be able to provide the
information to lenders in an electronic tabular format. The record
retention requirements in proposed Sec. 1041.18(b)(5) would thereby
help prevent and deter the identified unfair and abusive practices in
proposed part 1041.
The Bureau seeks comment on proposed Sec. 1041.18(b)(5), including
the benefits and costs and other burdens of tracking and retaining any
of the proposed records on loan performance
[[Page 48111]]
and payment history. The Bureau also seeks comment on the benefits and
costs and other burdens of retaining these records in electronic,
tabular format. The Bureau also seeks comment on whether the
requirements in proposed Sec. 1041.18(b)(5), in particular the
proposed requirement to retain information listed in proposed Sec.
1041.16(c)(3)(i) and (ii), should be modified for a covered longer-term
loan made under either proposed Sec. 1041.11 or Sec. 1041.12 for
which information is furnished to a consumer reporting agency that
compiles and maintains files on consumers on a nationwide basis instead
of registered and provisionally registered information systems.
Furthermore, the Bureau seeks comment on whether lenders expect to rely
on third-party vendors for tracking payment history or other loan
performance records for a covered loan, on the ways in which vendors
retain and report such data today, and any technological or other
issues that would be useful to account for when a lender compiles data
from multiple internal and external sources.
Section 1041.19 Prohibition Against Evasion
Proposed Sec. 1041.19 would provide that a lender must not take
any action with the intent of evading the requirements of proposed part
1041. Proposed Sec. 1041.19 would complement the specific, substantive
requirements of the proposed rule by prohibiting any lender action
taken with the intent to evade those requirements. As discussed further
below, the Bureau is proposing Sec. 1041.19 based on the Bureau's
authority under Dodd-Frank Act section 1022(b)(1) to prevent evasions.
Proposed comment 19-1 clarifies the meaning under proposed Sec.
1041.19 of when a lender action is taken with the intent of evading the
requirements of the proposed rule. Specifically, proposed comment 19-1
clarifies that the form, characterization, label, structure, or written
documentation in connection with the lender's action shall not be
dispositive, and 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 proposed part 1041. Proposed comment 19-1 also
clarifies 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 of proposed 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 proposed part 1041.\902\ Proposed comment 19-1 also
clarifies that a lender action taken with the intent of evading the
requirements of proposed part 1041 may be knowing or reckless.
Furthermore, proposed comment 19-1 clarifies 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.
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\902\ The Bureau notes 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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Proposed comment 19-2 provides several non-exhaustive 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 proposed Sec. 1041.19. Proposed
comment 19-3 provides an example of a lender action that is not taken
with the intent of evasion and thus is not a violation of proposed
Sec. 1041.19.
The Bureau is proposing 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 proposed rule but
which the Bureau may not, or could not, have anticipated in developing
the proposed rule. The proposed rule contains certain requirements that
are specifically targeted at potential lender evasion and which rely on
the Bureau's authority to prevent evasion under Dodd-Frank Act section
1022(b)(1).\903\ However, the Bureau cannot anticipate every possible
way in which lenders could evade the requirements of the proposed
rule.\904\ The Bureau is 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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\903\ For example, proposed Sec. 1041.7(d) is 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.
\904\ As the Commodity Futures Trading Commission (CFTC) noted
in a proposed rulemaking implementing an anti-evasion provision
under title VII of the Dodd-Frank Act, ``Structuring transactions
and entities to evade the requirements of the Dodd-Frank Act could
take any number of forms. As with the law of manipulation, the
`methods and techniques' of evasion are `limited only by the
ingenuity of man.''' 76 FR 29818, 29866 (May 23, 2011) (quoting
Cargill v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971)). The
Bureau's approach to the anti-evasion clause in proposed Sec.
1041.19 has been informed by this CFTC rulemaking, as discussed
below.
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Second, the Bureau believes that proposed Sec. 1041.19 is
appropriate to include in the proposed rule given the historical
background of the markets for covered loans. As discussed in Market
Concerns--Short-Term Loans, 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, 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.\905\
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 narrowly outside of the scope of regulations to implement
the Federal Military Lending Act, passed by Congress in 2006. For
example, in response to the MLA regulations prohibiting 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
[[Page 48112]]
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
undermine the MLA's consumer protections for service members and their
families.\906\ Given this historical background, the Bureau believes
that the anti-evasion provision in Sec. 1041.19 is appropriate to
include in the proposed rule.
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\905\ 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.
\906\ 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 the amendments
were ``essential to preventing future evasions'' of the MLA
regulations. Id. at 43561 (quoting letter from Jack Reed, et al,
Nov. 25, 2014).
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In proposing Sec. 1041.19 and its accompanying commentary, the
Bureau is relying on anti-evasion authority under Dodd-Frank Act
section 1022(b)(1). As discussed in part IV, Dodd-Frank Act section
1022(b)(1) 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.'' \907\
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\907\ The Bureau notes 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 is not relying on this authority for
proposed Sec. 1041.19 but notes that this statutory provision could
be used in an enforcement action to address evasive conduct if a
lender's actions were taken with the substantial assistance of a
non-covered person.
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Anti-evasion provisions are a feature of many Federal consumer
financial laws and regulations.\908\ 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).\909\ 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
\910\ 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.'' \911\ Moreover, in the preamble for the final CFTC
Anti-Evasion Rules, the CFTC provided interpretive guidance regarding
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 may constitute
evasion depending on the facts and circumstances.\912\ The Bureau
believes that the CFTC Anti-Evasion Rules are an informative source of
regulatory text and interpretative guidance with regard to agency use
of anti-evasion authority granted under the Dodd-Frank Act.\913\
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\908\ 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.'').
\909\ 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.
\910\ 17 CFR 1.6(a).
\911\ 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).
\912\ 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.
\913\ The Bureau emphasizes 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 is not
formally adopting as the Bureau's own the interpretations drawn by
the CFTC in the CFTC Anti-Evasion Rules' preamble, nor is the Bureau
endorsing the reasoning and citations provided by the CFTC in the
CFTC Anti-Evasion Rules' preamble.
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As noted above, proposed comment 19-2 provides several non-
exhaustive examples of lender actions that may have been taken with the
intent of evading the requirements of the proposed rule and thus may be
violations of proposed Sec. 1041.19. Proposed comment 19-2.i provides
an example that assumes the following facts: (1) A lender makes non-
covered loans to consumers without assessing their ability to repay,
with a contractual duration of 46 days or longer and a total cost of
credit exceeding a rate of 36 percent per annum, as measured at the
time of consummation; (2) as a matter of lender practice for loans with
these contractual terms, more than 72 hours after consumers receive the
entire amount of funds that they are entitled to receive under their
loans, the lender routinely offers consumers a monetary or non-monetary
incentive (e.g., the opportunity to skip a payment) in exchange for
allowing the lender or its affiliate to obtain a leveraged repayment
mechanism or vehicle security, and consumers routinely agree to provide
the leveraged payment mechanism or vehicle security; (3) the lender
began the practice following the issuance of the final rule that is
codified in 12 CFR part 1041; and (4) the lender's prior practice when
making loans to consumers with these contractual terms was to require a
leveraged payment mechanism or vehicle security at or prior to
consummation.
The Bureau believes that the type of loan contract structure at
issue in conjunction with the other facts and circumstances presented
in proposed comment 19-2.i would indicate that the lender may have
taken the action with the intent of evading the requirements of the
proposed rule. The loan otherwise would be a covered longer-term loan
under proposed Sec. 1041.3(b)(2)(ii) except
[[Page 48113]]
for the fact that the lender obtains the leveraged payment mechanism or
vehicle security more than 72 hours after the consumer has received all
loan proceeds; therefore, the lender's action would result in avoidance
of the ability-to-repay and other requirements of proposed part 1041.
The fact that the lender began offering these incentives to customers
routinely as a matter of lender practice following the issuance of the
final rule would be relevant toward determining whether the lender's
action was taken with the intent of evading the rule, rather than
solely for legitimate business purposes. In contrast, if a lender
obtains a leveraged payment mechanism or vehicle security from
consumers more than 72 hours after the consumers receive all loan
proceeds on sporadic occasions as part of individually tailored,
reasonable workout agreements, then, absent any other relevant
factors,\914\ these actions would tend to not raise concerns about the
lender's intent to evade the requirements of the proposed rule.
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\914\ For example, if the loan contract requires the consumer to
pledge an article of personal property at consummation, but after
the 72-hour window has passed the lender routinely offers to release
the pledge in exchange for obtaining the leveraged payment mechanism
or vehicle security, such lender action may raise concerns about the
lender's intent to evade the requirements of the proposed rule. That
is, these actions would suggest the lender is using the pledge not
for security but instead as a means of strategically inducing
consumers to provide a leveraged payment mechanism or vehicle title
security shortly after consummation in order to avoid the scope
coverage of the proposed rule and the corresponding ability-to-repay
and other requirements.
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Proposed comment 19-2.ii provides an example that assumes the
following facts: (1) A lender makes covered short-term loans with a
contractual duration of 14 days and a lump-sum repayment structure; (2)
the loan contracts provide for a ``recurring late fee'' as a lender
remedy that is automatically triggered in the event of a consumer's
delinquency (i.e., if a consumer does not pay the entire lump-sum
amount on the contractual due date, with no grace period); (3) the
recurring late fee is to be paid biweekly while the loan remains
outstanding; (4) the amount of the recurring late fee is equivalent to
the fee that the lender charges on transactions that are considered
rollovers under applicable State law; (5) for consumers who are
delinquent, the lender takes no other steps to collect on the loan
other than charging the recurring late fees for 90 days; and (6) the
lender gives non-delinquent consumers who express an inability to repay
the principal by the contractual due date the option of paying the
recurring late fee.
The Bureau believes that this type of loan contract structure in
conjunction with the other facts and circumstances presented in
proposed comment 19-2.ii would indicate that the lender may have taken
the action with the intent of evading the requirements of the proposed
rule. This loan contract structure effectively would recreate a loan
sequence of covered short-term loans with a corresponding rollover fee-
based revenue stream for the lender, even though nominally the contract
duration would be for only 14 days and the recurring fees would be
characterized as late fees attributable to the first loan. If the loan
was made pursuant to proposed Sec. 1041.5 (i.e., the ability-to-repay
requirements), the lender's action would result in avoidance of the
requirements of proposed Sec. 1041.6, which would impose a presumption
of unaffordability for the second or third covered short-term loan in a
sequence of loans made under proposed Sec. 1041.5 and a prohibition on
making another covered short-term loan for 30 days following the third
covered short-term loan in such a sequence. Likewise, if the loan was
made pursuant to proposed Sec. 1041.7 (i.e., the conditional exemption
for Section 7 loans), the lender's action would result in avoidance of
the principal reduction requirements, the three-loan cap on sequences
of Section 7 loans, and the other restrictions under proposed Sec.
1041.7. As noted in proposed comment 19-1, the actual substance of the
transaction would be what mattered, not the form, characterization,
label, or structure of the transaction. Although the lender's receipt
of the recurring late fee is contingent because not all consumers who
take out the loans will become delinquent, in this example several
facts and circumstances would make it likely that a high percentage of
consumers would end up paying the recurring late fee. These include:
The automatic nature of the penalty; the relatively short contractual
duration (14 days); the lender's offer that non-delinquent consumers
who express an inability to repay the principal by the contractual due
date can instead pay the recurring late fee; and, most notably, the
lender's avoidance of the ability-to-repay requirement, which makes it
more likely that the loan would be unaffordable and result in a
delinquency triggering the recurring late fee. Moreover, the fact that
the lender did not impose any other penalties for 90 days would be
relevant toward determining whether the lender's action was taken with
the intent of evading the rule, rather than solely for legitimate
business purposes, because it suggests that the lender was using the
recurring late fee as a continuing revenue source rather than as a
collection tool or compensation to the lender for expenses as a result
of the late payment.
Proposed comment 19-2.iii provides an example in which a lender
makes a non-covered loan to consumers without assessing their ability
to repay and with the following terms: A contractual duration of 60
days, repayment through four periodic payments each due every 15 days,
and a total cost of credit that is below 36 percent per annum, as
measured at the time of consummation. Proposed comment 19-2.iii also
includes the following facts: (1) The lender requires a leveraged
payment mechanism at or prior to consummation; (2) the loan contract
imposes a penalty interest rate of 360 percent per annum (i.e., more
than 10 times the contractual annual percentage rate) as a lender
remedy that is automatically triggered in the event of the consumer's
delinquency (i.e., if the consumer does not make a periodic payment or
repay the entire loan balance when due, with no grace period); (3) the
lender did not include the penalty interest rate in its loan contracts
prior to the issuance of the final rule that is codified in 12 CFR part
1041; (4) for consumers who are delinquent, the lender takes no steps
to collect on the loan other than charging the penalty interest rate
for 90 days; and (5) the lender gives non-delinquent consumers who
express an inability to repay the principal by the contractual due date
the option of paying the penalty interest rate.
The Bureau believes that this type of loan contract structure in
conjunction with the other facts and circumstances presented in
proposed comment 19-2.iii would indicate that the lender may have taken
the action with the intent of evading the requirements of the proposed
rule. The loan otherwise would be a covered longer-term loan under
proposed Sec. 1041.3(b)(2)(ii) except for the fact that the total cost
of credit does not exceed 36 percent per annum. Lenders would avoid the
proposed ability-to-repay and other requirements simply by changing the
contractual terms to re-characterize fees that otherwise would be
counted toward the cost threshold for scope coverage of longer-term
loans, while many consumers would end up paying more than 10 times that
cost threshold because of the penalty interest rate. As noted in
proposed comment 19-1, the actual substance of the transaction would be
what mattered, not the form, characterization, label, or structure of
[[Page 48114]]
the transaction. Although the lender's receipt of the penalty interest
is contingent because not all consumers who take out the loans will
become delinquent, in this example several facts and circumstances
would make it likely that a high percentage of consumers would end up
paying the penalty interest rate. These include: The automatic nature
of the penalty; the relatively short contractual duration (60 days);
the lender's offer that non-delinquent consumers who express an
inability to repay the principal by the contractual due date can
instead pay the penalty interest rate; and, most notably, the lender's
avoidance of the ability-to-repay requirement, which makes it more
likely that the loan would be unaffordable and result in a delinquency
triggering the penalty interest rate. The lender also did not include
the penalty interest rate in its loan contracts prior to the issuance
of the final rule. Therefore, these facts and circumstances would be
relevant toward the determination of whether the lender's action was
taken with the intent of evading the rule, rather than solely for
legitimate business purposes.
The Bureau emphasizes that the preceding example as well as the
examples in proposed comments 19-2.i and -2.ii are non-exhaustive and
illustrative only. The Bureau believes that other types of loan
contract structures, such as those containing other types of
extraordinary remedies or with deferred interest rates, could raise
similar facts and circumstances indicating that a lender may have taken
action with the intent of evading the proposed rule.
In addition to the preceding examples of potentially evasive lender
actions related to loan contract structures for covered loans, proposed
comment 19-2.iv provides a non-exhaustive, illustrative example of a
lender action related to payment practices that may have been taken
with the intent of evading the requirements of proposed Sec. 1041.14
and thus may be a violation of proposed Sec. 1041.19. This proposed
comment assumes the following facts: (1) A lender collects payment on
its covered longer-term installment loans primarily through recurring
electronic fund transfers authorized by consumers at consummation; (2)
as a matter of lender policy and practice, after a first ACH payment
transfer to a consumer's account for the full payment amount is
returned for nonsufficient funds, the lender makes a second payment
transfer to the account on the following day for $1.00; (3) if the
second payment transfer succeeds, the lender immediately splits the
amount of the full payment into two separate payment transfers and
makes both payment transfers to the account at the same time, resulting
in two returns for nonsufficient funds in the vast majority of cases;
(4) the lender developed the policy and began the practice shortly
prior to the effective date of the rule that is codified in 12 CFR part
1041, which, among other provisions, restricts lenders from making
further attempts to withdraw payment from consumers' account after two
consecutive attempts have failed, unless the lender obtains a new and
specific authorization from the consumer; and (5) 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.
The Bureau believes that re-presenting a first failed payment
transfer for a very small fraction of the full payment amount would
indicate that the lender may have taken the action with the intent of
evading the proposed rule's restrictions on making further payment
withdrawal attempts from a consumer's account after two consecutive
attempts have failed. By taking this action, the lender would reset the
failed payment transfer count by making a ``successful'' attempt for a
nominal amount. The fact that the lender developed the policy and began
the practice shortly before the rule's effective date would be relevant
toward determining whether the lender's action was taken with the
intent of evasion rather than solely for legitimate business purposes.
Proposed comment 19-3 provides an example of a lender action that
is not taken with the intent of evading the requirements of the
proposed rule and thus does not violate proposed Sec. 1041.19. The
proposed comment includes the following facts: (1) Prior to the
effective date of the rule that is codified in 12 CFR part 1041, a
lender offers a loan product to consumers with a contractual duration
of 30 days (Loan Product A), and if the lender had continued to make
Loan Product A to consumers following the effective date of the rule,
Loan Product A would have been treated as a covered short-term loan,
requiring the lender to make an ability-to-repay determination under
Sec. 1041.5; (2) as of the effective date of the rule, the lender
ceases offering Loan Product A and, in its place, offers consumers an
alternative loan product with a 46-day contractual duration and other
terms and conditions that result in treatment as a covered longer-term
loan (Loan Product B); and (3) for Loan Product B, the lender does not
make an ability-to-repay determination under Sec. 1041.9, but the
lender satisfies the requirements of Sec. Sec. 1041.11 or 1041.12,
i.e., one of the conditional exemptions for covered longer-term loans.
The Bureau would not consider this lender action to have been taken
with the intent of evading the requirements of the proposed rule. While
it is the case that the lender changed the loan product terms from a
30-day duration to a 46-day duration and began offering the alternative
loan product as of the effective date of the rule, and that the
alternative loan product would not be subject to the ability-to-repay
requirements for covered longer-term loans under proposed Sec. 1041.9,
these facts do not indicate that the lender took action to evade the
requirements of the rule because no actual evasion has occurred. That
is, the alternative loan product is a covered loan subject to the
requirements of the conditional exemptions for covered longer-term
loans under proposed Sec. Sec. 1041.11 and 1041.12--and the example
assumes that the lender is in compliance with the requirements of those
sections. This example stands in contrast to the examples in proposed
comments 19-2.i and -2.iii, where lenders take actions that result in
avoiding coverage of the rule and, when combined with the other facts
and circumstances presented in the examples, indicate the lender's
intent to evade the requirements of the rule.
The Bureau solicits comment on whether it is appropriate to include
proposed Sec. 1041.19 and on the specific language of the proposed
anti-evasion provision. The Bureau solicits comment on whether, in lieu
of or in addition to proposed Sec. 1041.19, the substantive
requirements of the proposed rule should directly prohibit the conduct
described in proposed comments 19-2.i to 19-2.iv or additional types of
lender actions that may have been taken with the intent of evading the
requirements of the proposed rule and, if so, the specific types of
conduct that should be proscribed. For example, the Bureau solicits
comment on: (1) Whether the Bureau should prohibit lenders from
offering incentives to obtain leveraged payment mechanism or vehicle
security after the proceeds of a covered loan have been fully received
by the consumer; (2) whether the Bureau should modify the definition of
loan sequence to address the example in proposed comment 19-2.ii; (3)
whether the Bureau should modify the definition of covered longer-term
loan to address the example in proposed comment 19-2.iii and whether
there are circumstances when this type of penalty interest rate
structure is not an evasion;
[[Page 48115]]
and (4) whether the Bureau should restrict the ability of lenders to
initiate smaller or multiple payment transfers after a failed payment
transfer attempt. Additionally, the Bureau solicits comment on whether
to include the specific proposed commentary examples, whether
additional types of lender actions that may have been taken with the
intent of evasion should be addressed in the commentary with examples
and, if so, what specific types of lender actions should be addressed.
The Bureau also solicits comment on whether the Bureau should include
additional examples in the commentary of lender actions that are not
taken with the intent of evading the requirements of the rule and, if
so, what specific types of lender actions should be addressed.
Additionally, the Bureau solicits comment on whether proposed Sec.
1041.19 and related commentary should provide additional clarification
on the facts and circumstances that would be relevant to a
determination that a lender's action was taken with the intent of
evading the proposed rule and on what types of lender actions are taken
solely for legitimate business purposes and thus not would constitute
evasion.
Section 1041.20 Severability
Proposed Sec. 1041.20 provides that the provisions of this rule
are separate and severable from one another and that it is the
intention of the Bureau that the remaining provisions shall continue in
effect if any provision is stayed or determined to be invalid.
Proposed Effective Date
The Bureau is proposing that, in general, the final rule would take
effect 15 months after publication in the Federal Register. The Bureau
believes that 15 months appears to strike 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 has given thought to the time necessary
to implement the consumer reporting components of the proposal, in
addition to the time that lender would need to adjust their
underwriting practices and prepare to provide new consumer disclosures.
As is discussed in the section-by-section analysis of proposed
Sec. Sec. 1041.16 and 1041.17 above, the Bureau is proposing that
Sec. 1041.17 would take effect 60 days after publication in the
Federal Register with regard to registered information systems. The
Bureau believes that this earlier effective date for Sec. 1041.17 may
be 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. The Bureau is also seeking comment on two general approaches on
the effective date for the requirement to furnish loan information to
registered and provisionally registered information systems to
facilitate an orderly implementation process. The Bureau seeks comment
on all aspects of the Bureau's approach to the effective date of the
final rule, whether it should be simplified and whether the proposed
time periods are appropriate, should be lengthened, or should be
shortened.
VI. Dodd-Frank Act Section 1022(b)(2) Analysis
A. Overview
In developing this proposed 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 (which in this case would
be the providers subject to the proposed rule), 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.
The Bureau requests comment on the preliminary analysis presented
below as well as submissions of additional data that could inform the
Bureau's analysis of the benefits, costs, and impacts of the proposed
rule. In developing the proposed rule, the Bureau has consulted with
the prudential regulators and the FTC regarding, among other things,
consistency with any prudential, market, or systemic objectives
administered by such agencies.
In considering the potential benefits, costs, and impacts of the
proposal, the Bureau takes as the baseline for the analysis the
regulatory regime that currently exists for the covered products and
covered persons.\915\ These include State and local laws and
regulations; Federal laws, such as the MLA, FCRA, the Fair Debt
Collection Practices Act (FDCPA), TILA, EFTA, 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.\916\
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\915\ 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.
\916\ See, e.g., FDIC Financial Institution Letter, Payday
Lending Programs, March 1, 2005, 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); FDIC, Guidance on Supervisory Concerns and
Expectations Regarding Deposit Advance Products, 78 FR 70552 (Nov.
26, 2013).
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The proposal includes several conditional exemptions that have the
effect of creating alternative methods of compliance, and in places it
is useful to discuss their costs, benefits, and impacts relative to
those of the core provisions of the proposed regulation to which they
are an alternative. The baseline for evaluating the potential full
benefits, costs, and impacts of the proposal, however, is the current
regulatory regime as of the issuance of the proposal.
The timeframe for the consideration of benefits and costs includes
the initial transitional period during which lenders would develop the
capacity to comply with the proposed regulation and the market would
adjust to the new requirements and limitations of the proposal, as well
as the steady-state that would be reached once those adjustments had
occurred. The Bureau believes these adjustments would take place within
three to five years of finalization of the proposed rule. The
marketplace for covered loans and similar products would likely
continue to evolve beyond that date, but such long-term changes are
beyond the scope of this analysis.
B. Need for the Regulation
As discussed in Market Concerns--Short-Term Loans, Market
Concerns--Longer-Term Loans, and Market Concerns--Payments above, the
Bureau is concerned that practices in the markets for payday, vehicle
title, and payday installment loans 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 can afford to repay
the loan while paying for other major financial obligations and basic
living expenses. These include harms from delinquency and default,
including bank and lender fees and aggressive collections efforts, and
harms from making unaffordable payments. They also include extended
sequences of short-term loans, which lead to very high costs of
borrowing that the Bureau believes are, in many cases, not
[[Page 48116]]
anticipated by consumers. And, in the case of vehicle title loans, many
borrowers are harmed by the repossession of their vehicle.
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 cause substantial injury to consumers, including
increased fees and risk of account closure.
C. Provisions to be Considered
The discussion below considers the benefits, costs, and impacts of
the following major proposed provisions:
1. Provisions Relating Specifically to Covered Short-Term Loans:
a. Requirement to determine borrowers' ability to repay, including
the requirement to obtain a consumer report from a registered
information system and furnish loan information to registered
information systems;
b. Limitations on making loans to borrowers with recent covered
loans; and
c. Alternative to the requirement to determine borrowers' ability
to repay, including notices to consumers taking out loans originated
under this alternative;
2. Provisions Relating Specifically to Covered Longer-Term Loans:
a. Requirement to determine borrowers' ability to repay, including
the requirement to obtain a consumer report from a registered
information system and furnish loan information to registered
information systems;
b. Limitations on making loans to borrowers with recent covered
loans; and
c. Alternatives to the requirement to determine borrowers' ability
to repay;
3. Provisions Relating to Payment Practices:
a. Limitations on continuing to attempt to withdraw money from a
borrower's account after two consecutive failed attempts; and
b. Payment notice requirements;
4. Recordkeeping requirements; and
5. Requirements for registered information systems.
The discussions of impacts are organized into the five main
categories of provisions listed above; those relating to covered short-
term loans, those relating to covered longer-term loans, those relating
to limitations of payment practices, recordkeeping requirements, and
requirements for registered information systems. Within each of these
main categories, the discussion is organized to facilitate a clear and
complete consideration of the benefits, costs, and impacts of the major
provisions of the proposed rule. Impacts on depository institutions
with $10 billion or less in total assets and on rural consumers are
discussed separately below.
D. Coverage of the Proposal
1. Provisions Relating to Covered Short-Term Loans
The provision relating to covered short-term loans would apply to
lenders who make those loans. The definition of a covered short-term
loan is provided in proposed Sec. 1041.3(b)(1).
The Bureau believes that these provisions would primarily affect
storefront and online payday lenders and storefront vehicle title
lenders. Some Federal credit unions, however, make loans under the NCUA
PAL program with a term of 45 days or less; similarly, some community
banks may make ``accommodation loans'' with a term of 45 days or less,
and these institutions would also be affected. In addition, there is a
least one bank that makes deposit advance product loans that would
likely be covered by these provisions.
2. Provisions Relating to Covered Longer-Term Loans
The provisions relating to covered longer term loans would apply to
lenders who make those loans. The definition of a covered longer term
loan is provided in proposed Sec. 1041.3(b)(2).
The Bureau believes that these provisions would primarily affect
vehicle title lenders, online lenders making high-cost loans, and
storefront payday lenders who have entered the payday installment loan
market. The provisions may also cover a portion of the loans made by
consumer finance companies when those lenders obtain authorizations for
direct repayment from a borrower's account or vehicle security. In
addition, some loans made by community banks or credit unions that are
secured by a borrower's vehicle or repaid from the consumer's deposit
account may be covered. This would most likely occur if the loan is
relatively small and has an origination fee that causes the total cost
of credit of the loan to be greater than 36 percent. Finally, many of
the PAL loans made by Federal credit unions would be covered because
those loans often have an origination application fee that causes the
total cost of credit to be above 36 percent, and the loans are often
repaid directly from the borrowers' deposit accounts at the credit
unions.\917\
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\917\ For additional information on all of these products and
lenders see part II.
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3. Provisions Relating to Payment Practices, and Related Notices
The provisions relating to payment practices and related notices
would apply to any lender making a covered loan, either short-term or
longer-term, for which the lender has obtained authorization to
withdraw payment directly from a borrower's deposit account or prepaid
account. These provisions would affect online lenders, who normally
receive payments via ACH. 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, would be affected. Lenders
making vehicle title loans often do not obtain an ACH authorization or
post-dated check, but those that do would be affected. Lenders making
loans under one of the alternatives to the ATR requirements for covered
longer-term loans would not be required to provide the payment notices,
but would be affected to the extent they reach the limit on the number
of attempts to withdraw payment from a borrower's account.
4. Recordkeeping Requirements
The provisions relating to recordkeeping requirements would apply
to any lender making covered loans.
5. Registered Information System Requirements
The provisions relating to applying to become a registered
information system would apply to any firm that applied. The provisions
relating to the requirements to operate as a registered information
system would apply to any firm that became a registered information
system.
E. Data Limitations and Quantification of Benefits, Costs and Impacts
The analysis presented below relies on data that the Bureau has
obtained from industry, other regulatory agencies, and publically
available sources, including the findings of other researchers. General
economic principles and the Bureau's expertise in consumer financial
markets, together with the data and findings that are available,
provide insight into the potential benefits, costs, and impacts of the
proposed regulation. Where possible, the Bureau has made quantitative
estimates based on these principles and the data available. Some
benefits and costs, however, are not amenable to quantification, or are
not quantifiable given the data available to the Bureau; a qualitative
discussion of
[[Page 48117]]
those benefits, costs, and impacts is provided.
The Bureau solicits comments on all aspects of the quantitative
estimates provided below, as well as comments on the qualitative
discussion where quantitative estimates are not provided. The Bureau
also solicits data and analysis that would supplement the quantitative
analysis discussed below or provide quantitative estimates of benefits,
costs, or impacts for which there are currently only qualitative
discussions.
F. Potential Benefits and Costs of the Proposed Rule to Consumers and
Covered Persons--Provisions Relating Specifically to Covered Short-Term
Loans
This section discusses the impacts of the provisions of the
proposal that specifically relate to covered short-term loans. The
benefits and costs of these provisions may be affected by other
provisions of the proposed rule. For example, the potential for
consumer substitution across different categories of covered products
means that provisions relating to covered longer-term loans, to the
extent they affect the cost or availability of those loans, may have
implications for the effects of the provisions relating to covered
short-term loans. Potential interactions are discussed as appropriate.
The provisions discussed in this part VI.F include the proposed
requirements under Sec. Sec. 1041.5 and 1041.6 that lenders determine
that applicants for these covered 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 proposed in Sec. 1041.7.
In this part VI, 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 proposed Sec. 1041.7 will be
referred to as the ``Alternative approach.''
The proposed procedural requirements for originations, and the
associated restrictions on reborrowing, 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 proposal,
this section first describes the benefits and costs of the proposal to
covered persons and then discusses the implications of the proposal for
the overall markets for these products. The benefits and costs to
consumers are then described.
1. Benefits and Costs to Covered Persons
The proposed rule would impose a number of procedural requirements
on lenders making covered short-term loans, as well as impose
restrictions on the number of covered short-term loans that could 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, then
discusses the benefits and costs of the procedural requirements for
lenders using the Alternative approach. The final section discusses the
potential impacts on loan volume and revenues of the underwriting and
reborrowing restrictions under both the ATR and the Alternative
approach.
Most if not all of the proposed provisions concern activities that
lenders could choose to engage in absent the proposal. 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, in the lenders' view, do not
currently outweigh the costs.
(a). Procedural Requirements--ATR Approach
Lenders making loans using the ATR approach would need to comply
with several procedural requirements when originating loans. Lenders
would need to consult their own records and the records of their
affiliates to determine whether the borrower had taken out any prior
covered loans, or non-covered bridge loans, that were still outstanding
or were repaid within the prior 30 days. Lenders would have to obtain a
consumer report from a registered information system, if available, to
obtain information about the consumer's borrowing history across
lenders, and would be required to furnish information regarding covered
loans they originate to registered information systems. Lenders would
also be required to obtain information and verification evidence about
the amount and timing of an applicant's income and major financial
obligations, obtain a statement from applicants of their income and
payments on major financial obligations, and assess that information,
along with an estimate of the borrower's basic living expenses, to
determine whether a consumer has the ability to repay the loan.
In addition, before making a covered short-term loan to a consumer
during the term of and for 30 days following the consumer having a
covered short-term loan outstanding, a lender would need to determine
that the borrower's financial capacity had sufficiently improved since
obtaining the prior loan. Documenting the improved capacity would
impose procedural costs on lenders in some circumstances.
Each of the procedural requirements entails costs that would
potentially be incurred for each loan application, and not just for
loans that were originated. Lenders would 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 would 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 would eliminate the
cost of collecting additional information on borrowers who fail those
screens. But in most cases lenders would incur some of these costs
evaluating loan applications that do not result in an originated loan
and in some cases lenders would incur all of these costs in evaluating
loan applications that are eventually declined.
Finally, lenders would be 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
underwriting loans and would 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.
Consulting Lender's Own Records
In order to consult its own records and those of any affiliates, a
lender would 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 would most
likely comply with this requirement by using computerized
[[Page 48118]]
recordkeeping. A lender operating a single storefront would 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 would 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 would presumably maintain a single set of
records; if it maintained multiple sets of records it would need a way
to access each set of records.
The Bureau believes 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, as 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 (at least 23) 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.
Developing this capacity would 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 would 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 would
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 record keeping system, would 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.
As noted above, the Bureau believes that many lenders use automated
loan origination systems and would 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 loan origination system, the Bureau
estimates that doing so would take three minutes of an employee's time.
Accessing a Registered Information System
The Bureau believes that many lenders already work with firms that
provide some of the information that would be included in the
registered information system data, such as in States where a private
third-party operates reporting systems 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 covered short-term loans who operate only in
States without a state-mandated reporting system and who make lending
decisions without obtaining any data from a consumer reporting agency.
Lenders would benefit from being able to obtain from a registered
information system in real time, or close to real time, reasonably
comprehensive information with respect to an applicant's current
outstanding covered loans and borrowing history with respect to such
loans, including information from which the lender can identify prior
defaults. Lenders that do not currently obtain consumer reports from
specialty consumer reporting systems would benefit from doing so
through reduced fraud risk and reduced default risk. And, because the
proposed rule would require much broader reporting of covered loans by
imposing a furnishing obligation on all lenders with respect to all
covered loans (except for covered longer-term loans made pursuant to
one of the conditional exemptions and reported to a national consumer
reporting agency), even lenders that already receive reports from
specialty consumer reporting agencies would benefit from the
requirement to access a registered information system, because the
systems would have greater coverage of the market for covered loans.
As noted above, the Bureau believes that many lenders use automated
loan origination systems and would modify those systems or purchase
upgrades to those systems such that they would automatically order a
report from a registered information system during the lending process.
For lenders that order reports manually, the Bureau estimates that it
would take approximately three minutes 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 would be priced
on a ``per-hit'' basis, in which 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 would be $0.50, based on pricing in existing specialty
consumer reporting markets.
Furnishing Information to Registered Information Systems
Lenders making covered short-term loans would be required to
furnish information about those loans to all information systems that
have been registered with the Bureau for 120 days or more, have been
provisionally registered with the Bureau for 120 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 would need 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 would need to furnish information about 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 would need to
furnish the date as of which the loan ceased to be outstanding, and,
for certain loans that have been paid in full, the amount paid on the
loan.
Furnishing data to registered information systems would benefit all
lenders by improving the quality of information available to lenders.
This would allow lenders to better identify borrowers who pose
relatively high default risk, and the richer information and more
complete market coverage would make fraud detection more effective.
Furnishing information to registered information systems would
require 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 procedures for furnishing
the loan data and procedures for compliance with applicable laws.
Lenders using automated loan origination systems would likely modify
those systems, or purchase upgrades to those systems, to incorporate
the ability to furnish the required information to registered
[[Page 48119]]
information systems.\918\ The costs of these systems are discussed
below, in the discussion of developing procedures, upgrading systems,
and training staff.
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\918\ 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.
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The ongoing costs would be the costs of actually furnishing the
data. Lenders with automated loan origination and servicing systems
with the capacity of furnishing the required data would have very low
ongoing costs. Lenders that report information manually would likely do
so through a web-based form, which the Bureau estimates would take five
to 10 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. Assuming that multiple registered
information systems existed, it might be necessary to incur this cost
multiple times, if data are not shared across the systems. The Bureau
notes that some lenders in States where a private third party operates
reporting systems on behalf of State regulators are already required to
provide similar information, albeit to a single reporting entity, and
so have experience complying with this type of requirement. The Bureau
would also encourage the development of common data standards for
registered information systems when possible to reduce the costs of
providing data to multiple services.
Obtaining Information and Verification Evidence About Income and Major
Financial Obligations
Lenders making loans under the ATR approach would be required to
collect information and verification evidence about the amount and
timing of income and major financial obligations, obtain a statement
from applicants about their income and payments on major financial
obligations, and use that information to make an ability-to-repay
determination. There are two types of costs entailed in making an ATR
determination: The cost of obtaining the verification evidence and the
cost of making an ATR assessment consistent with that evidence, which
is discussed in the subsequent section. The impact on lenders with
respect to applicants who a lender determines do not have the ability
to repay, and are thus denied loans, is discussed separately.
The Bureau believes that many lenders that make covered short-term
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 income information
at all, let alone income verification evidence, on any 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 proposal, 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 covered
short-term loans do not currently collect information on applicants'
major financial obligations, let alone verification evidence of such
obligations, or determine consumers' ability to repay a loan, as would
be required under the proposed rule.
As noted above, many lenders already use automated systems when
originating loans. These lenders would likely modify those systems or
purchase upgrades to those systems to automate many of the tasks that
would be required by the proposal.
Lenders would be required to obtain a consumer report from a
national consumer reporting agency to verify applicants' required
payments under debt obligations. This would be in addition to the cost
of obtaining a consumer report from a registered information system.
Verification evidence for housing costs may be included on an
applicant's consumer report, if the applicant has a mortgage;
otherwise, verification costs could consist of obtaining documentation
of actual rent or estimating a consumer's housing expense based on the
housing expenses of similarly situated consumers with households in
their area. The Bureau believes that most lenders would purchase
reports from specialty consumer reporting agencies that would contain
both debt information from a national consumer reporting agency and
housing expense estimates. Based on industry outreach, the Bureau
believes these reports would cost approximately $2.00 for small lenders
and $0.55 for larger lenders. As with the ordering of reports from
registered information systems, the Bureau believes that many lenders
would modify their loan origination system, or purchase an upgrade to
that system, to allow the system to automatically order a specialty
consumer report during the lending process at a stage in the process
when the information is relevant. For lenders that order reports
manually, the Bureau estimates that it would take approximately two
minutes for a lender to request a report.
Lenders that do not currently collect income information or
verification evidence for income would need to do so. For lenders that
use a manual process, for consumers who have straightforward
documentation of income and provide documentation for housing expenses,
rather than relying on housing cost estimates, the Bureau estimates
that gathering and reviewing information and verification evidence for
income and major expenses, and having a consumer list income and major
financial obligations, would take roughly three to five minutes per
application.
Some consumers may visit a lender's storefront without the required
income documentation and may have income for which verification
evidence cannot be obtained electronically, raising lenders' costs and
potentially leading to some consumers failing to complete the loan
application process, reducing lender revenue.
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 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.
Making Ability-to-Repay Determination
Once information and verification evidence on income and major
financial obligations has been obtained, the lender would need to make
a reasonable determination whether the consumer has the ability to
repay the contemplated loan. In addition to considering the information
collected about income and major financial obligations, lenders would
need to estimate an amount that borrowers generally need 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 providing for a
``cushion'' calculated as a percentage of income.
[[Page 48120]]
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 would modify these systems or purchase upgrade
these systems to make the ability-to-repay calculations. On an ongoing
basis, the Bureau estimates that this would take roughly 10 additional
minutes for lenders that use a manual process to make the ability-to-
repay calculations.
Total Procedural Costs of the ATR Approach
In total, the Bureau estimates that obtaining a statement from the
consumer and verification evidence about consumers' 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 would take essentially no
time for a fully automated electronic system and between 15 and 20
minutes for a fully manual system, with total costs dependent on the
existing utilization rates of and wages paid to staff that would spend
time carrying out this work. Dollar costs would include a report from a
registered information system costing $0.50 and a specialty consumer
report containing housing costs estimates costing between $0.55 and
$2.00, depending on lender size; lenders relying on electronic services
to gather verification information about income would face an
additional small cost.
Documenting Improved Financial Capacity
Because of the impact of the presumption of unaffordability for a
new covered short-term loan during the term of and for 30 days
following a prior covered short-term originated using the ATR approach,
lenders would not be able to make another similar covered short-term
loan to a borrower within 30 days of the prior loan, unless the
borrower's financial capacity had sufficiently improved since obtaining
the prior loan.\919\ This improvement in the borrower's circumstances
would need to be documented using the same general kinds of
verification evidence that lenders would need to make an initial loan.
This requirement would benefit lenders if it leads to fewer borrowers
defaulting on loans that they do not have the ability to repay.
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\919\ The presumption would not apply in certain circumstances
where the consumer has made substantial payments on the prior loan,
as discussed in connection with Sec. 1041.6.
---------------------------------------------------------------------------
When making a loan using the ATR approach, a lender would need to
project the borrower's residual income, and therefore that aspect of
this requirement would impose no additional cost on the lender.
Comparing the borrower's projected financial capacity for the new loan
with the consumer's financial capacity since obtaining the prior loan
would impose very little cost, as long as the same lender had made the
prior loan. The lender would need to collect additional documentation
to overcome the presumption of unaffordability if the lender did not
make the prior loan or if the borrower's financial capacity would be
better for the new loan because of the borrower's unanticipated dip in
income since obtaining the prior loan that is not likely to be
repeated.
Developing Procedures, Upgrading Systems, and Training Staff
Lenders would need to develop procedures to comply with the
requirements of the ATR approach and train their staff in those
procedures. Many of these requirements would 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 reborrowing and while
paying for major financial obligations and 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, lowering the cost of developing procedures.
Lenders would also need to develop a process for estimating borrowers'
basic living expenses. Some lenders may rely on vendors that provide
services to determine ability to repay that include estimate of basic
living expenses. For a lender to conduct an independent analysis to
determine reliable statistical estimate of basic living expenses would
be quite costly. There are a number of online services, however, that
provide living expense estimates that lenders may be able to use to
obtain estimates or to confirm the reasonableness of information
provided by loan applicants.
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
would likely include an automated system to make the ability-to-repay
determination; subtracting the component expense elements from income
itself is quite straightforward and would not require substantial
development costs. 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.\920\ 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 would 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. 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 would rely on the entity-level licenses.
---------------------------------------------------------------------------
\920\ In the Paperwork Reduction Act (PRA) analysis prepared by
the Bureau, the burden hours estimated to modify loan origination
systems is 500. This is because only part of the systems
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 Installment Loans (12 CFR part
1041).
---------------------------------------------------------------------------
The Bureau estimates that lender personnel engaging in making loans
would require approximately five hours of initial training in carrying
out the tasks described in this section and 2.5 hours of periodic
ongoing training per year.
(b). Procedural Requirements--Alternative Approach
The procedural requirements of the Alternative approach would
generally have less impact on lenders than the requirements of the ATR
approach. Specifically, the rule would not mandate that lenders obtain
information or verification evidence about income or major financial
obligations, estimate basic living expenses, complete an ability-to-
repay determination, or document improved capacity prior to making
loans that meet the requirements of the Alternative approach.\921\
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\921\ As discussed above, the Bureau believes that lenders might
choose to strengthen their internal processes and procedures in
order to increase the odds that they would be paid in full over a
sequence of three Alternative approach loans, since the proposed
rule would restrict further reborrowing as discussed in more detail
below.
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[[Page 48121]]
The proposed rule would instead require only that lenders making
loans under Sec. 1041.7 consult their internal records and those of
affiliates, obtain reports from a registered information system,
furnish information to 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
reborrowing activity) were met. The requirement to consult the lender's
own records would be slightly different than under the ATR approach, as
the lender would need to check the records for the prior 12 months.
This would be unlikely to have different impacts on the lenders,
however, as any system that allows the lender to comply with the own-
record checking requirements of the ATR approach should be sufficient
for the Alternative approach, and vice-versa. A lender would also have
to develop procedures and train staff.
Disclosure Requirement
Lenders making covered short-term loans under the Alternative
approach would be required to provide borrowers with disclosures,
described in the section-by-section analysis of proposed Sec.
1041.7(e), containing information about their loans and about the
restrictions on future loans taken out using the Alternative approach.
One disclosure would be required at the time of origination of a first
Alternative approach loan, when a borrower had not had an Alternative
approach loan within the prior 30 days. The other disclosure would be
required when originating a third Alternative approach loan in a
sequence, because the borrower would therefore be unable to take out
another Alternative approach loan for at least 30 days after repaying
the loan being originated. The disclosures would need to be customized
to reflect the specifics of the individual loan.
By informing borrowers that they would likely be unable to take out
another covered loan for the full amount of their current loan within
30 days of repaying the current loan, the disclosure may help lenders
reduce defaults by borrowers who are unable to repay the loan, even in
part, without reborrowing. 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 proposed requirement
if they believed that the restrictions on principal and reborrowing
were likely to discourage many borrowers who could repay from taking
out loans made under the Alternative approach.
The Bureau believes that 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 would 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 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. 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 would rely on entity-level licenses.
In addition to the upgrades to the disclosure systems, the Bureau
estimates that small storefront lenders would pay $200 to a vendor for
a standard electronic origination disclosure form template.
The Bureau estimates that providing disclosures in stores would
take a store employee two minutes and cost $.10.
(c). Effect on Loan Volumes and Revenue From Underwriting Requirements
and Restrictions on Certain Reborrowing
The underwriting requirements under the ATR approach and the
restrictions on certain reborrowing under both the ATR approach and
Alternative approach would impact lenders' loan volume in a way that
the Bureau believes would likely be more substantial to their
operations than the cost of implementing the procedural requirements
discussed above. The following section discusses these impacts by
industry, since storefront and online payday lenders would have the
option of using both the ATR approach and Alternative approach, while
vehicle title lenders would be required to use only the ATR approach.
The subsequent section discusses overall combined impacts on these
markets from the reduction in lender revenue and the increased
procedural costs.
One of the challenges with anticipating the effects of the proposed
lending restrictions is that the effects would depend in part on how
borrowers would behave if their loan sequences were cut off by the
restrictions. Currently, it is common for borrowers to take out loan
sequences that are longer than would be permitted under the proposal.
If borrowers who currently take out these long sequences would respond
to the sequences being cut short by returning to borrow again as soon
as they can, the impact of the reborrowing restrictions on total loan
volume would be less. On the other hand, if borrowers do not return to
reborrow once they are out of a sequence of loans, the restrictions
would have a larger impact. To the extent that long sequences reflect
the difficulty that borrowers having paying off large single-payment
loans, rather than borrowers repeatedly experiencing new income or
expense shocks that lead to additional borrowing, it would be more
likely that borrower would tend not to return to borrow once a loan
sequence has ended.
Storefront Payday Lending
The Bureau believes that storefront payday lenders would make loans
primarily using the Alternative approach. The Alternative approach
would have lower procedural costs. It would also allow a greater number
of initial loans and, depending on the specifics of how borrowers'
behavior changes in response to the proposed restrictions, would
potentially allow more reborrowing. The combined impacts on which loans
could be made would likely produce greater lender revenue than the ATR
approach. If lenders do primarily make loans using the Alternative
approach, however, they might use the ATR approach to make loans to
some borrowers who had reached the annual limits on borrowing under the
Alternative approach and could demonstrate an ability to repay a new
payday loan.
For a borrower who has not previously taken out a covered short-
term loan, the Alternative approach
[[Page 48122]]
would allow a lender to make a payday loan without conducting an
ability-to-repay analysis under Sec. Sec. 1041.5 and 1041.6. The major
restriction on that loan, relative to a payday loan made under the ATR
approach, would be that the loan size could not exceed $500. There
would also be restrictions on the size of subsequent loans taken out
within 30 days of a prior loan. The second loan could not be larger
than two-thirds the size of the first loan, and the third loan could
not be greater than one-third the size of the first loan. A fourth loan
would not be permitted for at least 30 days after repaying a third
loan. Lenders would not be permitted to make a covered short-term loan
under the ATR approach to a consumer during the term of and for 30 days
following the consumer having a covered short-term loan under the
Alternative approach outstanding. There is also a limitation that a
borrower could not take out a loan made under the Alternative approach
if the loan would cause the borrower to have more than six covered
short-term loans in a year or be in debt on covered short-term loans
for more than 90 days in a year.
The Bureau has simulated the impacts of the lending restrictions of
the Alternative approach, assuming that lenders only make loans using
the Alternative 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 proposed regulation had been in
effect.\922\ 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 reborrowing
restrictions. Depending on the extent to which borrowers who have loan
sequences cut off by the three-loan limit would return to borrow again
after the 30-day period following the third loan, the estimated impact
of the lending restrictions on loan volume varies from 55 to 62
percent, and the estimated impact on lender revenue varies from 71 to
76 percent.\923\ The impact on revenue would be greater than the impact
on loan volume because of the loan-size restrictions of the Alternative
approach.
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\922\ Details on the simulations of these effects are provided
in CFPB Report on Supplemental Findings, at ch. 6.
\923\ CFPB Report on Supplemental Findings, at 149.
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The Bureau has also simulated the effects of the reborrowing
restrictions of the ATR approach. Under the ATR approach, in general, a
new covered short-term loan cannot be made during the term of and for
30 days following a prior covered short-term loan unless the lender
determines, based on documented information, that the consumer's
financial capacity has sufficiently improved since obtaining the prior
loan. The Bureau has not attempted to estimate the share of borrowers
who would be able to satisfy this requirement and borrow again within
30 days of a prior covered short-term loan. Assuming that borrowers
would not be able to take out a second loan within 30 days, the
Bureau's simulations produce estimates of the reduction of loan volume
and lender revenue of approximately 60 to 81 percent, relative to
lending volume today.\924\ 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, during which they cannot borrow without
demonstrating sufficient improvement in their financial capacity.
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\924\ CFPB Report on Supplemental Findings, at 147.
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Estimating the share of payday loan borrowers for whom a lender
could reasonably determine ability to repay the loan is very
challenging. To do so would require data on borrowers' income, details
about the prospective loans, especially the payments, and data on
borrowers' major financial obligations and basic living expenses. In
addition, lenders would be required to estimate borrowers' basic living
expenses, and lenders could do this in a variety of ways, complicating
estimates of the effects of the requirement.
The Bureau provides here a limited discussion of the share of
borrowers who would be able to demonstrate an ability to repay a payday
loan, using what data are available. These data 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 is 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.
Data on payday loans and their associated individual borrower
incomes were obtained under the Bureau's supervisory authority.\925\
These data cover a large number of payday loans originated by several
lenders in over 30 states.
---------------------------------------------------------------------------
\925\ These data have been used in prior Bureau publications,
including CFPB White Paper, CFPB Data Point, and CFPB Report on
Supplemental Findings, and are discussed in more detail in those
publications.
---------------------------------------------------------------------------
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 expenditures on
utilities, food, and transportation. These expense categories would
likely 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 would be required to make the
ATR determination for an individual borrower, but given the lack of
available information on individual expenditures, household level
income and expenditures information is presented here. Because the data
on payday loans collected under the Bureau's supervisory authority
contains information on borrowers' individual incomes, the Bureau used
a third source of data to map individual incomes to household incomes,
and in particular for this population. Data on both individual and
household incomes comes from the three waves of the FDIC National
Survey of Unbanked and Underbanked Households that have been conducted
as a special supplement to the CPS Supplement. 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
[[Page 48123]]
respondents, of whom roughly three percent reported having taken out a
payday or vehicle title loan in the past 12 months in the most recent
wave of the survey.\926\ These data are the most extensive source of
information on both the individual and household income of such
borrowers that the Bureau is aware of.
---------------------------------------------------------------------------
\926\ FDIC (2013), ``2013 FDIC National Survey of Unbanked and
Underbanked Households,'' at 47.
---------------------------------------------------------------------------
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.
Table 1--Distribution of Individual Monthly Income of Payday Borrowers
------------------------------------------------------------------------
Share of
Individual monthly income borrowers
(percent)
------------------------------------------------------------------------
$0-$499................................................. 2.3
$500-$999............................................... 14.4
$1000-$1499............................................. 17.5
$1500-$1999............................................. 17.3
$2000-$2499............................................. 14.0
$2500-$2999............................................. 10.9
$3000-$3499............................................. 7.5
$3500-$3999............................................. 4.8
$4000-$4999............................................. 5.7
$5000-$5999............................................. 2.7
$6000-$6999............................................. 1.3
$7000-$7999............................................. 1.4
------------------------------------------------------------------------
Source: CFPB analysis of loan-level payday data.
Table 2 provides the distribution of household monthly income among
payday and vehicle title borrowers by their individual level of monthly
income, from the CPS Supplement. For instance, referring back to Table
1, 14 percent of payday loans in the loan data analyzed by the Bureau
were taken out by 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
approximately $2,398 per month, with the mean household income slightly
higher at $2,764 per month.
Table 2--Distribution of Household Monthly Income by Individual Monthly Income a
----------------------------------------------------------------------------------------------------------------
Individual monthly income Mean 10th Pct. Median 90th Pct.
----------------------------------------------------------------------------------------------------------------
$0-$499......................................... $834 $0 $390 $2,237
500-999......................................... 1,259 642 836 2,589
1000-1499....................................... 1,719 1,053 1,389 3,044
1500-1999....................................... 2,187 1,537 1,804 3,276
2000-2499....................................... 2,764 2,075 2,398 3,900
2500-2999....................................... 3,601 2,635 2,965 5,009
3000-3499....................................... 4,331 3,072 3,482 6,249
3500-3999....................................... 4,905 3,523 4,276 7,321
4000-4999....................................... 5,818 4,212 4,847 8,376
5000-5999....................................... 7,217 5,251 7,149 9,574
6000-6999....................................... 7,894 6,497 7,517 10,194
7000-7999....................................... 11,186 7,271 9,327 25,786
8000-8999....................................... 10,390 8,054 8,724 15,415
9000-9999....................................... 9,594 9,282 9,360 10,825
10,000+......................................... 14,101 11,700 13,572 18,487
----------------------------------------------------------------------------------------------------------------
Source: 2009, 2011, and 2013 FDIC National Survey of Unbanked and Underbanked Households.
a Reported data includes only borrowers who reported taking out a payday or vehicle title loan in the last 12
months.
Table 3 shows the distribution of 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 recurring
obligations, including rent or mortgage payments and vehicle loan
payments. The same households spend an average of $763 on the basic
living expenses included here, food, utilities, and transportation.
That leaves $689 to cover any other major financial obligations,
including payments on other forms of debt, and other basic living
expenses.
Table 3--Distribution of Household Expenditures and Average Remaining Income by Household Monthly Income a
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total household expenditures a Recurring Basic living Remaining
---------------------------------------------------------------- obligations b expenses c income
Household monthly income -----------------------------------------------
Mean 10th Pct. Median 90th Pct. Mean Mean Mean
--------------------------------------------------------------------------------------------------------------------------------------------------------
$0-$499................................. $1,096 $432 $982 $1,888 $555 $541 $-884
$500-$999............................... 971 428 879 1,641 451 520 -190
$1000-$1499............................. 1,196 595 1,094 1,958 589 607 36
$1500-$1999............................. 1,383 732 1,280 2,156 673 710 350
$2000-$2499............................. 1,519 888 1,450 2,281 756 763 689
$2500-$2999............................. 1,674 1,002 1,557 2,461 870 804 1,062
$3000-$3499............................. 1,743 1,066 1,667 2,617 901 843 1,459
$3500-$3999............................. 1,854 1,157 1,743 2,736 975 880 1,864
$4000-$4999............................. 2,011 1,218 1,900 2,981 1,052 959 2,436
$5000-$5999............................. 2,186 1,342 2,087 3,152 1,189 997 3,260
$6000-$6999............................. 2,325 1,471 2,227 3,359 1,283 1,042 4,112
[[Page 48124]]
$7000-$7999............................. 2,580 1,650 2,500 3,735 1,453 1,128 4,841
$8000-$8999............................. 2,760 1,709 2,656 4,017 1,551 1,209 5,668
$9000-$9999............................. 2,855 1,801 2,824 4,188 1,576 1,279 6,547
$10,000+................................ 3,182 2,014 3,108 4,652 1,819 1,363 9,562
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: 2010 BLS Consumer Expenditure Survey.
a Household expenditures include housing obligations (rent or mortgage payments), vehicle loan payments, expenditure on transportation (gas and public
transit), payments on utilities, and expenditure on food.
b Recurring obligations include housing obligations (rent or mortgage payments) and vehicle loan payments.
c Basic living expenses include expenditure on transportation (gas and public transit), payments on utilities, and expenditure on food.
Based on these data, it appears that payday borrowers would need at
least $1,500 in household income, monthly, to have some possibility of
having sufficient residual income to be able to repay a typical payday
loan of $300-$400. This would require, however, that the household have
no other major financial obligations and that basic living expenses are
sufficiently captured by these calculations that include only food,
utilities, and transportation.
Table 4 provides additional information about the other typical
major financial obligations of households that use payday loans. It
shows both the amount of outstanding debts and monthly payments for
several categories of credit for households that used payday loans in
the last year, 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). The SCF has detailed information on
respondents' assets, debts, and income, but the number of payday
borrowers in the data is not sufficiently large to allow estimates of
the debts for payday borrowers in different income ranges.\927\
---------------------------------------------------------------------------
\927\ 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.
Table 4--Distribution of Debt Obligation Conditional Balances and Monthly Payments Among Payday Borrowers a
----------------------------------------------------------------------------------------------------------------
Fraction of
borrowers with
outstanding
Debt obligations Mean 10th Pct. Median 90th Pct. debt
obligation
(percent)
----------------------------------------------------------------------------------------------------------------
Outstanding Balances
----------------------------------------------------------------------------------------------------------------
Credit Cards.................... $3,287 $230 $1,300 $7,130 34
Revolving Charge Accounts b..... 3,351 300 750 6,000 9
----------------------------------------------------------------------------------------------------------------
Monthly Payments
----------------------------------------------------------------------------------------------------------------
Housing Payments c.............. 755 300 660 1,300 96
Lines of Credit d............... 196 20 135 405 4
Car Loans e..................... 421 200 360 770 35
Student Loans................... 174 50 105 370 14
Other Consumer Loans............ 266 30 150 672 20
----------------------------------------------------------------------------------------------------------------
Total Balances and Payments
----------------------------------------------------------------------------------------------------------------
All Credit Card and Charge 3,561 230 1,200 8,000 40
Accounts.......................
All Monthly Payments f.......... 977 370 809 1,710 98
All Monthly Payments Minus 263 50 160 640 33
Housing and Car Loan Payments..
----------------------------------------------------------------------------------------------------------------
Source: 2010 Federal Reserve Board Survey of Consumer Finances.
a Households are identified as payday borrowers if a household member took out a payday loan during the past
year.
b Revolving charge accounts at stores other than store accounts where a household has credit.
c Includes mortgage payments, rental payments, land contract payments, payments on home equity loans, and
payments on home improvement loans.
d Payments on lines of credit (including home equity lines of credit).
e Includes personally owned cars, trucks, vans, and sport utility vehicles.
f Includes payments on housing, lines of credit, car loans, student loans, and other consumer loans.
Table 4 shows that 40 percent of households with payday loans have
outstanding credit card debt, with an average balance above $3,500. An
average credit card balance of approximately $3,500 would require a
[[Page 48125]]
minimum monthly payment of just over $100.\928\ It also shows that one
third of payday households have other debts, 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 would need monthly income substantially higher than
$1,500 to be able to demonstrate an ability to repay a typical payday
loan. For example, if a household needs $3,000 in monthly income to
demonstrate an ability to repay a typical payday loan, an individual
would need roughly $2,500. In the data the Bureau has analyzed, roughly
one-third of payday borrowers have individual income above $2,500 per
month.
---------------------------------------------------------------------------
\928\ 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 would be less likely than the data here
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 would be more likely to be able to borrower
under the ATR approach. Given the borrowers' need for liquidity,
however, it is 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.
Online Payday Loans
The impact of the proposal on the online payday market is more
difficult to predict. The simulations of the reborrowing restrictions
and the ATR analysis described above each relate only to storefront
loans.
There is no indication that online payday lenders would be more
successful under the ATR approach than storefront lenders, and, in
fact, it may be 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 source
of data on all online lenders. If very long sequences of loans are less
common for online loans, however, the reborrowing restrictions of both
the ATR and Alternative approaches would have a smaller impact on
online lenders.
Vehicle Title Lending
Vehicle title loans are not eligible for the Alternative approach,
and therefore lenders making only vehicle title loans would only be
able to make such loans to borrowers who the lender is able to
determine have the ability to repay the loan. Table 5 shows the
distribution of individual incomes of single-payment vehicle title
borrowers.
Table 5--Distribution of Individual Monthly Income of Single-Payment
Vehicle Title Borrowers
------------------------------------------------------------------------
Share of
Individual monthly income borrowers
(percent)
------------------------------------------------------------------------
$0--$499................................................ 2.9
$500--$999.............................................. 13.2
$1000--$1499............................................ 19.9
$1500--$1999............................................ 20.1
$2000--$2499............................................ 13.0
$2500--$2999............................................ 8.9
$3000--$3499............................................ 7.5
$3500--$3999............................................ 3.3
$4000--$4999............................................ 4.7
$5000--$5999............................................ 2.4
$6000--$6999............................................ 1.6
$7000--$7999............................................ 0.7
$8000--$8999............................................ 0.5
$9000--$9999............................................ 0.2
$10,000+................................................ 1.2
------------------------------------------------------------------------
Source: CFPB analysis of loan-level single-payment vehicle title loan
data.
Table 5 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.\929\
Based on Tables 3 and 4, it appears that very few households with
monthly income below $3,000 would be able to demonstrate an ability to
repay a loan with a payment of $700, and even $3,000 would 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 would 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 would be needed
to have sufficient residual income to make such a payment. Table 5
shows that less than one third of vehicle title borrowers have monthly
individual income above $2,500.
---------------------------------------------------------------------------
\929\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 15; CFPB Single-Payment Vehicle Title Lending, at 6.
---------------------------------------------------------------------------
Putting aside the difficulty of developing precise estimates of the
share of borrowers who would be able to demonstrate an ability to repay
a loan, it is clear that the share would be smaller for vehicle title
borrowers than payday borrowers simply because vehicle title borrowers
have slightly lower incomes, on average, and single-payment vehicle
title loans are substantially larger, on average, than payday loans.
Vehicle title lenders would 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
published the results of simulations of the impacts of this restriction
on the share of single-payment vehicle title loans that are currently
made that could still be made under the proposal.\930\ The simulations
do not account for the effects of the main ATR determination but
rather, as for the payday ATR simulations discussed above, assume that
borrowers could not take out a loan within 30 days of repaying a prior
loan. Depending on whether borrowers who currently take out long
sequences of loans would return to borrow again after a 30-day period
following repayment of a loan, the Bureau estimates that the re-
borrowing restrictions of the ATR approach would prevent between 48 and
78 percent vehicle title loans that are currently made, with an
equivalent reduction in loan volume and revenue.\931\
---------------------------------------------------------------------------
\930\ CFPB Report on Supplemental Findings, at ch. 6.
\931\ CFPB Report on Supplemental Findings, at 147.
---------------------------------------------------------------------------
Combined with the effects of the ATR requirement, vehicle title
lenders making single-payment loans would therefore likely experience
greater reductions in the volume and associated revenue from these
loans than would payday lenders.
(d). Overall Impacts on These Markets
For the reasons discussed above, the Bureau believes that the
proposed rule would 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 would come from the proposed limitations on lending.
Most of the costs associated with the procedural requirements of
the proposed rule are per-loan (or per-application) costs, what
economists refer to as ``marginal costs.'' Standard economic theory
predicts that marginal costs would be passed through to
[[Page 48126]]
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 would not be able to recoup
those costs through higher prices. The new procedural costs to lenders
making loans using the Alternative approach, however, would be quite
small, primarily the costs of obtaining data from registered
information systems and providing data to those same systems. Lenders
making vehicle title loans, which cannot be made under the Alternative
approach, would be required to incur the costs of using the ATR
approach. Given the larger average size of these loans, these costs
would likely have a limited impact on the price or availability of
these loans. If lenders make smaller loans to comply with the ATR
requirements, however, the relative importance of procedural costs
could increase.
The limitations on lending included in the proposed rule would have
a much larger impact on lenders and on these markets than would the
procedural costs. As described above, these limitations would 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
could be substantial as well. However, it is important to emphasize
that these revenue projections do not account for lenders making any
changes to the terms of their loans to better fit the proposed
regulatory structure or in 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. 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 would 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. This pattern 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.\932\
---------------------------------------------------------------------------
\932\ CFPB Report on Supplemental Findings, at ch. 3.
---------------------------------------------------------------------------
With regard to evolution in product offerings, it is quite likely
that lenders may respond to the requirements and restrictions in the
proposed 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 would 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,
when these loans can be originated profitably within the limits
permitted by State law.\933\ If those loans were covered longer-term
loans, lenders would be required to comply with the provisions of the
proposal that relate to those loans, including the ATR requirement or
one of the alternative approaches for covered longer-term loans.
Because borrowers would normally be more likely to have the ability to
repay a loan with lower payments, even if the payments extend over a
longer period of time, the likelihood that such loans will satisfy the
ATR requirement is generally higher, as discussed separately below.
---------------------------------------------------------------------------
\933\ 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?, at 3
(December 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
would 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 would likely have very little
direct cost for lenders that already offer those products. These
lenders would 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 would incur a number of costs.
These would include learning about or developing those products;
developing the policies, procedures, and systems required to originate
and 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 proposal would 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, and from the costs of defaulting on other major financial
obligations or being unable to cover basic living expenses in order to
pay off covered short-term loans. Borrowers would also benefit when
lenders adjusted their loan terms or product mix so that future loans
are more predictable and ultimate repayment is more likely.
Eliminating Extended Loan Sequences
As discussed in greater detail in Market Concerns--Short-Term
Loans, 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
reborrow their loans, or expect only a short period of reborrowing,
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 covered loans that would apply under either the ATR
approach or the Alternative approach would eliminate these long
sequences of loans.
Evidence on the prevalence of long sequences of loans in storefront
payday lending and single-payment vehicle title lending is discussed in
Market Concerns--Short-Term Loans. Based on analysis by the Bureau, by
academic and other researchers, by State government agencies, and on a
report submitted by several of the SERs as part of the SBREFA process,
several key findings emerge. First, the majority of new payday and
single-payment vehicle title loans result in reborrowing. With slight
variation depending on the particular analysis, from approximately one-
in-three to one-in-five payday loans and approximately one-in-eight
single-
[[Page 48127]]
payment vehicle title loans is repaid without reborrowing, while about
half of loans lead to sequences at least four loans long, for both
types of loan.\934\ 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 a 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.\935\
---------------------------------------------------------------------------
\934\ See CFPB Data Point: Payday Lending, at 10-11; CFPB
Single-Payment Vehicle Title Lending, at 10-11; CFPB Report on
Supplemental Findings, at ch. 5; Charles River Associates, Economic
Impact on Small Lenders of the Payday Lending Rules Under
Consideration by the CFPB (2015), available at http://www.crai.com/publication/economic-impact-small-lenders-payday-lending-rules-under-consideration-cfpb; Tennessee Dep't of Fin. Insts., Biennial
Report on the Title Pledge Industry, at 8 (2016) available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf.
\935\ nonPrime 101, Report 7-C, A Balanced View of Storefront
Payday Borrowing Patterns: Results from a Longitudinal Random Sample
over 4.5 Years, at Table A-7 (March 28, 2016) available at https://www.nonprime101.com/data-findings/.
---------------------------------------------------------------------------
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.\936\ Two studies have asked payday and
vehicle title borrowers about their expectations about how long it
takes to repay payday loans, and not reborrow shortly thereafter, and
compared their responses with actual repayment behavior of the overall
borrower population.\937\ These studies did not compare borrowers'
predictions with their own borrowing experiences, but did show that
borrowers appear, on average, somewhat optimistic about reborrowing.
---------------------------------------------------------------------------
\936\ The evidence described in this section is discussed in
greater detail in Market Concerns--Short-Term Loans.
\937\ Kathryn Fritzdixon, Jim Hawkins, & Paige Marta Skiba,
Dude, Where's My Car Title?: The Law, Behavior, and Economics of
Title Lending Markets, 2014 U. Ill. L. Rev. 1013 (2014), available
at https://illinoislawreview.org/wp-content/ilr-content/articles/2014/4/Hawkins,Skiba,&Fritzdixon.pdf; Marianne Bertrand & Adair
Morse, Information Disclosure, Cognitive Biases and Payday
Borrowing, 66 J. Fin. 1865 (2011), available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2011.01698.x/full.
---------------------------------------------------------------------------
One study asked borrowers about their expectations for reborrowing
and compared that with their actual borrowing experience.\938\ As
explained in more detail in Market Concerns--Short-Term Loans above, it
found that borrowers who wound up with very long sequences of loans had
rarely expected those long sequences; in fact they were no more likely
to expect long sequences than were other borrowers. A smaller share of
borrowers, 40 percent, expected to reborrow than the 60 percent who
actually did. And, 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 reborrowing.
---------------------------------------------------------------------------
\938\ Robert Mann, Assessing the Optimism of Payday Loan
Borrowers, 21 Sup. Ct. Econ. Rev. 105 (2014) (assessing the optimism
of payday borrowers); Email from Ronald Mann, Professor, Columbia
Law School, to Jialan Wang & Jesse Leary, Bureau of Consumer Fin.
Prot. (Sept. 24, 2013, 1:32 EDT).
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Two nearly identical surveys, one conducted in 2013 and one in
2016, of borrowers who had recently repaid a loan and not reborrowed
asked if it had taken as long as the borrower had initially expected to
repay the loan.\939\ They found that the overwhelming majority of
borrowers stated that it had not taken longer than they expected. This
approach, however, may suffer from recall problems, as borrowers were
asked about what they expected in the past and whether their
expectations were accurate. From the wording of the survey it is also
not clear if borrowers would 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.
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\939\ Tarrance Group, et al., Borrower and Voter Views of Payday
Loans (2016), http://www.tarrance.com/docs/CFSA-BorrowerandVoterSurvey-AnalysisF03.03.16.pdf (last visited May 29,
2016); Harris Interactive, Payday Loans and the Borrower Experience
(2013), http://cfsaa.com/Portals/0/Harris_Interactive/CFSA_HarrisPoll_SurveyResults.pdf (last visted May 29, 2016).
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It is less clear how large the benefits from the limitations on
rapid repeat borrowing would 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 source
of data on all online lenders. If very long sequences of loans are less
common for online loans, however, the costs of those sequences would be
less and the benefits to consumers of preventing long sequences would
be smaller.
Reduced Defaults and Delinquencies
The Bureau believes that borrowers taking out covered short-term
loans would experience substantially fewer defaults under the proposed
rule, for two reasons. First, borrowers who take out loans from lenders
that use the ATR approach would go through a meaningful evaluation of
their ability to make the payment or payments on the loan. The
borrowers whom lenders determine would have sufficient residual income
to cover each loan payment and meet basic living expenses over the term
of the loan, and 30 days thereafter, would likely pose a substantially
lower risk of default than the average risk of borrowers who currently
take out these loans. Second, lenders' ability to make long sequences
of loans to borrowers would be greatly curtailed, whether lenders use
the ATR or Alternative approach. This would give lenders a greater
incentive to screen borrowers to avoid making loans that are likely to
default. 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
reborrowing. The option to reborrow may make borrowers willing to make
a payment they know they cannot actually afford, given their other
obligations or expenditure needs. This ability to continue to reborrow
allows borrowers to put off defaulting, which may allow them to
ultimately repay the loan. If continued reborrowing does not allow them
to ultimately repay the loan, the lender will still have received
multiple finance charges before the borrower defaults.\940\ Each of
these effects, the ability to put off default and the ability to
collect multiple finance charges, makes borrowers with a higher
likelihood of default more attractive to lenders than they would be if
the restrictions on reborrowing in the proposal were to take effect.
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\940\ To put it another way, a lender considering making a loan
to a borrower who has not recently taken out a payday or single-
payment vehicle title loan presumably considers the expected credit
losses on the sequence of loans that the borrower will take out, as
well as the expected revenue from the sequence of loans.
Restrictions on the number of loans the borrower can take out in
sequence would lower the expected revenue from the loan sequence.
This means that some loan sequences that have positive expected
revenue, net of default costs, without restrictions on reborrowing
will have negative expected net revenue with restrictions on
reborrowing, and therefore would be less likely to be originated.
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Borrowers who are more likely to default are also more likely to
have late payments; reducing the rate of defaults would also reduce the
rate of late payments and the harm associated with
[[Page 48128]]
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 \941\ to over 10 percent.\942\ 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.\943\ 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 will likely charge a returned-item fee. In addition,
analysis the Bureau has conducted of payment requests from online
lenders shows that substantial numbers of payments that are made are
overdrafts.\944\ Fees for overdrafts are generally equal to NSF fees at
the same institution. Consumers would also benefit from the mitigations
of the harm from NSF and overdraft transactions by the proposed
limitations on payment practices and related notices described in the
section-by-section analysis of Sec. Sec. 1041.14 and 1041.15.
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\941\ ``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), available at http://www.sec.gov/Archives/edgar/data/1299704/000104746912002758/a2208026z10-k.htm.
\942\ Paige Marta Skiba & Jeremy Tobacman, Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default, at 6 (Vanderbilt University Law School, Law
and Economics Working Paper #08-33, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1319751&download=yes
[hereinafter Skiba & Tobacman].
\943\ Id.; Montezemolo & Wolff, at 5.
\944\ 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.
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Default rates on individual payday loans are fairly low, 3 percent
in the data the Bureau has analyzed.\945\ 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.\946\
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\945\ 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.
\946\ Skiba & Tobacman, at Table 2.
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Less information is available on the delinquency and default rates
for online 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.\947\ It shows a
lower rate of payment failure; six percent of payment attempts that
were not preceded by a failed payment attempt themselves failed.\948\
Default rates are more difficult to determine, but 42 percent of
checking accounts with failed online loan payments are subsequently
closed.\949\ This provides a rough measure of default on these loans.
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\947\ CFPB Online Payday Loan Payments.
\948\ CFPB Online Payday Loan Payments, at Table 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.
\949\ CFPB Online Payday Loan Payments, at Table 5.
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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 6 percent, and the sequence-level default rate is
33 percent. In the data the Bureau has analyzed, 3 percent of all
single-payment vehicle title loans lead to repossession, and at the
sequence level, 20 percent of sequences end with repossession. So, at
the loan level and at the sequence level, slightly more than half the
time default leads to repossession of the borrower's vehicle.
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.\950\ Thirty-five percent of
borrowers pledge the title to the only working vehicle in the
household.\951\ 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.
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\950\ Fritzdixon, et al., at 1038.
\951\ Pew Charitable Trusts, Auto Title Loans, Market Practices
and Borrower Experiences, at 14 (2015). available at http://
www.pewtrusts.org/~/media/assets/2015/03/autotitleloansreport.pdf.
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Harms From Making Unaffordable Payments
Consumers would 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 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 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.
Changes to Loan Structure
Consumers may benefit if lenders respond to the proposed 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 and experience the costs associated with reborrowing,
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. And, the financing costs of longer-term loans are
likely to be easier for borrowers to predict, given the high rate of
unanticipated reborrowing of short-term loans, and therefore borrowers
may be less likely to end up in a loan that is
[[Page 48129]]
substantially more expensive than they anticipated.\952\
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\952\ Note that longer-term loans have other costs that
borrowers may not fully anticipate, such as the specific costs and
consequences associated with default. These costs are discussed in
Market Concerns--Longer-Term Loans.
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(b). Costs to Consumers and Access to Credit
The procedural requirements of the rule would make the process of
obtaining a loan more time consuming and complex for some borrowers.
The restrictions on lending included in the proposal would reduce the
availability of storefront payday loans, online payday loans, and
single-payment vehicle title loans. Borrowers may experience reduced
access to new loans, i.e., loans that are not part of an existing loan
sequence. Some borrowers would also be prevented from rolling loans
over or reborrowing 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 receive absent the proposal.
Procedural Requirements
The procedural requirements for lenders would make the process of
obtaining a loan more time consuming for some borrowers. This would
depend on whether lenders use the ATR approach or the Alternative
approach, and the extent to which lenders automate their lending
processes. In particular, borrowers taking out payday loans originated
under the Alternative approach from lenders that automate the process
of checking their records and obtaining a report from a registered
information system would see little, if any, increase in the time to
obtain a loan. Borrowers taking out loans from lenders using the ATR
approach are more likely to experience additional complexity.
Storefront payday borrowers may be required to provide more income
documentation than is currently required (for example, documentation
for more than one pay period) and may also be required to document
their housing expenses. Online payday borrowers and vehicle title
borrowers would be required to provide documentation of the amount and
timing of their income, which currently is often not required, and also
may be required to document their housing expenses. All of these
borrowers would be asked to fill out a form listing the amount and
timing of their income and payments on major financial obligations. If
the lender orders consumer reports manually and performs the
calculations by hand necessary to determine that the borrower has the
ability to repay the loan, this could add 20 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. 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.
Reduced Access to Initial Loans
Initial covered short-term loans, 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--loans that are not taken during the term of and for 30
days following a prior covered loan--for a number of 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 proposal or be
unable to satisfy additional underwriting requirements adopted by
lenders to mitigate risk in light of the reduced revenue potential
resulting from the lower reborrowing that is permitted.
Payday borrowers are not likely to be required to satisfy an ATR
requirement unless and until they have exhausted the limits on loans
available to them under the Alternative approach. However, to obtain
loans under the Alternative approach, borrowers may be required to
satisfy more exacting underwriting requirements than are applied today
as lenders adopt measures in response to the Alternative approach's
limits on reborrowing. Moreover, after exhausting the limits on
Alternative approach loans, borrowers would be required to satisfy the
ATR requirement to start a new sequence.
The direct effects of the Alternative approach on borrowers'
ability to take out loans when they have not recently had a loan would
be quite limited. The Bureau estimates that only 6 percent of initial
payday loans taken out currently, that are not part of an existing
sequence, would be prevented by the annual limits, and 7 percent of
borrowers would be affected.\953\ That is, only 6 percent of the loans
that are most likely to reflect a new need for credit would be affected
by these annual limits on borrowing. These borrowers would then have to
satisfy the ATR test in order to start a new sequence.
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\953\ CFPB Report on Supplemental Findings, at 149. If
borrowers, as discussed above in part VI.F.1(c), who have loan
sequence cut short by the reborrowing restrictions return to
reborrow as soon at the 30-day limitation on reborrowing has ended,
a larger portion of these potential new sequences would be affected.
If all borrowers were to behave in this way, 9 percent of potential
initial new loans could not be originated under that Alternative
approach, affecting 11 percent of borrowers.
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Vehicle title borrowers are more likely to find themselves unable
to obtain an initial loan because the Alternative approach does not
provide for vehicle title loans and thus these borrowers would have to
satisfy the ATR requirement, as well as any additional underwriting
limitations imposed by the lender. Many of these consumers could choose
to pursue a payday loan instead and seek to avail themselves of the
Alternative 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 would not be eligible
for a payday loan.\954\ 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 would be dependent upon their ability
to demonstrate an ability to repay and satisfy any other underwriting
requirements the lender may impose.
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\954\ The 2013 FDIC National Survey of Unbanked and Underbanked
Households finds that 15 percent of consumers reporting having used
an auto title loan in the prior 12 months are unbanked.
---------------------------------------------------------------------------
Consumers who are unable to start new loan sequences because they
cannot satisfy the ability-to-repay requirement and have exhausted or
cannot qualify for a loan under the Alternative approach would bear
some costs from reduced access to credit. They may be forced to forgo
certain purchases or delay paying existing obligations, such as paying
bills late, or 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, overdrafting
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. And, some consumers may
take out
[[Page 48130]]
online loans from lenders that do not comply with the proposed
regulation.\955\
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\955\ It has been suggested that some borrowers might turn to
traditional 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 any evidence that the amount of such
lending increased in States which repealed their payday lending
prohibitions.
---------------------------------------------------------------------------
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 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.\956\ 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.\957\
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\956\ Neil Bhutta, Jacob Goldin, & Tatiana Homonoff, Consumer
Borrowing After Payday Loan Bans, at 1 (Nov. 24, 2014), available at
http://www.human.cornell.edu/pam/people/upload/ConsumerBorrowing_BhuttaGoldinHomonoff.pdf.
\957\ Pew Charitable Trusts, Payday Lending in America: Who
Borrows, Where They Borrow, and Why (2012), at 14-16, available at
http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/
2012/pewpaydaylendingreportpdf.pdf.
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In data collected by the Bureau from banks that ceased offering
DAP, there was no evidence that reduced access to these products led to
greater rates of overdrafting or account closure.\958\
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\958\ CFPB Report on Supplemental Findings, at 39.
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Limits on Loan Size
Lenders making loans using the Alternative approach could not make
loans larger than $500. This would limit the availability of credit to
borrowers who would seek a larger loan, and either do not have access
to loans under the ATR approach or could not 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.\959\ Any borrowers that would have preferred a
vehicle title loan but instead obtain a payday loan originated under
the Alternative approach may be more affected by the loan size limit,
as the median single-payment vehicle title loan is for nearly
$700.\960\
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\959\ CFPB Payday Loans and Deposit Advance Products White
Paper, at 15.
\960\ CFPB Single-Payment Vehicle Title Lending, at Table 1.
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Limits on Reborrowing
For storefront payday borrowers, most of the reduction in the
availability of credit would likely take the form of 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 would employ the
Alternative approach to making loans. If lenders only make loans under
the Alternative approach, each successive loan in a sequence would have
to reduce the amount borrowed by at least one-third of the original
principal amount, with a maximum of three loans per sequence, and
borrowers would only be able to take out six covered short-term loans
per year or be in debt on such loans for at most 90 days over the
course of a year.\961\ This restriction would limit borrowers paid
monthly to as few as three loans per year, depending on the timing of
when they take out their loans, relative to when they are paid. If
lenders make both ATR approach loans and Alternative approach loans,
borrowers who could demonstrate an ability to repay a loan could take
out ATR approach loans even if they could no longer take out an
Alternative approach loan because of the annual caps.
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\961\ Prior loans made using the ATR approach would count
towards the maximum number of loans and maximum time in debt limits
of the Alternative approach.
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As described above, consumers would benefit from not having long
sequences of loans that lead to higher borrowing costs than they
anticipate. Some borrowers, however, may experience costs from not
being able to continue to re-borrow. For example, 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
windfall may experience costs if they are unable to re-borrow the full
amount due because of the restrictions imposed by the proposed 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 exact situation may be
likely to ultimately repay the loan, given the upcoming windfall, but
it is conceivable that borrowers who lose the ability to continue to
borrow after taking out a payday loan could be more likely to default.
The Bureau does not believe, however, that the restrictions on lending
would lead to increases in borrowers defaulting on payday loans, in
part because the step-down provisions of the proposed Alternative
approach are designed to help the consumer 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.
Borrowers taking out single-payment vehicle title loans would also
be much less likely to be able to roll their loans over or borrow again
within a short period of time than they are today. These borrowers
would potentially suffer the same costs as those borne by payday
borrowers taking out loans under the ATR approach who would prefer to
roll over or reborrow rather than repay their loan without reborrowing.
Reduced Geographic Availability of Covered Short-Term Loans
Consumers would 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.\962\ 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.
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, which is roughly the median
travel distance for payday borrowers nationwide. Using the revenue
impacts calculated above for storefront lenders just using the
[[Page 48131]]
Alternative Approach, which were about 70 percent without accounting
for additional ATR lending or for changes in product terms or
mixes,\963\ the Bureau forecasts that a large number of storefronts
would close if the proposed rules were adopted, but that consumers'
geographic access to stores would not be substantially affected in most
areas.
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\962\ CFPB Report on Supplemental Findings, at ch. 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, Scale Economies at Payday Loan Stores,
Proceedings of the Federal Reserve Bank of Chicago's 43rd Annual
Conference on Bank Structure and Competition, at 233-259 (May 2007),
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2360233) as well as 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 (April 2014), available
at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs/
content-level_pages/fact_sheets/stateratelimitsfactsheetpdf.pdf.
\963\ CFPB Report on Supplemental Findings, at 149. 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 proposed regulation by, for example,
broadening the range of products they offer. The ability to do this
will vary across States and across individual lenders.
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(c.) Evidence on the Benefits and Costs to Consumers of Access to
Payday and Other Covered Loans
A number of studies have been conducted on the effects of consumers
having access to storefront payday loans. There is a much smaller
literature on the effects of access to online loans, and very little
research that can describe the effects of access to vehicle title
lending.
It is important to stress that most prior research has addressed
the question of what happens when all access to a given form of credit
is cut off. As described above, the proposed regulation would not ban
any of these products, and the evidence from States that have imposed
strong restrictions on lending, but not outright or de facto bans, is
that even after large contractions in this industry, loans remain
widely available in terms of physical locations.
The evidence on the effects on consumers of access to storefront
payday loans is mixed, with some studies finding positive effects from
access to loans, others no effects, and others finding that consumers
are made worse off when loans are available. Some evidence suggests
that the consumers who are most likely to benefit from access to payday
loans are those that have experienced a discrete short-term loss of
income or a one-time expense, such as from a natural disaster. If
payday lenders make loans using the Alternative approach, the proposed
regulation would not prevent people in these situations from taking out
loans; they would be prevented from taking out many loans in a row, but
if they are truly facing a short-term need and can quickly repay this
restriction would not affect them. The limited evidence on which
consumers tend to take out many loans in a row suggests that it is
consumers who chronically have expenses greater than their income,
rather than consumers with unusual one-time drops in income or
increases in expenses.
There are fewer studies on the effects of online lending on
borrowers, but those consistently show negative effects of these loans
with respect to outcomes like overdrafts and insufficient funds.
Most studies of the effects of payday loans on consumer welfare
have relied on State-level variation in laws governing payday lending.
Morgan, et. al., (2008), studying a number of State law changes over a
ten-year period, found that payday bans were associated with higher
rates of bounced checks.\964\ 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. Campbell, et. al.,
(2008), however, 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.\965\ Bhutta, et. al. (2008),
using data from the Current Population Survey, saw weak evidence of an
increase in involuntary account closings after the imposition of State
bans of payday loans, but this effect did not persist.\966\
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\964\ Donald P. Morgan & Michael R. Strain, Payday Holiday: How
Households Fare after Payday Credit Bans, FRB of New York Staff
Reports, No. 309, at 3 (Revised Feb. 2008).
\965\ Dennis F. Campbell, As[iacute]s Mart[iacute]nes-Jerez, &
Peter Tufano, Bouncing Out of the Banking System: An Empirical
Analysis of Involuntary Bank Account Closures, 36 J. of Banking &
Fin. 1224.
\966\ Bhutta, Goldin, & Homonoff, Consumer Borrowing After
Payday Loan Bans, at 1.
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In data collected by the Bureau from banks that ceased offering
DAP, there was no evidence that reduced access to these products led to
greater rates of overdrafting or account closure.\967\
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\967\ CFPB Report on Supplemental Findings, at 39.
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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.\968\ 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
(2014), found higher Supplemental Nutritional Assistance Program (food
stamp) usage and lower child-support payments with greater payday
availability.\969\
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\968\ Brian T. Melzer, The Real Costs of Credit Access: Evidence
from the Payday Lending Market, 162 Quarterly J. of Econ. 517
(2011), available at http://qje.oxfordjournals.org/content/126/1/517.
\969\ Brian T. Melzer, Spillovers from Costly Credit (Aug.
2014), available at http://www.kellogg.northwestern.edu/faculty/melzer/papers/spillovers%20from%20costly%20credit_08_13_14.pdf.
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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.\970\ 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.
---------------------------------------------------------------------------
\970\ Jonathan Zinman, Restricting Consumer Credit Access:
Household Survey Evidence on Effects around the Oregon Rate Cap, 34
J. Banking & Fin. 546 (2009), available at http://www.dartmouth.edu/
~jzinman/Papers/Zinman_RestrictingAccess_jbf_forth.pdf.
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Morse (2009) looked at the impact of the availability of payday
loans in particular circumstances, natural disasters.\971\ 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 goods.\972\ But, similar to Morse (2009), 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.
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\971\ Adair Morse, Payday Lenders: Heroes or Villians?, 102 J.
of Fin. Econ. 28 (2011), available at http://www.sciencedirect.com/science/article/pii/S0304405X11000870.
\972\ Christine L. Dobridge, Heterogeneous Effects of Household
Credit: The Payday Lending Case (working paper, Nov. 2014),
available at https://fnce.wharton.upenn.edu/files/?whdmsaction=public:main.file&fileID=8601.
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Carrell and Zinman (2008) \973\ developed a measure of payday loan
access similar to that used by Morse (2009) 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. Carter and Skimmyhorn (2015) used
the
[[Page 48132]]
implementation of the MLA, which effectively banned payday loans to
military personnel, to measure the impact of payday loans on financial
well-being and labor market outcomes of soldiers in the Army.\974\
Unlike Carrell and Zinman, they 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 time periods covered by the
respective studies.
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\973\ Scott Carrell & Jonathan Zinman, In Harm's Way? Payday
Loan Access and Military Personnel Performance, 27 Rev. Fin. Studies
2805 (2013), available at https://www.dartmouth.edu/~jzinman/Papers/
PayDay_AirForce_aug08.pdf.
\974\ Susan Payne Carter & William Skimmyhorn, Much Ado About
Nothing: Evidence Suggests No Welfare Improvements from the Military
Lending Act (working paper, Mar. 27, 2015), available at http://www.usma.edu/sosh/SiteAssets/Lists/FacultyBiographies/EditForm/carter-skimmyhorn-pdl-mar-2015.pdf.
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Another study 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).\975\ 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.
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\975\ Mary Zaki, Access to Short-term Credit and Consumption
Smoothing Within the Paycycle (working paper Dec. 23, 2013),
available at http://arefiles.ucdavis.edu/uploads/filer_public/2014/03/27/zaki-access-to-short-term-credit.pdf.
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Other studies, rather than using differences across States in the
availability of payday loans, have used data on borrowers who apply for
loans and are either offered loans or are rejected. Skiba and Tobacman
(2015) in using this approach found that taking out a payday loan
increases the likelihood that the borrower will file for Chapter 13
bankruptcy.\976\ 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.\977\ 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.
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\976\ Paige Skiba & Jeremy Tobacman, Do Payday Loans Cause
Bankruptcy? (working paper March 10, 2015), available at http://
assets.wharton.upenn.edu/~tobacman/papers/rd.pdf.
\977\ Neil Bhutta, Paige Marta Skiba, & Jeremy Tobacman, Payday
Loan Choices and Consequences, 47 J. Money, Credit & Banking 223
(2014), available at http://onlinelibrary.wiley.com/doi/10.1111/jmcb.12175/pdf.
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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.\978\ 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.
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\978\ Brian Baugh, What Happens When Payday Borrowers Are Cut
Off From Payday Lending? A Natural Experiment (Aug. 2015) (Ph.D.
dissertation, Ohio State University), available at http://fisher.osu.edu/supplements/10/16174/Baugh.pdf.
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The UK Financial Conduct Authority (FCA) \979\ 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 FCA 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.
---------------------------------------------------------------------------
\979\ Financial Conduct Authority, Technical Annexes Supplement
to CP 14/10, Impact of the Cap on High Cost Short Term Credit
Demand, at Technical Appendix 3 (July 2014), available at https://www.fca.org.uk/static/documents/consultation-papers/cp-14-10-technical-annexes.pdf.
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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) 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.\980\ These differences were not economically meaningful,
however, with each additional loan being associated with less than one
point in credit score increase.\981\ 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.\982\ Similar to
the Bhutta, et. al., study, neither of these 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.
---------------------------------------------------------------------------
\980\ Jennifer Priestley, Payday Loan Rollovers and Consumer
Welfare (Dec. 4, 2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2534628.
\981\ 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.
\982\ Ronald Mann, Do Defaults on Payday Loans Matter?, (working
paper Dec. 2014), available at http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2560005.
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In 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-terms loans would still be available in States that
allow them to consumers facing a truly short-term need for credit.
G. Potential Benefits and Costs of Proposed Rule to Covered Persons and
Consumers--Provisions Relating Specifically to Covered Longer-Term
Loans
This section discusses the impacts of the provisions of the
proposal that specifically relate to covered longer-term loans. These
provisions include the requirement that lenders determine that
applicants for these covered loans have the ability to repay the loan
while still meeting their major financial obligations and paying basic
living expenses proposed in Sec. 1041.9, as well as the alternative
approaches to making covered longer-term loans proposed in Sec. Sec.
1041.11 and 1041.12. In this section, 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.'' The practice of making
loans that share certain
[[Page 48133]]
features of loans made pursuant to the NCUA PAL program, with certain
additional restrictions, as described in the section-by-section
analysis of proposed Sec. 1041.11 will be referred to as the ``PAL
approach.'' The practice of making loans with a low portfolio default
rate, and other restrictions, as described in the section-by-section
analysis of proposed Sec. 1041.12, will be referred to as the
``Portfolio approach.''
The Bureau believes that most covered longer-term loans would be
made using the ATR approach. The PAL approach and the Portfolio
approach would allow some lenders to originate covered longer-term
loans without undertaking all of the requirements of the ATR approach.
The impacts of the ATR approach are discussed first. The impacts of the
PAL approach and the Portfolio approach are then discussed; those
impacts are primarily discussed relative to the impacts of the ATR
approach.
As noted in part VI.B, the Bureau believes that these provisions
would primarily affect vehicle title lenders, online lenders making
high-cost loans, and storefront payday lenders who have entered the
payday installment loan market. The provisions may also cover a portion
of the loans made by consumer finance companies when those lenders
obtain authorizations to withdraw payments directly from a borrower's
account or vehicle security. In addition, some loans made by community
banks or credit unions that are secured by a borrower's vehicle or
repaid from the consumer's deposit account may be covered, along with
many credit union PAL loans. The Bureau believes that the impacts of
the proposal on different types of lenders would vary widely because
their existing underwriting practices and business models vary widely.
The following discussion primarily focusses on the impacts for lenders
whose current operations would be most affected by the proposed rule,
since both the benefits and costs to those lenders would likely be more
substantial than for lenders whose practices are already more in line
with the proposed rule.
1. Benefits and Costs of ATR Requirements
The proposed rule would impose a number of procedural requirements
on lenders making covered longer-term loans using the ATR approach, as
well as impose restrictions on the covered loans that could be made. In
order to present a clear analysis of the benefits and costs of the
proposal, this section first describes the benefits and costs of the
proposal to lenders and then discusses the implications of the proposal
for the overall markets for these products. The benefits and costs to
consumers are then described.
(a). Benefits and Costs to Covered Persons
The benefits and costs of the procedural requirements are described
first. The limitation on lending to borrowers who have demonstrated an
inability to repay their outstanding loan is then discussed. The
possible effects on loan volume from the requirement that loans only be
made to borrowers who the lender determines have the ability to repay
the loan are then discussed, along with the benefits and costs to
lenders of this reduction. The section concludes with a discussion of
the possibility that lenders would respond by modifying their loan
terms or product mixes to either make it easier to originate loans
under the rule or to avoid falling within the scope of the rule.
The proposed rule would require lenders to consult their own
records and the records of their affiliates to determine whether the
borrower had taken out any recent covered loans or non-covered bridge
loan and, if so, the timing of those loans, as well as whether a
borrower currently has an outstanding loan and has demonstrated
difficulty repaying the loan. Lenders would be required to obtain a
consumer report from a registered information system containing
information about the consumer's borrowing history across lenders, if
available, and would be required to furnish information regarding
covered loans they originate to registered information systems. Lenders
would also be required to obtain information and verification evidence
about the amount and timing of borrowers' income and payments for major
financial obligations, obtain a statement from applicants listing their
income and payments on major financial obligations, and assess that
information to determine whether a consumer has the ability to repay
the loan. A lender could not make a covered loan to a borrower without
making a reasonable determination that the borrower could repay the
loan while still meeting major financial obligations and paying basic
living expenses.
In addition, a consumer who has had a covered short-term loan or a
covered longer-term balloon-payment loan outstanding within the past 30
days would need to demonstrate sufficient improvement in financial
capacity to overcome a presumption of unaffordability for a new covered
longer-term loan, unless the new loan would have substantially smaller
payments. Similarly, a consumer that had outstanding a covered longer-
term loan (other than a covered longer-term balloon-payment loan) or a
non-covered loan that was made or is being serviced by the same lender
or its affiliate and for which there was an indication that the
consumer is in financial distress would need to demonstrate sufficient
improvement in financial capacity to overcome a presumption of
unaffordability before refinancing into a new covered longer-term loan,
unless the new loan would have substantially smaller payments or
substantially lower cost of credit. Documenting the improved financial
capacity would impose procedural costs on lenders in some
circumstances.
Each of the procedural costs associated with making a loan using
the ATR approach would potentially be incurred for each loan
application, and not just for loans that were originated. Lenders would
likely avoid incurring the full set of costs on each application by
establishing procedures to reject applicants who fail a screen based on
a review of partial information. The Bureau expects that lenders would
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 would eliminate the
cost of collecting additional information on those borrowers who fail
those screens. But, in most cases lenders would incur some of these
costs evaluating loan applications that do not result in an originated
loan and in some cases lenders would incur all of these costs in
evaluating loan applications that are eventually declined. Finally,
lenders would be 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
underwriting loans and would 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.
As noted above, in the discussion of the benefits and costs to
covered persons of the provision relating to
[[Page 48134]]
covered short-term loans, a number of the proposed provisions concern
activities that lenders could choose to engage in absent the proposal.
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, in the lenders'
view, do not currently outweigh the costs.
Consulting Lender's Own Records
In order to consult its own records and those of any affiliates, a
lender would 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 would most
likely comply with this requirement by using computerized
recordkeeping. A lender operating a single storefront would 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 would 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 would presumably maintain a single set of
records; if it maintained multiple sets of records it would need a way
to access each set of records.
The Bureau believes that most lenders making covered longer-term
loans already have the ability to comply with this provision, with the
possible exception of lenders 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 lending
risk, such as by avoiding lending to a consumer who has defaulted on a
prior loan.
There may be some lenders, however, that currently do not have the
capacity in place to comply with this requirement. Developing this
capacity would enable them 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 would
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
would cost approximately $2,000, plus $1,000 for each additional
storefront. For firms that already have standard personal computer
hardware, but no electronic recordkeeping system, the Bureau estimates
that the cost would be approximately $500 per storefront. 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 would 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 loan origination system, the Bureau
estimates that doing so would take three minutes of an employee's time.
Accessing a Registered Information System
The Bureau believes that many lenders already work with firms that
provide some of the information that would be included in the
registered information system data for risk management purposes, such
as fraud detection. The Bureau recognizes, however that there also is a
sizable segment of lenders making covered longer-term loans that make
lending decisions without obtaining any similar data.
Lenders would benefit from obtaining consumer reports from
registered information systems through reduced fraud risk and reduced
default risk. And, because the proposed rule would require much broader
and detailed furnishing of information about loans that would be
covered loans, all lenders would benefit from the requirement to obtain
a consumer report from a registered information system because of the
greater market coverage and more detailed information.
As noted above, the Bureau believes that many lenders use automated
loan origination systems and would modify those systems or purchase
upgrades to those systems such that they automatically order a consumer
report from a registered information system during the lending process.
The costs of these systems are discussed below, in the discussion of
developing procedures, upgrading systems, and training staff. For
lenders that order reports manually, the Bureau estimates that it would
take approximately three minutes for a lender to request a report from
a registered information system. The Bureau expects that access to a
registered information system would be priced on a ``per-hit'' basis,
in which 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 would be
$0.50, based on pricing in existing specialty consumer reporting
markets.
Furnishing Information to Registered Information Systems
Lenders making most covered longer-term loans would be required to
furnish information about those loans to all information systems that
have been registered with the Bureau for 120 days or more, have been
provisionally registered with the Bureau for 120 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 would need 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 would need to furnish information about any update
to information previously furnished pursuant to the rule within a
reasonable period following the event prompting the update. And when a
loan ceases to be an outstanding loan, lenders would need to furnish
the date as of which the loan ceased to be outstanding, and the amount
paid on the loan.
Furnishing data to registered information systems would benefit all
lenders required to obtain consumer reports from such systems by
improving the quality of information available to such lenders. This
would allow lenders to better identify borrowers who pose relatively
high default risk, and the richer information and more complete market
coverage would make fraud detection more effective.
Furnishing information to registered information systems would
require lenders to incur one-time and ongoing costs. These include
costs associated with establishing a relationship with each registered
information system, developing procedures for furnishing the loan data,
and developing procedures to comply with applicable laws. Lenders using
automated loan origination systems would likely modify those systems,
or purchase upgrades to those systems, to incorporate the ability to
furnish the required information to registered information systems. The
costs of these systems are discussed below, in the discussion of
developing procedures, upgrading systems, and training staff.
The ongoing costs would be the costs of actually furnishing the
data. Lenders
[[Page 48135]]
with automated loan origination and servicing systems with the capacity
of furnishing the required data would have very low ongoing costs. For
example, lenders or vendors may develop systems that would
automatically transmit loan data to registered information systems.
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;
similar enhancements could automate reporting to one or more registered
information systems. Lenders that report information manually would
likely do so through a web-based form, which the Bureau estimates would
take five to 10 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. Assuming that multiple
registered information systems existed, it might be necessary to incur
this cost multiple times, if data are not shared across systems. As
discussed above, the Bureau would encourage the development of common
data standards for registered information systems when possible to
reduce the costs of providing data to multiple systems.
Obtaining Information And Verification Evidence about Income and Major
Financial Obligations
Lenders making loans under the ATR approach would be required to
obtain information and verification evidence about the amount and
timing of an applicant's income and payments for major financial
obligations, obtain a statement from applicants of their income and
required payments for major financial obligations, and assess that
information to determine whether a consumer has the ability to repay
the loan.
The benefit to lenders of collecting information and verification
evidence comes from using that information and evidence in the ATR
determination, which is discussed in a subsequent section.
There are two types of costs entailed in making an ATR
determination: The cost of obtaining the verification evidence and the
cost of making an ATR assessment consistent with that evidence, which
is discussed separately below. The impact on lenders with respect to
applicants found to lack ATR and thus denied a loan is also discussed
separately.
As noted above, many lenders already use automated systems when
originating loans. These lenders would likely modify those systems or
purchase upgrades to those systems to automate many of the tasks that
would be required by the proposal.
Lenders originating covered longer-term loans would be required to
obtain information and verification evidence on the amount and timing
of an applicant's income for all such loans. The Bureau understands
that the underwriting practices of lenders that originate loans that
would be covered longer-term loans vary substantially. The Bureau
believes that many lenders that make covered longer-term loans, such as
payday installment lenders, already obtain some information and
verification evidence about consumers' incomes, but that others, such
as some vehicle title lenders or some lenders operating online, do not
do so for some or all of the loans they originate. And, some lenders,
such as storefront consumer finance installment lenders who make some
covered longer term loans and some newer entrants, have underwriting
practices that may satisfy, or satisfy with minor changes such as
obtaining housing cost estimates, the requirements of the proposed
rule. Other lenders, however, do not collect information or
verification evidence on applicants' major financial obligations or
determine consumers' ability to repay a loan in the manner contemplated
by the proposal.
Lenders would be required to obtain a consumer report from a
national consumer reporting agency to verify applicants' required
payments under debt obligations. This would be in addition to the cost
of obtaining a consumer report from a registered information system.
Verification evidence for housing costs may be included on an
applicant's consumer report, if the applicant has a mortgage;
otherwise, such evidence could consist of documentation of rent or an
estimate of a consumer's housing expense based on the housing expenses
of similarly situated consumers with households in their area. The
Bureau believes that most lenders would purchase reports from specialty
consumer reporting agencies that would contain both debt information
from a national consumer reporting agency and housing expense
estimates. Based on industry outreach, the Bureau believes these
reports would cost approximately $2.00 for small lenders and $0.55 for
larger lenders. As with the ordering of reports from registered
information systems, the Bureau believes that many lenders would modify
their automated loan origination system, or purchase an upgrade to the
system to enable the system to automatically order a specialty consumer
report during the lending process. For lenders that order reports
manually, the Bureau estimates that it would take approximately two
minutes for a lender to request a report.
Lenders that do not currently collect income or verification
evidence for income would need to do so. For lenders that use a manual
process, for consumers who have straightforward documentation for
income and provide documentation for housing expenses, rather than
relying on housing cost estimates, the Bureau estimates that gathering
and reviewing information and verification evidence for income and
major financial obligations would take roughly three to five minutes
per application.
Some consumers may visit a lender's storefront without the required
documentation and may have income for which verification evidence
cannot be obtained electronically, raising lenders' costs and
potentially leading to some consumers failing to complete the loan
application process, reducing lender revenue.
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. 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.
Making Ability-to-Repay Determination
Once information and verification evidence on income and major
financial obligations has been obtained, the lender would need to make
a reasonable determination whether the consumer has the ability to
repay the contemplated loan. In addition to considering the information
collected about income and major financial obligations, lenders would
need to estimate an amount that borrowers generally need for basic
living expenses. They may do this in a number of ways, including, for
example, collecting information directly from applicants, using
available estimates published by third parties, or providing for a
``cushion'' calculated as a percentage of income. The time it takes to
complete this review would depend on the method used by the lender.
Making the determination would be essentially instantaneous for lenders
using automated systems; the Bureau estimates that this would take
roughly 10 additional minutes for lenders that use a manual process to
make these calculations.
[[Page 48136]]
Total Procedural Costs of the ATR Approach
In total, the Bureau estimates that obtaining information and
verification evidence about consumers' income and major financial
obligations and arriving at a reasonable ATR determination would take
essentially no time for a fully automated electronic system and between
15 and 20 minutes for a fully manual system, with total costs dependent
on the existing utilization rates of and wages paid to staff that would
spend time carrying out this work. Dollar costs would include a report
from a registered information system costing $0.50 and a specialty
consumer report containing housing cost estimates costing between $0.55
and $2.00, depending on lender size; lenders relying on electronic
services to gather verification information about income would face an
additional small cost.
Documenting Improved Financial Capacity
Lenders would not be able to make a covered longer-term loan during
the term of and for 30 days following a prior covered short-term loan
or covered longer term balloon-payment loan unless the borrower's
financial capacity has sufficiently improved or payments on the new
loan would be substantially smaller than payments on the prior loan.
This situation is unlikely to occur frequently, as a covered longer-
term loan would normally have payments that are substantially smaller
than the payment for a covered short-term loan or the balloon payment
of a covered longer-term balloon-payment loan. It could arise, however,
if the new loan were for a substantially larger amount than the prior
loan, or if the new loan had only a slightly longer term than the prior
loan (for example, a 46-day three-payment loan following a 45-day
three-payment loan).
A similar limitation would apply in cases in which a consumer has
indicated difficulty in repaying other types of covered or non-covered
loans to the same lender or its affiliates. Unless the payments on the
new loan would be substantially smaller than payment on the prior loan
or the new loan would substantially lower the cost of credit, the
consumer would be presumed not to be able to afford the new loan unless
the lender concluded that the borrower's financial capacity had
improved sufficiently in the preceding 30 days. The improvement in
financial capacity would need to be documented using the same general
kinds of verification evidence that lenders would be need to collect as
part of the underlying assessment of the consumer's ability to repay.
When making a loan using the ATR approach, a lender would need to
project the borrower's residual income, and therefore that aspect of
this requirement would impose no additional cost on the lender.
Comparing the borrower's projected financial capacity for the new loan
with the consumer's financial capacity since obtaining the prior loan
(or during the prior 30 days for an unaffordable outstanding loan)
would impose very little cost, as long as the same lender had made the
prior loan. If the lender did not make the prior loan, or if the
borrower's financial capacity would be better for the new loan because
of an unanticipated dip in income since obtaining the prior loan (or
during the prior 30 days), the lender would need to collect additional
documentation to overcome the presumption of unaffordability.
Developing Procedures, Upgrading Systems, and Training Staff
Lenders would need to develop procedures to comply with the
requirements of the ATR approach and train their staff in those
procedures. Many of these requirements would 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 reborrowing and while
paying for major financial obligations and basic living expenses is
likely to be a greater challenge for many lenders. The Bureau expects
that vendors, law firms, and trade associations are likely to offer
both products and guidance to lenders, lowering the cost of developing
procedures. Lenders would also need to develop a process for estimating
borrowers' basic living expenses. Some lenders may rely on vendors that
provide services to determine ability to repay that include estimates
of basic living expenses. For a lender to conduct an independent
analysis to determine reliable statistical estimate of basic living
expenses would be quite costly. There are a number of online services,
however, that provide living expense estimates that lenders may be able
to use to obtain estimates or to confirm the reasonableness of
information provided by loan applicants.
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
would likely include an automated system to make the ability-to-repay
determination; subtracting the component expense elements from income
itself is quite straightforward and would not require substantial
development costs. 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.\983\ 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 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. 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
would rely on the entity-level licenses.
---------------------------------------------------------------------------
\983\ In the PRA analysis prepared by the Bureau, the burden
hours estimated to modify loan origination systems is 500. This is
because only part of the systems modifications are for functions
related to information collections covered by the PRA. See Bureau of
Consumer Financial Protection Paperwork Reduction Act Information
Collection Request, Supporting Statement Part A, Payday, Vehicle
Title and Installment Loans (12 CFR part 1041).
---------------------------------------------------------------------------
The Bureau estimates that lender personnel engaging in making loans
would require approximately five hours of initial training in carrying
out the tasks described in this section and 2.5 hours of periodic
ongoing training per year.
Impacts of ATR Requirement on Loan Volume and Revenues
As noted above, the Bureau believes that most covered longer-term
loans would be originated under the ATR approach, as many current loan
products that would be covered longer-term loans would not readily
qualify for either the Portfolio or PAL approach.
The proposed rule would prevent lenders from making loans to
borrowers whom the lender could not determine had the ability to repay
the loan. This restriction would reduce the total number of covered
loans that could be originated and lower the average risk of default of
the loans that could be originated. Each of these effects would have
benefits and costs for lenders.
[[Page 48137]]
The set of covered longer-term loans is quite diverse. The Bureau
believes that the share of current borrowers taking out covered longer-
term loans who could demonstrate the ability to repay the loan varies
considerably across this diverse range of products. The impacts of the
ATR requirement in the proposed rule would, therefore, vary
considerably across these products. The discussion presented here is
for installment vehicle title loans and installment payday loans
originated either through storefronts or online.
As discussed in part VI.F.1(c), estimating the share of borrowers
who would be likely to demonstrate an ability to repay the loan is very
challenging. The same limitations apply to this discussion, with the
further complication that lenders making covered longer-term loans
would need to provide for a greater cushion when evaluating borrowers'
ability to repay, given the greater uncertainty about borrowers'
incomes and expenses over a longer loan term.
Table 6--Distribution of Individual Monthly Income by Installment Loan Type
----------------------------------------------------------------------------------------------------------------
Payday
Individual monthly income Vehicle title Payday installment
installment (all) (online only) a
----------------------------------------------------------------------------------------------------------------
$0-$499................................................ 3.2% 0.2% 0.0%
$500-$999.............................................. 15.7 3.3 0.3
$1000-$1499............................................ 21.6 8.3 1.8
$1500-$1999............................................ 19.4 13.2 5.0
$2000-$2499............................................ 12.6 13.0 10.0
$2500-$2999............................................ 8.2 12.8 12.5
$3000-$3499............................................ 6.3 10.8 13.6
$3500-$3999............................................ 3.2 8.3 9.6
$4000-$4999............................................ 4.2 11.8 16.6
$5000-$5999............................................ 2.2 7.4 10.4
$6000-$6999............................................ 1.3 4.7 6.9
$7000-$7999............................................ 0.6 2.5 3.8
$8000-$8999............................................ 0.5 1.6 2.3
$9000-$9999............................................ 1.0 1.0 1.5
$10,000+b.............................................. ................. 3.0 3.5
----------------------------------------------------------------------------------------------------------------
Source: CFPB analysis of loan-level data.
a Represents only those loans for which the Bureau was able to identify the origination channel as being online.
b Data does not contain vehicle title installment loan borrowers with reported individual monthly incomes in
this range.
Table 6 shows the distribution of borrowers' individual monthly
incomes reported in the data the Bureau has analyzed for vehicle title
installment loans, payday installment loans, and payday installment
loans originated online.\984\ It shows that the incomes of installment
vehicle title borrowers are quite low, with more than half of borrowers
having monthly incomes below $2,000. Comparing the income distribution
of installment vehicle title borrowers with that of single-payment
vehicle-title borrowers shows that they are nearly identical.\985\
Likewise, the average amount borrowed is quite similar for installment
and single-payment auto-title loans, with median loan size of $710
\986\ and $694,\987\ respectively. The main distinction between the two
types of loans is in the typical term, and therefore the size of the
payments. For single-payment loans, the median amount required to pay
off the loan in full is $798.\988\ In contrast, the median monthly
payment for vehicle title installment loans is $230,\989\ as the term
of an auto-title installment loan can range anywhere from 2.5 months to
several years in duration. Payments are due bi-weekly, or more
commonly, due monthly.\990\ Accordingly, larger numbers of consumers
may be able to afford an installment payment as compared to a single-
payment loan for roughly the same amount.
---------------------------------------------------------------------------
\984\ See CFPB Report on Supplemental Findings, at ch. 1, for
additional information about these data. For a portion of the loans
in the data, the origination channel is unknown. These loans are
included in the column labeled ``Payday Installment (All)''.
\985\ See Table 1.
\986\ CFPB Report on Supplemental Findings, at 13.
\987\ CFPB Single-Payment Vehicle Title Lending, at 7.
\988\ Bureau calculations based on data described in CFPB
Single-Payment Vehicle Title Lending.
\989\ See CFPB Report on Supplemental Findings, at 11.
\990\ See id., at ch. 1.
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Table 2, in part VI.F.1(c), shows the relationship between
individual income and household income for borrowers who are likely to
be in this market, and Table 3 shows remaining income for households
with different levels of monthly income.\991\ Table 3 shows that most
borrowers would appear to need at least $1,500 in household income to
be able to demonstrate an ability to make a $230 monthly payment. A
more likely scenario is that they would actually need $2,500 or $3,000
in household income to support such payments, given the additional
major financial obligations borrowers may have, other basic living
expenses not included in these calculations, and the need to provide an
additional cushion on covered longer-term loans. Table 2 shows that
household income of $3,000 would translate into individual income of
roughly $2,500, and Table 6 shows that approximately one third of
vehicle title borrowers have individual incomes of at least that
amount. Based on these results, the Bureau believes that the fraction
of auto-title installment borrowers who would demonstrate an ability to
repay would be similar to that of payday borrowers and somewhat higher
than that of single-payment vehicle title borrowers.\992\
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\991\ See part VI.F.1 for a discussion of the sources of data
and derivation of these tables.
\992\ See discussion of the share of payday borrowers and
single-payment vehicle title borrowers in part VI.F.1(c).
---------------------------------------------------------------------------
The Bureau also considered the share of payday installment loans,
originated through any channel, that were likely to support a
reasonable determination that the consumer could repay the loan. Table
6 shows that these borrowers are generally higher income than vehicle
title installment loan borrowers (or single-payment vehicle title loan
borrowers). The typical amount borrowed for a payday installment loan
is higher than for vehicle title installment loans, with a median loan
[[Page 48138]]
size of $1,000.\993\ The median monthly payment is only slightly higher
than for vehicle title installment loans at $304,\994\ suggesting
borrowers would need a similar household income to be able to
demonstrate an ability to repay both types of loans. Given the
substantially higher average incomes of payday installment borrowers,
as seen in Table 6, it appears that a majority would be able to
demonstrate an ability to repay a typical payday installment loan.
---------------------------------------------------------------------------
\993\ CFPB Report on Supplemental Findings, at 13.
\994\ Id., at 12.
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Table 6 shows that borrowers taking out loans online have higher
incomes, on average, than payday installment borrowers overall.\995\
These loans are also substantially larger, with a median loan size of
$2,400,\996\ and average monthly payments of $580.\997\ An individual
borrower may need $3,000 in monthly income for household income to be
sufficient to make such a payment. More than two-thirds of the online
installment borrowers in the Bureau's data have individual incomes at
least that high.
---------------------------------------------------------------------------
\995\ The distribution of income in the online-only data
analyzed by the Bureau is substantially higher than that reported by
nonPrime 101 using data from Clarity Services, a specialty consumer
reporting agency serving the online lending industry. nonPrime 101
has conducted its own analysis of potential impacts of an ATR
requirement and found the qualitatively similar result that
installment borrowers would be more likely to demonstrate an ability
to repay the loan than would payday borrowers. nonPrime 101, ``Using
Supply Side Data, Consumption Pattern Data and Consumer
Characteristics to Model Effects of Regulation and Suggest Industry
Responses,'' presented at nonPrime101 Conference 2015, Aug. 4-5,
2015. See also nonPrime 101, Report 1: Profiling Internet Small-
Dollar Lending, at Fig. 3 (July 15, 2014), available at https://www.nonprime101.com/wp-content/uploads/2013/10/Clarity-Services-Profiling-Internet-Small-Dollar-Lending-0717141.pdf.
\996\ CFPB Report on Supplemental Findings, at 13.
\997\ Id., at 12.
---------------------------------------------------------------------------
Taken together, these results suggest that borrowers who currently
take out payday installment loans are more likely to demonstrate an
ability to repay the loans than are borrowers who take out vehicle
title loans, or any short-term loans, and this result is stronger for
borrowers taking out loans online.
As discussed above, in part VI.F.1(c), there is an additional
important caveat to this analysis. The CEX expenditure data is for all
households in a given income range, not households taking out vehicle
title or payday installment loans. If these borrowers have unusually
high expenses, relative to their incomes, they would be less likely
than the data here suggest to be able to demonstrate an ability to
repay a loan. Conversely, if borrowers have unusually low expenses,
relative to their incomes, they would be more likely to be able to
borrower under the ATR approach. Given the borrowers' need for
liquidity, however, it is 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 loan, as
this may be a time of unusually high expenses or low income.
As noted above, the proposal would also impose a presumption of
unaffordability in which a consumer seeks to take out a covered longer-
term loan within 30 days of a previous outstanding covered short-term
loan or a covered longer-term balloon-payment loan, as well as when a
consumer seeks to refinance some other covered loan or non-covered loan
with the same lender or its affiliates under circumstances indicating
that the consumer may be under financial distress. The presumptions
would not apply in circumstances in which the new loans would
substantially reduce the cost of credit or payment size, and could be
rebutted by evidence of an improvement in the consumer's financial
capacity in the last 30 days. The Bureau cannot model the impacts of
the presumptions precisely. However, it believes that these proposals
would have more modest impacts on the volume of covered longer-term
loans overall than the basic ability-to-repay requirements, though they
could be more substantial as applied specifically to longer-term
balloon payment loans in which there is evidence of substantial
reborrowing activity.
Overall, the reduction in loan volume from the proposed rules would
benefit lenders to the extent that it would substantially reduce their
costs associated with default, including credit losses and the costs of
collections. Cash-flow analyses similar to the residual income analysis
that would be required under the proposed rule are common for some
types of storefront installment lenders, indicating that they find this
approach effective at reducing credit losses. Calculations of debt-to-
income ratios are likewise common among lenders in a variety of other
consumer credit markets, such as mortgages and credit cards. And,
recent entrants making loans that would be covered longer-term loans
use various sources of income and expense data to conduct similar
analyses.
While the Bureau does not have information on the default rates of
borrowers who would or would not demonstrate an ability to repay a
loan, the Bureau has published an analysis of the default rates of
borrowers with different PTI ratios on their loans. In its analysis,
the Bureau found that, for most of the products studied, borrowers with
a higher PTI ratio were more likely to default on their loans than were
borrowers with a lower PTI ratio.\998\ Similarly, an analysis of the
same set of loans by researchers with access to a more complete set of
information about the loans found higher PTI ratios to be associated
with higher risks of default.\999\ This suggests that a more refined
evaluation that included information on borrower's payments on other
major financial obligations and living expenses would provide
information about the risk of a borrower defaulting on the loan.
---------------------------------------------------------------------------
\998\ Id., at ch. 1.
\999\ Howard Beales & Anand Goel, Small Dollar Installment
Loans: An Empirical Analysis, at Table 1 (March 20, 2015), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581667.
---------------------------------------------------------------------------
A third analysis focusing on online installment loans, by a
research group affiliated with a specialty consumer reporting agency,
also shows a relationship between PTI and the overall default
rate.\1000\ That report found that the relationship was substantially
mitigated or eliminated if loans for which the borrower never made a
payment (``first-payment defaults'') were excluded from the analysis.
In contrast, in the online installment loan data analyzed by the
Bureau, while first-payment defaults are common, the relationship
between PTI ratio and default remained after eliminating the loans for
which a payment was never made from the analysis.\1001\ Another
analysis by the research group affiliated with a specialty consumer
reporting agency found that a residual income model was ``proven
predictive of loan performance.'' \1002\
---------------------------------------------------------------------------
\1000\ nonPrime 101, Report 6: The CFPB Five Percent Solution:
Analysis of the Relationship of Payment-to-Income Ratio to Defaults
in Online Installment Loans (Sept. 10, 2015), https://www.nonprime101.com/wp-content/uploads/2015/09/Report-6-The-CFPB-5-Percent-Solution1.pdf
\1001\ CFPB Report on Supplemental Findings, at 24 n.31.
\1002\ nonPrime 101, Report 8: Can Storefront Payday Borrowers
Become Installment Loan Borrowers? (Dec. 2, 2015), https://www.nonprime101.com/wp-content/uploads/2015/12/Report-8-Can-Storefront-Payday-Borrowers-Become-Installment-Loan-Borrowers-Web-61.pdf.
---------------------------------------------------------------------------
The reduced loan volume that would result when lenders could not
make a reasonable determination that some borrowers did not have the
ability to repay the loan would be a cost to lenders. The magnitude of
this cost would vary across lenders; it would appear, based on the
analysis presented above, to be greatest for vehicle title installment
lenders, who currently make loans to borrowers with substantially
[[Page 48139]]
lower income than lenders making payday installment loans.
The Bureau does not expect the same level of consolidation of
lenders making covered longer-term loans as it does for payday and
single-payment vehicle title lenders. Lenders making vehicle title
installment loans may face challenges in determining that applicants
have the ability to repay a loan that are similar to those faced by
payday lenders, based on the discussions presented above. These lenders
would not, however, face revenue impacts from limitations on rolling
over loans, or permitting reborrowing, in the same way lenders making
covered short-term loans would. And, given that installment products
have a wider range of possible loan structures, it may be more feasible
for these lenders to adjust the terms of the loans such that they are
able to determine that applicants have the ability to repay the loan.
Possible Lender Response--Modifying Loan Terms To Satisfy ATR
Requirement
When presented with a borrower who does not demonstrate an ability
to repay the loan for which the borrower has applied, a lender may
respond by changing the terms of the loan such that the borrower is
able to demonstrate an ability to repay the loan. This could possibly
be achieved through some combination of reducing the size of the loan,
lowering the cost of the loan, or extending the term of the loan. The
latter approach could, however, require the lender to build in a larger
cushion to account for the increased risk of income volatility. See the
section-by-section analysis of proposed Sec. 1041.9(b).
Lenders may benefit from changes that make loan payments more
manageable in the form of reduced defaults on the loans. Lowering the
price of the loans may also attract additional borrowers. Extending the
term of a loan may increase lender revenue, holding constant repayment.
Lenders would, however, receive less revenue per loan if they reduced
the loan size or the price of a loan. And, extending the term of a loan
or offering only a smaller loan may make the loan less attractive to a
borrower and therefore make a borrower less willing to take the loan.
Extending the term of a loan may reduce the risk of default because of
the lower payment, but there may be an off-setting effect of a greater
risk that a borrower would experience a negative shock to income or
expenses during the term of the loan, resulting in default. That risk
may be mitigated to the extent the lender adjusts the cushion used in
assessing the consumer's ability to repay.
Possible Lender Response--Lowering the Total Cost of Credit To Avoid
Coverage
Longer-term loans are not covered loans if the total cost of credit
of the loan is below 36 percent. Many of the products that would be
covered by the proposed rule have a total cost of credit that far
exceed 36 percent, and lenders making these loans would presumably not
cut the price of the loans so dramatically, or make other changes to
the structure of the loan that would affect the total cost of credit,
to make them non-covered loans. Some lenders, however, make loans that
are only slightly above the 36 percent coverage threshold. For example,
a community bank might make a loan with a low interest rate but a
relatively high origination fee (compared to the amount of the loan)
and a short repayment term. Such a loan can exceed 36 percent total
cost of credit. Lenders making these loans may choose to reduce the
origination fee, or set a minimum loan size or minimum term, to bring
the total cost of credit below 36 percent. Some lenders sell add-on
products that are included in the total cost of credit calculation
unless the products are only sold at least 72 hours after the proceeds
of the loan are disbursed. Lenders may defer the sale of these products
until after the loan has been originated if doing so would bring the
total cost of credit below 36 percent.
Lowering the total cost of credit would reduce lender revenue. It
may also attract additional borrowers, who may be of lower risk than
the lenders' current borrowers, and may also reduce the credit risk
posed by existing borrowers taking out loans as they are currently
structured.
Possible Lender Response--Forgoing Account Access or Vehicle Security
Interest
Longer-term loans are also not covered loans if they do not include
either the ability to obtain payment directly from a borrower's account
or a non-purchase security interest in an automobile. Some lenders may
choose to eliminate these terms of their loans so that they would not
be covered loans. Lenders that specialize in making vehicle title loans
with very high costs and very high default rates, such as those the
Bureau analyzed for its report,\1003\ are unlikely to make similar
loans without taking a security interest in a vehicle title. Some
lenders, however, such as some community banks, take a vehicle security
interest for loans that are much lower cost and have much lower rates
of default, and these lenders do not normally exercise their security
interest in the case of default. These lenders might, in some cases,
decide to continue to make these loans, or make similar loans that
otherwise pose lower credit risk, such as loans for smaller amounts,
without taking the security interest in a vehicle. Similarly, for some
lenders, such as online lenders, the ability to process payments
through an ACH payment request or other electronic payment method is
very important to their business model. For other lenders it may be
that the ability to submit ACH payment requests or present post-dated
checks provides some benefit in the form of reduced defaults and more
effective collections, but is not essential. These lenders may decide
to forgo ACH authorizations, post-dated checks, or other leveraged
payment mechanisms when originating the loan, rather than make covered
longer-term loans.
---------------------------------------------------------------------------
\1003\ CFPB Report on Supplemental Findings, at ch 1.
---------------------------------------------------------------------------
Relinquishing access to the borrower's account, or not requiring a
security interest in a vehicle as a condition of a loan could result in
a lender experiencing higher credit losses. Lenders may also experience
higher processing costs if they forgo electronic payments, and have
higher servicing and collections costs if borrowers' payments are not
made automatically. These changes, however, may attract borrowers who
would not take loans with those features, although these borrowers may
be of higher risk. It may also allow lenders to avoid certain
procedural costs, such as inspecting vehicles.
(b). Benefits and Costs to Consumers
Requirement to Determine ATR
Benefits
The proposal would benefit consumers by reducing the harm they
suffer from the costs of delinquency and default on longer-term loans,
from the costs of defaulting on other major financial obligations or
being unable to cover basic living expenses in order to pay off covered
longer-term loans, and from reducing the harms from reborrowing on
longer-term balloon payment loans.
The Bureau believes that the ATR requirements would lead to
borrowers who take out covered longer-term loans to experience
substantially fewer defaults. Currently, defaults are very common on
many types of loans that would be covered longer-term loans.
[[Page 48140]]
The Bureau has analyzed data on numerous loan products from seven
lenders that were originated both online and through storefronts and
published the results of that analysis.\1004\ The overall default rate
across all of the longer-term payday installment loan products is 24
percent.\1005\ The default rate on payday installment loans originated
online is much higher, at 41 percent, while for payday installment
loans originated through storefronts that rate is 17 percent.\1006\ The
Bureau also analyzed sequences of loans, which include, in addition to
initial loans, refinancings or loans taken out within 30 days of the
repayment of a prior loan. The sequence default rate is 38 percent
overall, 55 percent for loans originated online, and 34 percent for
loans originated in storefronts.\1007\ For loans originated through
either channel, approximately 20 percent of loans that defaulted had no
payments made; for 80 percent of defaults the lender was repaid at
least in part before the borrower defaulted.\1008\
---------------------------------------------------------------------------
\1004\ Id., at ch 1.
\1005\ Id., at 22. ``Default'' is defined in this analysis as
the loan being charged-off by the lender. The Bureau did not have
origination channel information available for all loans included in
the calculations of the ``overall'' default rate; those loans are
excluded from the ``storefront'' and ``online'' default rate
calculations.
\1006\ Id.
\1007\ Id.
\1008\ An analysis by NonPrime 101 of online installment loans
also found loan-level default rates similar to those seen in the
data analyzed by the Bureau, even after excluding lenders with
extremely high default rates. NonPrime 101, Report 6: The CFPB Five
Percent Solution: Analysis of the Relationship of Payment-to-Income
Ratio to Defaults in Online Installment Loans (Sept. 10, 2015),
https://www.nonprime101.com/wp-content/uploads/2015/09/Report-6-The-CFPB-5-Percent-Solution1.pdf.
---------------------------------------------------------------------------
The Bureau also found very high rates of default on installment
vehicle title loans. The Bureau found a default rate on these loans of
22 percent.\1009\ When measured at the sequence level, in which a
sequence includes refinancings or loans that borrowers took out within
30 days of paying off a prior loan, 31 percent of loan sequences
ultimately lead to a default.\1010\ The share of defaults in which the
borrower made no payments prior to defaulting is higher on vehicle
title loans, with 32 percent of defaults having no payments made.\1011\
---------------------------------------------------------------------------
\1009\ CFPB Report on Supplemental Findings, at 22. For vehicle
title loans, default is measured as the loan being charged off and/
or the vehicle being repossessed.
\1010\ Id.
\1011\ Id.
---------------------------------------------------------------------------
The Bureau believes that the proposed requirements for lenders
using the ATR approach to originate covered longer-term loans would
reduce the harms borrowers suffer when they obtain loans with payments
that exceed their ability to repay. Such borrowers are likely to fall
behind in making payments and experience harms such as bank and lender
fees imposed when checks bounce or ACH payments are returned unpaid.
Many of these borrowers end up defaulting and experience the harms from
default, which are discussed in greater detail in Market Concerns-
Longer-Term Loans and include not only bank and lender fees imposed
when checks bounce or ACH payments are returned unpaid, but also
aggressive collections practices, and, in the case of vehicle title
loans, loss of a vehicle to repossession. Borrowers whom lenders
determine would have sufficient residual income to cover each loan
payment and still meet basic living expenses over the term of the loan
would likely pose a substantially lower risk of default than the
average risk of borrowers who currently take out these loans. The
evidence on the relationship between PTI ratio and default, and how it
is informative about the effectiveness of an ATR assessment, is
discussed above in part VI.F.1(a).
The Bureau also believes that the proposed requirements for lenders
using the ATR approach to originate covered longer-term loans would
reduce collateral harms borrowers sometimes suffer from making
unaffordable payments. These may arise because the borrowers feel
compelled to forgo other major financial obligations or basic living
expenses to avoid defaulting on covered longer-term loans. If a lender
has taken a security interest in the borrower's vehicle, for instance,
the borrower may feel forced to prioritize the covered loan above other
obligations because of the leverage that the threat of repossession
gives to the lender. And, 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.
The ATR requirements would also reduce the harm that consumers
suffer from covered longer-term loans with balloon payments. As
discussed in Market Concerns--Longer-Term Loans, the Bureau has seen
evidence that covered longer-term loans with balloon payments have
higher default rates than similar loans without balloon payments and
that borrowers appear to refinance these loans, or reborrow shortly
after the time the balloon is due, in order to cover the balloon
payment. Requiring lenders to determine that a borrow has the ability
to repay a balloon payment would reduce the harm from default and the
likelihood of extended sequences of loans due to refinancings caused by
the difficulty of making the balloon payment.
Costs to Consumers and Costs and Impacts on Availability of Credit--
Procedural Requirements
The procedural requirements for lenders would impose some costs
directly on consumers by making the process of obtaining a loan more
time consuming for some borrowers. This would depend largely on the
extent to which lenders automate their lending processes. Borrowers
taking out covered longer-term loans from lenders that automate the
process of checking their records and obtaining a report from a
registered information system would see very little increase in the
time to obtain a loan.
Some borrowers taking out loans from lenders using the ATR approach
are likely to experience some additional complexity. Storefront
borrowers may be required to provide more income documentation than is
currently required (for example, documentation of income for more than
one pay period) and may also be required to document their rental
expenses. Online borrowers and vehicle title borrowers would be
required to provide documentation of their income, which is often not
required, today, and also may be required to document their housing
expense. All of these borrowers would be asked to fill out a form
listing their income and payments on major financial obligations. If
the lender orders reports manually and performs the calculations by
hand necessary to determine that the borrower has the ability to repay
the loan, this could add 20 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. 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.
The proposals could also increase the cost of credit to the extent
that lenders pass through the procedural costs from complying with the
proposed rule. As described above, however, these requirements would
likely lead to reduced costs from credit losses, which may mitigate
some of the procedural costs. And, many States impose caps on
[[Page 48141]]
the costs of credit that would limit, at least partially, the ability
of lenders to pass through cost increases to consumers.
Costs to Consumers and Impacts on Availability of Credit--Prohibition
on Lending to Borrowers Whom the Lender Does Not Determine To Have the
Ability To Repay the Loan
The restrictions on lending included in the proposal would reduce
the availability of payday installment and vehicle title installment
loans to some consumers. Borrowers would have less access to credit if
they cannot demonstrate an ability to repay a loan of the size they
desire on terms (e.g., price and duration) that are mutually acceptable
to the lender and the consumer. Some borrowers might still be able to
borrow, but for smaller amounts or with different loan structures, and
find this less preferable than the terms they would receive absent the
proposal.
Some borrowers who would be unable to take out loans would bear
some costs from this reduced access to credit. They may be forced to
forgo certain purchases or delay paying existing obligations, such as
paying bills late, or 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, overdrafting
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. And, some consumers may
take out online loans from lenders that do not comply with the proposed
regulation.
As discussed above, the Bureau does not anticipate the same level
of consolidation in the market for covered longer-term loans that is
likely to occur in the market for covered short-term loans.
Restrictions on Reborrowing
Although more limited than with regard to covered short-term loans,
the proposal would impose certain restrictions when there is reason to
believe that the consumer may be trapped in a cycle of reborrowing or
is otherwise in financial distress. Specifically, lenders would not be
able to make a covered longer-term loan with similar payments to a
consumer within 30 days of the consumer having a covered short-term
loan or covered longer-term balloon-payment loan outstanding unless
there is reliable evidence that the consumer's financial capacity has
improved sufficiently to support a reasonable determination of ability
to repay. A similar presumption would apply when a consumer seeks a new
loan from the same lender in circumstances that tend to indicate the
consumer is struggling to repay the earlier loan, including
refinancings that provide no new funds or new funds that are less than
the payments due within 30 days.
These provisions would prevent borrowers from incurring the costs
associated with taking out another covered loan which they are unlikely
to have the ability to repay. They would also reinforce lenders'
obligation to ensure that borrowers taking out covered loans can afford
them, as the lenders would be less able to use a covered longer-term
loan to continue to lend to a borrower who may otherwise default on the
loan. The limitations on refinancing may benefit consumers by causing
the lender and the borrower to take steps to resolve the problem rather
than have the borrower incur additional costs by continuing to borrow
from the lender. The borrower could also benefit if the lender were to
make a new covered longer-term loan with substantially smaller payments
than the prior loan.
The limitation on refinancing loans when the borrower has had
difficulty repaying the loan, or on refinancings that provide borrowers
with little or no new funds, may harm borrowers who are having
temporary financial problems but would be able to successfully repay
the new loan. There may be some borrowers who would benefit from
additional cash out from a refinancing, or who benefit from small
additional time before the next payment is due that a refinancing may
provide.
Offering Different Loan Terms To Satisfy ATR Requirement
Borrowers would benefit when a lender changes the terms of the loan
offered to the borrower so as to make the loan one that the borrower
can afford to repay by the reduced likelihood that the borrower would
suffer the costs associated with default or the collateral costs of
making unaffordable payments. For covered longer-term balloon-payment
loans in particular, lenders may respond to the ATR requirement by
offering a loan with a balloon payment that is affordable or offering
instead a loan with no balloon payment. This may benefit borrowers by
making less likely unanticipated refinancing or reborrowing at the time
the balloon is due.
Lenders may modify a loan to make it possible for a borrower to
satisfy the ATR requirement by extending the term or making a smaller
loan. If the term is extended and the borrower could have actually
afforded the higher payments associated with a shorter term, the
borrower may have a higher total cost of borrowing. Note, however, that
absent a prepayment penalty a borrower could still choose to make the
higher payments and retire the debt more quickly. If a lender offers a
borrower a smaller loan so as to satisfy the ATR requirement, a
borrower may be made worse off if the borrower could have afforded the
payments associated with the larger loan, but is unable to access a
larger amount of credit because of the ATR requirement.
Modifying Loan Terms To Avoid Coverage
If a lender lowers the cost of a loan to avoid coverage by the
proposed rule, this would benefit borrowers that are able to obtain the
loan at the lower cost. Similarly, if a lender forgoes the security
interest in a borrower's vehicle, a borrower able to obtain the loan on
otherwise identical terms would benefit from the elimination of the
risk that the borrower would lose the vehicle. And, if lenders stop the
practice of obtaining the ability to withdraw a payment directly from a
borrower's account this eliminates the harms associated with that
practice, including NSF and overdraft fees, account closure, and the
loss of control of the borrower's funds.
If lenders modify the loans they offer to avoid coverage by the
rule, some consumers who would otherwise be able to borrow from those
lenders may not be able to do so. Eliminating the security interest in
a vehicle or the ability to withdraw payments directly from a
borrower's account would increase the risk to the lender of default on
the loan. This would likely make the lenders more cautious regarding
whom they lend to. In addition, if lenders drop the practice of
requiring a leverage payment mechanism, this may make paying a loan
less convenient for those borrowers who prefer this method of
repayment. However, this cost is likely to be minimal because borrowers
would have the option of voluntarily establishing automatic repayment
later in the term of the loan.
2. Impacts of Portfolio and PAL Approaches
As noted above, the Bureau believes that most covered longer-term
loans would be made using the ATR
[[Page 48142]]
approach. The Portfolio and PAL approaches would each allow lenders
making certain types of loans to avoid many of the procedural costs
associated with the ATR approach. In addition, because the approaches
are less prescriptive as to underwriting and verification requirements,
they may allow some loans to be made to borrowers for whom lenders
could not make a reasonable determination of ability to repay.
Because these approaches are alternatives to the ATR approach, most
of the impacts of these approaches are most easily considered relative
to the ATR approach. As noted above, however, the overall impacts of
the rule are still being considered relative to a baseline of the
existing Federal and State legal, regulatory, and supervisory regimes
in place as of the time of the proposal.
(a). Portfolio Approach
To qualify for the Portfolio approach, a lender would need to make
loans with a modified total cost of credit of 36 percent or below, and
could exclude from the calculation of the modified total cost of credit
an origination fee that represents a reasonable proportion of the
lender's cost of underwriting loans made pursuant to this exemption,
with a safe harbor for a fee that does not exceed $50. Loans would need
to be at least 46 days long and no more than 24 months long, have
roughly equal amortizing payments due at regular intervals, and not
have a prepayment penalty. Finally, a lender's portfolio of loans
originated using the Portfolio approach would need to have a portfolio
default rate, as defined in Sec. 1041.12(d) and (e), less than or
equal to 5 percent per year. If the portfolio default rate were to
exceed 5 percent, the lender would be required to refund the
origination fees on the loans originated during that period. Consumers
could not be indebted on more than two outstanding loans made under
this exemption from a lender or its affiliates within a period of 180
days.
Lenders making loans using the Portfolio approach would be required
to conduct underwriting, but would have the flexibility to determine
what underwriting to undertake consistent with the provisions in
proposed Sec. 1041.12. They would not be required to gather
information or verification evidence on borrowers' income or major
financial obligations nor determine that the borrower has the ability
to repay the loan while paying major financial obligations and paying
basic living expenses. Lenders making loans using the Portfolio
approach would also not be required to obtain a consumer report from a
registered information system. Moreover, they would have the option of
furnishing information concerning the loan either to each registered
information system or to a national consumer reporting agency. They
would also not be required to provide the payment notice, the costs and
benefits of which are described below in part VI.H.2.
Benefits and Costs to Covered Persons
The Portfolio approach would benefit lenders that originate covered
loans but have a very low portfolio default rate. These are most likely
to be community banks and credit unions that make these loans to
customers or members with whom they have a longstanding
relationship,\1012\ but could include new entrants who develop
sophisticated underwriting approaches that achieve very low default
rates. These loans typically carry interest rates below 36 percent and
an application or origination fee to cover in-branch or online
origination and underwriting costs. Relative to the ATR approach, these
lenders would benefit from being able to make these loans without
obtaining consumer reports from a registered information system or
gathering the information and verification evidence for borrowers'
income and major financial obligations. They would also benefit from
being able to make loans to borrowers that they judge to pose a very
low risk of default, but who would not be able to satisfy ability-to-
repay requirements. Considering these impacts, the Bureau believes that
lenders who currently make covered loans with very low rates of default
would be able to continue to operate as they currently do, with little
additional burden imposed by the proposal.
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\1012\ In industry outreach, the Bureau has consistently been
told by these types of institutions that their portfolios of loans
that would be covered longer-term loans have default rates well
below 5 percent.
---------------------------------------------------------------------------
Relative to the ATR approach, lenders using the Portfolio approach
would also benefit from not having to provide the payment notices
described in the section-by-section analysis of Sec. 1041.15.
Lenders with very low default rates would still incur some costs to
use the Portfolio approach. They would be required to break out covered
longer-term loans from the rest of their consumer lending activity and
calculate the covered portfolio default rate. If that rate exceeded
five percent, they would bear the costs of making refunds. Because of
the risk of having to refund borrowers' origination fees, lenders would
be likely to seek to maintain a portfolio default rate lower than 5
percent, so as to limit the risk that an unexpected increase in the
default rate, such as from changing local or national economic
conditions, does not push the portfolio default rate above 5 percent.
Lenders making loans using the Portfolio approach would also have
to furnish information about those loans either to each registered
information system or to a national consumer reporting agency. The
Bureau believes that many lenders that would use this approach already
furnish information concerning loans that would be covered longer-term
loans to a national consumer reporting agency. Those that do not report
these loans to a national consumer reporting agency are likely to
report other loans, and therefore have the capability, at little
additional cost, to also furnish information about these loans.
Lenders may also suffer some loss of revenue from the restriction
on making more than two loans in a 180-day period.
Benefits and Costs to Consumers
Relative to the ATR approach, the Portfolio approach would benefit
borrowers who a lender believes pose a very low risk of default. It
would make the lending process quicker and avoid a situation in which
the affected consumers cannot obtain a loan because they cannot satisfy
the ability-to-repay requirements.
Borrowers may also benefit if the lender that they borrow from is
using the Portfolio approach and has a default rate rise about 5
percent, and is therefore required to refund the borrowers' origination
fees.
Because lenders using the Portfolio approach would not have to
follow all of the requirements of the ATR approach, some borrowers may
bear costs from obtaining loans that they do not have the ability to
repay while paying for major financial obligations and basic living
expenses. Given the low default rate that lenders would be required to
maintain, however, any additional risk to borrowers is likely to be
quite small, as only lending to borrowers who pose a very low
probability of default would also almost certainly mean only lending to
borrowers who are unlikely to have a very difficult time repaying the
loan.
Borrowers would also not be able to be indebted on more than two
outstanding loans made under the Portfolio approach from the lender or
its affiliates within a period of 180 days. The Bureau does not have
information about the frequency with which
[[Page 48143]]
borrowers currently take out loans that would likely be originated as
Portfolio approach loans, but given that these are all longer-term
loans, the Bureau expects that the impact of this limitation would be
small.
(b). PAL Approach
To qualify for the PAL approach, a loan could not carry a total
cost of credit of more than the cost permissible for Federal credit
unions to charge under regulations issued by the NCUA. NCUA permits
Federal credit unions to charge an interest rate of 1,000 basis points
above the maximum interest rate established by the NCUA Board, and an
application fee of not more than $20. The loan would need to be
structured with a term of 46 days to six months, with substantially
equal and amortizing payments due at regular intervals, and no
prepayment penalty. The minimum loan size would be $200 and the maximum
loan size $1,000.
Lenders making loans under the PAL approach would be required to
maintain and comply with policies and procedures for documenting proof
of recurring income, but would not be required to gather other
information or engage in underwriting, beyond any underwriting the
lender undertakes for its own purposes. Lenders making PAL loans would
not be required to obtain a consumer report from a registered
information system. Moreover, they would have the option of furnishing
information concerning the loan either to each registered information
system or to a national consumer reporting agency. They would also not
be required to provide a notice before attempting to collect payment
directly from a borrower's checking, saving, or prepaid account.
The Bureau believes that the PAL approach would primarily be used
by Federal credit unions that currently make loans under the NCUA PAL
program. Other covered longer-term loans, other than those made by
banks, are generally sufficiently more expensive that modifying the
loan terms to comply with the PAL approach requirements would not be
feasible. The Bureau expects that loans made by banks will generally be
made using the Portfolio approach.
Benefits and Costs to Covered Persons
Relative to the ATR approach, lenders that make loans that meet the
criteria of the PAL approach would benefit from being able to make
these loans without obtaining a consumer report from a registered
information system or gathering the information and verification
evidence for borrowers' major financial obligations. They would also
benefit from being able to make loans to borrowers for whom the lender
could not make a reasonable determination of ability to repay. Relative
to the ATR approach, lenders using the PAL approach would also benefit
from not having to provide the payment notices described in the
section-by-section analysis of Sec. 1041.15.
Lenders making loans using the PAL approach would have to furnish
information about those loans either to each registered information
system or to a national consumer reporting agency. The Bureau believes
that loans made using the PAL approach would primarily be originated by
credit unions; 75 percent of Federal credit unions that make loans
similar to the loans that would be covered furnish information about
those loans to a national consumer reporting agency.\1013\ Those that
do not report these loans to a national consumer reporting agency are
likely to report other loans, and therefore have the capability, at
little additional cost, to also report these loans.
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\1013\ Nat'l Credit Union Ass'n, Trends and Estimates of
Consumer Savings from Payday Alternative Loan Programs, Office of
Chief Economist Research Note (April 2015).
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Benefits and Costs to Consumers
Relative to the ATR approach, the PAL approach would benefit
borrowers who are able to obtain these loans. It would make the lending
process quicker and avoid a situation in which consumers could not
obtain a loan because they cannot satisfy the ability-to-repay
requirements.
Consumers may also benefit if lenders modify their loans to make
them fit within the PAL requirements by lowering the cost of the loan,
such as limiting the size or term of the loan, and such modification
allows consumers to obtain loans that are more suited to their needs.
As noted above, however, the Bureau expects that PAL approach loans
would be originated primarily by Federal credit unions making loans
under the NCUA PAL program, and therefore that it would not be common
for other lenders to modify their loans significantly to comply with
the PAL approach.
Some consumers may incur costs from the availability of the PAL
approach if lenders modify their loans to fit within the PAL
requirements in ways that make the loans less well-suited to the
consumers' needs. For example, a lender that only makes covered longer-
term loans using the PAL approach could not offer a covered loan larger
than $1,000 or for a term longer than six months. Consumers seeking
larger loans or loans for a longer term, for example, would not be able
to obtain a covered longer-term loan from such a lender. These
consumers may be able to find a loan more suited to their needs from
lenders that are using the ATR approach, if they are able to satisfy
the ability-to-repay requirements, or from a lender offering loans
under the Portfolio approach. And, as just noted, the Bureau does not
expect that many lenders other than Federal credit unions would modify
their loan offerings to qualify for the PAL approach.
Because lenders using the PAL approach would not have to follow all
of the requirements of the ATR approach, some borrowers may bear costs
from obtaining loans that they do not have the ability to repay. Given
the restrictions on cost and loan size, however, any additional risk to
borrowers is likely to be quite small.
H. Potential Benefits and Costs of Proposals to Consumers and Covered
Persons--Provisions Relating to Payment Practices and Related Notices
The proposed rule would limit how lenders initiate payments on a
covered loan from a borrower's account and impose two notice
requirements relating to those payments. Specifically, lenders would be
prohibited from continuing to attempt to withdraw payment from a
borrower's account, by any means, if two consecutive prior attempts to
withdraw payment directly from the account had failed due to
insufficient funds, unless the lender obtains a new and specific
authorization to make further withdrawals from the consumer's account.
The proposal would also require most lenders to provide a notice to
borrowers prior to each attempt to withdraw payment directly from a
borrower's account. A special notice would also be required to be sent
to the borrower if the lender could 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 would be less frequent if the proposal is finalized, both
because of the routine pre-withdrawal notices and because the
provisions requiring lenders to determine a borrower has the ability to
repay before making the borrower a loan or to comply with the
requirements of one of the conditional exemptions would reduce the
frequency with which borrowers receive loans that they do not
[[Page 48144]]
have the ability to repay. This should in turn lessen the impacts of
the limitation on payment withdrawal attempts and the requirement to
notify consumers when a lender would no longer be permitted to attempt
to withdraw payments from a borrower's account.
Most if not all of the proposed provisions concern activities that
lenders could choose to engage in absent the proposal. 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, in the lenders' view, do not
outweigh the costs. 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. In addition, some
lenders provide upcoming payment notices to borrowers in some form.
1. Limitation on Payment Withdrawal Attempts
The proposed rule would prevent 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 could resume initiating payment if the lender obtained from
the consumer a new and specific authorization to collect payment from
the consumer's account.
(a). Benefits and Costs to Covered Persons
The proposal would 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 not
continuing to attempt to withdraw funds following repeated failures, as
other methods of collecting may be more successful. As noted above,
some lenders already limit their own attempts to withdraw payment from
borrowers' accounts following one or more failed attempts.
The impact of this restriction depends on how often a lender
currently attempts to collect from a consumers' account after more than
two consecutive failed transactions and how often the lender is
successful in doing so. Based on industry outreach, the Bureau
understands that some lenders already have 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 proposal.
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.\1014\ 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.\1015\ The
Bureau found that only 7 to 10 percent of the payments received through
the ACH system came after two failed payments requests, equivalent to
$55 to $219 per borrower.\1016\ These payments would have been
prevented if the proposal had been in place at the time. The Bureau
notes that under the proposed restriction, lenders still could seek
payment from borrowers and so the preceding are high-end estimates of
the impact of the restriction on the payments that would not be
collected by these particular lenders if the proposed restriction were
in place. These other forms of lawful collection practices, however,
may be more costly for lenders than attempting to collect directly from
a borrower's account.
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\1014\ CFPB Online Payday Loan Payments, Table 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 as 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. During this time period, an ACH rule limiting re-
presentment of returned entries was in effect. Changes to the rules
governing the ACH system in the fall of 2015 may have reduced the
frequency with which lenders continue to make ACH payment requests
after one or more payment attempts have failed. However, as
discussed in Market Concerns--Payments, the Bureau believes that
these changes will not eliminate harmful payment practices in this
market.
\1015\ Id., at Table 1.
\1016\ 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 974.
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After the limitation is triggered by two consecutive failed
attempts, lenders would be required to send a notice to consumers. To
seek a new and specific authorization to collect payment from a
consumer's account, the lender could send a request with the notice and
might need to initiate additional follow-up contact with the consumer.
The Bureau believes that this would most often be done in conjunction
with general collections efforts and would impose little additional
cost on lenders.
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 proposal may reduce lenders' revenue from
those fees.
Lenders would 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 would
have the capacity to identify when two consecutive payments have
failed, and therefore this requirement would not impose a significant
new cost.
(b). Benefits and Costs to Consumers
Consumers would benefit from the proposed restriction because it
would 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 would 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 collected. Borrowers may also benefit from a
reduction in the frequency of checking account closure.
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.\1017\ As noted above, most re-presentments
\1018\ of failed payment requests themselves fail, leading to NSF fees.
In addition, 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
[[Page 48145]]
withdrawal attempts fail are charged additional fees on subsequent
payment attempts of $64 to $87. These costs would be prevented by the
proposal.\1019\
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\1017\ CFPB Online Payday Loan Payments, at 2.
\1018\ 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.
\1019\ These costs may also be lower now. See note 974.
---------------------------------------------------------------------------
The restriction on repeated attempts to withdraw payments from a
borrower's checking account may also reduce the rate of account
closure. 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.\1020\ 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% versus 3%, respectively).\1021\ 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.
---------------------------------------------------------------------------
\1020\ CFPB Online Payday Loan Payments, at 24.
\1021\ CFPB Report on Supplemental Findings, at 177.
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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 proposal would also require lenders to provide consumers with a
notice prior to every 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 would be required
to include the date the lender would 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 would be separate notices prior to regular
scheduled payments and prior to unusual payments. The notice prior to a
regular scheduled payment would also include the APR of the loan.
This requirement would not apply to lenders when making covered
longer-term loans under the Portfolio or PAL approaches.
(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 or making deposits into their accounts or contacting the
lender to make alternative arrangements.
Costs to lenders of providing these notices would depend heavily on
whether they are able to provide the notice via email or text messages
or would have to send notices through paper mail. This is due in part
to differences in transmission costs between different channels, but
another source of impact is that lenders would have to initiate paper
messages earlier in order to provide sufficient time for them to reach
consumers. As discussed in the section-by-section analysis of Sec.
1041.15, 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. As
discussed above, the Bureau has intentionally structured the proposal
to encourage transmission by email or text message because it believes
those channels will be most effective for consumers as well as less
burdensome for lenders.
The Bureau believes that all lenders that would 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, or text message, 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 would incur a one-time
burden to upgrade their disclosure systems to comply with new
disclosure requirements.
Lenders would 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
that large depositories and non-depositories 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 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 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 lenders with a
significant number of stores would rely on the entity-level licenses.
Lenders with disclosure systems that do not automatically pull
information from the lenders' loan origination or servicing system
would need to enter payment information into the disclosure system
manually so that the disclosure system can generate payment
disclosures. The Bureau estimates that this would require two minutes
per loan. 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
[[Page 48146]]
would charge two different rates, one for high volume mailings and
another for low volume mailings. For the high volume mailings, the
Bureau estimates vendors would charge $0.53 per disclosure. For the low
volume mailings, the Bureau estimates vendors would charge $1.00 per
disclosure. For disclosures delivered through email, the Bureau
estimates vendors would 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 would charge $0.08 to create and deliver each text message such
that it complies with the requirements of the proposed rule. The vendor
would also need to provide a Web page where the full disclosure linked
to in the text message would be provided. The cost of providing this
web disclosure is included in the cost estimate of providing the text
message.
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
transmitting paper notices would be required to mail them between six
and ten business days prior to the payment initiation, while electronic
delivery would be required between three and seven business days in
advance. This lag time could affect lenders' decisions as to the timing
and frequency of withdrawal attempts. With regard to revenue, impacts
could go either way: Payment revenue would 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 would reduce lenders'
losses from non-payment, although also lower lenders' returned-item fee
revenue.
(b). Benefits and Costs to Consumers
Receiving notices prior to upcoming payments would benefit
consumers by allowing them to take those payments into account when
managing the funds in their accounts. This would allow them to reduce
the likelihood that they would run short of funds to cover either the
upcoming payment or other obligations. The notice would 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.\1022\
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\1022\ CFPB Online Payday Payments, at 3.
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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 or paper delivery of the
notices; the Bureau is proposing that lenders must provide an email
delivery option whenever they are providing a text or other electronic
delivery option.
3. Required Notice When Lender Could No Longer Collect Directly From a
Borrower's Account
The proposal would require a lender that has made two consecutive
unsuccessful attempts to collect payment directly 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.
(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. Lenders, however, would likely attempt to make contact
with borrowers to obtain payment even in the absence of this
requirement.
The requirement would impose on lenders the cost of providing the
notice. Lenders would 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 would not impose
any additional cost on lenders. And, the Bureau expects that lenders
would 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 would be able to include the required
notice in that mailing.
The Bureau expects that lenders would incorporate the ability to
provide this notice into their payment notification process. The Bureau
estimates that vendors would 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 would 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 would charge $0.08 to create
and deliver each text message. The vendor would also need to provide a
Web page where the full disclosure linked to in the text message would
be provided. The cost of providing this web disclosure is included in
the cost estimate of providing the text message.
(b). Benefits and Costs to Consumers
Consumers would benefit from the notice because it would 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 would 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 would
impose any other costs on consumers.
I. Potential Benefits and Costs of the Proposed Rule to Consumers and
Covered Persons--Recordkeeping Requirements
The proposed rule would require lenders to maintain sufficient
records to demonstrate compliance with the proposed rule. This would
include, among other records, loan records; materials collected during
the process of originating loans, including the
[[Page 48147]]
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; records of attempts to
withdraw payments directly from borrowers accounts, and the outcomes of
those attempts; and, for lenders utilizing the Portfolio approach,
records of the calculation of the portfolio default rate.
1. Benefits and Costs to Covered Persons
The Bureau believes that some of the records that lenders would be
required to maintain would be maintained in the ordinary course of
business. Other records may not be retained in the ordinary course of
business. Given the very low cost of electronic storage, however, the
Bureau does not believe that this would impose a meaningful new burden
on lenders. Lenders would 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 would
facilitate lenders' ability to comply and to document their compliance
with other aspects of the rule.
2. Benefits and Costs to Consumers
Consumers would benefit from the requirement to maintain records
sufficient to demonstrate compliance because this would make compliance
by lenders more likely, and would facilitate enforcement of the
proposed rule which would help to ensure that consumers would receive
the benefits of the proposed rule.
J. Potential Benefits and Costs of the Proposed Rule to Consumers and
Covered Persons--Requirements for Registered Information Systems
As discussed above, the proposed rule would generally require
lenders to report covered loans to registered information systems in
close to real time. Entities wishing to become registered information
systems would need to apply to the Bureau for approval. The proposed
process for becoming a registered information system prior to the
effective date of proposed Sec. 1041.16 would require an entity to
submit an application for preliminary approval with information
sufficient to determine that the entity would be reasonably likely to
satisfy the proposed 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 by the Bureau, it would need to provide certain
written third-party assessments contemplated by the proposed rule and
submit an application to be a registered information system; the
proposal would also permit 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 would pose an unreasonable risk to
consumers.
On or after the effective date of Sec. 1041.16, the proposed rule
contemplates a slightly different two-stage process. Specifically, an
entity could become provisionally registered by submitting an
application that contains information and documentation sufficient to
determine that the entity satisfies the proposed conditions to become a
registered information system, including the written third-party
assessments contemplated by the proposed rule. Lenders would be
required to report information to a provisionally registered system,
but the reports from such a system would not satisfy the lenders'
obligations to check borrowing history until a 180-day period has
expired, after which time the system would be deemed a fully registered
information system.
Once an entity is a registered information system under either
process, the proposal would require the entity to submit biennial
assessments of its information security program.
The Bureau expects that applicants to become registered information
systems would 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 proposed rule, which would require that
an entity possess the technical capability to receive specific
information from lenders immediately upon furnishing, 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, as appropriate, and at
most would need to further expand and enhance such programs to satisfy
the registration requirements.
1. Benefits and Costs to Covered Persons
The proposal would 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
would provide registered information systems with detailed data on
borrowing of covered loans. The requirement to obtain a consumer report
before originating most covered loans would ensure that there would be
a market for these reports, which would provide a source of revenue for
registered information systems. Registered systems would 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 would
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 proposed requirements for registered information systems. Although
firms currently operating as consumer reporting agencies must comply
with applicable existing laws
[[Page 48148]]
and regulations, including Federal consumer financial laws and the
Standards for Safeguarding Customer Information, and should have
programs in place to ensure such compliance, as appropriate,
independent assessments of these programs, as contemplated in the
proposed rule, may impose additional costs for some firms.
Once approved, a registered information system would 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 proposed rule, would incur very limited cost. Firms that do not
obtain biennial independent assessments similar to those contemplated
in the proposed rule would 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 would 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 would benefit borrowers by facilitating compliance with the
proposed rule's ability to repay requirements and the various
conditional exemptions to the ability to repay requirements. Consumers
would also benefit from the requirement that systems themselves
maintain compliance programs reasonably designed to ensure compliance
with applicable laws, including those designed to protect sensitive
consumer information. Among other things, these programs would reduce
the risk of consumer data being compromised.
K. Alternatives Considered
In preparing the proposed rule, the Bureau has considered a number
of alternatives to the provisions proposed. In this section the major
alternatives are briefly described and their impacts relative to the
proposed provisions are discussed. The proposals discussed here are:
1. Limits on Reborrowing of Covered Short-Term Loans Without an
Ability-to-Repay Requirement;
2. An Ability-to-Repay Requirement for Short-Term Loans With No
Alternative Approach;
3. Disclosures as an Alternative to the Ability-to-Repay
Requirement; and,
4. Limitations on Withdrawing Payments From Borrowers' Account
Without Associated Disclosures.
1. Limits on Reborrowing of Covered Short-Term Loans Without an
Ability-to-Repay Requirement
The Bureau considered not imposing a requirement that lenders
making covered short-term 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, as discussed
above in connection with alternatives to the presumptions framework in
proposed Sec. 1041.6.
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 Alternative approach, and therefore lower than the
ATR approach to making short-term loans.
The impacts of this limitation on payday or vehicle title lender
revenue would be less than the current proposal. The ATR approach and
the repeated lending limit would both place a three-loan cap on loan
sequences, but the ATR approach would impose the requirement that a
lender not make a first loan without determining the borrower has the
ability to repay the loan. The ATR approach would also require lenders
to document that borrowers have had an improvement in their financial
capacity before making a second or third loan in a sequence.
The repeated lending limit would also have less impact on payday
lender revenue than would the Alternative approach. The Alternative
approach would also limit loan sequence to no more than three loans,
but would, in addition, impose loan size limitations and limit
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 borrower limits, the ATR approach, as noted above, would
allow less lending than the repeated lending limit.
The Bureau believes that if repeated lending were limited, lenders
would have stronger incentives compared to today to underwrite
borrowers for ability to repay because loan sequences 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. However,
a rule that relied solely on limiting repeat lending would increase the
risk that borrowers would wind up with loans that they would not have
the ability to repay relative to the proposed rule. This approach would
also lack the protections of the Alternative approach, which provides
for mandatory reductions in loan size across a sequence of loans. The
Bureau believes that this step-down system would 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 reborrowing would be prohibited.
And, without the Alternative 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 reborrowing by returning as soon
the 30-day period has ended.
2. An Ability-to-Repay Requirement for Short-Term Loans With No
Alternative Approach
The Bureau also considered proposing the ATR approach without
proposing the Alternative approach for covered short-term loans. This
would have a larger impact on the total volume of payday loans that
could be originated than would the proposal. As described in part
VI.F.1(c), the Bureau's estimates of the relative impacts of the
reborrowing limitations of the ATR approach and the Alternative
approach depends on details of how borrowers behave when loan sequences
are cut off. The ATR approach, however, also prevents loans to
borrowers when the lender determines that the borrower does not have
the ability to repay the loan. Analysis described in part VI.F.1(c)
shows that this is likely to prevent a substantial share of payday
loans from being made.
Without the Alternative approach, lenders would also be required to
incur the expenses of the ATR approach for all payday loans. Together,
these effects would increase the loss in revenue and the operating
costs of lenders making payday loans.
The lack of an Alternative approach would make payday loans less
available. Borrowers who had not recently had a payday loan but could
not demonstrate an ability to repay the loan would be
[[Page 48149]]
unable to take out a payday loan. It would also make taking out a
second loan within 30 days of a prior loan more difficult, as this
would only be an option for borrowers who could document an improvement
in their financial capacity. And, borrowers would not have the benefit
of the step-down in loan size across a sequence of loans, which the
Bureau believes will reduce the likelihood that borrowers will default
on their covered short-term loans.
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 reborrowing or default, rather than the ATR
approach and the several alternatives to the ATR approach.
The Bureau believes that a disclosure-only approach would have
lower procedural costs for lenders than would the ATR approach, the
Alternative approach, the Portfolio approach, or the PAL approach. If
lenders were required to prepare disclosures that were customized to a
particular loan, that 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 reborrowing and the costs of reborrowing showed that these
disclosures had a marginal effect on the total volume of payday
borrowing.\1023\ Analysis by the Bureau of similar disclosures
implemented by the State of Texas, showing a reduction in loan volume
of 13 percent, confirms the limited magnitude of the impacts from the
field trial.
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\1023\ 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.
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The Bureau believes that a disclosure-only approach would also have
substantially less impact on the harms consumers experience from long
sequences of payday and single-payment vehicle title loans. Given that
loans in very long sequences make up well over half of all payday and
single-payment vehicle title loans, a reduction of 13 percent in total
lending clearly 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 reborrowing on a payday loan declined by
approximately 2 percent once the disclosure was put in place,
indicating that high levels of reborrowing and long sequences of payday
loans remain a significant source of consumer harm. A disclosure-only
approach would also not change lenders incentives to encourage
borrowers to take out long sequences of covered short-term loans.
While similar empirical evidence is not available for disclosures
warning borrowers taking out covered longer-term loans of the risks
associated with those loans, the Bureau believes that such disclosure
would also be ineffective in warning borrowers of those risks and
preventing the harms that the Bureau seeks to address with the
proposal. Due to the potential for tunneling in their decision-making
and general optimism bias, as discussed in more detail in Market
Concerns--Short-Term Covered Loans and Market Concerns--Longer-Term
Covered Loans, 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 an outcome, default,
that they do not anticipate experiencing themselves. 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.
4. Limitations on Withdrawing Payments From Borrowers' Account Without
Associated Disclosures
The Bureau considered including the proposed 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 disclosures of upcoming payments (both usual and 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 impacts of the provision that would require that
notice. In addition, however, there may be a particular interaction if
lenders were 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 be 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 be better
off using some alternative method of payment.
L. 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
would be covered short-term loans. The Bureau believes that some of
these institutions do originate loans that would be covered longer-term
loans.
As discussed in Part II, some community banks make loans that are
secured by a borrower's vehicle. These loans generally have interest
rates well below 36 percent but have origination fees that cause
smaller loans to have a total cost of credit above 36 percent. The
Bureau believes that community banks that make these loans would do so
primarily by using the Portfolio approach. Community banks have told
the Bureau that, because they lend primarily to customers with whom
they are already familiar and with whom they have an ongoing
relationship, their default rates are generally well below 5 percent.
The banks may need to adjust their pricing to fall within the
requirements of the Portfolio approach, such as by lowering their
origination fee. If they are unable to raise the interest rate to
compensate for the lower fee this would result in reduced revenue.
Alternatively, a bank could document the costs associated with
originating a loan and charge a fee commensurate with those costs.
Banks that do not report the loans that would be covered loans to a
national consumer reporting agency would incur the costs of that
reporting or the costs of reporting the loans to registered information
systems. The Bureau believes, however, that even if a community bank is
not reporting these particular loans the bank would be reporting other
loans to one or more national consumer reporting
[[Page 48150]]
agencies, and therefore the costs of reporting these loans, as well,
would be quite limited.
Some small Federal credit unions make loans to their members as
part of the NCUA PAL program. Similar to the loans made by community
banks, many have origination fees that cause the total cost of credit
to be above 36 percent, and many are repaid directly from the member's
deposit account. As a result, many loans originated under the PAL
program would be covered longer-term loans. The Bureau believes that
small credit unions that make PAL loans would continue to do so, using
the PAL approach. This proposed approach would impose two additional
requirements on credit unions beyond those of the NCUA PAL program.
Loans would need to be at least 46 days in length; the Bureau believes
that most PAL loans are already more than 46 days long. And, credit
unions that do not currently report PAL loans to a national consumer
reporting agency would be required either to do so or to report the
loans to each registered information system, and to incur the costs of
reporting. The majority, 75 percent, of Federal credit unions that make
loans similar to the loans that would be covered furnish information
about those loans to a national consumer reporting agency.\1024\ In
addition, the Bureau believes that even if a credit union is not
reporting PAL loans the credit union is reporting other loans, and
therefore the costs of reporting PAL loans, as well, would be quite
limited.
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\1024\ Nat'l Credit Union Ass'n, Trends and Estimates of
Consumer Savings from Payday Alternative Loan Programs, Office of
Chief Economist Research Note (April 2015).
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M. Impact on Consumers in Rural Areas
Consumers in rural areas would have a greater reduction in the
availability of covered short-term loans originated through storefronts
than would consumers living in areas that are not rural. As described
in parts VI.F.1(b) and VI.F.2(b), the Bureau estimates that the
proposed restrictions on making covered short-term loans would likely
lead to a substantial contraction in the markets for storefront payday
loans and storefront single-payment vehicle title loans. 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.\1025\ In those states, nearly all borrowers living in
non-rural areas (or MSAs) still had physical access to a payday
store.\1026\ 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.\1027\ Thirty seven percent would also need to
travel at least 20 miles in Colorado.\1028\ In Virginia, almost all
borrowers had a store that remained open within 20 miles of their
previous store.\1029\ And, in Washington 9 percent of borrowers would
have to travel at least 20 additional miles.\1030\ While many borrowers
who live outside of MSAs do travel that far to take out a payday loan,
many do not,\1031\ and the additional travel distance would 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 would retain the option to seek covered loans
from online lenders, subject to the restrictions of State and local
law.
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\1025\ CFPB Supplemental Findings, at ch. 3.
\1026\ Id., at 97.
\1027\ Id.
\1028\ Id.
\1029\ Id.
\1030\ Id.
\1031\ Id. at 93.
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The Bureau has not been able to study a similar contraction in the
single-payment vehicle title market, but expects that the relative
impacts on rural and non-rural consumers would 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.
Other than the greater reduction in the physical availability of
covered short-term loans made through storefronts, the Bureau does not
believe that consumers living in rural areas would experience
substantially different effects of the proposed regulation than other
consumers.
N. Request for Information
The Bureau will further consider the benefits, costs and impacts of
the proposed provisions and additional proposed modifications before
finalizing the proposal. As noted above, there are a number of areas in
which additional information would allow the Bureau to better estimate
the benefits, costs, and impacts of this proposal and more fully inform
the rulemaking. The Bureau asks interested parties to provide comment
or data on various aspects of the proposed rule, as detailed in the
section-by-section analysis. Information provided by interested parties
regarding these and other aspects of the proposed rule may be
considered in the analysis of the benefits, costs, and impacts of the
final rule.
VII. Regulatory Flexibility Act Analysis
Under section 603(a) of the Regulatory Flexibility Act (RFA), an
initial regulatory flexibility analysis (IRFA) ``shall describe the
impact of the proposed rule on small entities.'' \1032\ Section 603(b)
of the RFA sets forth the required elements of the IRFA. Section
603(b)(1) requires the IRFA to contain a description of the reasons why
action by the agency is being considered; \1033\ section 603(b)(2)
requires a succinct statement of the objectives of, and the legal basis
for, the proposed rule.\1034\ The IRFA further must contain a
description of and, where feasible, provide an estimate of the number
of small entities to which the proposed rule will apply.\1035\ Section
603(b)(4) requires a description of the projected reporting,
recordkeeping, and other compliance requirements of the proposed 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.\1036\ In
addition, the Bureau must identify, to the extent practicable, all
relevant Federal rules which may duplicate, overlap, or conflict with
the proposed rule.\1037\ The Bureau, further, must describe any
significant alternatives to the proposed rule which accomplish the
stated objectives of applicable statutes and which minimize any
significant economic impact of the proposed rule on small
entities.\1038\ Finally, section 603(d) of the RFA requires that the
IRFA include a description of any projected increase in the cost of
credit for small entities, a description of any significant
alternatives to the proposed rule which accomplish the stated
objectives of applicable statutes and which minimize any increase in
the cost of credit for small entities (if such an increase in the cost
of credit is projected), and a description of the advice and
recommendations of representatives of
[[Page 48151]]
small entities relating to the cost of credit issues.\1039\
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\1032\ 5 U.S.C. 603(a).
\1033\ 5 U.S.C. 603(b)(1).
\1034\ 5 U.S.C. 603(b)(2).
\1035\ 5 U.S.C. 603(b)(3).
\1036\ 5 U.S.C. 603(b)(4).
\1037\ 5 U.S.C. 603(b)(5).
\1038\ 5 U.S.C. 603(c).
\1039\ 5 U.S.C. 603(d)(1).
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1. Description of the Reasons Why Agency Action Is Being Considered
As discussed in Market Concerns--Short-Term Loans, Market
Concerns--Longer-Term Loans, and Market Concerns--Payments above, the
Bureau is concerned that practices in the market for payday, vehicle
title, and installment loans 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 can afford 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 cause substantial injury to consumers.
To address these concerns, the proposed rule would identify certain
practices in the markets for covered loans as an unfair and abusive act
or practice and would impose certain requirements in connection with
the extension and servicing of covered loans in order to prevent those
unfair and abusive acts and practices. For a further description of the
reasons why agency action is being considered, see the discussions in
Market Concerns--Short-Term Loans, Market Concerns--Longer-Term Loans,
and Market Concerns--Payments, above.
2. Statement of the Objectives of, and Legal Basis for, the Proposed
Rule
The Bureau is issuing the proposed 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.
In particular, section 1031(b) of the Dodd-Frank Act provides the
Bureau with authority to prescribe rules to identify and prevent
unfair, deceptive, and abusive acts or practices.\1040\ Section 1031(c)
of the Dodd-Frank Act sets forth the standard for ``unfair'' acts or
practices; \1041\ section 1031(d) of the Dodd-Frank Act sets forth the
standard for ``abusive'' acts or practices.\1042\ The proposed rule
would identify certain acts or practices related to covered loans as
unfair and abusive and would prescribe requirements for the purposes of
preventing such acts or practices.\1043\
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\1040\ 12 U.S.C. 5531(b).
\1041\ 12 U.S.C. 5531(c).
\1042\ 12 U.S.C. 5531(d).
\1043\ 12 U.S.C. 5531(b) (providing that ``rules under this
section may include requirements for the purposes of preventing such
acts or practices.'')
---------------------------------------------------------------------------
The Bureau's proposal would also promote consumer comprehension
through disclosures and provide model disclosure forms. Section 1032(a)
of the Dodd-Frank Act authorizes the Bureau to 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 benefits, costs, and risks
associated with the product or service, in light of the facts and
circumstances.'' \1044\ Section 1032(b)(1) of the Dodd-Frank Act
provides that any final rule prescribed by the Bureau under Dodd-Frank
Act 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.\1045\
---------------------------------------------------------------------------
\1044\ 12 U.S.C. 5532(a).
\1045\ 12 U.S.C. 5532(b)(1).
---------------------------------------------------------------------------
Under section 1022(b) of the Dodd-Frank Act, the Bureau is
authorized to ``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.'' \1046\ Section 1022(b)(3)(A)
of the Dodd-Frank Act authorizes the Bureau to, by rule,
``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, taking into consideration the factors set
forth in section 1022(b)(3)(B) of the Dodd-Frank Act.\1047\ In exercise
of these authorities, the Bureau's proposal would provide a partial and
conditional exemption from parts of the proposed rule for certain
covered loans.
---------------------------------------------------------------------------
\1046\ 12 U.S.C. 5512(b)(1).
\1047\ 12 U.S.C. 5512(b)(3)(A).
---------------------------------------------------------------------------
The sections of the Bureau's proposal that would govern furnishing
of information to registered information systems and would prescribe
processes and criteria for registration of information systems are also
authorized by additional Dodd-Frank authorities, including Dodd-Frank
Act sections 1021(c)(3),\1048\ 1022(c)(7),\1049\ 1024(b)(1),\1050\ and
1024(b)(7).\1051\
---------------------------------------------------------------------------
\1048\ 12 U.S.C. 5511(c)(3).
\1049\ 12 U.S.C. 5512(c)(7).
\1050\ 12 U.S.C. 5514(b)(1).
\1051\ 12 U.S.C. 5514(b)(7).
---------------------------------------------------------------------------
The legal basis for the proposed rule is discussed in detail in the
legal authority analysis in part IV and in the section-by-section
analysis in part V.
3. Description and, Where Feasible, Provision of an Estimate of the
Number of Small Entities to Which the Proposed Rule Will Apply
As discussed in the Small Business Review Panel Report, for
purposes of assessing the impacts of the proposed rule on small
entities, ``small entities'' is defined in the RFA to include small
businesses, small nonprofit organizations, and small government
jurisdictions.\1052\ A ``small business'' is determined by application
of SBA regulations and reference to the North American Industry
Classification System (NAICS) classifications and size standards.\1053\
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.\1054\
---------------------------------------------------------------------------
\1052\ 5 U.S.C. 601(6).
\1053\ 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.
\1054\ See id.
---------------------------------------------------------------------------
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 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.
Since the time the Small Business Review Panel Report was
completed, some of the data sources that the Bureau used to estimate
the numbers of small
[[Page 48152]]
entities of different types have released updated information and the
Bureau has revised some aspects of the estimation procedure. The
following table provides the Bureau's revised estimates of the number
and types of entities that may be affected by the proposed rule: \1055\
---------------------------------------------------------------------------
\1055\ In the Small Business Review Panel Report, 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 26-27.
Table 1--Estimated Number and Types of Affected Entities and Small Entities by NAICS Code
----------------------------------------------------------------------------------------------------------------
Estimated Estimated
NAICS Industry NAICS Code Small entity threshold number of number of
total entities small entities
----------------------------------------------------------------------------------------------------------------
Commercial Banks, Savings 522110; 522120; $550 million........... 13,348 11,676
Institutions, and Credit Unions. a 522130 in assets..............
Nondepository Institutions Engaged 522298 $38.5 million.......... 5,523 5,403
in Consumer Lending or Credit in annual revenues.....
Intermediation Activities. b
Nondepository Institutions Engaged 522390 $20.5 million.......... 4,701 4,549
in Other Activities Related to in annual revenues.....
Credit Intermediation Activities. b
Mortgage and Non-Mortgage Loan 522310 $7.5 million........... 7,007 6,817
Brokers b. in annual revenues.....
Consumer Lending b.................. 522291 $38.5 million.......... 3,206 3,130
in annual revenues.....
----------------------------------------------------------------------------------------------------------------
a Total number of entities and small entities was estimated based on the 2014 Call Report.
b Total number of entities and small entities was estimated based on the Census Bureau's Statistics of U.S.
Businesses for 2012.
As discussed in the Small Business Review Panel Report, the NAICS
categories are likely to include firms that do not extend credit that
would be covered by the proposed rule. The following table provides the
Bureau's estimates of the numbers and types of small entities within
particular segments of primary industries that may be affected by the
proposed rule:
Table 2--Estimated Number and Types of Affected Small Entities by Industry Category
----------------------------------------------------------------------------------------------------------------
Estimated
Industry category NAICS Code Small entity number of
threshold small entities
----------------------------------------------------------------------------------------------------------------
Storefront Payday Lenders a..................................... 522390 $20.5 million 2,218
in annual
revenue
Storefront Payday Lenders Operating Primarily as Brokers a...... 522310 $7.5 million 229
in annual
revenue
Storefront Installment Lenders b................................ 522291 $38.5 million 1,577
in annual
revenue
Storefront Vehicle Title Lenders c.............................. 522298 $38.5 million 812
in annual
revenue
Online Lenders d................................................ 522298; 522390 $20.5 million 124
or 38.5
million in
annual revenue
Credit Unions e................................................. 522130 $550 million 6,622
in assets
Banks and Thrifts e............................................. 522110; 522120 $550 million 6,726
in assets
----------------------------------------------------------------------------------------------------------------
a The number of small storefront payday lenders is estimated 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.\1056\ Based on these sources, there
are approximately 2,256 storefront payday lenders in the United States. Based on the publicly-available
revenue information, at least 38 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.
b The number of storefront installment lenders is estimated using industry estimates of the overall number of
installment loan storefront locations and information on the number of locations of the largest storefront
installment lenders.\1057\ A recent industry report estimated that there are between 8,000 and 10,000
storefront installment lender locations. Based on publicly-available information, approximately 58 of the
largest firms have revenue above the small entity threshold. These larger firms operate approximately 5,718
storefronts, leaving, on the high end, approximately 4,282 storefronts operated by small entities. The number
of small entities likely is on the high end of potential estimates of the number of entities that would be
affected by the proposal, as not all small storefront installment lenders originate covered loans.
c The number of small storefront vehicle title lenders is estimated using licensee information from State
financial regulators and revenue information from public filings and from non-public sources.\1058\ Based on
these sources, there are approximately 842 storefront vehicle title lenders in the United States. Based on the
revenue information, at least 30 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.
[[Page 48153]]
d The number of small online lenders is estimated based on bureau outreach and on estimates from nonPrime101,
Report 1: Profiling Internet Small Dollar Lending--Basic Demographics and Loan Characteristics, at 3 (2014),
https://www.nonprime101.com/wp-content/uploads/2015/02/Profiling-Internet-Small-Dollar-Lending-Final.pdf. The
Bureau solicits data and information that would supplement existing estimates of the number of small entities
that are online lenders.
e The estimate for banks, savings associations, and credit unions (collectively, depository institutions or
``DIs'') is on the high end of the possible number of small entities that would be subject to the Bureau's
proposal, as not all small DIs originate covered loans. However, the Bureau does not have complete information
about how many small DIs originated covered loans. DIs would most likely be affected by the proposals if they
originate small loans with substantial application or underwriting fees and take a non-purchase money security
interest in a personal vehicle or have access to a consumer's account for repayment. In 2014, 533 Federal
credit unions originated loans under the NCUA Payday Alternative Loan program and would likely be affected by
the proposal. Not all of these 533 Federal credit unions are small entities and therefore, this figure is
likely overstated for the purposes of establishing the number of small entities that would be affected by the
proposal.
4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements of the Proposed Rule, Including an Estimate of Classes of
Small Entities Which Will Be Subject to the Requirements and the Type
of Professional Skills Necessary for the Preparation of the Report or
Record
---------------------------------------------------------------------------
\1056\ State reports supplemented with location information
prepared by Steven Graves and Christopher Peterson, available at
http://www.csun.edu/~sg4002/research/data/US_pdl_addr.xls.
\1057\ John Hecht, Stephens Inc., Alternative Financial
Services: Innovating to Meet Customer Needs in an Evolving
Regulatory Framework (2014), available at http://cfsaa.com/Portals/0/cfsa2014_conference/Presentations/CFSA2014_THURSDAY_GeneralSession_JohnHecht_Stephens.pdf.
\1058\ State reports supplemented with estimates from Susanna
Montezemolo, Ctr. for Responsible Lending, Car-Title Lending: The
State of Lending in America & its Impact on U.S. Households (2013),
available at http://www.responsiblelending.org/state-of-lending/reports/7-Car-Title-Loans.pdf.
---------------------------------------------------------------------------
The proposed 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
The proposed rule imposes new reporting requirements to ensure that
lenders making most covered loans under the proposal have access to
timely and reasonably comprehensive information about a consumer's
current and recent borrower history with other lenders, as discussed in
the section-by-section analysis for proposed Sec. 1041.16. This
section discusses these reporting requirements and their associated
costs on small entities and is organized into two main subsections--
those relating to covered short-term loans and those relating to
covered longer-term loans--to facilitate a clear and complete
consideration of those costs.
Reporting Requirements for Covered Short-Term Loans
Lenders making covered short-term loans would be required to
furnish information about those loans to all information systems that
have been registered with the Bureau for 120 days or more, have been
provisionally registered with the Bureau for 120 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 would need 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 would 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 would need to furnish the date as of
which the loan ceased to be outstanding, and, for certain loans that
have been paid in full, the amount paid on the loan.
Costs to Small Entities
Furnishing information to registered information systems would
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 procedures for
furnishing the loan data. Lenders using automated loan origination
systems would likely modify those systems, or purchase upgrades to
those systems, to incorporate the ability to furnish the required
information to registered information systems.\1059\
---------------------------------------------------------------------------
\1059\ 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 would be those of actually furnishing the data.
Lenders with automated loan origination and servicing systems with the
capacity to furnish the required data would have very low ongoing
costs. Lenders that report information manually would likely do so
through a web-based form, which the Bureau estimates would take five to
10 minutes to fill out for each loan at the time of consummation and
when the loan ceases to be an outstanding loan, as well as other times
when lenders must furnish any updates to information previously
furnished. Assuming that multiple registered information systems
existed, it might be necessary to incur this cost multiple times,
although common data standards or other approaches may minimize such
costs.
The Bureau notes that some lenders in States where a private third-
party operates reporting systems on behalf of State regulators are
already required to provide similar information, albeit to a single
reporting entity, and so have experience complying with this type of
requirement. The Bureau also intends to foster the development of
common data standards where possible for registered information systems
to reduce the costs of providing data to multiple services.
In addition to the costs of developing procedures for furnishing
the specified information to registered information systems, lenders
would also need to train their staff in those procedures. The Bureau
estimates that lender personnel engaging in furnishing information
would 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.
Reporting Requirements for Covered Longer-Term Loans--ATR Approach
Lenders making covered longer-term loans under the ATR approach, as
described above in proposed Sec. 1041.9, would be required to furnish
information about those loans to all information systems that have been
registered with the Bureau for 120 days or more, have been
provisionally registered with the Bureau for 120 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 would need 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 would need to furnish any update to information
previously furnished pursuant to the
[[Page 48154]]
rule within a reasonable period of the event prompting the update. And
when a loan ceases to be an outstanding loan, lenders would need to
furnish the date as of which the loan ceased to be outstanding.
Costs to Small Entities
Furnishing information to registered information systems would
require small entities to incur one-time and ongoing costs. These
include costs associated with establishing a relationship with each
registered information system and developing procedures for furnishing
the loan data. Lenders using automated loan origination systems would
likely modify those systems, or purchase upgrades to those systems, to
incorporate the ability to furnish the required information to
registered information systems.
The ongoing costs would be those of actually furnishing the data.
Lenders with automated loan origination and servicing systems with the
capacity to furnish the required data would have very low ongoing
costs. For example, lenders or vendors may develop systems that would
automatically transmit loan data to registered information systems.
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;
similar enhancements could automate reporting to one or more registered
information systems. Lenders that report information manually would
likely do so through a web-based form, which the Bureau estimates would
take five to 10 minutes to fill out for each loan at the time of
consummation, and when the loan ceases to be an outstanding loan, as
well as other times when lenders must furnish any updates to
information previously furnished. Assuming that multiple registered
information systems existed, it might be necessary to incur this cost
multiple times, although common data standards or other approaches may
minimize such costs.
In addition to the costs of developing procedures for furnishing
the specified information to registered information systems, lenders
would also need to train their staff in those procedures. The Bureau
estimates that lender personnel engaging in furnishing information
would 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.
Reporting Requirements for Covered Longer-Term Loans--Portfolio or PAL
Approach
Lenders making covered longer-term loans using the Portfolio or PAL
approach as alternatives to the ATR approach would also have to furnish
information about those loans but would have the option of furnishing
either to each registered information system or to a national consumer
reporting agency.\1060\ The Bureau believes that many lenders that
would use either the Portfolio approach or the PAL approach already
furnish information concerning loans that would be covered longer-term
loans to a national consumer reporting agency. Those that do not report
these loans to a national consumer reporting agency are likely to
report other loans, and therefore have the capability, at little
additional cost, to also furnish information about these loans.
---------------------------------------------------------------------------
\1060\ See proposed Sec. Sec. 1041.11 and 1041.12 for
descriptions of the qualifications for making loans under the
Portfolio approach and PAL approach, respectively.
---------------------------------------------------------------------------
b. Recordkeeping Requirements
The proposed 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 covered
short-term and covered longer-term loans by requiring lenders to
maintain evidence of compliance in electronic tabular format for
certain records. The proposed retention period is 36 months, as
discussed above in the section-by-section analysis for proposed Sec.
1041.18. The following section discusses the costs of the new
recordkeeping requirements on small entities that originate covered
short-term loans and those originating covered longer-term loans.
Costs to Small Entities Originating Covered Short-Term Loans
The data retention requirement in the proposed 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 proposed record retention provisions, therefore, lenders
originating covered short-term 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 Requirements and Alternatives to the
Requirements to Assess Borrowers' Ability to Repay. Similarly, small
entities that rely on vendors would likely rely on vendor software and
systems to comply in part with the data retention requirements.
In addition to the costs described above, lenders would also need
to train their staff in record retention procedures. The Bureau
estimates that lender personnel engaging in recordkeeping would 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.
Costs to Small Entities Originating Covered Longer-Term Loans
The Bureau estimates that the costs associated with the new
recordkeeping requirements of the proposed rule on small entities
originating covered longer-term loans are the same as the costs on
small entities originating covered short-term loans, as described
above. The Bureau solicits comment on the costs of recordkeeping for
small entities.
c. Compliance Requirements
The analysis below discusses the costs of compliance for small
entities of the following major proposed provisions:
1. Provisions Relating Specifically to Covered Short-Term Loans:
a. Requirement to determine borrowers' ability to repay, including
the requirement to obtain a consumer report from registered information
systems;
b. Limitations on making loans to borrowers with recent covered
loans; and,
c. Alternative to the requirement to determine borrowers' ability
to repay, including notices to consumers taking out loans originated
under this alternative;
2. Provisions Relating Specifically to Covered Longer-Term Loans:
a. Requirement to determine borrowers' ability to repay, including
the requirement to obtain information from registered information
systems;
b. Limitations on making loans to borrowers with recent covered
loans: and,
c. Alternatives to the requirement to determine borrowers' ability
to repay:
3. Provisions Relating to Payment Practices:
a. Limitations on continuing to attempt to withdraw money from a
[[Page 48155]]
borrower's account after two consecutive failed attempts; and,
b. Payment notice requirements.
The discussions of the impacts are organized into the three main
categories of provisions listed above--those relating to covered short-
term loans, those relating to covered longer-term loans, and those
relating to limitations of payment practices. Within each of these main
categories, the discussion is organized to facilitate a clear and
complete consideration of the impacts of the major provisions of the
proposed rule on small entities.
In considering the potential impacts of the proposal, the Bureau
takes as the baseline for the analysis the regulatory regime that
currently exists for the covered products and covered persons.\1061\
These include State laws and regulations; Federal laws, such as the
MLA, FCRA, FDCPA, TILA, EFTA, 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.\1062\
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\1061\ 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.
\1062\ See, e.g., FDIC Financial Institution Letter FIL-14-2005,
Payday Lending Programs (Mar. 1, 2005), 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), available at http://www.occ.treas.gov/news-issuances/federal-register/78fr70624.pdf;
FDIC, Guidance on Supervisory Concerns and Expectations Regarding
Deposit Advance Products, 78 FR 70552 (Nov. 26, 2013), available at
http://www.gpo.gov/fdsys/pkg/FR-2013-11-26/pdf/2013-28306.pdf.
---------------------------------------------------------------------------
The proposal includes several exemptions which have the effect of
creating alternative methods of compliance, and in places it is useful
to discuss their benefits, costs, and impacts relative to those of the
core provisions of the proposed regulation to which they are an
alternative. 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 Bureau solicits comments on all aspects of quantitative
estimates provided below, as well as comments on the qualitative
discussion where quantitative estimates are not provided. The Bureau
also solicits data and analysis that would supplement the quantitative
analysis discussed below or provide quantitative estimates of benefits,
costs, or impacts for which there are currently only qualitative
discussions.
The discussion here is confined to the direct costs to small
entities of complying with the requirements of the proposed rule. Other
impacts, such as the impacts of limitations on loans that could be made
under the proposed rule, are discussed at length in part VI. The Bureau
believes that, except where otherwise noted, the impacts discussed in
part VI would apply to small entities.
Provisions Relating Specifically to Covered Short-Term Loans
i. Requirement To Assess Borrowers' Ability To Repay
The proposed rule would require that lenders determine that
applicants for covered short-term loans have the ability to repay the
loan while still meeting their major financial obligations and paying
basic living expenses. In this part VII, 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 would need to comply with several procedural
requirements when 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 would 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.
Consulting Lender's Own Records
Under the proposed rule, lenders would need to consult their own
records and the records of their affiliates to determine whether the
borrower had taken out any prior covered loans, or non-covered bridge
loans, that were still outstanding or were repaid within the prior 30
days. To do so, a lender would 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
would most likely comply with this requirement by using computerized
recordkeeping. A lender operating a single storefront would 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 would 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 would presumably maintain a single set of
records; if it maintained multiple sets of records, it would 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 (at least 23) 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.
Costs to Small Entities
Small entities that do not already have a records system in place
would 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 would 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 record
keeping system, would 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.
As noted above, the Bureau believes that many lenders use automated
loan origination systems and would 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 doing so will take three minutes of an employee's time.
Obtaining a Consumer Report From a Registered Information System
Under the proposed rule, small entities would have to obtain a
[[Page 48156]]
consumer report from a registered information system containing
information about the consumer's borrowing history across lenders, if
one or more such systems were available. The Bureau believes that many
lenders likely already work with firms that provide some of the
information that would be included in the registered information system
data, such as in States where a private third-party operates reporting
systems 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
covered short-term loans who operate only in States without a State-
mandated reporting system and who make lending decisions without
obtaining any data from a consumer reporting agency.
Costs to Small Entities
As noted above, the Bureau believes that many small entities use
automated loan origination systems and would modify those systems or
purchase upgrades to those systems such that they would automatically
order a report from a registered information system during the lending
process. For lenders that order reports manually, the Bureau estimates
that it would take approximately three minutes 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 would 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 specialty consumer reporting markets.
Obtaining Information and Verification Evidence About Income and Major
Financial Obligations and Making Ability-to-Repay Determination
The proposed rule would require lenders to obtain information and
verification evidence about the amount and timing of an applicant's net
income and payments for major financial obligations, to obtain a
statement from applicants describing their income and payments on major
financial obligations, and to assess that information to determine
whether a consumer has the ability to repay the loan.
The Bureau believes that many small entities that make covered
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, on any 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 proposal, consumers
and lenders may 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 covered short-term loans do not currently collect
information on applicants' major financial obligations, let alone
verification evidence of such obligations, nor do they determine
consumers' ability to repay a loan, as would be required under the
proposed rule.
Costs to Small Entities
There are two types of costs entailed in making an ATR
determination: The cost of obtaining the verification evidence 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 would likely modify those systems or
purchase upgrades to those systems to automate many of the tasks that
would be required by the proposal.
(a) Obtaining Verification Evidence
Under the proposed rule, small entities would be required to obtain
a consumer report from a national consumer reporting agency to verify
the amount and timing of payments for debt obligations. This would be
in addition to the cost of obtaining a consumer report from a
registered information system. Verification evidence for housing
expenses may be included on an applicant's consumer report, if the
applicant has a mortgage; otherwise, verification costs could consist
of obtaining documentation of rent payments estimating a consumer's
housing expense based on the housing expenses of similarly situated
consumers with households in their area. The Bureau believes that many
lenders will purchase reports from specialty consumer reporting
agencies that will contain both debt information from a national
consumer reporting agency and housing expense estimates. 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 would modify their loan origination system or purchase
an upgrade to that system to allow the system to automatically order a
specialty consumer report 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
two minutes for a lender to request a report.
Small entities that do not currently collect income or verification
evidence for income would need to do so. For consumers who have
straightforward documentation for income and provide documentation for
housing expenses, rather than relying on housing cost estimates, the
Bureau estimates that gathering and reviewing information and
verification evidence for income and major expenses and having a
consumer sign a document listing income and major financial obligations
would take roughly three to five minutes per application. Some
consumers may visit a lender's storefront without the required
documentation and may have income for which verification evidence
cannot be obtained electronically, raising lenders' costs and
potentially leading to some consumers failing to complete the loan
application process, reducing lender revenue.
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.
(b) Making Ability-to-Repay Determination
Once information and verification evidence on income and major
financial obligations has been obtained, the lender would need to
determine whether the consumer has the ability to repay the
contemplated loan. In addition to considering the information
[[Page 48157]]
collected about income and major financial obligations, lenders would
need to estimate an amount that borrowers generally need 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 providing for a
``cushion'' calculated as a percentage of income.
On an ongoing basis, the Bureau estimates that this would take
roughly 10 additional minutes for lenders that use a manual process to
make the ability-to-repay calculations. As noted above, the Bureau
believes that many lenders use automated loan origination systems and
would modify those systems or purchase upgrades to those systems to
carry out the ability-to-repay calculations.
In total, the Bureau estimates that obtaining a statement from the
consumer and verification evidence about the amount and timing of
consumers' income and payments on major financial obligations,
projecting the consumer's residual income, estimating the consumer's
basic living expenses, and arriving at a reasonable ATR determination
would take essentially no time for a fully automated electronic system
and between 15 and 20 minutes for a fully manual system, with
incremental costs dependent on the existing utilization rates of and
wages paid to staff that would spend time carrying out this work.
Dollar costs would include a report from a registered information
system costing $.50 and a specialty consumer report containing housing
costs estimates costing $2; lenders relying on electronic services to
gather verification information about income would face an additional
small cost.
Developing Procedures, Upgrading Systems, and Training Staff
Small entities would need to develop procedures to comply with the
requirements of the ATR approach and train their staff in those
procedures. Many of these requirements would 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 reborrowing 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, lowering the cost of developing
procedures. Lenders, however, would also need to develop a process for
estimating borrowers' basic living expenses. Some lenders may rely on
vendors that provide services to determine ability to repay that
include estimates of basic living expenses. For a lender to conduct an
independent analysis to determine a reliable statistical estimate of
basic living expenses would be quite costly. There are a number of
online services, however, that provide living expense estimates that
lenders may be able to use to obtain estimates or to confirm the
reasonableness of information provided by loan applicants.
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
would likely include an automated system to make the ability-to-repay
determination; the calculation itself is quite straightforward and will
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
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. 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 would rely on the
entity-level licenses.
The Bureau estimates that lender personnel engaging in making loans
would require approximately 4.5 hours of initial training in carrying
out the tasks described in this section and 2.25 hours of periodic
ongoing training per year.\1063\
---------------------------------------------------------------------------
\1063\ Note that the Bureau expects that this training would be
combined with the training relating to furnishing loan information
discussed in part VII.4(a).
---------------------------------------------------------------------------
ii. Limitations on Making Loans to Borrowers With Recent Covered Loans
The proposed rule identifies circumstances in which a presumption
of unaffordability would be triggered, thereby limiting lenders'
ability to make a covered short-term loan with similar payments to a
consumer within 30 days of the consumer having a covered short-term
loan or covered longer-term balloon-payment loan outstanding.
Because of the impact of the presumption of unaffordability for a
new covered short-term loan during the term of and for 30 days
following a prior covered short-term loan originated using the ATR
approach, lenders would not be able to make another similar covered
short-term loan to a borrower within 30 days of the prior loan unless
the borrower's financial capacity had sufficiently improved since
obtaining the prior loan.\1064\ This improvement in the borrower's
financial capacity would need to be documented.
---------------------------------------------------------------------------
\1064\ The presumption would not apply in certain circumstances
where the consumer has made substantial payments in the prior loan,
as discussed in connection with proposed Sec. 1041.6.
---------------------------------------------------------------------------
Costs to Small Entities
Under the proposed rule, small entities making a loan using the ATR
approach would need to project the borrower's residual income, and
therefore that aspect of this requirement would impose no additional
cost on the lender. Comparing the borrower's projected financial
capacity for the new loan with the consumer's financial capacity since
obtaining the prior loan would impose very little cost, as long as the
same lender had made the prior loan. The lender would need to collect
additional documentation to overcome the presumption of unaffordability
if the lender did not make the prior loan or if the borrower's
financial capacity would be better for the new loan because of the
borrower's unanticipated dip in income since obtaining the prior loan
that is not likely to be repeated.
iii. Alternative to the Requirement To Assess Borrowers' Ability To
Repay
The proposal includes an alternative set of requirements to the ATR
approach for originating certain covered short-term loans as proposed
in Sec. 1041.7. In this section, the practice of making loans by
complying with the alternative requirements under proposed Sec. 1041.7
will be referred to as the ``Alternative approach.''
The procedural requirements of the Alternative approach would
generally have less impact on lenders than the requirements of the ATR
approach. Lenders that make covered short-term loans under the
Alternative approach would not have to obtain information or
verification evidence about income or major financial obligations,
forecast basic living expenses, complete an ability-to-repay
determination, or document changed financial capacity prior to making
loans that meet those requirements.
[[Page 48158]]
The proposed rule would instead require only that lenders making
loans under Sec. 1041.7 consult their internal records and those of
affiliates, access reports from a registered information system,
furnish information to registered information systems, and make an
assessment as part of the origination process that certain loan
requirements (such as principal limitations and borrowing history
limitations) were met. The requirement to consult the lender's own
records would be slightly different in duration compared to an ATR
Approach loan, since the lender would need to check the records for the
prior 12 months. This would be unlikely to have different impacts on
the lenders, however, as any system that allows the lender to comply
with the own-record checking requirements of the ATR approach should be
sufficient for the Alternative approach and vice-versa. A lender would
also have to develop procedures and train staff.
Disclosure Requirement
Small entities making covered short-term loans under the
Alternative approach would be required to provide borrowers with a
disclosure, described in the section-by-section analysis of proposed
Sec. 1041.7(e), with information about their loans and about the
restrictions on future loans taken out using the Alternative approach.
One disclosure would be required at the time of origination of an
Alternative approach loan when a borrower had not had an Alternative
approach loan within the prior 30 days. The other disclosure would be
required when originating a third Alternative approach loan in a
sequence because the borrower would therefore be unable to take out
another Alternative approach loan within 30 days of repaying the loan
being originated. The disclosures would need to be customized to
reflect the specifics of the individual loan.
Costs to Small Entities
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, 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 that the lender then
provides to the borrower. Respondents would incur a one-time cost to
upgrade their disclosure systems to comply with new disclosure
requirements.
The Bureau believes that 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 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. 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 would rely on entity-level licenses.
In addition to the upgrades to the disclosure systems, the Bureau
estimates that small storefront lenders would pay $200 to a vendor for
a standard electronic origination disclosure form template.
The Bureau estimates that providing disclosures in stores would
take a store employee two minutes and cost $.10.
Provisions Relating Specifically to Covered Longer-Term Loans
i. Requirement To Assess Borrowers' Ability To Repay
The proposed rule requires that lenders determine that applicants
for covered longer-term loans have the ability to repay the loan while
still meeting their major financial obligations and paying basic living
expenses. In this section, 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 would need to comply with several procedural requirements when
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 would 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.
Consulting Lender's Own Records
Under the proposed rule, lenders would need to consult their own
records and the records of their affiliates to determine whether the
borrower had taken out any prior recent covered loans or non-covered
bridge loan and, if so, the timing of those loans, as well as whether a
borrower currently has an open loan and has demonstrated difficulty
repaying the loan. To do so, a lender would 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 would most likely comply with this requirement by using
computerized recordkeeping. A lender operating a single storefront
would 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 would 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 would presumably maintain
a single set of records; if it maintained multiple sets of records it
would need a way to access each set of records.
The Bureau believes that most small entities making covered longer-
term loans 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 lending
risk, such as by avoiding lending to a consumer who has defaulted on a
prior loan. There may be some lenders, however, that currently do not
have the capacity in place to comply with this requirement.
Costs to Small Entities
Small entities that do not already have a records system in place
would 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 would cost approximately $2,000, plus $1,000 for each
additional storefront. For firms that already have standard personal
computer hardware, but no electronic record keeping system, the Bureau
estimates that the cost would be approximately $500 per storefront.
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 would modify
[[Page 48159]]
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 loan
origination system, the Bureau estimates that doing so will take three
minutes of an employee's time.
Obtaining a Consumer Report From a Registered Information System
Under the proposed rule, small entities would have to obtain a
consumer report from a registered information system containing
information about the consumer's borrowing history across lenders, if
one or more such systems were available.
Costs to Small Entities
As noted above, the Bureau believes that many lenders use automated
loan origination systems and would modify or purchase upgrades to those
systems such that they automatically order a consumer report from a
registered information system during the lending process. For lenders
that order reports manually, the Bureau estimates that it would take
approximately three minutes for a lender to request a report from a
registered information system. The Bureau expects that access to a
registered information system would 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 would be $0.50 per hit, based
on pricing in existing specialty consumer reporting markets.
Obtaining Information and Verification Evidence about Income and Major
Financial Obligations and Making Ability-to-Repay Determination
The proposed rule requires lenders making loans under the ATR
approach to obtain information and verification evidence about the
amount and timing of an applicant's income and payments for major
financial obligations, to obtain a statement from applicants describing
their income and payments for major financial obligations, and to
assess that information to determine whether a consumer has the ability
to repay the loan.
The Bureau understands that the underwriting practices of lenders
that originate loans that would be covered longer-term loans vary
substantially. The Bureau believes that many small entities that make
covered longer-term loans already obtain some information and
verification evidence about consumers' incomes, but that some, such as
some vehicle title lenders or some lenders operating online, do not do
so for some or all of the loans they originate. And some lenders, such
as consumer finance installment lenders who make some covered longer-
term loans and some newer entrants to this market, have underwriting
practices that may satisfy--or satisfy with minor changes, such as
obtaining housing cost estimates--the requirements of the proposed
rule. Other lenders, however, do not collect information or
verification evidence on applicants' major financial obligations or
determine consumers' ability to repay a loan in the manner contemplated
by this proposal.
Costs to Small Entities
There are two types of costs entailed in making an ATR
determination: the cost of obtaining the information and verification
evidence and the cost of making an ATR assessment consistent with that
information and evidence.
As noted above, many lenders already use automated systems when
originating loans. These lenders would likely modify those systems or
purchase upgrades to those systems to automate many of the tasks that
would be required by the proposal.
(a) Obtaining Verification Evidence
Small entities would be required to obtain a consumer report to
verify the amount and timing of borrowers' payments on debt
obligations. This would be in addition to the cost of obtaining a
consumer report from a registered information system. Verification
evidence for housing expenses may be included on an applicant's
consumer report if the applicant has a mortgage; otherwise,
verification costs could consist of obtaining documentation of actual
rent or creating a tool to estimate a consumer's housing expense based
on the housing expenses of similarly situated consumers with households
in their area. The Bureau believes that most small entities will
purchase reports from specialty consumer reporting agencies that will
contain both debt information from a national consumer reporting agency
and housing expense estimates. 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 would modify
their automated loan origination system or purchase an upgrade to the
system to enable the system to automatically order a specialty consumer
report during the lending process. For small entities that order
reports manually, the Bureau estimates that it would take approximately
two minutes for a lender to request a report.
Small entities that do not currently collect income or verification
evidence for income would need to do so. For lenders that use a manual
process for consumers who have straightforward documentation for income
and provide documentation for housing expenses, rather than relying on
housing cost estimates, the Bureau estimates that gathering and
reviewing information and verification evidence for income and major
financial obligations would take roughly three to five minutes per
application. Some consumers may visit a lender's storefront without the
required documentation and may have income for which verification
evidence cannot be obtained electronically, raising lenders' costs and
potentially leading to some consumers failing to complete the loan
application process, reducing lender revenue.
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. 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.
(b) Making Ability-to-Repay Determination
Once information and verification evidence on income and major
financial obligations has been obtained, the lender would need to make
a reasonable determination whether the consumer has the ability to
repay the contemplated loan. In addition to considering the information
collected about income and major financial obligations, lenders would
need to estimate an amount that borrowers generally need 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 providing for a
``cushion'' calculated as a percentage of income.
The time it takes to complete this review will depend on the method
used by the lender. Making the determination would be essentially
instantaneous for lenders using automated systems. The Bureau estimates
that this would take roughly 10 additional minutes for
[[Page 48160]]
lenders that use a manual process to make these calculations.
In total, the Bureau estimates that obtaining information and
verification evidence about consumers' income and major financial
obligations and arriving at a reasonable ATR determination would take
essentially no time for a fully automated electronic system and between
15 and 20 minutes for a fully manual system, with total costs dependent
on the existing utilization rates of and wages paid to staff that would
spend time carrying out this work. Dollar costs would include a report
from a registered information system costing $0.50 and a specialty
consumer report containing housing costs estimates that would cost
$2.00; lenders relying on electronic services to gather verification
information about income would face an additional small cost.
Developing Procedures, Upgrading Systems, and Training Staff
Small entities would need to develop procedures to comply with the
requirements of the ATR approach and train their staff in those
procedures. Many of these requirements would not appear qualitatively
different than 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 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, lowering the cost of developing procedures. Lenders would
also need to develop a process for estimating borrowers' basic living
expenses. Some lenders may rely on vendors that provide services to
determine ability to repay that include estimates of basic living
expenses. For a lender to conduct an independent analysis to determine
a reliable statistical estimate of basic living expenses would be quite
costly. There are a number of online services, however, that provide
living expense estimates that lenders may be able to use to obtain
estimates or to confirm the reasonableness of information provided by
loan applicants.
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
would likely include an automated system to make the ability-to-repay
determination; subtracting the component expense elements from income
itself is quite straightforward and will not require substantial
development costs. The Bureau believes that 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 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. 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 would rely on the entity-level licenses.
The Bureau estimates that lender personnel engaging in making loans
would require approximately 4.5 hours of initial training in carrying
out the tasks described in this section and 2.25 hours of periodic
ongoing training per year.
ii. Limitations on Making Loans to Borrowers With Recent Covered Loans
The proposed rule identifies a set of circumstances in which a
presumption of unaffordability would be triggered, thereby limiting
lenders' ability to make a covered longer-term loan with similar
payments to a consumer within 30 days of the consumer having a covered
short-term loan or covered longer-term balloon-payment loan
outstanding.
Under the proposed rule, lenders would not be able to make a
covered longer-term loan during the term of and for 30 days following a
prior covered short-term loan or covered longer-term balloon-payment
loan unless the borrower's financial capacity has sufficiently improved
or payments on the new loan would be substantially smaller than
payments on the prior loan. This situation is unlikely to occur
frequently, as a covered longer-term loan would normally have payments
that are substantially smaller than the payment for a covered short-
term loan or the balloon payment of a covered longer-term balloon-
payment loan. It could arise, however, if the new loan were for a
substantially larger amount than the prior loan, or if the new loan had
only a slightly longer term than the prior loan (for example, a 46-day
three-payment loan following a 45-day three-payment loan).
Specifically, the loan could not be made unless (1) the borrower's
projected residual income with respect to the new loan were higher than
the borrower's actual residual income was during the prior 30 days, or
(2) the borrower's projected residual income for the new loan was
higher than the projected residual income at the time the first loan
was made. This improvement in financial capacity would need to be
documented using the same general kinds of verification evidence that
lenders would need to collect as part of the underlying assessment of
the consumer's ability to repay.
Costs to Small Entities
Under the proposed rule, small entities making a loan using the ATR
approach would need to project the borrower's financial capacity, and
therefore that aspect of this requirement would impose no additional
cost on the lender. Comparing the borrower's projected financial
capacity for the new loan with the consumer's projected financial
capacity since obtaining the prior loan (or during the prior 30 days
for an unaffordable outstanding loan) would impose very little cost, as
long as the same lender had made the prior loan. If the lender did not
make the prior loan or if the borrower's financial capacity would be
better for the new loan because of an unanticipated dip in income or
increase in major financial obligations since obtaining the prior loan,
the lender would need to collect additional documentation to overcome
the presumption of unaffordability.
iii. Alternatives to the Requirement To Assess Borrowers' Ability To
Repay
The proposal includes several alternative requirements to the ATR
approach for making covered longer-term loans proposed in Sec. Sec.
1041.11 and 1041.12. In this section, the practice of making loans with
a low portfolio default rate and other restrictions, as described in
the section-by-section analysis of proposed Sec. 1041.11, will be
referred to as the ``Portfolio approach.'' The practice of making loans
that share certain features of loans made pursuant to the NCUA PAL
program, with certain additional restrictions, as described in Sec.
1041.12 will be referred to as the ``PAL approach.''
The Bureau believes that most covered longer-term loans would be
made using the ATR approach. The Portfolio approach and the PAL
approach would each allow some lenders to originate covered longer-term
loans without undertaking all of the requirements of the ATR approach.
The impacts of these alternative approaches are primarily discussed
relative to the impacts of the ATR approach. As noted
[[Page 48161]]
above, however, the overall impacts of the rule are still being
evaluated relative to a baseline of the existing Federal and State
legal, regulatory, and supervisory regimes in place as of the time of
the proposal.
(a). Portfolio Approach
To qualify for the Portfolio approach, a lender would need to make
loans with a modified total cost of credit of 36 percent or below and
could exclude from the calculation of the modified total cost of credit
a single origination fee that represents a reasonable proportion of the
lender's cost of underwriting loans made pursuant to this exemption,
with a safe harbor for a fee that does not exceed $50. Among other
limitations, loans would also need to be at least 46 days long and no
more than 24 months long, have substantially equal and amortizing
payments due at regular intervals, and not have a prepayment penalty.
Finally, a lender's portfolio of loans originated using the Portfolio
approach would need to have a portfolio default rate, as defined in
proposed Sec. 1041.12(d) and (e), less than or equal to 5 percent per
year. If the portfolio default rate were to exceed 5 percent, the
lender would be required to refund the origination fees on the loans
originated during that period. Consumers could not be indebted on more
than two outstanding loans made under this exemption from a lender or
its affiliates within a period of 180 days.
Small entities making loans using the Portfolio approach would be
required to conduct underwriting, but would have the flexibility to
determine what underwriting to undertake consistent with the provisions
in proposed Sec. 1041.12. They would not be required to gather
information or verification evidence on borrowers' income or major
financial obligations nor determine that the borrower has the ability
to repay the loan while paying major financial obligations and paying
basic living expenses. They would also not be required to obtain a
consumer report from a registered information system. Moreover, they
would have the option of furnishing information concerning the loan
either to each registered information system or to a national consumer
reporting agency. They would also not be required to provide the
payment notice, the costs and benefits of which are described below.
Costs to Small Entities
Small entities with very low portfolio default rates would still
incur some costs to use the Portfolio approach. They would be required
to break out covered longer-term loans from the rest of their personal
lending activity and calculate the covered portfolio default rate. If
that rate exceeded 5 percent, they would bear the costs of making
refunds. Because of the risk of having to refund borrowers' origination
fees, lenders would be likely to seek to maintain a portfolio default
rate lower than 5 percent so as to limit the risk that an unexpected
increase in the portfolio default rate, such as from changing local or
national economic conditions, does not push the portfolio default rate
above 5 percent.
The Portfolio approach would also limit the number of loans that a
small entity could make because prior to making a Portfolio approach
loan, a lender must determine from its records and the records of its
affiliates that the loan would not result in the consumer being
indebted on more than two outstanding Portfolio approach loans from the
lender or its affiliates within a period of 180 days.
(b). PAL Approach
To qualify for the PAL approach, a loan could not carry a total
cost of credit of more than the cost permissible for Federal credit
unions to charge under regulations issued by the NCUA. NCUA permits
Federal credit unions to charge an interest rate of 1,000 basis points
above the maximum interest rate established by the NCUA Board
(currently, the applicable annualized interest rate is 28 percent) and
an application fee of not more than $20. Among other requirements, the
loan would need to be structured with a term of 46 days to six months,
with substantially equal and amortizing payments due at regular
intervals and no prepayment penalty. The minimum and maximum loan size
would be $200 and $1,000, respectively.
Small entities making loans under the PAL approach would be
required to maintain and comply with policies and procedures for
documenting proof of recurring income, but would not be required to
gather other information or engage in underwriting beyond any
underwriting the lender undertakes for its own purposes. They would
also not be required to obtain a consumer report from a registered
information system. Moreover, they would have the option of furnishing
information concerning the loan either to each registered information
system or to a national consumer reporting agency. They would also not
be required to provide the payment notice.
Costs to Small Entities
The only costs to small entities would be those associated with
furnish information, which are discussed above in part VII.4(a).
Provisions Relating to Payment Practices and Related Notices
The proposed rule would limit how payments on a covered loan are
initiated from a borrower's checking, savings, or prepaid account and
impose two notice requirements relating to those payments. The impacts
of these provisions are discussed here for all covered loans.
Note that the Bureau believes that the proposed requirement to
assess ATR before making a covered loan or to comply with one of the
conditional exemptions would 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 would no longer be
permitted to attempt to withdraw payments from a borrower's account.
i. Limitation on Payment Withdrawal Attempts
The proposed rule would prevent lenders from attempting to withdraw
payment from a consumer's deposit or prepaid account if two consecutive
prior payment attempts made through any channel are returned for
nonsufficient funds. The lender could resume initiating payment if the
lender obtained from the consumer a new authorization to collect
payment from the consumer's account.
Cost to Small Entities
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 are successful 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 would not incur costs from the proposal.
The Bureau notes that under the proposed restriction, lenders still
could seek payment from their borrowers, including by obtaining a new
and specific authorization to collect payment from a borrower's account
or by engaging in other lawful collection practices, and so the
preceding estimate represents a high-end estimate of the impact of the
restriction on the payments that would not be collected by
[[Page 48162]]
these particular lenders if the proposed restriction were in place.
These other forms of lawful collection practices, however, may be more
costly for lenders than attempting to collect directly from a
borrower's account.
If, after two consecutive failed attempts, a lender chooses to seek
a new authorization to collect payment from a consumer's account, the
lender would have to contact the consumer.\1065\ The Bureau believes
that this would most often be done in conjunction with general
collections efforts and would impose little additional cost on lenders.
---------------------------------------------------------------------------
\1065\ Note that, as described below, lenders would be required
to provide a notice to the borrower in this circumstance, regardless
of whether the lender were attempting to obtain a new authorization.
---------------------------------------------------------------------------
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 proposal may reduce lenders' revenue from
those fees.
Small entities would 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 would have the capacity to identify when two consecutive
payments have failed, and therefore this requirement would not impose a
significant new cost.
ii. Required Notice Prior To Attempt To Collect Directly From a
Borrower's Account
The proposal would require lenders to provide consumers with a
notice prior to every 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 would 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 would be separate notices prior to regular
scheduled payments and prior to unusual payments. The notice prior to a
regular scheduled payment would also include the APR of the loan.
This provision would not apply to lenders making covered longer-
term loan under the Portfolio or PAL approach.
Costs to Small Entities
The costs to small entities of providing these notices would depend
heavily on whether they are able to provide the notice via email or
text messages or would have to send notices through paper mail. As
discussed in the section-by-section analysis of Sec. 1041.15, 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 believes that small entities that would 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, or text message, 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 would incur a one-time
burden to upgrade their disclosure systems to comply with new
disclosure requirements.
Lenders would 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 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
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 would 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. 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 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 would charge such lenders $1.00 per disclosure. For
disclosures delivered through email, the Bureau estimates vendors would
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 would charge $0.08
to create and deliver each text message such that it complies with the
requirements of the proposed rule. The vendor would also need to
provide a Web page where the full disclosure linked to in the text
message would be provided. The cost of providing this web disclosure is
included in the cost estimate of providing the text message.
iii. Required Notice When Lender Could No Longer Collect Directly From
a Borrower's Account
The proposal would require a lender that has made two consecutive
unsuccessful attempts to collect payment directly 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.
Costs to Small Entities
The requirement would impose on small entities the cost of
providing the notice. Lenders would 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 would
not impose any additional cost on lenders. And the Bureau expects that
lenders will 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.
[[Page 48163]]
The Bureau expects that small entities will incorporate the ability
to provide this notice into their payment notification process. The
Bureau estimates that vendors would charge $1.00 per notice for small
entities that send a small volume of mailing. For disclosures delivered
through email, the Bureau estimates vendors would 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 would charge $0.08 to create
and deliver each text message. The vendor would also need to provide a
Web page where the full disclosure linked to in the text message would
be provided. The cost of providing this web disclosure is included in
the cost estimate of providing the text message.
Costs of Possible Lender Responses to Major Proposed Provisions
Most of the costs associated with the procedural requirements of
the proposed 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. Many covered loans,
however, 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 those costs through higher prices.
While the sections above outline both the limitations on lending and
procedural costs of complying with the major provisions of the proposed
rule, the overall impacts of the proposal will depend in part on how
and to what extent lenders respond to the major proposed provisions.
For instance, lenders may respond by changing loan terms to better fit
the proposed regulatory structure or by expanding or shifting the
products they offer; to the extent that lenders are able to make these
and other such changes, it will mitigate their revenue losses. Possible
lender responses to the major proposed provisions are discussed for
both covered short-term loans and covered long-term loans in turn
below.
i. Possible Responses by Small Entities Making Covered Short-Term Loans
Small entities may respond to the requirements and restrictions in
the proposed rule by adjusting the costs and features of particular
short-term loans or by changing the range of products that they offer.
If lenders are able to make these changes, it will mitigate their
revenue losses. In particular, lenders may mitigate their revenue loses
by modifying loan terms--for instance by offering a smaller loan or, if
allowed in the State where the lender operates, a payment schedule with
comparable APR but a longer repayment period--to satisfy the ability to
repay requirement or they may 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 and
where legally permitted by State law.\1066\ If those loans were covered
longer-term loans, lenders would be required to comply with the
provisions of the proposal that relate to those loans.
---------------------------------------------------------------------------
\1066\ 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. nonPrime101, Report 8: Can
Storefront Payday Borrowers Become Installment loan Borrowers?, at 5
(2015), https://www.nonprime101.com/blog/can-storefront-payday-borrowers-become-installment-loan-borrowers/.
---------------------------------------------------------------------------
Making changes to individual loans and to overall product offerings
would impose some costs on small entities; these changes and their
associated costs are discussed in detail in part VI.F.1(c).
ii. Possible Responses by Small Entities Making Covered Longer-Term
Loans
Small entities may respond to the requirements and restrictions in
the proposed rule by adjusting the costs and features of particular
longer-term loans, by lowering the overall total cost of credit to
avoid coverage, or by forgoing account access or security interest in a
vehicle. If they are able to make these changes, it will mitigate their
revenue losses. In particular, lenders may mitigate their revenue
losses by modifying loan terms through some combination of reducing the
size of the loan, lowering the cost of the loan, or extending the term
of the loan. The latter approach could, however, require the lender to
build in a larger cushion to account for the increased risk of income
volatility. See the section-by-section analysis of proposed Sec.
1041.9(b). For some lenders that make loans that are only slightly
above the 36 percent coverage threshold to qualify as a covered longer-
term loan, they may also choose to reduce origination fees, set a
minimum loan size or minimum term, or defer the sale of add-on products
until after the loan is originated if doing so would bring the total
cost of credit below 36 percent. Some lenders may also shift to making
loans without taking the security interest in a vehicle or to forgo ACH
authorizations, post-dated checks, or other leveraged payment
mechanisms rather than make covered loans.
Making changes to individual loans and to overall product offerings
would impose some costs on small entities; these changes and their
associated costs are discussed in detail in Section VI.G.1(a).
d. Estimate of the Classes of Small Entities Which Will Be Subject to
the Requirement and the Type of Professional Skills Necessary for the
Preparation of the Report or Record
Section 603(b)(4) 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 proposed rule
that are not otherwise required in the ordinary course of business of
the small entities affected by the proposed rule. Part VII.4(b) and
VII.4(c) summarize the recordkeeping and compliance requirements of the
proposed rule that would 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 that are not otherwise required in the
ordinary course of business would 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 would 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 proposed 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 would
[[Page 48164]]
generally be of the same professional skill set as current staff.
5. Identification, to the Extent Practicable, of All Relevant Federal
Rules Which May Duplicate, Overlap, or Conflict With the Proposed Rule
The proposed rule would impose additional requirements on certain
forms of credit that are currently subject to the Federal consumer
financial laws. In addition to the Dodd-Frank Act, several other
Federal laws regulate certain matters related to the extension,
servicing, and reporting of credit that would be covered by the
proposals under consideration by the Bureau: These laws are described
below. However, consistent with the findings of the Small Business
Review Panel, the Bureau is not aware of any other Federal regulations
that currently duplicate, overlap, or conflict with the proposed rule.
The Truth in Lending Act, implemented by the Bureau's Regulation Z,
establishes, among other conditions on extensions of credit, disclosure
requirements for credit extended primarily for personal, family, or
household purposes.\1067\ The Electronic Fund Transfer Act, implemented
by the Bureau's Regulation E, establishes rights, liabilities, and
responsibilities related to electronic funds transfers.\1068\ The
requirements and protections of Regulation E apply to transfers of
funds initiated through electronic means that authorize a financial
institution to debit or credit a consumer's account. The Fair Credit
Reporting Act and its implementing regulation, Regulation V, create a
regulatory framework for furnishing, use, and disclosure of information
in reports associated with credit, insurance, employment, and other
decisions made about consumers.\1069\ The Military Lending Act limits
certain terms on extensions of consumer credit, defined by the
Department of Defense's regulation, to members of the active-duty
military and their dependents.\1070\ Among other protections, the
Military Lending Act limits the cost a lender may charge on an
extension of credit to a servicemember or dependent to 36 percent MAPR.
The Department of Defense's regulation establishes the cost elements
that must be included in the calculation of the MAPR. Finally, the
Federal Credit Union Act, implemented by the NCUA, permits Federal
credit unions to extend credit to members and establishes the maximum
rate of interest that Federal credit unions may charge on such
loans.\1071\ The NCUA's regulation permits Federal credit unions to
charge a higher rate on certain specified ``Payday Alternative Loans''
and sets out the criteria for such loans.\1072\
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\1067\ 12 CFR part 1026.
\1068\ 12 CFR part 1005.
\1069\ 15 U.S.C. 1681 et seq.; 12 CFR part 1022.
\1070\ 32 CFR part 232.
\1071\ 12 CFR 701.21.
\1072\ 12 CFR 701.21(c)(7)(iii).
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6. Description of Any Significant Alternatives to the Proposed Rule
Which Accomplish the Stated Objectives of the Applicable Statutes and
Minimize Any Significant Economic Impact of the Proposed Rule on Small
Entities
Section 603(c) of the RFA requires that Bureau to describe in the
IRFA any significant alternatives to the proposed rule which accomplish
the stated objectives of applicable statutes and which minimize any
significant economic impact of the proposed rule on small
entities.\1073\ In developing the proposed rule, the Bureau has
considered several alternatives and believes that none of the
alternatives, discussed below, would accomplish the stated objectives
of the applicable provisions of Title X of the Dodd-Frank Act while
minimizing the impact of the proposed rule on small entities. In this
section, the major alternatives are briefly described and their impacts
relative to the proposed provisions are discussed below. The proposals
discussed here are:
---------------------------------------------------------------------------
\1073\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------
1. Limits on reborrowing of covered short-term loans without an
ability-to-repay requirement
2. An ATR requirement for covered short-term loans with no
Alternative approach
3. Disclosures as an alternative to the ability-to-repay
requirement
4. Limitations on withdrawing payments from borrowers' account
without associated disclosures
In addition to the major alternatives outlined above, the Bureau
has considered and solicits comment on numerous alternatives to
specific provisions of the proposed rule, discussed in detail in the
section-by-section analysis of each corresponding section.
i. Limits on Reborrowing of Covered Short-Term Loans Without an
Ability-To-Repay Requirement
As an alternative to the proposed ability-to-repay requirements in
proposed Sec. Sec. 1041.5 and 1041.6 for covered short-term loans, the
Bureau considered a limitation on the overall number of covered 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 reborrowing on covered short-term loans. However,
as discussed further in part VI.J.1, the Bureau believes that a
limitation on reborrowing without a requirement to determine the
consumer's ability to repay the loan would not provide sufficient
protection against consumer injury from making a covered short-term
loan without reasonably determining that the consumer will have the
ability to repay the loan. Accordingly, the Bureau does not believe
that a limitation on repeat borrowing alone would be consistent with
the stated objectives of Title X to identify and prevent unfair,
deceptive, or abusive acts or practices.
ii. An ATR Requirement for Covered Short-Term Loans With No Alternative
Approach
The Bureau considered proposing the ability-to-repay requirements
in Sec. Sec. 1041.5 and 1041.6 for covered short-term loans without
proposing the alternative set of requirements for originating certain
covered short-term loans as proposed in Sec. 1041.7. In the absence of
the Alternative 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 covered short-term loan that they
originate. However, the Bureau believes that the Alternative approach
would provide sufficiently strong screening and 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.
Accordingly, the Bureau believes that providing the Alternative
approach as described in proposed Sec. 1041.7 would 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.
[[Page 48165]]
iii. Disclosures as an Alternative to the Ability-To-Repay Requirement
As an alternative to substantive regulation of the consumer credit
transactions that would be covered by the proposed rule, the Bureau
considered whether enhanced disclosure requirements would prevent the
consumer injury that is the focus of the proposed rule and minimize the
impact of the proposal on small entities. 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 proposing in proposed Sec. Sec. 1041.7, 1041.14, and 1041.15
to require lenders to 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 covered 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 VI.J.3.
Because the Bureau believes 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 proposing
disclosure as an alternative to the ability-to-repay and other
requirements of the proposed rule.
iv. Limitations on Withdrawing Payments From Borrowers' Account Without
Associated 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 proposed Sec. 1041.14 unless the lender obtains a new and
specific authorization, but not including the required disclosures of
upcoming payment withdrawals (both usual 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 could therefore no longer continue to attempt to collect
payments from a borrower account. This alternative would reduce the
one-time costs of upgrading their disclosure systems as well as the
incremental burden to lenders of providing each disclosure. The Bureau
believes that in the absence of the disclosures, however, consumers
face an increased risk of injury from adverse consequences of lenders
initiating payment transfers, especially 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, and 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.
v. Exemption for Small Entities
Consistent with the RFA and the Small Business Review Panel Report,
the Bureau considered providing a whole or partial exemption for small
entities from the requirements of the proposed rule. In particular, the
Bureau examined whether small businesses in the affected markets are
engaged in meaningfully different lending practices than are larger
businesses in these markets. As part of the SBREFA Process and in
ongoing outreach, the Bureau heard directly from small businesses about
their loan origination and servicing practices. Among other feedback,
the SERs provided the Bureau with information about the extent to which
these lenders rely heavily on consumers who regularly take out long
sequences of short-term loans. Similarly, a study submitted by several
of the SERs purports to support their claim that a limit of three
covered short-term loans in a sequence would cause a significant
decrease in revenue and profit for their businesses.\1074\ Accordingly,
the Bureau does not have reason to believe that small businesses are
engaged in meaningfully different lending practices; in light of these
circumstances, the Bureau does not believe that such that an exemption
from the requirements of the proposed rule would be consistent with the
objectives of Title X of the Dodd-Frank Act.
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\1074\ Charles River Associates, Economic Impact on Small
Lenders of the Payday Lending Rules Under Consideration by the CFPB
(2015), available at http://www.crai.com/publication/economic-impact-small-lenders-payday-lending-rules-under-consideration-cfpb.
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7. Discussion of Impact on Cost of Credit for Small Entities
Section 603(d) of the RFA requires the Bureau to consult with small
entities regarding the potential impact of the proposed rule on the
cost of credit for small entities and related matters. 5 U.S.C. 603(d).
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.\1075\ 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.\1076\
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\1075\ 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.
\1076\ 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 cost of business credit
issues.\1077\ 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.
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\1077\ See Small Business Review Panel Report, at 25.
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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 making their businesses less credit worthy and
by reducing access to credit for their customers that are using loans
to fund small business operations.
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. See Small Business Review
Panel Report, at 33. Proposed Sec. 1041.3(b) specifies that the
proposed rule would 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
would not be subject to this part. The Bureau recognizes that some
covered loans may be used in part or in whole to finance small
businesses, both with and without the knowledge of the lender. The
Bureau also recognizes that the proposed rules will impact the ability
of
[[Page 48166]]
some small entities to access business credit themselves. In developing
the proposed rule, the Bureau has considered alternatives and believes
that none of those alternatives considered would achieve the statutory
objectives while minimizing the cost of credit for small entities.
VIII. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et
seq., Federal agencies are generally required to seek approval from the
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.
As part of its continuing effort to reduce paperwork and respondent
burden, the Bureau conducts a preclearance consultation program to
provide the general public and Federal agencies with an opportunity to
comment on the new information collection requirements in accordance
with the PRA. See 44 U.S.C. 3506(c)(2)(A). This helps ensure that: The
public understands the Bureau's requirements or instructions,
respondents can provide the requested data in the desired format,
reporting burden (time and financial resources) is minimized,
collection instruments are clearly understood, and the Bureau can
properly assess the impact of collection requirements on respondents.
The Bureau believes the following aspects of the proposed 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. 1041.7, 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.
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. Please send your comments to the Office of
Information and Regulatory Affairs, OMB, Attention: Desk Officer for
the Bureau of Consumer Financial Protection. Send these comments by
email to oira_submission@omb.eop.gov or by fax to (202) 395-6974. If
you wish to share your comments with the Bureau, please send a copy of
these comments to the docket for this proposed rule at
www.regulations.gov. The ICR submitted to OMB requesting approval under
the PRA for the information collection requirements contained herein is
available at www.regulations.gov as well as OMB's public-facing docket
at www.reginfo.gov.
Title of Collection: Payday, Vehicle Title, and Certain High-Cost
Installment Loans.
OMB Control Number: 3170-XXXX.
Type of Review: New collection (Request for a new OMB control
number).
Affected Public: Private Sector.
Estimated Number of Respondents: 10,442.
Estimated Total Annual Burden Hours: 6,629,201.
Comments are invited on: (a) Whether the collection of information
is necessary for the proper performance of the functions of the Bureau,
including whether the information will have practical utility; (b) the
accuracy of the Bureau's estimate of the burden of the collection of
information, including the validity of the methods and the assumptions
used; (c) ways to enhance the quality, utility, and clarity of the
information to be collected; and (d) ways to minimize the burden of the
collection of information on respondents, including through the use of
automated collection techniques or other forms of information
technology. Comments submitted in response to this notice will be
summarized and/or included in the request for OMB approval. All
comments will become a matter of public record.
If applicable, the notice of final rule will display the control
number assigned by OMB to any information collection requirements
proposed herein and adopted in the final rule. If the OMB control
number has not been assigned prior to publication of the final rule in
the Federal Register, the Bureau will publish a separate notice in the
Federal Register prior to the effective date of the final rule.
List of Subjects in 12 Part 1041
Banks, banking, Consumer protection, Credit, Credit unions,
National banks, Registration, Reporting and recordkeeping requirements,
Savings associations, Trade practices.
Authority and Issuance
For the reasons set forth above, the Bureau proposes to add part
1041 to Chapter X in Title 12 of the Code of Federal Regulations, as
set forth below:
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.
Subpart B--Short-Term Loans
1041.4 Identification of abusive and unfair practice.
1041.5 Ability-to-repay determination required.
1041.6 Additional limitations on lending--covered short-term loans.
1041.7 Conditional exemption for certain covered short-term loans.
Subpart C--Longer-Term Loans
1041.8 Identification of abusive and unfair practice.
1041.9 Ability-to-repay determination required.
1041.10 Additional limitations on lending--covered longer-term
loans.
1041.11 Conditional exemption for certain covered longer-term loans
up to 6 months' duration.
1041.12 Conditional exemption for certain covered longer-term loans
of up to 24 months' duration.
Subpart D--Payments
1041.13 Identification of unfair and abusive practice.
1041.14 Prohibited payment transfer attempts.
1041.15 Disclosure of payment transfer attempts.
Subpart E--Information Furnishing, Recordkeeping, Anti-Evasion, and
Severability
1041.16 Information furnishing requirements.
1041.17 Registered information systems.
1041.18 Compliance program and record retention.
1041.19 Prohibition against evasion.
[[Page 48167]]
1041.20 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.
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 Sec. 1041.2(a)(14).
(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) Covered short-term loan means a loan described in Sec.
1041.3(b)(1).
(7) Covered longer-term balloon-payment loan means a loan described
in Sec. 1041.3(b)(2) that requires the consumer to repay the loan in a
single payment or repay the loan through at least one payment that is
more than twice as large as any other payment(s) under the loan.
(8) Covered longer-term loan means a loan described in Sec.
1041.3(b)(2).
(9) Credit has the same meaning as in Regulation Z, 12 CFR
1026.2(a)(14).
(10) Electronic fund transfer has the same meaning as in Regulation
E, 12 CFR 1005.3(b).
(11) Lender means a person who regularly extends loans to a
consumer primarily for personal, family, or household purposes.
(12) Loan sequence or sequence means a series of consecutive or
concurrent covered short-term loans in which each of the loans (other
than the first loan) is made during the time period in which the
consumer has a covered short-term 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 is the first loan in a sequence if
the loan is extended to a consumer who had no covered short-term loans
outstanding within the immediately preceding 30 days;
(ii) A covered short-term is the second loan in the sequence if the
consumer has a currently outstanding covered short-term loan, 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 is the third loan in the sequence if the
consumer has a currently outstanding covered short-term 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 is the fourth loan in the sequence if the
consumer has a currently outstanding covered short-term 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.
(13) Non-covered bridge loan means a non-recourse pawn loan
described in Sec. 1041.3(e)(5) that is made within 30 days of the
consumer having an outstanding covered short-term loan or outstanding
covered longer-term balloon-payment loan made by the same lender or its
affiliate, provided that the consumer is required to repay
substantially the entire amount due under the non-recourse pawn loan
within 90 days of its consummation.
(14) 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), or is extended to a consumer, as
defined in 12 CFR 1026.2(a)(11).
(15) 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.
(16) Prepayment penalty means any charge imposed for paying all or
part of the loan before the date on which the loan is due in full.
(17) Service provider has the same meaning as in the Dodd-Frank
Wall Street Reform and Consumer Protection Act, 12 U.S.C. 5481(26).
(18) Total cost of credit means the total amount of charges
associated with a loan expressed as a per annum rate and is determined
as follows:
(i) Charges included in the total cost of credit. The total cost of
credit includes the following charges to the extent they are imposed in
connection with the loan:
(A) Any charge that the consumer incurs in connection with credit
insurance 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, including any charges for
application, sign-up, or participation in a credit insurance plan, and
any charge for a debt cancellation or debt suspension agreement;
(B) Any charge for a credit-related ancillary product, service, or
membership sold 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 and in connection with the credit
transaction for closed-end credit or an account for open-end credit;
(C) Finance charges associated with the credit 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), is
extended by a creditor, as that term is defined in 12 CFR
1026.2(a)(17), or is extended to a consumer, as that term is defined in
12 CFR 1026.2(a)(11);
(D) Any application fee charged to a consumer who applies for a
covered loan; and
(E) Any fee imposed for participation in any plan or arrangement
for a covered loan.
(ii) Certain exclusions of Regulation Z inapplicable. A charge
described in paragraphs (18)(i)(A) through (E) of this section must be
included in the calculation of the total cost of credit even if that
charge would be excluded from the finance charge under Regulation Z, 12
CFR 1026.4(c) through (e).
[[Page 48168]]
(iii) Calculation of the total cost of credit--(A) Closed-end
credit. For closed-end credit, the total cost of credit must be
calculated according to the requirements of Regulation Z, 12 CFR
1026.22, except that the calculation must include the charges set forth
in paragraphs (18)(i)(A) through (E) of this section.
(B) Open-end credit. For open-end credit, the total cost of credit
must be calculated following 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) (as if a lender must comply with that
section) and must include the charges set forth in paragraphs
(18)(i)(A) through (E) of this section, including the amount of charges
related to opening, renewing, or continuing an account, to the extent
those charges are set forth in paragraphs (18)(i)(A) through (E) of
this section.
(b) [Reserved].
Sec. 1041.3 Scope of coverage; exclusions.
(a) General. This part applies to a lender that makes 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 (e) 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 the advance within 45 days of the advance under the
loan; or
(2) For closed-end credit that does not provide for multiple
advances to consumers, the consumer is not required to repay
substantially the entire amount of the loan within 45 days of
consummation, or for all other loans, the consumer is not required to
repay substantially the entire amount of the loan within 45 days of an
advance under the loan, and the following conditions are satisfied:
(i) The total cost of credit for the loan exceeds a rate of 36
percent per annum, as measured at the time of consummation or at the
time of each subsequent ability-to-repay determination required to be
made pursuant to Sec. 1041.5(b); and
(ii) The lender or service provider obtains either a leveraged
payment mechanism as defined in paragraph (c) of this section or
vehicle security as defined in paragraph (d) of this section 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.
(c) Leveraged payment mechanism. For purposes of paragraph (b) of
this section, a lender or service provider obtains a leveraged payment
mechanism if it:
(1) 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 one-time electronic fund transfer
immediately after the consumer authorizes the transfer;
(2) Has the contractual right to obtain payment directly from the
consumer's employer or other source of income; or
(3) Requires the consumer to repay the loan through a payroll
deduction or deduction from another source of income.
(d) Vehicle security. For purposes of paragraph (b) of this
section, a lender or service provider obtains vehicle security if it
obtains an interest in a consumer's motor vehicle (as that term is
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.
(e) Exclusions. This part does not apply to the following types of
credit:
(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).
Subpart B--Short-Term Loans
Sec. 1041.4 Identification of abusive and unfair practice.
It is an abusive and 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.
Sec. 1041.5 Ability-to-repay determination required.
(a) Definitions. For purposes of this section and Sec. 1041.6:
(1) Basic living expenses means expenditures, other than payments
for major financial obligations, that 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.
(2) Major financial obligations means 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.
(3) 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).
(4) 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 loan or for any major financial
obligation);
[[Page 48169]]
(5) Payment under the covered short-term 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, 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;
(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 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.
(6) Residual income means 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 the
period, all of which projected amounts are determined in accordance
with paragraph (c).
(b) Reasonable determination required. (1)(i) Except as provided in
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 that the consumer
will have the ability to repay the loan according to its terms.
(ii) 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 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 according to its terms.
(2) A lender's determination of a consumer's ability to repay a
covered short-term loan is reasonable only if, based on projections in
accordance with paragraph (c) of this section, the lender reasonably
concludes that:
(i) The consumer's residual income will be sufficient for the
consumer to make all payments under the loan and to meet basic living
expenses during the shorter of the term of the loan or the period
ending 45 days after consummation of the loan;
(ii) The consumer will be able to make payments required for major
financial obligations as they fall due, to make any remaining payments
under the loan, and to meet basic living expenses for 30 days after
having made the highest payment under the loan on its due date; and
(iii) For a loan for which a presumption of unaffordability applies
under Sec. 1041.6, the applicable requirements of Sec. 1041.6 are
satisfied.
(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)(3)(i),
obtain verification evidence as required by paragraph (c)(3)(ii), and
make a reasonable projection of the amount and timing of a consumer's
net income and payments for major financial obligations. To be
reasonable, a projection of the amount and timing of net income or
payments for major financial obligations may be based on a consumer's
written statement of amounts and timing under paragraph (c)(3)(i) of
this section only to the extent the stated amounts and timing are
consistent with verification evidence obtained in accordance with
paragraph (c)(3)(ii) of this section. In determining whether and the
extent to which such 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.
(2) Changes not supported by verification evidence. A lender may
project a net income amount that is higher than an amount that would
otherwise be supported under paragraph (c)(1) of this section or a
payment amount under a major financial obligation that is lower than an
amount that would otherwise be supported under paragraph (c)(1) of this
section 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.
(3) 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 and timing of the consumer's net income receipts;
and
(B) The amount and timing of payments required for categories of
the consumer's major financial obligations.
(ii) Verification evidence. A lender must obtain verification
evidence for the amounts and timing of the consumer's net income and
payments for major financial obligations, as follows:
(A) For the consumer's net income, a reliable record (or records)
of an income payment (or payments) covering sufficient history to
support the lender's projection under paragraph (c)(1);
(B) For the consumer's required payments under debt obligations, 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 Sec. 1041.17(d)(2), if
available;
(C) For a consumer's required payments under court- or government
agency-ordered child support obligations, a national consumer report;
(D) 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)(3)(ii)(B) of this section):
(1) A reliable transaction record (or records) of recent housing
expense payments or a lease; or
(2) An amount determined under a reliable method of estimating a
consumer's housing expense based on the housing expenses of consumers
with households in the locality of the consumer.
Sec. 1041.6 Additional limitations on lending--covered short-term
loans.
(a) Additional limitations on making a covered short-term loan
under Sec. 1041.5--(1) General. When a consumer is presumed under
paragraphs (b), (c), and (d) of this section not to have the ability to
repay a covered short-term loan, a lender's determination that the
consumer will have the ability to repay the loan is not reasonable
unless the requirements set forth in paragraph (e) of this section are
satisfied. A lender must not make a covered short-term loan under Sec.
1041.5 during the mandatory cooling-off periods set forth in paragraphs
(f) and (g) of this section.
(2) Borrowing history review. Prior to making a covered short-term
loan under Sec. 1041.5, in order to determine whether any of the
presumptions or prohibitions in this subsection 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
currently registered pursuant to Sec. 1041.17(c)(2) or (d)(2), if
available.
[[Page 48170]]
(b) Presumption of unaffordability for sequence of covered short-
term loans made under Sec. 1041.5--(1) Presumption. A consumer is
presumed not to have the ability to repay a covered short-term loan
under Sec. 1041.5 during the time period in which the consumer has a
covered short-term loan made under Sec. 1041.5 outstanding and for 30
days thereafter.
(2) Exception. The presumption of unaffordability in paragraph
(b)(1) of this section does not apply if:
(i) Either:
(A) The consumer paid in full the prior covered short-term loan
(including the amount financed, charges included in the total cost of
credit, and charges excluded from the total cost of credit), and the
consumer would not owe, in connection with the new covered short-term
loan, more than 50 percent of the amount that the consumer paid on the
prior covered short-term loan (including the amount financed and
charges included in the total cost of credit, but excluding any charges
excluded from the total cost of credit); or
(B) The consumer is seeking to roll over the remaining balance on a
covered short-term loan and would not owe more on the new covered
short-term loan than the consumer paid on the prior covered short-term
loan that is being rolled over (including the amount financed and
charges included in the total cost of credit, but excluding any charges
that are excluded from the total cost of credit); and
(ii) The new covered short-term loan would be repayable over a
period that is at least as long as the period over which the consumer
made payment or payments on the prior covered short-term loan.
(c) Presumption of unaffordability for a covered short-term loan
following a covered longer-term balloon-payment loan made under Sec.
1041.9. A consumer is presumed not to have the ability to repay a
covered short-term loan under Sec. 1041.5 during the time period in
which the consumer has a covered longer-term balloon-payment loan made
under Sec. 1041.9 outstanding and for 30 days thereafter.
(d) Presumption of unaffordability for a covered short-term loan
during an unaffordable outstanding loan. Except for loans subject to
the presumptions or prohibitions under paragraphs (b), (c), (f), or (g)
of this section, a consumer is presumed not to have the ability to
repay a covered short-term loan under Sec. 1041.5 if, at the time of
the lender's determination under Sec. 1041.5, the consumer currently
has a covered or non-covered loan outstanding that was made or is being
serviced by the same lender or its affiliate and one or more of the
following conditions are present:
(1) The consumer is or has been delinquent by more than seven days
within the past 30 days on a scheduled payment on the outstanding loan;
(2) The consumer expresses or has expressed within the past 30 days
an inability to make one or more payments on the outstanding loan;
(3) The period of time between consummation of the new covered
short-term loan and the first scheduled payment on that loan would be
longer than the period of time between consummation of the new covered
short-term loan and the next regularly scheduled payment on the
outstanding loan; or
(4) The new covered short-term loan would result in the consumer
receiving no disbursement of loan proceeds or an amount of funds as
disbursement of the loan proceeds that would not substantially exceed
the amount of the payment or payments that would be due on the
outstanding loan within 30 days of consummation of the new covered
short-term loan.
(e) Overcoming the presumption of unaffordability. When a
presumption under paragraphs (b), (c), or (d) of this section applies
to a covered short-term loan, a lender's determination under Sec.
1041.5 that the consumer will have the ability to repay the loan is not
reasonable unless the lender reasonably determines, based on reliable
evidence, that the consumer will have sufficient improvement in
financial capacity such that the consumer will have the ability to
repay the new loan according to its terms despite the unaffordability
of the prior loan. To assess whether there is such sufficient
improvement in financial capacity, the lender must compare the
consumer's financial capacity during the period for which the lender is
required to make an ability-to-repay determination for the new loan
pursuant to Sec. 1041.5(b)(2) to the consumer's financial capacity
since obtaining the prior loan or, if the prior loan was not a covered
short-term loan or covered longer-term balloon-payment loan, during the
30 days prior to the lender's determination.
(f) Prohibition on loan sequences of more than three covered short-
term loans made under Sec. 1041.5. Notwithstanding the requirements of
paragraph (b) of this section, a lender must not make a covered short-
term loan under Sec. 1041.5 during the time period in which the
consumer has a covered short-term loan made under Sec. 1041.5
outstanding and for 30 days thereafter if the new covered short-term
loan would be the fourth loan in a sequence of covered short-term loans
made under Sec. 1041.5.
(g) Prohibition on making a covered short-term loan under Sec.
1041.5 following a covered short-term loan made under Sec. 1041.7. A
lender must not make a covered short-term loan under Sec. 1041.5
during the time period in which the consumer has a covered short-term
loan made under Sec. 1041.7 outstanding and for 30 days thereafter.
(h) Determining period between consecutive covered loans. If a
lender or its affiliate makes a non-covered bridge loan during the time
period in which any covered short-term loan made by the lender or its
affiliate under Sec. 1041.5 or Sec. 1041.7 or a covered longer-term
balloon-payment loan made by the lender or its affiliate under Sec.
1041.9 is outstanding and for 30 days thereafter, the days during which
the non-covered bridge loan is outstanding do not count toward the
determination of time periods specified by paragraphs (b), (c), (f),
and (g) of this section.
Sec. 1041.7 Conditional exemption for certain covered short-term
loans.
(a) Conditional exemption for certain covered short-term loans.
Sections 1041.4, 1041.5, and 1041.6, 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, the lender must review the consumer's borrowing
history in the records of the lender, the records of the lender's
affiliates, and a consumer report from an information system currently
registered pursuant to Sec. 1041.17(c)(2) or Sec. 1041.17(d)(2). The
lender must use this borrowing history information to determine a
potential loan's compliance with the requirements in paragraphs (b),
(c), and (d) 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
[[Page 48171]]
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 every scheduled
repayment period for the term of the loan.
(3) The lender does not take an interest in a consumer's motor
vehicle as a condition of the loan, as described in Sec. 1041.3(d).
(4) The loan is not structured as open-end credit, as defined in
Sec. 1041.2(a)(14).
(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 does not have a covered loan outstanding made
under Sec. 1041.5, Sec. 1041.7, or Sec. 1041.9, not including a loan
made by the same lender or its affiliate under Sec. 1041.7 that the
lender is rolling over;
(2) The consumer has not had in the past 30 days an outstanding
loan that was either a covered short-term loan made under Sec. 1041.5
or a covered longer-term balloon-payment loan made under Sec. 1041.9;
(3) The loan would not result in the consumer having a loan
sequence of more than three covered short-term loans made by any lender
under this section; and
(4) 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) Determining period between consecutive covered short-term loans
made under the conditional exemption. If the lender or an affiliate
makes a non-covered bridge loan during the time period in which any
covered short-term loan made by a lender or its affiliate under this
section is outstanding and for 30 days thereafter, the days during
which the non-covered bridge loan is outstanding do not count toward
the determination of time periods when making a subsequent loan under
this section.
(e) Disclosures.
(1) General form of disclosures.
(i) Clear and conspicuous. 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 provision 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 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 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 (e)(2)(ii) of this section to the consumer
before a loan under Sec. 1041.7 is consummated.
[[Page 48172]]
Subpart C--Longer-Term Loans
Sec. 1041.8 Identification of abusive and unfair practice.
It is an abusive and unfair practice for a lender to make a covered
longer-term loan without reasonably determining that the consumer will
have the ability to repay the loan.
Sec. 1041.9 Ability-to-repay determination required.
(a) Definitions. For purposes of this section and Sec. 1041.10:
(1) Basic living expenses means expenditures, other than payments
for major financial obligations, that 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.
(2) Major financial obligations means 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.
(3) 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).
(4) 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 loan or for any major financial
obligation);
(5) Payment under the covered longer-term loan:
(i) Means the combined dollar amount payable by the consumer at a
particular time following consummation in connection with the covered
longer-term 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;
(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 loan as soon as the credit is available to the consumer;
(B) The consumer will make only minimum required payments under the
covered loan; and
(C) If the terms of the covered longer-term loan would not provide
for termination of access to the line of credit by a date certain and
for full repayment of all amounts due by a subsequent date certain,
that the consumer must repay any remaining balance in one payment on
the date that is 180 days following the consummation date.
(6) Residual income means 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 the
period, all of which projected amounts are determined in accordance
with paragraph (c).
(b) Reasonable determination required. (1)(i) Except as provided in
Sec. 1041.11 or Sec. 1041.12, a lender must not make a covered
longer-term loan or increase the credit available under a covered
longer-term 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 longer-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 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 loan according to its terms.
(2) A lender's determination of a consumer's ability to repay a
covered longer-term loan is reasonable only if, based on projections in
accordance with paragraph (c) of this section, the lender reasonably
concludes that:
(i) The consumer's residual income will be sufficient for the
consumer to make all payments under the loan and to meet basic living
expenses during the term of the loan;
(ii) For a covered longer-term balloon-payment loan, the consumer
will be able to make payments required for major financial obligations
as they fall due, to make any remaining payments under the loan, and to
meet basic living expenses for 30 days after having made the highest
payment under the loan on its due date; and
(iii) For a loan for which a presumption of unaffordability applies
under Sec. 1041.10, the applicable requirements of Sec. 1041.10 are
satisfied.
(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)(3)(i) of
this section, obtain verification evidence as required by paragraph
(c)(3)(ii) of this section, and make a reasonable projection of the
amount and timing of a consumer's net income and payments for major
financial obligations. To be reasonable, a projection of the amount and
timing of net income or payments for major financial obligations may be
based on a consumer's written statement of amounts and timing under
paragraph (c)(3)(i) of this section only to the extent the stated
amounts and timing are consistent with verification evidence obtained
in accordance with paragraph (c)(3)(ii) of this section. In determining
whether and the extent to which such 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.
(2) Changes not supported by verification evidence. A lender may
project a net income amount that is higher than an amount that would
otherwise be supported under paragraph (c)(1) of this section or a
payment amount under a major financial obligation that is lower than an
amount that would otherwise be supported under paragraph (c)(1) of this
section 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.
(3) 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 and timing of the consumer's net income receipts;
and
(B) The amount and timing of payments required for categories of
the consumer's major financial obligations.
(ii) Verification evidence. A lender must obtain verification
evidence for the amounts and timing of the consumer's net income and
payments for major financial obligations, as follows:
(A) For the consumer's net income, a reliable record (or records)
of an income payment (or payments) covering sufficient history to
support the lender's
[[Page 48173]]
projection under paragraph (c)(1) of this section;
(B) For the consumer's required payments under debt obligations, 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 Sec. 1041.17(d)(2), if
available;
(C) For a consumer's required payments under court- or government
agency-ordered child support obligations, a national consumer report;
(D) 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)(3)(ii)(B) of this section):
(1) A reliable transaction record (or records) of recent housing
expense payments or a lease; or
(2) An amount determined under a reliable method of estimating a
consumer's housing expense based on the housing expenses of consumers
with households in the locality of the consumer.
Sec. 1041.10 Additional limitations on lending--covered longer-term
loans.
(a) Additional limitations on making a covered longer-term loan
under Sec. 1041.9.--(1) General. When a consumer is presumed under
paragraphs (b) or (c) of this section not to have the ability to repay
a covered longer-term loan, a lender's determination that the consumer
will have the ability to repay the loan is not reasonable unless the
requirements set forth in paragraph (d) of this section are satisfied.
A lender must not make a covered longer-term loan under Sec. 1041.9
during the period set forth in paragraph (e) of this section.
(2) Borrowing history review. Prior to making a covered longer-term
loan under Sec. 1041.9, in order to determine whether either of the
presumptions or the prohibition in this section is 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 currently
registered pursuant to Sec. 1041.17(c)(2) or (d)(2), if available.
(b) Presumption of unaffordability for certain covered longer-term
loans following a covered short-term loan or covered longer-term
balloon-payment loan--(1) Presumption. A consumer is presumed not to
have the ability to repay a covered longer-term loan under Sec. 1041.9
during the time period in which the consumer has a covered short-term
loan made under Sec. 1041.5 or a covered longer-term balloon-payment
loan made under Sec. 1041.9 outstanding and for 30 days thereafter.
(2) Exception. The presumption of unaffordability in paragraph
(b)(1) of this section does not apply if every payment on the new
covered longer-term loan would be substantially smaller than the
largest required payment on the prior covered short-term loan or
covered longer-term balloon-payment loan.
(c) Presumption of unaffordability for a covered longer-term loan
during an unaffordable outstanding loan--(1) Presumption. Except for
loans subject to the presumption under paragraph (b) or the prohibition
under paragraph (e) of this section, a consumer is presumed not to have
the ability to repay a covered longer-term loan under Sec. 1041.9 if,
at the time of the lender's determination under Sec. 1041.9, the
consumer currently has a covered or non-covered loan outstanding that
was made or is being serviced by the same lender or its affiliate and
one or more of the following conditions are present:
(i) The consumer is or has been delinquent by more than seven days
within the past 30 days on a scheduled payment on the outstanding loan;
(ii) The consumer expresses or has expressed within the past 30
days an inability to make one or more payments on the outstanding loan;
(iii) The period of time between consummation of the new covered
longer-term loan and the first scheduled payment on that loan would be
longer than the period of time between consummation of the new covered
longer-term loan and the next regularly scheduled payment on the
outstanding loan; or
(iv) The new covered longer-term loan would result in the consumer
receiving no disbursement of loan proceeds or an amount of funds as
disbursement of the loan proceeds that would not substantially exceed
the amount of payment or payments that would be due on the outstanding
loan within 30 days of consummation of the new covered longer-term
loan.
(2) Exception. The presumption of unaffordability in paragraph
(c)(1) of this section does not apply if either:
(i) The size of every payment on the new covered longer-term loan
would be substantially smaller than the size of every payment on the
outstanding loan; or
(ii) The new covered longer-term loan would result in a substantial
reduction in the total cost of credit for the consumer relative to the
outstanding loan.
(d) Overcoming the presumption of unaffordability. When a
presumption under paragraphs (b) or (c) of this section applies to a
covered longer-term loan, a lender's determination under Sec. 1041.9
that the consumer will have the ability to repay the loan is not
reasonable unless the lender reasonably determines, based on reliable
evidence, that the consumer will have sufficient improvement in
financial capacity such that the consumer will have the ability to
repay the new loan according to its terms despite the unaffordability
of the prior loan. To assess whether there is such sufficient
improvement in financial capacity, the lender must compare the
consumer's financial capacity during the period for which the lender is
required to make an ability-to-repay determination for the new loan
pursuant to Sec. 1041.9(b)(2) to the consumer's financial capacity
since obtaining the prior loan or, if the prior loan was not a covered
short-term loan or covered longer-term balloon-payment loan, during the
30 days prior to the lender's determination.
(e) Prohibition on making a covered longer-term loan under Sec.
1041.9 following a covered short-term loan made under Sec. 1041.7.
Notwithstanding the requirements of paragraph (b) of this section, a
lender must not make a covered longer-term loan under Sec. 1041.9
during the time period in which the consumer has a covered short-term
loan made by the lender or its affiliate under Sec. 1041.7 outstanding
and for 30 days thereafter.
(f) Determining period between consecutive covered loans. If the
lender or its affiliate makes a non-covered bridge loan during the time
period in which a covered short-term loan made by the lender or its
affiliate under Sec. 1041.5 or Sec. 1041.7 or a covered longer-term
balloon-payment loan made by the lender or its affiliate under Sec.
1041.9 is outstanding and for 30 days thereafter, the days during which
the non-covered bridge loan is outstanding do not count toward the
determination of time periods specified by paragraphs (b) and (e) of
this section.
Sec. 1041.11 Conditional exemption for certain covered longer-term
loans of up to six months' duration.
(a) Conditional exemption for certain covered longer-term loans.
Sections 1041.8, 1041.9, 1041.10, and 1041.15(b) do not apply to a
covered longer-term loan that satisfies the conditions and requirements
set forth in paragraphs (b) through (e) of this section.
(b) Loan term conditions. A covered longer-term loan that is made
under this
[[Page 48174]]
section must satisfy the following conditions:
(1) The loan is not structured as open-end credit, as defined in
Sec. 1041.2(a)(14);
(2) The loan has a term of not more than six months;
(3) The principal of the loan is not less than $200 and not more
than $1,000;
(4) The loan is repayable in two or more payments due no less
frequently than monthly, all of which payments are substantially equal
in amount and fall due in substantially equal intervals;
(5) 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 every repayment period
for the term of the loan; and
(6) The loan carries a total cost of credit of not more than the
cost permissible for Federal credit unions to charge under regulations
issued by the National Credit Union Administration at 12 CFR
701.21(c)(7)(iii).
(c) Borrowing history condition. Prior to making a covered longer-
term loan under this section, the lender must determine from its
records and the records of its affiliates that the loan would not
result in the consumer being indebted on more than three outstanding
loans made under this section from the lender or its affiliates within
a period of 180 days.
(d) Income documentation condition. The lender must maintain and
comply with policies and procedures for documenting proof of recurring
income.
(e) Additional requirements. The lender must comply with the
following requirements in connection with a covered longer-term loan
made under this section:
(1) In connection with a covered longer-term loan made under this
section, the lender must not:
(i) Impose a prepayment penalty; or
(ii) If the lender holds funds on deposit in the consumer's name,
in response to an actual or expected delinquency or default on the
loan: Sweep the account to a negative balance, exercise a right of set-
off to collect on the loan, including placing a hold on funds in the
consumer's account, or close the account.
(2) For each covered longer-term loan made under this section, the
lender must either:
(i) Furnish the information concerning the loan as described in
Sec. 1041.16(c) to each information system described in Sec.
1041.16(b); or
(ii) Furnish information concerning the loan at the time of the
lender's next regularly-scheduled furnishing of information to a
consumer reporting agency that compiles and maintains files on
consumers on a nationwide basis or within 30 days of consummation of
the loan, whichever is earlier. For the purposes of this paragraph
(e)(2)(ii), ``consumer reporting agency that compiles and maintains
files on consumers on a nationwide basis'' has the same meaning as in
section 603(p) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(p).
Sec. 1041.12 Conditional exemption for certain covered longer-term
loans of up to 24 months' duration.
(a) Conditional exemption for certain covered longer-term loans.
Sections 1041.8, 1041.9, 1041.10, and 1041.15(b) do not apply to a
covered longer-term loan that satisfies the conditions and requirements
set forth in paragraphs (b) through (f) of this section.
(b) Loan term conditions. A covered longer-term loan that is made
under this section must satisfy the following conditions:
(1) The loan is not structured as open-end credit, as defined in
Sec. 1041.2(a)(14);
(2) The loan has a term of not more than 24 months;
(3) The loan is repayable in two or more payments due no less
frequently than monthly, all of which payments are substantially equal
in amount and fall due in substantially equal intervals;
(4) 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 every repayment period
for the term of the loan; and
(5) The loan carries a modified total cost of credit of less than
or equal to an annual rate of 36 percent. Modified total cost of credit
is calculated in the manner set forth in Sec. 1041.2(a)(18)(iii)(A)
for calculating total cost of credit for closed-end loans, except that
for purposes of this paragraph (b)(5) only, the lender may exclude from
the calculation a single origination fee meeting the criteria in
paragraph (b)(5)(i) or (ii) of this section.
(i) Fee based on costs. A lender may exclude from the calculation
of modified total cost of credit a single origination fee that
represents a reasonable proportion of the lender's cost of underwriting
loans made pursuant to this section.
(ii) Safe harbor. A lender may exclude from the calculation of
modified total cost of credit a single origination fee if the dollar
amount of the fee does not exceed $50.
(c) Borrowing history condition. Prior to making a covered longer-
term loan under this section, the lender must determine from its
records and the records of its affiliates that the loan would not
result in the consumer being indebted on more than two outstanding
loans made under this section from the lender or its affiliates within
a period of 180 days.
(d) Underwriting method. The lender must maintain and comply with
policies and procedures for effectuating an underwriting method
designed to result in a portfolio default rate that will be less than
or equal to 5 percent per year. Such policies and procedures must
include the following:
(1) At least once every 12 months, the lender must calculate the
portfolio default rate for covered longer-term loans made under this
section that were outstanding at any time during the preceding year;
and
(2) If the lender's portfolio default rate for covered longer-term
loans made under this section exceeds 5 percent per year, the lender
must, within 30 calendar days of identifying the excessive portfolio
default rate, refund to each consumer that received a loan included in
the calculation of the portfolio default rate any origination fee
imposed in connection with the covered longer-term loan and excluded
from the modified total cost of credit pursuant to paragraph (b)(5) of
this section. A lender will be deemed to have timely refunded a
consumer if the lender delivers payment to the consumer or places the
payment in the mail to the consumer within 30 calendar days after
identifying the excessive portfolio default rate.
(e) Calculation of portfolio default rate. For the purposes of this
section, a lender's portfolio default rate calculation must comply with
the following conditions:
(1) Portfolio default rate means:
(i) The sum of the dollar amounts owed on any covered longer-term
loans made under this section that were either:
(A) Delinquent for a period of 120 consecutive days or more during
the 12-month period for which the portfolio default rate is being
calculated; or
(B) Charged off during the 12-month period for which the portfolio
default
[[Page 48175]]
rate is being calculated before becoming 120 days delinquent;
(ii) Divided by the average of month-end outstanding balances owed
on all covered longer-term loans made under this section for each month
of the 12-month period;
(2) The portfolio default rate must be calculated as a gross sum
using all covered longer-term loans made under this section that were
outstanding at any point during the 12-month period for which the
portfolio default rate is calculated;
(3) For purposes of this paragraph, a loan is considered 120 days
delinquent even if it is re-aged by the lender prior to the 120th day,
unless the consumer has made at least one full payment and the re-aging
is for a period equivalent to the period for which the consumer has
made a payment; and
(4) A lender must calculate the portfolio default rate within 90
days following the last day of the applicable 12-month period.
(f) Additional requirements. The lender must comply with the
following requirements in connection with a covered longer-term loan
made under this section:
(1) In connection with a covered longer-term loan made under this
section, the lender must not:
(i) Impose a prepayment penalty; or
(ii) If the lender holds funds on deposit in the consumer's name,
in response to an actual or expected delinquency or default on the
loan: sweep the account to a negative balance, exercise a right of set-
off to collect on the loan, including placing a hold on funds in the
consumer's account, or close the account.
(2) For each covered longer-term loan made under this section, the
lender must either:
(i) Furnish the information concerning the loan as described in
Sec. 1041.16(c) to each information system described in Sec.
1041.16(b); or
(ii) Furnish information concerning the loan at the time of the
lender's next regularly-scheduled furnishing of information to a
consumer reporting agency that compiles and maintains files on
consumers on a nationwide basis or within 30 days of consummation of
the loan, whichever is earlier. For the purposes of this paragraph
(f)(2)(ii), ``consumer reporting agency that compiles and maintains
files on consumers on a nationwide basis'' has the same meaning as in
section 603(p) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(p).
Subpart D--Payments
Sec. 1041.13 Identification of unfair and abusive practice.
It is 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.
Sec. 1041.14 Prohibited payment transfer attempts.
(a) Definitions. For purposes of this section and Sec. 1041.15:
(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.
The term includes, but is not limited to, a debit or withdrawal of
funds initiated by the lender from a consumer's account for such
purpose through any of the following means:
(i) Electronic fund transfer, including a preauthorized electronic
fund transfer as defined in Regulation E, 12 CFR 1005.2(k).
(ii) Signature check, regardless of whether the transaction is
processed through the check network or another network, such as the
automated clearing house (ACH) network.
(iii) Remotely created check as defined in Regulation CC, 12 CFR
229.2(fff).
(iv) Remotely created payment order as defined in 16 CFR 310.2(cc).
(v) An account-holding institution's transfer of funds from a
consumer's account that is held at the same institution.
(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 a covered loan after the lender has attempted to
initiate two consecutive failed payment transfers from the consumer's
account in connection with that covered loan. 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, for a lender that is the consumer's account-
holding institution, it results in the collection of less than the
amount for which the payment transfer is initiated because the account
lacks sufficient funds.
(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 if it meets any of the following
conditions:
(A) The lender has initiated no other payment transfer from the
consumer's account in connection with the covered loan.
(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 if the
previous 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.
[[Page 48176]]
(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) 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 authorizes the lender to initiate
such payment transfers. For purposes of this paragraph (c)(2)(iii)(A),
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 specifies the
highest amount for such fees that may be charged, and the payment
channel to be used.
(B) A lender may add the amount of one late fee or one returned
item fee to the original amount of a payment transfer authorized by the
consumer pursuant to this paragraph (c) only if the consumer authorizes
the lender to initiate transfers that include such an additional
amount. For purposes of this paragraph (c)(2)(iii)(B), the consumer
authorizes the lender to initiate payment transfers that include such
an amount 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 the amount of
one late fee or one returned item fee may be added to any payment
transfer and 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. 1041.15(d). The
request must include the payment transfer terms required under
paragraph (c)(2)(i) of this section and, if applicable, the statements
required by paragraph (c)(2)(iii)(A) or (B) of this section. The lender
may provide the terms and statements 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. 1041.15(a)(4) or agrees to receive the terms
and statements by email in the course of a communication initiated by
the consumer in response to the consumer rights notice required by
Sec. 1041.15(d).
(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. 1041.15(d) and agrees to receive the terms and
statements 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 terms
required under paragraph (c)(2)(i) of this section and, if applicable,
the statements required by paragraph (c)(2)(iii)(A) or (B) of this
section to which the consumer has agreed. The signed authorization must
be obtained from the consumer no earlier than when the consumer
receives the consumer rights notice required by Sec. 1041.15(d) 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).
(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. 1041.15(d) or
on the date that the consumer affirmatively contacts the lender to
discuss repayment options, whichever date is earlier.
Sec. 1041.15 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
[[Page 48177]]
accepted or readily understandable abbreviations.
(2) In writing or electronic delivery. Disclosures required by this
section must be provided in writing or through electronic delivery. The
disclosures may be provided electronically as long as the requirements
of paragraph (a)(4) of this section are satisfied. The disclosures must
be provided in a form that can be viewed on paper or a screen, as
applicable. This provision 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 (c) or
(e) 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)(3)(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) and the consumer rights notice required by
paragraph (d) 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 (d) 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 (c) 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 (e) 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. Except as provided in paragraph
(b)(2) of this section, prior to initiating a payment transfer 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.
(2) Exceptions. The payment notice need not be provided when the
lender initiates:
(i) A payment transfer in connection with a covered loan made under
Sec. 1041.11 or Sec. 1041.12;
(ii) The first payment transfer from a consumer's account after
obtaining consumer consent pursuant to Sec. 1041.14(c), regardless of
whether any of the conditions in paragraph (b)(5) of this section
apply; or
(iii) A single immediate payment transfer initiated at the
consumer's request in accordance with Sec. 1041.14(a)(2).
(3) Timing--(i) Mail. If the lender provides the payment 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.
(ii) Electronic delivery. (A) If the lender provides the payment
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.
(B) If, after providing the payment notice through electronic
delivery pursuant to the timing requirements in paragraph (b)(3)(ii)(A)
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 the
notice before any future payment attempt, if applicable, through
alternate means.
(iii) In person. If the lender provides the 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.
(4) Content requirements. The notice must contain the following
information and statements, as applicable, using language substantially
similar to the language set forth in Model Forms A-3 and A-4 in
appendix A to this part:
(i) Identifying statement--(A) Upcoming withdrawal. If none of the
additional content requirements set forth in paragraph (b)(5) of this
section apply, the statement, ``Upcoming Withdrawal Notice,'' using
that phrase, and, in the same statement, the name of the lender
providing the notice.
(B) Unusual withdrawal. If any of the additional content
requirements in paragraph (b)(5) of this section apply, the statement,
``Alert: Unusual Withdrawal,'' using that phrase, and, in the same
statement, the name of the lender that is providing the notice.
(ii) Transfer terms. (A) Date. Date that the lender will initiate
the transfer.
(B) Amount. Dollar amount of the transfer.
(C) 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-5 in appendix A
to this part.
(D) Loan identification information. Sufficient information to
permit the consumer to identify the covered loan associated with the
transfer.
(E) Payment channel. Payment channel of the transfer.
(F) 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.
(iii) Annual percentage rate. Annual percentage rate of the covered
loan, as
[[Page 48178]]
disclosed at consummation pursuant to the requirements in Regulation Z,
12 CFR 1026.6(b)(2)(i) or 1026.18(e), as applicable, unless the
transfer is for an unusual attempt under paragraph (b)(5) of this
section.
(iv) Payment breakdown. In a tabular form:
(A) Payment breakdown heading. A heading with the statement
``Payment Breakdown,'' using that phrase.
(B) Principal. The amount of the payment that will be applied to
principal.
(C) Interest. The amount of the payment that will be applied to
accrued interest on the loan.
(D) Fees. If applicable, the amount of the payment that will be
applied to fees.
(E) Other charges. If applicable, the amount of the payment that
will be applied to other charges.
(F) Amount. The statement ``Total Payment Amount,'' using that
phrase, and the total dollar amount of the payment as provided in
paragraph (b)(4)(ii)(B) of this section.
(G) 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.''
(v) 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.
(5) Additional content requirements for unusual attempts. If any of
the conditions specified in this paragraph (b)(5) are triggered, the
notice must also contain the following content, as applicable, in a
form substantially similar to the form in Model Form A-4 in appendix A
to this part:
(i) Varying amount. 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) 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.
(iii) 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.
(iv) 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.
(c) Electronic short notice. (1) General. When the consumer has
consented to receive disclosures through electronic delivery, the
lender may provide the payment notice required by paragraph (b) of this
section through electronic delivery only if it also provides an
electronic short notice in accordance with the following requirements:
(2) Content. The electronic short notice required by this paragraph
(c) 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:
(i) Identifying statement, as required under paragraph (b)(4)(i) of
this section;
(ii) Transfer terms. (A) Date, as required under paragraph
(b)(4)(ii)(A) of this section;
(B) Amount, as required under paragraph (b)(4)(ii)(B) of this
section;
(C) Consumer account, as required and limited under paragraph
(b)(4)(ii)(C) of this section;
(iii) Web site URL. 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.
(3) Additional content requirements. If any of the conditions for
unusual attempts specified in paragraph (b)(5) of this section are
triggered, 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:
(i) Varying amount, as defined under paragraph (b)(5)(i) of this
section;
(ii) Date other than due date of regularly scheduled payment, as
defined under paragraph (b)(5)(ii) of this section; and
(iii) Different payment channel, as defined under paragraph
(b)(5)(iii) of this section.
(d) Consumer rights notice--(1) General. After a lender initiates
two consecutive failed payment transfers from a consumer's account as
described in Sec. 1041.14(b), the lender must provide to the consumer
a consumer rights notice in accordance with the following requirements:
(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.
(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 the covered loan 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
[[Page 48179]]
indication that these fees were charged by the lender.
(v) 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 a relevant
portion of the CFPB Web site. This statement must be the last piece of
information provided in the notice.
(e) Electronic short notice--(1) General. When the consumer has
consented to receive disclosures through electronic delivery, the
lender may provide the consumer rights notice required by paragraph (d)
through electronic delivery only if it also provides an electronic
short notice in accordance with the following requirements:
(2) 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:
(i) Identifying statement, as required under paragraph (d)(3)(i) of
this section;
(ii) Last two attempts were returned, as required under paragraph
(d)(3)(ii) of this section;
(iii) Consumer account, as required and limited under paragraph
(d)(3)(iii) of this section;
(iv) Statement of Federal law prohibition, as required under
paragraph (d)(3)(v) of this section; and
(v) Web site URL. The unique URL of a Web site that the consumer
may use to access the full consumer rights notice required by paragraph
(d) of this section.
Subpart E--Information Furnishing, Recordkeeping, Anti-Evasion, and
Severability
Sec. 1041.16 Information furnishing requirements.
(a) Loans subject to furnishing requirement. For each covered loan
a lender makes other than a covered loan that is made under Sec.
1041.11 or Sec. 1041.12, the lender must furnish the information
concerning the loan described in paragraph (c) of this section to each
information system described in paragraph (b) 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.
1041.17(c)(2) for 120 days or more; or
(ii) Has been provisionally registered with the Bureau pursuant to
Sec. 1041.17(d)(1) for 120 days or more or subsequently has become
registered with the Bureau pursuant to Sec. 1041.17(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. 1041.17(d)(1), registration of an information
system pursuant to Sec. 1041.17(c)(2) or (d)(2), and suspension or
revocation of the provisional registration or registration of an
information system pursuant to Sec. 1041.17(g). 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. 1041.17(d)(1) and
registered pursuant to Sec. 1041.17(c)(2) and (d)(2).
(c) Information to be furnished. A lender must furnish the
information described in this paragraph, at the times described in this
paragraph, 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, a covered
longer-term loan, or a covered longer-term balloon-payment loan;
(iv) Whether the loan is made under Sec. 1041.5, Sec. 1041.7, or
Sec. 1041.9, as applicable;
(v) For a covered short-term loan, the loan consummation date;
(vi) For a loan made under Sec. 1041.7, 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.
(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) For a covered short-term loan:
(A) Whether all amounts owed in connection with the loan were paid
in full, including the amount financed, charges included in the total
cost of credit, and charges excluded from the total cost of credit; and
(B) If all amounts owed in connection with the loan were paid in
full, the amount paid on the loan, including the amount financed and
charges included in the total cost of credit but excluding any charges
excluded from the total cost of credit.
Sec. 1041.17 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
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furnish pursuant to Sec. 1041.16 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. 1041.16
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 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 effective date of
Sec. 1041.16. (1) Preliminary approval. Prior to the effective date of
Sec. 1041.16, 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 (b)(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.
(2) Registration. Prior to the effective date of Sec. 1041.16, 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 30 days from the effective date of this section.
(ii) The deadline to submit an application to be a registered
information system pursuant to paragraph (c)(2) of this section is 90
days from the date preliminary approval for registration is granted.
(iii) The Bureau may waive the deadlines set forth in this
paragraph.
(d) Registration of information systems on or after effective date
of Sec. 1041.16. (1) Provisional registration. On or after the
effective date of Sec. 1041.16, 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
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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 180-day period commencing on the date the
information system is provisionally registered. For purposes of this
paragraph, 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) 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.
(f) 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, within 14
days of such change.
(g) 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
paragraphs (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 (f) 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 (g)(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 (g)(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 through 1041.7, 1041.9, and
1041.10, 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. 1041.16(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.
Sec. 1041.18 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 a covered loan. To comply with the requirements in
paragraph (b), a lender must retain or be able to reproduce an image of
the loan agreement and documentation obtained in connection with a
covered loan, including the following documentation as applicable:
(i) Consumer report from an information system registered pursuant
to Sec. 1041.17(c)(2) or (d)(2);
(ii) Verification evidence, as described in Sec. Sec.
1041.5(c)(3)(ii) and 1041.9(c)(3)(ii);
(iii) Any written statement obtained from the consumer, as
described in Sec. Sec. 1041.5(c)(3)(i) and 1041.9(c)(3)(i);
(iv) Authorization of additional payment transfer, as described in
Sec. 1041.14(c)(3)(iii); and
(v) Underlying one-time electronic transfer authorization or
underlying signature check, as described in Sec. 1041.14(d)(2).
(2) Electronic records in tabular format regarding origination
calculations and determinations for a covered loan. To comply with the
requirements in this paragraph (b), a lender must retain electronic
records in tabular format that include the following information:
(i) For a covered short-term loan made under Sec. 1041.5:
(A) The projection made by the lender of the amount and timing of a
consumer's net income;
(B) The projections made by the lender of the amounts and timing of
a consumer's major financial obligations;
(C) Calculated residual income; and
(D) Estimated basic living expenses for the consumer;
(ii) For a covered longer-term loan made under Sec. 1041.9:
(A) The projection made by the lender of the amount and timing of a
consumer's net income;
(B) The projections made by the lender of the amounts and timing of
a consumer's major financial obligations;
(C) Calculated residual income; and
(D) Estimated basic living expenses for the consumer.
(iii) Whether a non-covered bridge loan was outstanding in the
preceding 30 days;
(3) Electronic records in tabular format for a consumer who
qualifies for an exception to or overcomes a presumption of
unaffordability for a covered 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 loan:
(i) For a consumer who qualifies for the exception in Sec.
1041.6(b)(2) to the presumption of unaffordability in Sec.
1041.6(b)(1) for a sequence of covered short-term loans:
(A) Percentage difference between the amount to be paid in
connection with the new covered short-term loan
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(including the amount financed, charges included in the total cost of
credit, and charges excluded from the total cost of credit) and:
(B) Either:
(1) The amount that the consumer paid in full on the prior covered
short-term loan (including the amount financed and charges included in
the total cost of credit, but excluding any charges excluded from the
total cost of credit); or
(2) The amount that the consumer paid on the prior covered short-
term loan that is being rolled over or renewed (including the amount
financed and charges included in the total cost of credit but excluding
any charges that are excluded from the total cost of credit);
(C) Loan term in days of the new covered short-term loan; and
(D) The term in days of the period over which the consumer made
payment or payments on the prior covered short-term loan;
(ii) For a consumer who overcomes a presumption of unaffordability
in Sec. 1041.6 for a covered short-term: Dollar difference between the
consumer's financial capacity projected for the new covered short-term
loan and the consumer's financial capacity since obtaining the prior
loan;
(iii) For a consumer who qualifies for an exception in Sec.
1041.10(b)(2) to the presumption of unaffordability in Sec.
1041.10(b)(1) for a covered longer-term loan following a covered short-
term or covered longer-term balloon-payment loan: Percentage difference
between the size of the largest payment on the covered longer-term loan
and the largest payment on the prior covered short-term or covered
longer-term balloon-payment loan;
(iv) For a consumer who qualifies for an exception in Sec.
1041.10(c)(2) to the presumption of unaffordability in Sec.
1041.10(c)(1) for a covered longer-term loan during an unaffordable
outstanding loan:
(A) Percentage difference between the size of the largest payment
on the covered longer-term loan and the size of the smallest payment on
the outstanding loan; and
(B) Percentage difference between the total cost of credit on the
covered longer-term loan and the total cost of credit on the
outstanding loan;
(v) For a consumer who overcomes a presumption of unaffordability
in Sec. 1041.10 for a covered longer-term loan: Dollar difference
between the consumer's financial capacity projected for the new covered
longer-term loan and the consumer's financial capacity during the 30
days prior to the lender's determination.
(4) Electronic records in tabular format regarding loan type and
terms. 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:
(i) As applicable, the information listed in Sec. 1041.16(c)(1)(i)
through (iii), Sec. 1041.16(c)(1)(v) through (viii), andSec.
1041.16(c)(2);
(ii) Whether the loan is made under Sec. 1041.5, Sec. 1041.7,
Sec. 1041.9, Sec. 1041.11, or Sec. 1041.12;
(iii) Leveraged payment mechanism(s) obtained by the lender from
the consumer;
(iv) Whether the lender obtained vehicle security from the
consumer; and
(v) For a covered short-term loan made under Sec. 1041.5 or Sec.
1041.7: Loan number in loan sequence.
(5) Electronic records in tabular format regarding payment history
and loan performance. 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:
(i) History of payments received and attempted payment transfers,
as defined in Sec. 1041.14(a)(1):
(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 was
subject to the prohibition in Sec. 1041.14(b)(1), whether the
authorization to initiate a payment transfer was obtained from the
consumer in accordance with the requirements in Sec. 1041.14(c) or
(d);
(iii) If a full payment, including the amount financed, charges
included in the cost of credit, and charges excluded from the cost of
credit, was not received or transferred by the contractual due date,
the maximum number of days, up to 180 days, any full payment was past
due;
(iv) For a covered longer-term loan made under Sec. 1041.12:
Whether the loan was charged off;
(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. 1041.16(c)(3)(i) and (ii).
Sec. 1041.19 Prohibition against evasion.
A lender must not take any action with the intent of evading the
requirements of this part.
Sec. 1041.20 Severability.
The provisions of this part are separate and severable from one
another. If any provision is stayed or determined to be invalid, it is
the Bureau's intention that the remaining provisions shall continue in
effect.
Appendix A to Part 1041--Model Forms
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Supplement I to Part 1041--Official Interpretations
Section 1041
Section 1041.2--Definitions
2(a)(1) Account
1. In general. Institutions may rely on 12 CFR 1005.2(b) and its
related commentary in determining the meaning of account.
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. A modification of an existing
loan constitutes a consummation for purposes of this rule in certain
circumstances. If the principal 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) or Sec. 1041.9(b),
as appropriate. A loan modification is not considered consummated
under Sec. 1041.2(a)(5) if the modification reduces the principal
amount or 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. 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 involve a consummation.
2(a)(7) Covered Longer-Term Balloon-Payment Loan
1. Loans repayable in a single payment. A loan described in
Sec. 1041.3(b)(2) is considered to be a covered longer-term
balloon-payment loan under Sec. 1041.2(a)(7) if the consumer must
repay the entire amount of the loan in a single payment.
2. Payments more than twice as large as other payments. A loan
described in Sec. 1041.3(b)(2) is considered to be a covered
longer-term balloon-payment loan under Sec. 1041.2(a)(7) if any one
payment is more than twice as large as any other payment(s) under
the loan. All required payments of principal and interest (or
interest 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.
2(a)(9) 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)(10) 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.
2(a)(11) Lender
1. Regularly makes loans. The test for determining whether a
person regularly makes loans for personal, family, or household
purposes is explained in Regulation Z, 12 CFR 1026.2(a)(17)(v). Any
loan to a consumer for personal, family, or household purposes,
whether or not the loan is a covered loan under part 1041, counts
toward the numeric threshold for
[[Page 48190]]
determining whether a person regularly makes loans.
2(a)(13) Non-Covered Bridge Loan
1. Applicability. A non-recourse pawn loan is a non-covered
bridge loan only to the extent that it meets the criteria set forth
in Sec. 1041.3(e)(5). A pawn loan that does not meet the criteria
set forth in Sec. 1041.3(e)(5), either because the consumer retains
possession of the pawned item during the loan term or because the
lender has recourse in the event the consumer does not redeem the
pawned item, is not a non-covered bridge loan. Instead, such a pawn
loan is a covered loan to the extent it meets the criteria set forth
in Sec. 1041.3(b).
2(a)(14) 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 is consumer credit,
as that term is defined in 12 CFR 1026.2(a)(12), is extended by a
creditor, as that term is defined in 12 CFR 1026.2(a)(17), or is
extended to a consumer, as that term is defined in 12 CFR
1026.2(a)(11). For the purposes of defining open-end credit under
part 1041, the term credit, as defined in proposed Sec.
1041.2(a)(9), would be 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), would be substituted for
the term creditor in the Regulation Z definition of open-end credit;
and the term consumer, as defined in proposed Sec. 1041.2(a)(4),
would be substituted for the term consumer in the Regulation Z
definition of open-end credit.
2(a)(15) 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)(15),
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)(15).
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 part 1041 if the consumer has not made a payment, regardless of
whether the payment is a regularly scheduled 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. 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,
or 180 days following the last payment that the consumer has made on
the loan.
2(a)(16) Prepayment Penalty
1. Facts and circumstances. Whether a charge is a prepayment
penalty depends on the circumstances around the assessment of the
charge, and specifically whether the charge was assessed in
connection with the consumer paying any of the loan before the date
on which the loan is due in full. For example, assume a covered
longer-term loan is repayable in six monthly installments, but that
a consumer pays the entire amount due two months early. If the
lender assesses a charge at that point and such charge is not
assessed if the consumer makes all six monthly installments, that
charge is a prepayment penalty, regardless of how the lender
characterizes the charge.
2(a)(17) 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 during the
course of obtaining for consumers, or assisting consumers in
obtaining, loans from lenders are service providers, subject to the
specific limitations in Dodd-Frank Act section 1002(26).
2(a)(18) Total Cost of Credit
2(a)(18)(i) Charges Included in the Total Cost of Credit
1. Finance charges. Institutions may rely on 12 CFR 1026.4 and
its related commentary in determining whether a charge is a finance
charge. Fees paid by consumers to credit access businesses or credit
services organizations are typically finance charges under 12 CFR
1026.4(a)(1).
2. Credit insurance premiums. The total cost of credit
calculation must include any charge that the consumer incurs 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 in connection with credit insurance, including any
charges for application, sign-up, or participation in a credit
insurance plan, even if those charges are assessed in a single, up-
front payment. Charges that the consumer pays in connection with
debt cancellation or debt suspension agreements are included in the
cost of credit calculation.
3. Charges for credit-related ancillary products. The total cost
of credit calculation must include any charge that the consumer
incurs 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 for any product, service, or
membership sold in connection with the credit transaction, including
fees paid to unaffiliated third parties. Examples of such credit-
related ancillary products include, but are not limited to:
i. Products marketed to protect consumers from identity theft or
to alleviate harms caused by identity theft;
ii. Products marketed to alleviate harms caused by the
consumer's unemployment;
iii. Products marketed to alleviate harms caused by other
hardships that the consumer may suffer, such as credit life, credit
disability insurance, or debt suspension products;
iv. Products marketed to alleviate harms resulting from the
consumer's wallet or account information being lost or stolen; and
v. Products marketed to keep the consumer informed of
information bearing on the consumer's credit record or score.
2(a)(18)(iii)(A) Calculation of the Total Cost of Credit for Closed-End
Credit
1. Similar to Regulation Z. The total cost of credit must be
calculated according to the requirements of Regulation Z, 12 CFR
1026.22, except that the calculation must include the charges set
forth in Sec. Sec. 1041.2(a)(18)(i)(A) through (E). Aside from this
distinction, entities may rely on Regulation Z, 12 CFR 1026.22 and
its related commentary in calculating the total cost of credit for
closed-end credit.
2(a)(18)(iii)(B) Calculation of the Total Cost of Credit for Open-End
Credit
1. Similar to Regulation Z. The total cost of credit must be
calculated following 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) (as if a creditor must comply with that
section) and must include the charges set forth in Sec.
1041.2(a)(18)(i)(A) through (E), including the amount of charges
related to opening, renewing, or continuing an account, to the
extent those charges are set forth in Sec. 1041.2(a)(18)(i)(A)
through (E). Aside from these distinctions, entities may rely on
Regulation Z, 12 CFR 1026.14 and its related commentary in
calculating the total cost of credit for open-end credit.
2. Example. Assume that a lender offers open-end credit to a
consumer primarily for personal, family, or household purposes, and
permits the consumer to repay on a monthly basis. At consummation,
the consumer borrows the full $500 available under the plan and
agrees to repay the loan through recurring electronic fund
transfers. The lender charges a periodic rate of 0.006875 (which
corresponds to an annual rate of 8.25 percent), plus a fee of $25,
charged when the account is established and annually thereafter.
Under these circumstances, pursuant to Sec. 1026.14(c)(2) of
Regulation Z, the lender would calculate the total cost of credit as
follows: ``dividing the total finance charge for the billing
cycle''--which is $3.44 (corresponding to 0.006875 multiplied by
$500), plus $25--``by the amount of the balance to which it is
applicable''--$500--``and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a year''--12 (since
the creditor allows the borrower to repay monthly), which is 68.26
percent. In this example, the line of credit would be a covered loan
under proposed Sec. 1041.3(b) because the total cost of credit
exceeds a rate of 36 percent per annum and the lender has obtained a
leveraged payment mechanism as of consummation.
[[Page 48191]]
Section 1041.3--Scope of Coverage; Exclusions
3(b) Covered Loans
1. In general. Whether a loan is a covered loan is generally
determined based on the loan terms at the time of consummation.
2. Credit structure. The term covered loan includes open-end
credit and closed-end credit, regardless of the form or structure of
the credit.
3. 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 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:
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 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. 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 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 loan under Sec.
1041.3(b)(2) if the loan otherwise met the criteria specified in
proposed Sec. 1041.3(b)(2). For loans that are not required to be
repaid within 45 days of consummation or advance, if the consumer
would breach the agreement between the consumer and the lender by
not repaying the loan in either a single payment or a balloon
payment, the loan is a covered longer-term balloon-payment loan
under Sec. 1041.2(a)(7).
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. Conditions for coverage of a longer-term loan. A loan that is
not required to be substantially repaid within 45 days of
consummation or advance is a covered loan only if it satisfies both
the total cost of credit requirement of Sec. 1041.3(b)(2)(i) and
leveraged payment mechanism or vehicle security requirement of Sec.
1041.3(b)(2)(ii). If the requirements of Sec. Sec. 1041.3(b)(2)(i)
and (ii) are met, and the loan is not otherwise excluded from
coverage by proposed Sec. 1041.3(e), the loan is a covered longer-
term loan. For example, a 60-day loan is not a covered longer-term
loan if the total cost of credit as measured pursuant to Sec.
1041.2(a)(18) 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 or vehicle security.
Paragraph 3(b)(2)(ii)
1. Timing. The condition in Sec. 1041.3(b)(2)(ii) is satisfied
if a lender or service provider obtains a leveraged payment
mechanism or 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, regardless of
the means by which the lender or service provider obtains a
leveraged payment mechanism or vehicle security. If a lender or
service provider obtains a leveraged payment mechanism or vehicle
security more than 72 hours after the consumer receives the entire
amount of funds that the consumer is entitled to receive under the
loan, the credit is not a covered loan under Sec. 1041.3(b)(2). The
loan may nevertheless be a covered loan under Sec. 1041.3(b)(1).
If a loan modification provides for the consumer to receive
additional funds, the condition in Sec. 1041.3(b)(2)(ii) is
satisfied if a lender or service provider obtains a leveraged
payment mechanism or 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
modification. If a lender or service provider has obtained a
leveraged payment mechanism on a non-covered loan more than 72 hours
after the consumer receives the entire amount of funds that the
consumer is entitled to receive under the loan, and a modification
of such a non-covered loan provides for the consumer to receive
additional funds, the loan modification will result in the non-
covered loan becoming a covered loan if the conditions in Sec.
1041.3(b)(2)(ii) are otherwise satisfied. Thus, as of the
consummation of such a loan modification, the lender would have to
comply with the requirements of part 1041 as they would apply to a
new covered loan.
2. Entirety of funds. A consumer receives the entire amount of
funds that the consumer is entitled to receive under the loan when
the consumer has:
i. Received the entire sum available under a closed-end credit
agreement and can receive no further funds without consummating
another loan; or
ii. Fully drawn down the entire sum available under an open-end
credit plan and can receive no further funds without replenishing
the credit plan or repaying the balance (if replenishment is allowed
under the plan), consummating another loan (if replenishment is not
allowed under the plan), or increasing the credit line available
under the credit plan.
3. Leveraged payment mechanism or vehicle security in contract.
The condition in Sec. 1041.3(b)(2)(ii) is satisfied if a loan
agreement authorizes the lender to elect to obtain a leveraged
payment mechanism or vehicle security, regardless of the time at
which the lender actually obtains a leveraged payment mechanism or
vehicle security. The following are examples of situations in which
a lender obtains a leveraged payment mechanism under Sec.
1041.3(b)(2)(ii):
i. Future authorization. A loan agreement provides that the
consumer, at some future date more than 72 hours after receiving the
loan funds, 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;
iii. Wage assignments and similar assignment. A loan agreement
provides that, in the event that the consumer becomes delinquent or
defaults on the loan, the consumer automatically authorizes the
consumer's employer to withhold money from the consumer's paycheck
and pay that money to the lender or service provider, or makes a
similar assignment of expected future income.
Paragraph 3(c)(1)
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 unless the consumer is contractually
obligated to initiate the transaction.
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:
[[Page 48192]]
i. Check. A lender or service provider obtains a check, draft,
or similar paper instrument written by the consumer.
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 an immediate one-time transfer as described in
Sec. 1041.3(c)(1) and comment 3(c)(1)-3.
iii. Remotely created check. 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, 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. One-time transfers. 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 consumer may authorize a lender
or service provider to immediately initiate a one-time transfer
without causing the loan to be a covered loan. ``Immediately'' means
that the lender initiates the one-time transfer with as little delay
as possible after the consumer authorizes the transfer. For example,
a consumer whose loan payment is due can authorize the lender to use
an ACH transfer to make the payment. If the lender uses the
authorization to initiate the transfer within minutes of the
authorization, and does not use the authorization to initiate future
transfers, the lender's one-time initiation of an electronic fund
transfer does not constitute a leveraged payment mechanism for the
purposes of Sec. 1041.3(c)(1).
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 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.
Paragraph 3(c)(3)
1. Payroll deductions. A lender obtains a leveraged payment
mechanism if, pursuant to a requirement in an agreement between the
consumer and the lender or service provider, the consumer directs
the consumer's employer or other payor of income to withhold an
amount from the consumer's pay or other income or directs a
financial institution to receive an amount from an employer or other
payor of income that the financial institution would otherwise
credit to a consumer's account, which the employer (or other payor
of income) or financial institution pays to a lender or service
provider in partial or full satisfaction of an amount due under the
loan. A lender or service provider obtains a leveraged payment
mechanism regardless of whether payroll or other income deductions
are recurring or whether deduction of payroll or other income will
occur only upon delinquency or default.
3(d) Vehicle Security
Paragraph 3(d)(1)
1. An interest in a consumer's motor vehicle as a condition of
credit. Subject to the exclusion described in Sec. 1041.3(e)(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. 1041.3(d)(2).
3(e) Exclusions
3(e)(1) Certain Purchase Money Security Interest Loans
1. ``Sole purpose'' test. The requirements of part 1041 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 total cost of credit exceeds 36
percent per annum and the lender also obtains a leveraged payment
mechanism. If the item that is purchased with the credit is not a
good or if the amount financed is greater than the cost of acquiring
the good, the credit is not excluded from the requirements of part
1041 under Sec. 1041.3(e)(1). This exclusion does not apply to
refinances of credit extended for the purchase of a good.
3(e)(2) Real Estate Secured Credit
1. Real estate and dwellings. The requirements of part 1041 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 total 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 part 1041 under Sec. 1041.3(e)(2).
3(e)(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 part 1041 under Sec. 1041.3(e)(5). First, the
lender must have sole physical possession and use of the property
securing the pawned property at all times during the entire 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
part 1041 under Sec. 1041.3(e)(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 part 1041 under Sec. 1041.3(e)(5).
3(e)(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 part 1041 under Sec. 1041.3(e)(6).
Section 1041.5--Ability-To-Repay Determination Required
5(a) Definitions
5(a)(1) Basic Living Expenses
1. General. For purposes of the ability-to-repay determination
required under Sec. 1041.5(b), a lender must make a reasonable
determination that the consumer's residual income is 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 covered short-term loan or the period ending 45 days after
consummation. In addition, the lender must determine that the
consumer, after making the highest payment under the covered short-
term loan, is able to make payments required for major financial
obligations as they fall due, to make any remaining payments under
the loan, and to meet basic living expenses for 30 days following
the date of the highest payment under the loan. Section 1041.5(a)(1)
defines basic living expenses as expenditures, other than payments
for major financial obligations, that the consumer must make 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 members of the consumer's household who are financially
dependent on the consumer. Examples of goods and services that are
necessary for maintaining health and welfare include food and
utilities. Examples of goods and services that are necessary for
maintaining the ability to produce income include transportation to
and from a place of employment and daycare for dependent children.
See comment 5(b)-4.
5(a)(2) Major Financial Obligations
1. General. Section 1041.5(a)(2) defines major financial
obligations as a consumer's housing expense, minimum payments and
any delinquent amounts due under debt
[[Page 48193]]
obligations (including outstanding covered loans), and court- or
government agency-ordered child support obligations. 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. Minimum
payments and any delinquent amounts due under debt obligations
include periodic payments for automobile loan payments, student loan
payments, other covered and non-covered loan payments, and minimum
required credit card payments due during the underwriting period, as
well as and any delinquent periodic payments.
5(a)(5) Payment Under the Covered Short-Term Loan.
Paragraphs 5(a)(5)(i) and (ii)
1. General. Section 1041.5(a)(5)(i) defines payment under a
covered short-term 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 loan. Section
1041.5(a)(5)(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 short-term loan, a
consumer would owe on a particular date $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 and also has the option to pay the $80 in principal at a
later date. 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)(5)(iii)
1. General. Section 1041.5(a)(5)(iii) provides assumptions that
a lender must make in calculating the payment under Sec.
1041.5(a)(5) for a covered short-term loan with 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)(5)(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.
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. 1041.7) unless it first makes a reasonable
determination that the consumer will have the ability to repay the
loan according to its terms. Section 1041.5(b) provides minimum
standards that the lender's determination must meet to constitute a
reasonable determination. The minimum standards provide that the
reasonable determination includes three components. Section
1041.5(b)(2)(i) requires that as part of the ability-to-repay
determination for any covered short-term loan, a lender must
determine that the consumer's residual income projected in
accordance with Sec. 1041.5(c) is sufficient for the consumer to
make all payments under the loan and to meet basic living expenses
during the term of the loan. Section 1041.5(b)(2)(ii) requires that
the ability-to-repay determination for a covered short-term loan
must also include a determination that the consumer, after making
the highest payment under the loan, is able to make payments for
major financial obligations, to make any remaining payments under
the loan, and to meet basic living expenses for 30 days following
the date of the highest payment under the loan. Section
1041.5(b)(2)(iii) requires that for a covered short-term loan for
which a presumption of unaffordability applies under Sec. 1041.6,
the applicable requirements of Sec. 1041.6 are satisfied. Section
1041.5(b)(2) provides that a determination of a consumer's ability
to repay is reasonable only if it is based on projections of
consumer net income and major financial obligations that comply with
Sec. 1041.5(c).
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 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 must:
A. Include the determinations required in Sec. 1041.5(b)(2)(i),
(ii), and (iii), as applicable;
B. Be based on reasonable projections of a consumer's net income
and major financial obligations in accordance with Sec. 1041.5(c);
C. Be based on reasonable estimates of a consumer's basic living
expenses (see comment 5(b)-(4);
D. Be consistent with a lender's written policies and procedures
required under Sec. 1041.18 and grounded in reasonable inferences
and conclusions as to a consumer's ability to repay a covered short-
term 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); and
E. Appropriately account for information known by the lender,
whether or not the lender is required to obtain the information
under part 1041, that indicates that the consumer may not have the
ability to repay a covered short-term loan according to its terms.
ii. A determination of ability to repay is not reasonable if it:
A. Relies on an implicit 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.
iii. Evidence of whether a lender's determinations of ability to
repay are reasonable may include the extent to which the lender's
determinations subject to Sec. 1041.5 result in rates of
delinquency, default, and reborrowing for covered short-term loans
that are low, equal to, or high, including in comparison to the
rates of other lenders making covered short-term loans to similarly
situated consumers.
3. Payments under the covered short-term loan. Under the
ability-to-repay requirements in Sec. 1041.5(b)(2)(i), (ii), and
(iii), a lender must determine the amount and timing of the payments
due in connection with the covered short-term loan. The lender is
responsible for calculating, for purposes of the determination and
as of consummation, the timing and amount for all payments under the
loan based on the terms of the loan. See Sec. 1041.5(a)(5) for the
definition of payment under a covered short-term loan, including
assumptions that the lender must make in calculating the amount and
timing of payments under a loan that is a line of credit.
4. Basic living expenses. To comply with Sec. 1041.5(b), a
lender must account for a consumer's need to meet basic living
expenses for the applicable period. Section 1041.5(a)(1) defines
basic living expenses as expenditures, other than payments for major
financial obligations, that the consumer must make 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 members of the consumer's household who are financially dependent
on the consumer. Sections 1041.5(a)(1) and (b) do not specify a
particular method that a lender must use to determine an amount of
funds that a consumer requires to meet basic living expenses for an
applicable period. For example, a lender is not required to itemize
the basic living expenses of each consumer. Nor is a lender required
to assume that a consumer's basic living expenses during the term of
a prospective covered loan must be
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equal to the consumer's expenditures for goods and services other
than major financial obligations during a recent period preceding
consummation of the prospective loan. Whether a particular method
complies with the requirements of Sec. 1041.5(b) 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.
i. Reasonable methods of estimating basic living expenses may
include, but are not necessarily limited to, the following:
A. Setting 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;
B. Obtaining additional reliable information about a consumer's
expenses other than the information required to be obtained under
Sec. 1041.5(c), to develop a reasonably accurate estimate of a
consumer's basic living expenses; or
C. Any method that reliably predicts basic living expenses.
ii. Unreasonable methods of estimating basic living expenses may
include, but are not necessarily limited to, the following:
A. Assuming 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; or
B. 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 reborrowing relative
to rates of default and reborrowing of other lenders making covered
loans to similarly situated consumers.
5(b)(2)(i)
1. Applicable period for residual income. Section
1041.5(b)(2)(i) requires the lender to make a reasonable
determination that the consumer's residual income will be sufficient
for the consumer to make all payments under the covered short-term
loan and to meet basic living expenses during the term of the loan.
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 loan plus an amount the lender
reasonably estimates will be needed for basic living expenses during
the term of the loan. For example:
A. Assume a lender considers making a covered loan to a consumer
on March 1. The prospective loan would be repayable in a single
payment of $385 on March 17. The lender determines that, based on
its projections of net income that the consumer will receive and
payments for major financial obligations that will fall due from
March 1 through March 17, the consumer will have $800 in residual
income. The lender complies with the requirement in Sec.
1041.5(b)(1) if it reasonably determines that $800 will be greater
than the sum of the $385 loan payment plus an amount the lender
reasonably estimates will be needed for basic living expenses from
March 1 through March 17. (Note that in this example the lender also
would have to comply with the requirement of Sec. 1041.5(b)(2)(ii).
See comment 5(b)(2)(ii)-1.)
2. Sufficiency of residual income. For any covered short-term
loan, the lender must make a reasonable determination that the
consumer's residual income will be sufficient for the consumer to
make all payments under the loan and to meet basic living expenses
during the shorter of the term of the loan or for 45 days after
consummation of the loan. For a covered short-term loan, residual
income is sufficient if it is greater than the sum of payments that
would be due under the loan plus an amount the lender reasonably
estimates will be needed for basic living expenses. (See comment
5(b)(2)(i)-1 for applicable periods for the determination.)
Paragraph 5(b)(2)(ii)
1. General. Section 1041.5(b)(2)(ii) requires that for a covered
short-term loan, the lender must make a reasonable determination
that the consumer, after making the highest loan payment that will
be due under the loan, will be able to make payments required for
major financial obligations as they fall due, to make any remaining
payments under the loan as they fall due, and to meet basic living
expenses for 30 days following the date of the highest payment under
the loan. (This determination is in addition to the required
determination regarding residual income under Sec.
1041.5(b)(2)(i).) Section 1041.5(b) provides that a determination of
a consumer's ability to repay is reasonable only if it is based on
projections of consumer net income and payments for major financial
obligations determined in accordance with Sec. 1041.5(c).
Accordingly, a lender must include in its determination under Sec.
1041.5(b)(2)(ii) the amount and timing of payments for major
financial obligations that it projects the consumer must make during
the 30-day period following the highest loan payment, in accordance
with Sec. 1041.5(c). A lender must include in its determination
under 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 Sec. 1041.5(c).
For a loan with two or more payments that are equal to each other in
amount and higher than all other payments, a lender complies by
making the required determination for the 30-day period following
the later in time of the two or more higher payments. See comment
5(b)-4, regarding methods for estimating amounts for basic living
expenses. For example:
i. Assume that a lender considers making a covered loan to a
consumer on April 23 and that the loan would be repayable in a
single payment of $550 (i.e., that payment is also the highest loan
payment) on April 29. Assume further that the lender reasonably
determines in accordance with Sec. 1041.5(b)(2)(i) that the
consumer's residual income for the period from April 23 through
April 29 will be sufficiently greater than the sum of the $550 loan
payment plus an adequate amount for basic living expenses for the
same period. Assume further that payment of the $550 loan payment,
however, will consume all but $1,000 of the consumer's last paycheck
preceding or coinciding with the date of the loan payment. The
lender projects that the consumer's next receipt of income will not
occur until May 13, and the consumer must make a rent payment of
$950 on May 1 and a student loan payment of $200 on May 5. The
consumer, having made the $550 covered loan payment, would not be
able make payments under two major financial obligations (i.e., rent
payment and the student loan payment), that fall due before May 30.
Accordingly, the lender cannot reasonably determine that the
consumer has the ability to repay the loan under Sec.
1041.5(b)(2)(ii).
5(c) Projecting Consumer Net Income and Payments for Major Financial
Obligations
Paragraph 5(c)(1)
1. General. Section 1041.5(c)(1) provides that to be reasonable,
a projection of the amount and timing of net income or payments for
major financial obligations may be based on amounts and timing
stated by the consumer under Sec. 1041.5(c)(3)(i) only to the
extent the stated amounts and timing are consistent with
verification evidence obtained in accordance with Sec.
1041.5(c)(3)(ii). It further provides that in determining whether
and the extent to which such 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. For example:
A. Assume that a consumer states that her net income is $1,000
every two weeks, pursuant to Sec. 1041.5(c)(3)(i). The deposit
account transaction records the lender obtains as verification
evidence pursuant to Sec. 1041.5(c)(3)(ii) show that the consumer
receives $900 every two weeks. 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 $900 in income every two weeks
because it relies on the stated amount and timing only to the extent
they are consistent with the verification evidence.
B. Assume that a consumer states that her net income is $900
every two weeks, pursuant to Sec. 1041.5(c)(3)(i). For verification
evidence, the lender uses an online income verification service that
verifies gross income based on employer-reported payroll
information, pursuant to Sec. 1041.5(c)(3)(ii)(A) and comment
5(c)(3)(ii)(A)-1. The verification evidence the lender obtains
pursuant to Sec. 1041.5(c)(3)(ii) shows that the consumer receives
$1,200 every two weeks. The lender reasonably determines that for a
typical consumer, gross income of $1,200 is consistent with net
income of $900. 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 $900 in income every two weeks because it relies on
the stated amount and timing only to the
[[Page 48195]]
extent they are consistent with the verification evidence.
C. Assume that a consumer states that her minimum required
credit card payment is $150 on the fifth day of each month, pursuant
to Sec. 1041.5(c)(3)(i). The national consumer report that the
lender obtains as verification evidence pursuant to Sec.
1041.5(c)(3)(ii) shows that the consumer's minimum monthly payment
is $160. 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 a $160 credit card payment on the fifth day of each month because
it relies on the stated amount and timing only to the extent they
are consistent with the verification evidence.
D. Assume that a consumer states that her net income is $1,000
every two weeks, pursuant to Sec. 1041.5(c)(3)(i). The lender
obtains electronic records of the consumer's deposit account
transactions as verification evidence pursuant to Sec.
1041.5(c)(3)(ii) showing biweekly direct deposits of $750, $850, and
$995, respectively, during the preceding six-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 projection
of a $1,000 in net income every two weeks.
E. Assume that a consumer states that her net income is $1,000
every two weeks, pursuant to Sec. 1041.5(c)(3)(i). The lender
obtains electronic records of the consumer's deposit account
transactions as verification evidence pursuant to Sec.
1041.5(c)(3)(ii) showing biweekly direct deposits of $1,000, $1,000,
and $800, respectively, during the preceding six-week period. The
consumer explains that the most recent income was lower than her
usual income 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 $1,000 in income every two weeks because it reasonably considers
the consumer's explanation in determining whether the stated amount
and timing is consistent with the verification evidence.
F. Assume that a consumer states that her net income is $2,000
every two weeks, pursuant to Sec. 1041.5(c)(3)(i). The lender
obtains electronic records of the consumer's deposit account
transactions as verification evidence pursuant to Sec.
1041.5(c)(3)(ii) 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 $2,000 in income every two weeks because it reasonably
considers the consumer's explanation in determining whether the
stated amount and timing is consistent with the verification
evidence.
G. Assume that a consumer states that she owes a child support
payment of $200 on the first day of each month, pursuant to Sec.
1041.5(c)(3)(i). The national consumer report that the lender
obtains as verification evidence pursuant to Sec. 1041.5(c)(3)(ii)
does not include any child support payment. 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 a $200 child support
payment on the first day of each month because it relies on the
stated amount and timing and nothing in the verification evidence is
inconsistent with the stated amount and timing.
5(c)(3) Evidence of Net Income and Payments for Major Financial
Obligations
Paragraph 5(c)(3)(i)
1. Consumer statements. Section 1041.5(c)(3)(i) requires a
lender to obtain a consumer's written statement of the amounts and
timing of consumer's net income receipts and payments for categories
(e.g., credit card payments, automobile loan payments, housing
expense payments, child support payments, etc.) of the consumer's
major financial obligations. 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 and retains. 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 paid
through the period required under Sec. 1041.5(b)(2). For example, 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.
Paragraph 5(c)(3)(ii)
1. Verification requirement. Section 1041.5(c)(3)(ii)
establishes requirements for a lender to obtain verification
evidence for the amounts and timing of a consumer's net income and
required payments for major financial obligations.
Paragraph 5(c)(3)(ii)(A)
1. Income. Section 1041.5(c)(3)(ii)(A) requires a lender to
obtain a reliable record (or records) of income payment (or
payments) covering sufficient history to reasonably support the
lender's projection under Sec. 1041.5(c)(1). 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.
Paragraph 5(c)(3)(ii)(B)
1. Payments under debt obligations. To verify a consumer's
required payments under debt obligations, Sec. 1041.5(c)(3)(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 currently registered pursuant to Sec.
1041.17(c)(2) or Sec. 1041.17(d)(2), if available. A lender
satisfies its obligation under Sec. 1041.6(a)(2) to obtain a
consumer report from an information system currently registered
pursuant to Sec. 1041.17(c)(2) or (d)(2), if available, when it
complies with the requirement in Sec. 1041.5(c)(3)(ii)(B) to obtain
this same consumer report. The amount and timing of a payment
required under a debt obligation or 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.
Paragraph 5(c)(3)(ii)(D)
1. Housing expense. Section 1041.5(c)(3)(ii)(D) requires a
lender to obtain verification evidence for the consumer's housing
expense. It provides three methods for complying with this
obligation.
i. For a housing expense under a debt obligation (i.e., a
mortgage), Sec. 1041.5(c)(3)(ii)(D) provides that a lender may
satisfy the requirement by obtaining a national consumer report that
includes the housing expense under a debt obligation pursuant to
Sec. 1041.5(c)(3)(ii)(B).
ii. Under Sec. 1041.5(c)(1)(ii)(D)(1), a lender may satisfy the
obligation to obtain verification evidence of housing expense by
obtaining a reliable transaction record (or records) of recent
housing expense payments or a rental or lease agreement. For
purposes of this alternative, reliable transaction records include a
facially genuine original, photocopy or image of a receipt,
cancelled check, or money order, or an electronic or paper record of
depository account transactions or prepaid account transactions
(including transactions on a general purpose reloadable prepaid card
account, a payroll card account, or a government benefits card
account), from which the lender can reasonably determine that a
payment was for housing expense as well as the date and amount paid
by the consumer.
iii. Under Sec. 1041.5(c)(1)(ii)(D)(2), a lender may satisfy
its obligation to obtain verification evidence of housing expense
using an amount determined under a reliable method of estimating a
consumer's housing expense based on the housing expenses of
consumers with households in the locality of the consumer. The
lender may estimate a consumer's share of housing expense based on
the individual or household housing expenses of similarly situated
consumers with households in the locality of the consumer seeking a
covered loan. For example, a lender may use data from a statistical
survey, such as the American Community Survey of the United States
Census Bureau, to estimate individual or household housing expense
in the locality (e.g., in the same census tract) where the consumer
resides. Alternatively, a lender may estimate individual or
household housing expense based on housing expense and other data
reported by applicants to the lender, provided that it periodically
reviews
[[Page 48196]]
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. A lender
may estimate a consumer's share of household housing expense based
on estimated household housing expense by reasonably apportioning
the estimated household housing expense by the number of persons
sharing housing expense as stated by the consumer, or by another
reasonable method.
Section 1041.6--Additional Limitations on Lending--Covered Short-
Term Loans
6(a) Additional Limitations on Making a Covered Short-Term Loan Under
Sec. 1041.5
6(a)(1) General
1. General. Section 1041.6 specifies circumstances in which a
consumer is presumed to not have the ability to repay a covered
short-term loan under Sec. 1041.5 and circumstances in which making
a new covered short-term loan under Sec. 1041.5 is prohibited
during a mandatory cooling-off period. The presumptions and
prohibitions apply to making a covered short-term loan under Sec.
1041.5.
2. Application to rollovers. The presumptions and prohibitions
in Sec. 1041.6 apply to new covered short-term 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). In the event that a
lender is permitted under State law to roll over a loan, the
rollover would be treated as a new covered short-term loan subject
to the presumptions and prohibitions in Sec. 1041.6. For example,
assume 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 $500 in principal and a 14-day contractual duration; the
consumer returns to the lender on day 14 and 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)(12), 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. Therefore, the
rollover would be subject to the presumption of unaffordability in
Sec. 1041.6(b).
3. Relationship to Sec. 1041.5. A lender's determination that a
consumer will have the ability to repay a covered short-term loan is
not reasonable within the meaning of Sec. 1041.5 if under Sec.
1041.6(b), (c), or (d) the consumer is presumed to not have the
ability to repay the loan and the lender is not able to overcome the
presumption in the manner set forth in Sec. 1041.6(e).
6(a)(2) Borrowing History Review
1. Relationship to Sec. 1041.5(c)(3)(ii)(B). A lender satisfies
its obligation under Sec. 1041.6(a)(2) to obtain a consumer report
from an information system currently registered pursuant to Sec.
1041.17(c)(2) or (d)(2), if available, when it complies with the
requirement in Sec. 1041.5(c)(3)(ii)(B) to obtain this same
consumer report.
2. Availability of information systems currently registered
pursuant to Sec. 1041.17(c)(2) or (d)(2). If no information systems
currently registered pursuant to Sec. 1041.17(c)(2) or (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.
A lender may be unable to obtain a consumer report from an
information system currently registered pursuant to Sec.
1041.17(c)(2) or (d)(2) if, for example, all registered information
systems are temporarily unavailable.
6(b) Presumption of Unaffordability for Sequence of Covered Short-Term
Loans Made Under Sec. 1041.5
6(b)(1) Presumption
1. General. Section 1041.6(b)(1) means that a lender cannot make
a covered short-term loan under Sec. 1041.5 during the time period
in which the consumer has a covered short-term loan made under Sec.
1041.5 outstanding and for 30 days thereafter unless either the
exception to the presumption in Sec. 1041.6(b)(2) applies or the
lender determines in the manner set forth in Sec. 1041.6(e) that
there is sufficient improvement in the consumer's financial capacity
such that the consumer would have the ability to repay the new loan
according to its terms despite the unaffordability of the prior
loan. If the loan is the fourth loan in a sequence of covered short-
term loans, however, the loan is subject to the prohibition under
Sec. 1041.6(f). See Sec. 1041.6(f) and accompanying commentary.
6(b)(2) Exception
1. Exception to the presumption. Section 1041.6(b)(2) provides a
limited exception to the presumption in Sec. 1041.6(b)(1) in
certain circumstances. Under Sec. 1041.6(b)(2), the presumption of
unaffordability does not apply if the circumstances in either Sec.
1041.6(b)(2)(i)(A) or (B) are present and the condition in Sec.
1041.6(b)(2)(ii) is satisfied.
Paragraph 6(b)(2)(i)(A)
1. General. The exception in Sec. 1041.6(b)(2)(i)(A) to the
presumption in Sec. 1041.6(b)(1) applies if the consumer has: (1)
Paid in full the prior covered short-term loan; and (2) would not
owe more than 50 percent of the amount paid on the prior loan in
connection with the new covered short-term loan. The prior covered
short-term loan is paid in full if the consumer has satisfied all
payment obligations on the loan, including repayment of the amount
financed and all charges included in the total cost of credit, as
well as any other fees and charges that are excluded from the total
cost of credit (e.g., late fees). See Sec. 1041.2(a)(18) for the
definition of total cost of credit. The loan is considered paid in
full for purposes of Sec. 1041.6(b)(2)(i)(A) whether or not the
consumer's obligations were satisfied timely under the loan
contract. For the exception under Sec. 1041.6(b)(2)(i)(A) to apply,
furthermore, the consumer would not owe, in connection with the new
covered short-term loan, more than 50 percent of the amount that the
consumer paid on the prior covered short-term loan. The amounts paid
and amounts owed include the amount financed and charges included in
the total cost of credit, but exclude any charges excluded from the
total cost of credit. This means, for example, that payment of late
fees is required for the loan to be ``paid in full,'' but the amount
of the late fees is not included toward calculating whether the
consumer would owe, in connection with the new loan, more than 50
percent of the amount the consumer paid on the prior loan.
2. Example. Assume a consumer receives a $400 loan with $100 in
finance charges and a 14-day contractual duration, pays the $500
principal and finance charges on the contractual due date, and then
returns 20 days later to borrow a $160 loan with $40 in finance
charges and a 14-day contractual duration. The presumption of
unaffordability under Sec. 1041.6(b) does not apply because the
prior covered short-term loan was paid in full and the $200 that
would be owed on the second loan is less than 50 percent of the $500
paid on the first loan. In contrast, in the example above, such
presumption of unaffordability applies if the consumer returned to
borrow a $320 loan with an $80 finance charge and a 14-day
contractual duration because $400 is more than 50 percent of the
$500 paid on the first loan.
Paragraph 6(b)(2)(i)(B)
1. General. If a lender is permitted under applicable State law
to roll over a covered short-term loan (or what is termed a renewal
in some States), the exception to the presumption of unaffordability
under Sec. 1041.6(b)(2) applies to a rollover of a prior covered
short-term loan in which the consumer provides partial repayment of
the prior loan. For purposes of the presumptions and prohibitions
under Sec. 1041.6, a rollover of a covered short-term loan is
considered a new covered short-term loan (see also comment 6(a)(1)-
(2). Thus, the reference in Sec. 1041.6(b)(2)(i)(B) to the prior
covered short-term loan is to the outstanding loan that is being
rolled over and the reference to the new covered short-term loan is
to the rollover. For the conditions of Sec. 1041.6(b)(2)(i)(B) to
be satisfied, the consumer would not owe more on the new covered
short-term loan (i.e., the rollover) than the consumer paid in
connection with the prior covered short-term loan (i.e., the
outstanding loan being rolled over). This means that the consumer
will repay at least 50 percent of the amount owed on the loan being
rolled over, including the amount financed and charges included in
the total cost of credit but excluding any fees that are excluded
from the total cost of credit (e.g., late fees).
2. Example. Assume a lender makes a covered short-term loan for
$400 with a 14-day contractual duration (Loan A) to a consumer and
the lender is permitted by applicable State law to roll over covered
short-term loans. The consumer returns on day 14 with $250 in cash
and seeks to roll over the remaining $150 due on Loan A into a
second covered short-term loan with a 14-day duration (Loan B).
Assume that the principal for Loan B would be $150 and the rollover
fee would be $30, so that the consumer would owe $180 on Loan B. The
[[Page 48197]]
exception in Sec. 1041.6(b)(2)(ii) would apply because the consumer
would not owe more on the new loan ($180) than the consumer paid on
the prior loan ($250).
6(c) Presumption of Unaffordability for a Covered Short-Term Loan
Following a Covered Longer-Term Balloon-Payment Loan Made Under Sec.
1041.9
1. General. Section 1041.6(c) means that a lender cannot make a
covered short-term loan under Sec. 1041.5 during the time period in
which the consumer has a covered longer-term balloon-payment loan
made under Sec. 1041.9 outstanding and for 30 days thereafter
unless the lender determines in the manner set forth in Sec.
1041.6(e) that there is sufficient improvement in the consumer's
financial capacity such that the consumer would have the ability to
repay the new loan according to its terms despite the
unaffordability of the prior loan.
6(d) Presumption of Unaffordability for a Covered Short-Term Loan
During an Unaffordable Outstanding Loan
1. General. Section 1041.6(d) provides that, except for loans
subject to the presumptions or prohibitions under Sec. 1041.6(b),
(c), (f), or (g), a consumer is presumed not to have the ability to
repay a covered short-term loan under Sec. 1041.5 if, at the time
of the lender's determination under Sec. 1041.5, the consumer
currently has a covered or non-covered loan outstanding that was
made or is being serviced by the same lender or its affiliate and
one or more of the conditions in Sec. 1041.6(d)(1) through (4) is
present. Section 1041.6(d) means that a lender cannot make a covered
short-term loan under Sec. 1041.5 if any of the conditions in Sec.
1041.6(d)(1) through (4) is present unless the lender determines in
the manner set forth in Sec. 1041.6(e) that there is sufficient
improvement in the consumer's financial capacity such that the
consumer will have the ability to repay the new loan according to
its terms despite the unaffordability of the prior loan.
2. Applicability. Section 1041.6(d) applies any time a consumer
has a loan outstanding that was made or is being serviced by the
same lender or its affiliate and one or more of the other conditions
are present except if a presumption or prohibition under Sec.
1041.6(b), (c), (f), or (g) would otherwise apply. For example, if a
consumer has outstanding with the same lender a non-covered
installment loan with scheduled biweekly payments of $100 and the
lender is determining whether the consumer will have the ability to
repay a new covered short-term loan that would have a payment of
$200, Sec. 1041.6(d) would apply if the consumer has, within the
prior 30 days, expressed an inability to make a payment on the
outstanding loan as provided for in Sec. 1041.6(d)(2). If a
consumer instead has a non-covered installment loan outstanding with
a different and unaffiliated lender, Sec. 1041.6(d) does not apply.
3. Indicia of distress. Section 1041.6(d) applies only if at
least one of the four circumstances in Sec. 1041.6(d)(1) through
(4) is present at the time that the lender is making the
determination of ability to repay for the new covered short-term
loan made under Sec. 1041.5.
Paragraph 6(d)(1)
1. Significant delinquency. Under Sec. 1041.6(d)(1), a
delinquency is relevant to the presumption if the consumer is more
than seven days delinquent at the time that the lender is making the
determination under Sec. 1041.5 for the new covered short-term loan
or has been more than seven days delinquent at any point in the 30
days prior to the ability-to-repay determination. Delinquencies that
have been cured and are older than 30 days do not cause the
application of the presumption in Sec. 1041.6(d). For example, if a
consumer has a non-covered installment loan outstanding with the
lender, was 10 days delinquent on a payment three months prior, and
is current on payments at the time of the ability-to-repay
determination for the new covered short-term loan, the prior
delinquency would not cause the application of the presumption of
unaffordability.
Paragraph 6(d)(2)
1. Expression of inability to make one or more payments. Under
Sec. 1041.6(d)(2), a consumer's expression of inability to make one
or more payments on the outstanding loan causes the application of
the presumption in Sec. 1041.6(d) only if such an expression was
made within the 30 days prior to the ability-to-repay determination
under Sec. 1041.5 for the new covered short-term loan. Consumers
may express inability to make a payment on the outstanding loan in a
number of ways. For example, a consumer may make a statement to the
lender or its affiliate that the consumer is unable to or needs help
to make a payment or a consumer may request or accept an offer of
additional time to make a payment.
Paragraph 6(d)(3)
1. Skipped payment. Under Sec. 1041.6(d)(3), the presumption in
Sec. 1041.6(d) applies if the period of time between consummation
of the new covered short-term loan and the first scheduled payment
on that loan would be longer than the period of time between
consummation of the new covered short-term loan and the next
regularly scheduled payment on the outstanding loan. Such a
transaction would have the effect of permitting the consumer to skip
a payment that would otherwise have been due on the outstanding
loan. For example, if a consumer has a non-covered installment loan
outstanding from the lender and the loan has a regularly scheduled
payment due on March 1 and another due on April 1, the circumstance
in Sec. 1041.6(d)(3) would be present if the new covered short-term
loan would be consummated on February 28 and would not require
payment until April 1.
Paragraph 6(d)(4)
1. Cash to cover payments on existing loan. Under Sec.
1041.6(d)(4), the presumption in Sec. 1041.6(d) applies if the new
covered short-term loan would result in the consumer receiving no
disbursement of loan proceeds or an amount of funds as disbursement
of the loan proceeds that is not substantially more than the amount
due in payments on the outstanding loan within 30 days of
consummation of the new covered short-term loan. For example, assume
a consumer has a non-covered installment loan outstanding that is
being serviced by the same lender, the loan has regularly scheduled
payments of $100 due every two weeks, and the new covered short-term
loan would result in the consumer receiving a disbursement of $200.
Since $200 in payments on the outstanding loan would be due within
30 days of consummation, the circumstance in Sec. 1041.6(d)(4)
would be present and under Sec. 1041.6(d) the consumer would be
presumed to not have the ability to repay the new covered short-term
loan. In contrast, if, in the same scenario, the new covered short-
term loan would result in the consumer receiving a disbursement of
$1,000, then the disbursement of loan proceeds would be
substantially more than the amount due in payments on the
outstanding loan within 30 days of consummation of the new covered
short-term loan and the circumstance in Sec. 1041.6(d)(4) would not
be present.
6(e) Overcoming the Presumption of Unaffordability
1. General. When a consumer seeks to roll over a covered short-
term loan or to borrow another covered short-term loan during the
term of or within a short period after repaying a prior loan, Sec.
1041.6(b) through (d) create a presumption that the consumer would
not be able to afford a new covered short-term loan. Section
1041.6(e) permits the lender to overcome the presumption in limited
circumstances evidencing a projected improvement in the consumer's
financial capacity for the new loan relative to the prior loan or,
in some circumstances, during the prior 30 days. See comments 6(e)-2
and -3 for examples of such circumstances. To overcome the
presumption of unaffordability, Sec. 1041.6(e) requires a lender to
reasonably determine, based on reliable evidence, that that the
consumer will have sufficient improvement in financial capacity such
that the new loan would not exceed the consumer's ability to repay
despite the unaffordability of the prior loan. Section 1041.6(e)
requires lenders to assess a sufficient improvement in financial
capacity by comparing the consumer's financial capacity during the
period for which the lender is required to make an ability-to-repay
determination for the new loan pursuant to Sec. 1041.5(b)(2) to the
consumer's financial capacity since obtaining the prior loan or, if
the prior loan was not a covered short-term loan or a covered
longer-term balloon-payment loan, during the 30 days prior to the
lender's determination.
2. Example. Under Sec. 1041.6(e), a lender may reasonably
determine that a consumer will have the ability to repay a new loan
despite the unaffordability of the prior loan where there is
reliable evidence that the need to reborrow is prompted by a decline
in income since obtaining the prior loan (or, if the prior loan was
not a covered short-term loan or covered longer-term balloon-payment
loan, during the 30 days prior to the lender's determination) that
is not reasonably expected to recur for the period during which the
lender is required to make an ability-to-repay determination for the
new covered short-term loan. For instance, assume a consumer
obtained a covered short-term loan for $500 with a 14-day
contractual duration, repaid that loan in full when due, and then
[[Page 48198]]
21 days later sought to take out a new covered short-term loan for
$500 with a 14-day contractual duration. The presumption of
unaffordability in Sec. 1041.6(b) applies to the new covered short-
term loan. However, suppose that the consumer presents evidence
showing that the consumer normally works 40 hours per week but was
unable to work during the first week after repaying the prior
covered short-term loan, and thus earned half of the consumer's
usual pay during that pay period. If the lender reasonably
determines that the consumer's residual income projected under Sec.
1041.5(b)(2)(i) for the new covered short-term loan will return to
normal levels and would be sufficient to enable the consumer to make
payments on the new loan and still have sufficient income to meet
basic living expenses, the lender may determine that the presumption
of unaffordability in Sec. 1041.6(b) has been overcome.
3. Example. Under Sec. 1041.6(e), a lender also may reasonably
determine that a consumer will have the ability to repay a new loan
despite the unaffordability of the prior loan where there is
reliable evidence that the consumer's financial capacity will be
sufficiently improved since obtaining the prior loan (or if the
prior loan was not a covered short-term loan or a covered longer-
term balloon-payment loan, during the 30 days prior to the lender's
determination) because of a projected increase in net income or a
decrease in major financial obligations for the period during which
the lender is required to make an ability-to-repay determination for
the new covered short-term loan. For instance, assume a consumer
obtains a $300 covered short-term loan with a 30-day contractual
duration. When the loan comes due, the consumer seeks a new $200
covered short-term loan with a 30-day contractual duration. The
presumption of unaffordability in Sec. 1041.6(b) applies to the new
covered short-term loan. However, suppose that the consumer presents
reliable evidence indicating that during the prior 30 days the
consumer moved to a new apartment and reduced housing expenses by
more than $100. If the lender reasonably determines that the amount
of the consumer's residual income projected under Sec.
1041.5(b)(2)(i) for the new covered short-term loan will exceed the
amount of the consumer's residual income previously projected under
Sec. 1041.5(b)(2)(i) for the prior loan by an amount that will be
sufficient to enable the consumer to make payments on the new loan
and still have sufficient income to meet basic living expenses, the
lender may determine that the presumption of unaffordability in
Sec. 1041.6(b) has been overcome.
4. Reliable evidence for the determination under Sec.
1041.6(e). In order to make a reasonable determination under Sec.
1041.6(e) of whether the consumer's financial capacity has
sufficiently improved since the prior loan (or if the prior loan was
not a covered short-term loan or a covered longer-term balloon-
payment loan, during the 30 days prior to the lender's
determination) such that the new loan would not exceed the
consumer's ability to repay the new loan according to its terms
despite the unaffordability of the prior loan, the lender must use
reliable evidence. Reliable evidence consists of verification
evidence regarding the consumer's net income and major financial
obligations sufficient to make the comparison required under Sec.
1041.6(e). For example, bank statements indicating direct deposit of
net income from the consumer's employer during the periods of time
for which the consumer's residual income must be compared to
determine whether sufficient improvement in the consumer's financial
capacity has taken place would constitute reliable evidence. In
contrast, a self-certification by the consumer that his or her
financial capacity has sufficiently improved since obtaining the
prior loan or, if the prior loan was not a covered short-term loan
or covered longer-term balloon-payment loan, during the 30 days
prior to the lender's determination would not constitute reliable
evidence unless the lender verifies the facts certified by the
consumer through other reliable means.
6(f) Prohibition on Loan Sequences of More Than Three Covered Short-
Term Loans Made Under Sec. 1041.5.
1. Prohibition. Section 1041.6(f) prohibits a lender from making
a fourth covered short-term loan under Sec. 1041.5 in a loan
sequence of covered short-term loans made under Sec. 1041.5.
Nothing in Sec. 1041.6(f) limits a lender's ability to make a
covered longer-term loan under Sec. 1041.9, Sec. 1041.11, or Sec.
1041.12. See Sec. 1041.2(a)(12) for the definition of a loan
sequence.
6(h) Determining Period Between Consecutive Covered Loans
1. General. Section 1041.6(h) specifies the manner in which the
time periods specified in Sec. 1041.6(b), (c), (f), and (g) must be
determined. Under Sec. 1041.6(h), during the time period in which
any covered short-term loan made by a lender or its affiliate under
Sec. 1041.5, any covered short-term loan made by a lender or its
affiliate under Sec. 1041.7, or any covered longer-term balloon-
payment loan made by the lender or its affiliate under Sec. 1041.9
is outstanding, and for 30 days thereafter, if the lender or its
affiliate makes a non-covered bridge loan, then the days during
which the non-covered bridge loan is outstanding do not count toward
the determination of the applicable time periods. See Sec.
1041.2(a)(13) for the definition of non-covered bridge loan.
2. Example. For example, assume that a lender makes a covered
short-term loan under Sec. 1041.5 with a contractual duration of 14
days (Loan X), the loan is the first loan in a sequence, and the
consumer repays Loan X on the contractual due date. Assume that 10
days later the lender then makes to the consumer a non-recourse pawn
loan (Loan Y), which under Sec. 1041.2(a)(13) is a non-covered
bridge loan, that Loan Y has a contractual duration of 60 days, and
that the consumer repays Loan Y on the contractual due date. Assume
that the consumer returns to the lender 10 days after repayment of
Loan Y seeking another covered short-term loan (Loan Z). The
consummation of Loan Z would be 80 calendar days after the date on
which Loan X was repaid. Because greater than 30 calendar days had
elapsed since Loan X was repaid, the lender generally would not need
to consider Loan X as the prior covered short-term loan when
determining whether Loan Z is permissible under Sec. 1041.6(b).
However, because Loan Y was a non-covered bridge loan, the 60 days
during which Loan Y was outstanding are not counted toward the
determination of whether 30 days has elapsed since the prior covered
short-term loan was outstanding. Not including the 60 days during
which Loan Y was outstanding, only 20 days had elapsed between the
date on which the consumer repaid Loan X and the consummation date
for Loan Z. Therefore, the consummation of Loan Z is deemed to be
within 30 days of Loan X being outstanding. As a result, under Sec.
1041.6(b), there would be a presumption of unaffordability for Loan
Z.
Section 1041.7 Conditional Exemption for Certain Covered Short-Term
Loans
7(a) Conditional Exemption for Certain Covered Short-Term Loans
1. General. Under Sec. 1041.7(a), a lender that complies with
Sec. 1041.7(b) through (e) can make a covered short-term loan,
without complying with the otherwise applicable requirements under
Sec. Sec. 1041.5 and 1041.6. Section 1041.7(a) provides an
exemption to the requirements of Sec. Sec. 1041.5 and 1041.6 only;
nothing in Sec. 1041.7 provides lenders with an exemption to the
requirements of other applicable laws, including State laws.
2. Obtaining consumer borrowing history information. Under Sec.
1041.7(a), the lender must determine prior to making a covered
short-term loan under Sec. 1041.7 that certain requirements are
satisfied. In particular, Sec. 1041.7(b), (c), and (d) would
require 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. Furthermore, Sec. 1041.7(b) and (c)
require the lender to obtain a consumer report from an information
system registered under Sec. 1041.17(c)(2) or (d)(2). If no
information systems are registered under Sec. 1041.17(c)(2) or
(d)(2) and available as of the time the lender is required to obtain
the report, the lender cannot comply with the requirements in Sec.
1041.7(b) and (c). A lender may be unable to obtain a consumer
report if, for example, information systems have been registered
under Sec. 1041.17(c)(2) or (d)(2) but all registered information
systems are temporarily unavailable. Under these circumstances, a
lender cannot make a covered short-term loan under Sec. 1041.7.
7(b) Loan Term Requirements
Paragraph 7(b)(1)
1. Loan sequence. Section 1041.2(a)(11) defines a loan sequence.
For further clarification and examples regarding the definition of
loan sequence, see Sec. 1041.2(a)(11).
2. Principal amount limitations--general. For a covered short-
term loan made under Sec. 1041.7, different principal amount
limitations apply under Sec. 1041.7(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. 1041.7(b)(1)(i), for the first
loan in a loan sequence, the
[[Page 48199]]
principal amount must be no greater than $500. Under Sec.
1041.7(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.
1041.7(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. 1041.7 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 covered 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, roll over a covered short-term loan made under
Sec. 1041.7, but the rollover would be treated as the second loan
or third loan in the loan sequence, as applicable, and would
therefore be subject to the principal amount limitations set forth
in Sec. 1041.7(b)(1). For example, assume a lender is permitted
under applicable State law to make a rollover. If the consumer is
made a first loan in a loan sequence under Sec. 1041.7 with a $300
principal amount, under Sec. 1041.7(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 rolled over loan would
be no greater than $200. Similarly, under Sec. 1041.7(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
rolled over loan would be no greater than $100.
4. Example. Assume that a consumer who otherwise complies with
the requirements of Sec. 1041.7 seeks a covered short-term loan and
that the lender chooses to make the loan without assessing the
consumer's ability to repay. Under Sec. 1041.7(b)(1)(i), the
principal amount of the loan must not exceed $500. Assume that the
consumer is made a covered short-term loan under Sec. 1041.7 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. 1041.7. Under Sec. 1041.7(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. 1041.7
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. 1041.7, under Sec. 1041.7(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 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, that loan would be subject to the
$500 principal amount limitation under Sec. 1041.7(b)(1)(i).
Paragraph 7(b)(2)
1. Equal payments and amortization for loans with multiple
payments. Section 1041.7(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. 1041.7(b)(2) the lender cannot require the
consumer to pay interest only for the first scheduled biweekly
payment and the remaining 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. 1041.7(b)(2).
Paragraph 7(b)(3)
1. Inapplicability of conditional exemption to a loan with
vehicle security. Section 1041.7(b)(3) prohibits a lender from
making a covered-short-term loan under Sec. 1041.7 with vehicle
security. If a covered short-term loan has vehicle security, the
lender must comply with all of the requirements under Sec. Sec.
1041.5 and 1041.6, including the ability-to-repay determination.
Paragraph 7(b)(4)
1. Inapplicability of conditional exemption to an open-end loan.
Section 1041.7(b)(4) prohibits a lender from making a covered short-
term loan under Sec. 1041.7 structured as an open-end loan under
Sec. 1041.7. If a covered short-term loan is structured as an open-
end loan, the lender must comply with all of the requirements under
Sec. Sec. 1041.5 and 1041.6, including the ability-to-repay
determination.
7(c) Borrowing History Requirements
Paragraph 7(c)(1)
1. Outstanding loan. Section 1041.7(c)(1) provides that a lender
cannot make a covered short-term loan under the requirements of
Sec. 1041.7 if the consumer has a covered loan outstanding made
under Sec. 1041.5, Sec. 1041.7, or Sec. 1041.9 with any lender,
not including a loan made by the same lender or an affiliate under
Sec. 1041.7 that the lender is rolling over. This requirement does
not apply to covered longer-term loans made under Sec. Sec. 1041.11
and 1041.12. Outstanding loan is defined in Sec. 1041.2(a)(15); see
Sec. 1041.2(a)(15) and accompanying commentary for further
clarification on the definition.
2. Application to rollovers. For purposes of the borrowing
history requirement under Sec. 1041.7(c)(1), an outstanding loan
does not include a loan made by the same lender or an affiliate
under Sec. 1041.7 that the lender is rolling over. For further
clarification on how the requirements under Sec. 1041.7 apply to
rollovers, see comment 7(b)(1)-3.
Paragraph 7(c)(2)
1. Preceding loans. Section 1041.7(c)(2) provides that prior to
making a covered short-term loan under Sec. 1041.7, 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)(6)) made under Sec. 1041.5 or a covered
longer-term balloon-payment loan (as defined in Sec. 1041.2(a)(7))
made under Sec. 1041.9. This requirement applies regardless of
whether this prior loan was made by the same lender, an affiliate,
or an unaffiliated lender. For example, assume a lender makes a
covered short-term loan to a consumer under Sec. 1041.5, the loan
has a contractual duration of 14 days, and the consumer repays the
loan on the contractual due date. If the consumer returns for a
second loan 20 days later, the lender cannot make a covered short-
term loan under Sec. 1041.7. However, the lender could make a
covered short-term loan under Sec. 1041.5 or a covered longer-term
loan under Sec. 1041.9, Sec. 1041.11, or Sec. 1041.12.
Paragraph 7(c)(3)
1. Loan sequence limitation. Section 1041.7(c)(3) provides that
a lender cannot make a covered short-term loan under Sec. 1041.7 if
the loan would result in the consumer having a loan sequence of more
than three covered short-term loans under Sec. 1041.7 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 7(b)(1)-1 and -2
for further clarification on the definition of loan sequence, as
well as Sec. 1041.2(a)(11) and accompanying commentary. For
example, assume a consumer is made a covered short-term loan under
the requirements of Sec. 1041.7 on February 1 that has 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. The second loan would be part of the same loan
sequence because 30 or less days have elapsed since repayment of the
first loan. Assume the lender makes the second loan, which has a
contractual due date of March 15; the consumer repays the loan on
March 15 and the consumer returns to the lender on April 1 for
another loan. The third loan would be part of the same loan sequence
as the first and second loans because 30 or less days have elapsed
since repayment of the second loan. Assume the lender makes the
third loan, which has a contractual due date of April 15, and the
consumer repays the loan on April 15. The consumer would not be
permitted to receive another covered short-term loan under Sec.
1041.7 until a 30-day period following April 15 has elapsed, that is
until after May 15, assuming the other requirements under Sec.
1041.7 are satisfied. Loans that are rollovers count toward the
sequence limitation under Sec. 1041.7(c)(3). For further
clarification on how the requirements
[[Page 48200]]
under Sec. 1041.7 apply to rollovers, see comment 7(b)(1)-3.
Paragraph 7(c)(4)
1. Consecutive 12-month period. Section 1041.7(c)(4) requires
that a covered short-term loan made under Sec. 1041.7 not result in
the consumer receiving more than six covered short-term loans 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.
1041.7 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. 1041.7 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. 1041.7(c)(4) 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 7(c)(4)(i)
1. Total number of covered short-term loans. Section
1041.7(c)(4)(i) provides that a lender cannot make a covered-short
term loan under Sec. 1041.7 if the loan would result in the
consumer having more than six covered short-term loans outstanding
in any consecutive 12-month period. In addition to the new loan, all
covered short-term loans made to the consumer during the consecutive
12-month period under either Sec. 1041.5 or Sec. 1041.7 are
counted 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. 1041.7(c)(4)(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
satisfy the requirement under Sec. 1041.7(c)(4)(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. 1041.7 with a contractual
duration of 14 days. Assume, further, that the lender determines
that during the 351 days preceding the consummation date of the new
loan, the consumer had outstanding a total of three covered short-
term loans. The new loan would be the fourth covered short-term loan
that was outstanding during a consecutive 12-month period and,
therefore, would satisfy the requirement. Alternatively, if the
lender determined that the consumer had outstanding a total of six
covered short-term loans during the 351 days preceding the
consummation date of the new loan, the new loan would be the seventh
covered short-term loan outstanding during a consecutive 12-month
period. In this instance, the requirement would not be satisfied,
and the lender would be prohibited from making a new covered short-
term loan under Sec. 1041.7.
Paragraph 7(c)(4)(ii)
1. Aggregate period of indebtedness. Section 1041.7(c)(4)(ii)
provides that a lender cannot make a covered short-term loan under
Sec. 1041.7 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.
1041.7 were outstanding is counted 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. 1041.7(c)(4)(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 satisfy the
requirement under Sec. 1041.7(c)(4)(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. 1041.7 with a contractual duration of 14 days.
Assume, further, that Lender A determines 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 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 requirement regarding aggregate time of indebtedness
would be satisfied. Alternatively, if Lender A determined that
during the 351 days preceding the consummation date of the new loan,
the consumer had obtained three 14-day loans from Lender A, a 14-day
loan from Lender B, and a 30-day loan from Lender C and repaid all
five loans on their contractual due dates, the consumer would have
had a total of 86 days of contractual indebtedness. The new loan
would result in the consumer having covered short-term loans
outstanding for an aggregate period of 100 days during the
consecutive 12-month period. In this instance, the requirement would
not be satisfied, and the lender would be prohibited from making a
new covered short-term loan under Sec. 1041.7.
7(d) Determining Period Between Consecutive Covered Short-Term Loans
Made Under the Conditional Exemption
1. Non-covered bridge loan. See Sec. 1041.2(a)(13) for the
definition of non-covered bridge loan.
2. Counting of loan sequence when making non-covered bridge
loan. Section 1041.7(d)(1) specifies 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 in time. If the lender
or an affiliate makes a non-covered bridge loan during the time
period in which any covered short-term loan made by the lender or an
affiliate under Sec. 1041.7 is outstanding and for 30 days
thereafter, the days during which the non-covered bridge loan is
outstanding must not be counted toward the determination of whether
a subsequent loan made by the lender or an affiliate under Sec.
1041.7 is part of the same loan sequence as the prior covered short-
term loan under Sec. 1041.7.
3. Example. Assume a lender makes a covered short-term loan
(Loan X) to a consumer under Sec. 1041.7 with a contractual
duration of 14 days, Loan X is the first loan in a loan sequence,
and the consumer repays Loan X on the contractual due date. Assume,
further, that 10 days later the lender makes a non-recourse pawn
loan (Loan Y) to the consumer, which under Sec. 1041.2(a)(13) is
defined as a non-covered bridge loan; Loan Y has a contractual
duration of 30 days; and the consumer repays Loan Y on the
contractual due date. Assume, further, that the consumer returns to
the lender 10 days later and requests another covered short-term
loan under Sec. 1041.7 (Loan Z). The consummation date of Loan Z
would be 50 days after the date on which Loan X was repaid. Because
more than 30 days has elapsed since Loan X was repaid, Loan Z
normally would not be considered part of the same loan sequence as
Loan X. However, in this instance, the 30 days during which Loan Y
was outstanding are not counted toward the determination of whether
Loan X and Loan Z are part of the same loan sequence. If those 30
days are not counted, only 20 days have elapsed between repayment of
Loan X and the consummation date of Loan Z. Therefore, Loan X and
Loan Z are part of the same loan sequence, and Loan Z would be
counted as the second loan in the loan sequence. Thus, Loan Z would
be subject, among other requirements, to the requirement under Sec.
1041.7(b)(3)(ii) that its principal amount be no greater than two-
thirds of the principal amount of Loan X.
7(e) Disclosures
1. General. Section 1041.7(e) sets forth two main disclosure
requirements related to a loan made under the requirements in Sec.
1041.7. The first, set forth in Sec. 1041.7(e)(2)(i), is a notice
of the restriction on the principal amount on the loan and
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restrictions on the number of future loans and the principal amounts
of such loans 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. 1041.7. The second, set forth in Sec.
1041.7(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 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. 1041.7.
7(e)(1) General Form of Disclosures
7(e)(1)(i) Clear and Conspicuous
1. Clear and conspicuous standard. Disclosures are clear and
conspicuous for purposes of Sec. 1041.7(e) if they are readily
understandable by the consumer and their location and type size are
readily noticeable to the consumer.
7(e)(1)(ii) In Writing or Electronic Delivery
1. General. Section 1041.7(e)(1)(ii) requires that disclosures
required by Sec. 1041.7 be provided to the consumer in writing or
through electronic delivery.
2. E-Sign Act requirements. The notices required by Sec. Sec.
1041.7(e)(2)(i) and 1041.7(e)(2)(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.).
7(e)(1)(iii) Retainable
1. General. Electronic disclosures are retainable for purposes
of Sec. 1041.7(e) if they are in a format that is capable of being
printed, saved, or emailed by the consumer.
7(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.
7(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.
7(e)(2) Notice Requirements
7(e)(2)(i) First Loan Notice
1. As applicable standard. Due to the requirements in Sec.
1041.7(c)(4), a consumer may not be eligible for a sequence of two
or three covered short-term loans under Sec. 1041.7. This consumer
may be permitted to obtain only one or two loans in a sequence of
covered short-term loans under Sec. 1041.7. Under these
circumstances, Sec. 1041.7(e)(2)(i) would require the lender to
modify the notice in Sec. 1041.7(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.
1041.7 because of the requirements in Sec. 1041.7(c)(4), 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.
7(e)(3) Timing
1. General. Section 1041.7(e)(3) requires a lender to provide
the notices required in Sec. 1041.7(e)(2)(i) and (ii) to the
consumer before a covered short-term loan under Sec. 1041.7 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. 1041.7 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.
1041.7(e)(1)(ii), Sec. 1041.7(e)(3) requires a lender to provide
the electronic notice to the consumer before a covered short-term
loan under Sec. 1041.7 is consummated. Specifically, Sec.
1041.7(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. 1041.7(e)(3), a lender could, for
example, display a screen on a web browser with the notices required
Sec. 1041.7(e)(2)(i) and (ii), provided the screen can be emailed,
printed, or saved, before a covered short-term loan under Sec.
1041.7 has been consummated.
Section 1041.9--Ability-to-Repay Determination Required
9(a) Definitions
9(a)(1) Basic Living Expenses
1. General. For purposes of the ability-to-repay determination
required under Sec. 1041.9(b), a lender must make a reasonable
determination that the consumer's residual income is sufficient for
the consumer to make all payments under the covered longer-term loan
and to meet basic living expenses during the term of the loan. In
addition, for a covered longer-term balloon-payment loan the lender
must determine that the consumer, after making the highest payment
under a covered longer-term balloon-payment loan, will be able to
make payments required for major financial obligations as they fall
due, to make any remaining payments under the loan, and to meet
basic living expenses for 30 days following the date of the highest
payment under the loan. Section 1041.9(a)(1) defines basic living
expenses as expenditures, other than payments for major financial
obligations, that the consumer must make 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 members of
the consumer's household who are financially dependent on the
consumer. Examples of goods and services that are necessary for
maintaining health and welfare include food and utilities. Examples
of goods and services that are necessary for maintaining the ability
to produce income include transportation to and from a place of
employment and daycare for dependent children. See comment 9(b)-4.
9(a)(2) Major Financial Obligations
1. General. Section 1041.9(a)(2) defines major financial
obligations as 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. 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. Minimum payments
and any delinquent amounts due under debt obligations include
periodic payments for automobile loan payments, student loan
payments, other covered and non-covered loan payments, and minimum
required credit card payments due during the underwriting period, as
well as and any delinquent periodic payments.
9(a)(5) Payment Under the Covered Longer-Term Loan
Paragraphs 9(a)(5)(i) and (ii)
1. General. Section 1041.9(a)(5)(i) defines payment under a
covered longer-term 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 loan. Section
1041.9(a)(5)(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 loan, a
consumer would owe on a particular date $100 to the lender, which
consists of $25 in finance charges, $70 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 and also has the option to pay the $70 in principal at a
later date. The payment under the loan is $110.
ii. Assume that in connection with a covered longer-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 longer-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
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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 9(a)(5)(iii)
1. General. Section 1041.9(a)(5)(iii) provides assumptions that
a lender must make in calculating the payment under Sec.
1041.9(a)(5) for a covered longer-term 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 1041.9(a)(5)(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, that the consumer will make only minimum
required payments, and, if the terms of the covered loan would not
provide for termination of access to the line of credit by a date
certain and for full repayment of all amounts due by a subsequent
date certain, that the consumer must repay any remaining balance in
one payment on the date that is 180 days following the consummation
date.
9(b) Reasonable Determination Required
1. Overview. Section 1041.9(b) prohibits a lender from making a
covered longer-term loan (other than a covered longer-term loan
described in Sec. 1041.11 or Sec. 1041.12) unless it first makes a
reasonable determination that the consumer will have the ability to
repay the loan according to its terms. Section 1041.9(b) provides
minimum standards that the lender's determination must meet to
constitute a reasonable determination. The minimum standards provide
that the reasonable determination includes three components. Section
1041.9(b)(2)(i) requires that as part of the ability-to-repay
determination for any covered longer-term loan, a lender must
determine that the consumer's residual income projected in
accordance with Sec. 1041.9(c) is sufficient for the consumer to
make all payments under the loan and to meet basic living expenses
during the term of the loan. Section 1041.9(b)(2)(ii) requires that
the ability-to-repay determination for a covered longer-term
balloon-payment loan must also include a determination that the
consumer, after making the highest payment under the loan, is able
to make payments for major financial obligations, to make any
remaining payments under the loan, and to meet basic living expenses
for 30 days following the date of the highest payment under the
loan. Section 1041.9(b)(2)(iii) requires that for a covered longer-
term loan for which a presumption of unaffordability applies under
Sec. 1041.10, the applicable requirements of Sec. 1041.10 are
satisfied. Section 1041.9(b)(2) provides that a determination of a
consumer's ability to repay is reasonable only if it is based on
projections of consumer net income and major financial obligations
that comply with Sec. 1041.9(c).
2. Reasonable determination. To comply with the requirements of
Sec. 1041.9(b), a lender's determination that a consumer will have
the ability to repay a covered longer-term loan must be reasonable
in all respects.
i. To be reasonable, a lender's determination of a consumer's
ability to repay a covered longer-term loan must:
A. Include the determinations required in Sec. 1041.9(b)(2)(i),
(ii), and (iii), as applicable;
B. Be based on reasonable projections of a consumer's net income
and major financial obligations in accordance with Sec. 1041.9(c);
C. Be based on reasonable estimates of a consumer's basic living
expenses (see comment 9(b)-4);
D. Be consistent with a lender's written policies and procedures
required under Sec. 1041.18 and grounded in reasonable inferences
and conclusions as to a consumer's ability to repay a covered
longer-term loan according to its terms in light of information the
lender is required to obtain or consider as part of its
determination under Sec. 1041.9(b).
E. Appropriately account for information known by the lender,
whether or not the lender is required to obtain the information
under part 1041, that indicates that the consumer may not have the
ability to repay a covered longer-term loan according to its terms;
and
F. Appropriately account for the possibility of volatility in a
consumer's income and basic living expenses during the term of the
loan. See comment 9(b)(2)(i)-2.
ii. A determination of ability to repay is not reasonable if it:
A. Relies on an implicit assumption that the consumer will
obtain additional consumer credit to be able to make payments under
the covered longer-term loan, to make payments under major financial
obligations, or to meet basic living expenses; or
B. 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 savings, the consumer
will be able to make a subsequent loan payment under the loan.
iii. Evidence of whether a lender's determinations of ability to
repay are reasonable may include the extent to which the lender's
determinations subject to Sec. 1041.9 result in rates of
delinquency, default, and reborrowing for covered longer-term loans
that are low, equal to, or high, including in comparison to the
rates of other lenders making similar covered longer-term loans to
similarly situated consumers.
3. Payments under the covered longer-term loan. Under the
ability-to-repay requirements in Sec. 1041.9(b)(2)(i) and (iii), a
lender must determine the amount and timing of the payments due in
connection with the covered longer-term loan. The lender is
responsible for calculating, for purposes of the determination and
as of consummation, the timing and amount for all payments under the
loan based on the terms of the loan. See Sec. 1041.9(a)(5) for the
definition of payment under a covered longer-term loan, including
assumptions that the lender must make in calculating the amount and
timing of payments under a loan that is a line of credit.
4. Basic living expenses. To comply with Sec. 1041.9(b), a
lender must account for a consumer's need to meet basic living
expenses for the applicable period. Section 1041.9(a)(1) defines
basic living expenses as expenditures, other than payments for major
financial obligations, that the consumer must make 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 members of the consumer's household who are financially dependent
on the consumer. Sections 9(a)(1) and (b) do not specify a
particular method that a lender must use to determine an amount of
funds that a consumer requires to meet basic living expenses for an
applicable period. For example, a lender is not required to itemize
the basic living expenses of each consumer. Nor is a lender required
to assume that a consumer's basic living expenses during the term of
a prospective covered loan must be equal to the consumer's
expenditures for goods and services other than major financial
obligations during a recent period preceding consummation of the
prospective loan. Whether a particular method complies with the
requirements of Sec. 1041.9(b) 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.
i. Reasonable methods of estimating basic living expenses may
include, but are not necessarily limited to, the following:
A. Setting 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;
B. Obtaining additional reliable information about a consumer's
expenses other than the information required to be obtained under
Sec. 1041.9(c), to develop a reasonably accurate estimate of a
consumer's basic living expenses; or
C. Any method that reliably predicts basic living expenses.
ii. Unreasonable methods of estimating basic living expenses may
include, but are not necessarily limited to, the following:
A. Assuming 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; or
B. Setting minimum percentages of income or dollar amounts that,
when used in ability-to-repay determinations for covered loans, have
yielded high rates of default and reborrowing relative to rates of
default and reborrowing of other lenders making covered loans to
similarly situated consumers.
Paragraph 9(b)(2)(i)
1. Applicable period for residual income. Section
1041.9(b)(2)(i) requires the lender to make a reasonable
determination that the consumer's residual income will be sufficient
for the consumer to make all payments under the covered longer-term
loan and to meet
[[Page 48203]]
basic living expenses during the term of the loan.
i. A lender complies with the requirement in Sec.
1041.9(b)(2)(i) if it reasonably determines that for the month with
the highest sum of payments (if applicable) under the loan, the
consumer's residual income will be sufficient for the consumer to
make the payments and to meet basic living expenses during that
month, provided that the lender's determination does not rely on a
projected increase in the consumer's residual income during the term
of the loan. If the same sum of payments would be due in each month,
or if the highest sum of payments applies to more than one month,
the lender may make the determination for any such month. (See
comment 9(b)(2)(i)-2 regarding the requirement to account for the
possibility of volatility in a consumer's income and basic living
expenses.) For example:
A. Assume a lender considers making a covered longer-term loan
to a consumer on March 1. The prospective loan would be repayable in
six biweekly payments, the first five of which payments would be for
$100, and the last of which payments would be for $275. The lender
determines that highest sum of these payments that would be due
within a monthly period would be $375. The lender further determines
that, based on its projections of net income per month and of
payments for major financial obligations per month, the consumer
will have $1,200 in monthly residual income, and the lender has no
reason to believe this amount of residual income will change during
the term of the loan. The lender complies with the requirement in
Sec. 1041.9(b)(1) if it reasonably determines that $1,200 will be
sufficiently compared to the sum of the $375 in loan payments plus
an amount the lender reasonably estimates is adequate for basic
living expenses during a monthly period.
2. Sufficiency of residual income; accounting for volatility in
net income and basic living expenses. The lender must make a
reasonable determination that the consumer's residual income will be
sufficient for the consumer to make all payments under the loan and
to meet basic living expenses during the term of the loan. For a
covered longer-term loan, 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 the loan 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. Reasonably accounting for volatility requires
considering the length of the loan term because the longer the term
of the loan, the greater the possibility that residual income could
decrease or basic living expenses could increase at some point
during the term of the loan. For example, if illness or a reduction
in work hours could reduce a consumer's net income below levels of
net income reasonably projected in accordance with Sec. 1041.9(c),
then the likelihood of such events resulting in insufficiency of the
consumer's residual income at some point during the term of the loan
increases with the length of the term. 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 loan and of the amount needed for basic
living expenses. A cushion is reasonably determined if it is large
enough so that a consumer would have sufficient residual income to
make payments under the loan despite volatility in net income or
basic living expenses experienced by similarly situated consumers
during a similar period of time. Alternatively, a lender reasonably
accounts for the possibility of volatility in consumer income by
reasonably determining that a particular consumer is unlikely to
experience such volatility notwithstanding the experience of
otherwise similarly situated consumers during a similar period of
time, such as if a consumer has stable employment and receives a
salary and sick leave.
9(b)(2)(ii)
1. General. Section 1041.9(b)(2)(ii) requires that for a covered
longer-term balloon-payment loan, the lender must make a reasonable
determination that the consumer, after making the highest loan
payment that will be due under the loan, will be able to make
payments required for major financial obligations as they fall due,
to make any remaining payments under the loan as they fall due, and
to meet basic living expenses for 30 days following the date of the
highest payment under the loan. (This determination is in addition
to the required determination regarding residual income under Sec.
1041.9(b)(2)(i).) Section 1041.9(b) provides that a determination of
a consumer's ability to repay is reasonable only if it is based on
projections of consumer net income and payments for major financial
obligations determined in accordance with Sec. 1041.9(c).
Accordingly, a lender must include in its determination under Sec.
1041.9(b)(2)(ii) the amount and timing of payments for major
financial obligations that it projects the consumer must make during
the 30-day period following the highest loan payment, in accordance
with Sec. 1041.9(c). A lender must include in its determination
under Sec. 1041.9(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 Sec. 1041.4(c).
For a loan with two or more payments that are equal to each other in
amount and higher than all other payments, a lender complies by
making the required determination for the 30-day period following
the later in time of the two or more higher payments. See comment
9(b)-4, regarding methods for estimating amounts for basic living
expenses. For example:
i. Assume a lender considers making a covered longer-term loan
to a consumer on March 1. The prospective loan would be repayable in
six biweekly payments, the first five of which payments would be for
$100, and the last of which payments would be for $275, on May 20.
The loan would be a covered longer-term balloon-payment loan as
defined in Sec. 1041.2(a)(7), so the requirement in Sec.
1041.9(b)(2)(ii) applies. Assume further that the lender reasonably
determines in accordance with Sec. 1041.9(b)(2)(i) that the
consumer's residual income for the month with the highest sum of
payments, (i.e., $375), the consumer's residual income will be
sufficient for the consumer to make the payments and to meet basic
living expenses during that month. Assume further that payment of
the $275 loan payment, however, will consume all but $1,000 of the
consumer's last paycheck preceding or coinciding with the date of
the loan payment. The lender projects that the consumer's next
receipt of income will not occur until June 3, and the consumer must
make a student loan payment of $200 on May 25 and a rent payment of
$950 on June 1. The consumer, having made the $275 loan payment,
would not be able make payments under two major financial
obligations (i.e., the student loan payment and the rent payment),
that fall due before June 3. Accordingly, the lender cannot
reasonably determine that the consumer has the ability to repay the
loan under Sec. 1041.9(b)(2)(ii).
9(c) Projecting Consumer Net Income and Payments for Major Financial
Obligations
Paragraph 9(c)(1)
1. General. Section 1041.9(c)(1) provides that to be reasonable,
a projection of the amount and timing of net income or payments for
major financial obligations may be based on amounts and timing
stated by the consumer under Sec. 1041.9(c)(3)(i) only to the
extent the stated amounts and timing are consistent with
verification evidence obtained in accordance with Sec.
1041.9(c)(3)(ii). It further provides that in determining whether
and the extent to which such 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. For example:
A. Assume that a consumer states that her net income is $1,000
every two weeks, pursuant to Sec. 1041.9(c)(3)(i). The deposit
account transaction records the lender obtains as verification
evidence pursuant to Sec. 1041.9(c)(3)(ii) show that the consumer
receives $900 every two weeks. The lender complies with Sec.
1041.9(c)(1) if it makes the determination required under Sec.
1041.9(b) based on a projection of $900 in income every two weeks
because it relies on the stated amount and timing only to the extent
they are consistent with the verification evidence.
B. Assume that a consumer states that her net income is $900
every two weeks, pursuant to Sec. 1041.9(c)(3)(i). For verification
evidence, the lender uses an online income verification service that
verifies gross income based on employer-reported payroll
information, pursuant to Sec. 1041.9(c)(3)(ii)(A) and comment
9(c)(3)(ii)(A)-1. The verification evidence the lender obtains
pursuant to Sec. 1041.9(c)(3)(ii) shows that the consumer receives
$1,200 every two weeks. The lender reasonably determines that for a
typical consumer, gross income of $1,200 is consistent with net
income of $900. The lender complies with Sec. 1041.9(c)(1) if it
makes the determination required under Sec. 1041.9(b) based on a
projection of $900 in income every two weeks because it relies on
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the stated amount and timing only to the extent they are consistent
with the verification evidence.
C. Assume that a consumer states that her minimum required
credit card payment is $150 on the fifth day of each month, pursuant
to Sec. 1041.9(c)(3)(i). The national consumer report that the
lender obtains as verification evidence pursuant to Sec.
1041.9(c)(3)(ii) shows that the consumer's minimum monthly payment
is $160. The lender complies with Sec. 1041.9(c)(1) if it makes the
determination required under Sec. 1041.9(b) based on a projection
of a $160 credit card payment on the fifth day of each month because
it relies on the stated amount and timing only to the extent they
are consistent with the verification evidence.
D. Assume that a consumer states that her net income is $1,000
every two weeks, pursuant to Sec. 1041.9(c)(3)(i). The lender
obtains electronic records of the consumer's deposit account
transactions as verification evidence pursuant to Sec.
1041.9(c)(3)(ii) showing biweekly direct deposits of $750, $850, and
$995, respectively, during the preceding six-week period. The lender
does not comply with Sec. 1041.9(c)(1) if it makes the
determination required under Sec. 1041.9(b) based on a projection
of a $1,000 in net income every two weeks.
E. Assume that a consumer states that her net income is $1,000
every two weeks, pursuant to Sec. 1041.9(c)(3)(i). The lender
obtains electronic records of the consumer's deposit account
transactions as verification evidence pursuant to Sec.
1041.9(c)(3)(ii) showing biweekly direct deposits of $1,000, $1,000,
and $800, respectively, during the preceding six-week period. The
consumer explains that the most recent income was lower than her
usual income because she missed two days of work due to illness. The
lender complies with Sec. 1041.9(c)(1) if it makes the
determination required under Sec. 1041.9(b) based on a projection
of $1,000 in income every two weeks because it reasonably considers
the consumer's explanation in determining whether the stated amount
and timing is consistent with the verification evidence.
F. Assume that a consumer states that her net income is $2,000
every two weeks, pursuant to Sec. 1041.9(c)(3)(i). The lender
obtains electronic records of the consumer's deposit account
transactions as verification evidence pursuant to Sec.
1041.9(c)(3)(ii) 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. 1041.9(c)(1) if it makes
the determination required under Sec. 1041.9(b) based on a
projection of $2,000 in income every two weeks because it reasonably
considers the consumer's explanation in determining whether the
stated amount and timing is consistent with the verification
evidence.
G. Assume that a consumer states that she owes a child support
payment of $200 on the first day of each month, pursuant to Sec.
1041.9(c)(3)(i). The national consumer report that the lender
obtains as verification evidence pursuant to Sec. 1041.9(c)(3)(ii)
does not include any child support payment. The lender complies with
Sec. 1041.9(c)(1) if it makes the determination required under
Sec. 1041.9(b) based on a projection of a $200 child support
payment on the first day of each month because it relies on the
stated amount and timing and nothing in the verification evidence is
inconsistent with the stated amount and timing.
9(c)(3) Evidence of Consumer Net Income and Payments for Major
Financial Obligations
Paragraph 9(c)(3)(i)
1. Consumer statements. Section 1041.9(c)(3)(i) requires a
lender to obtain a consumer's written statement of the amounts and
timing of consumer's net income receipts and payments for categories
(e.g., credit card payments, automobile loan payments, housing
expense payments, child support payments, etc.) of the consumer's
major financial obligations. 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 and retains. 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 paid
through the period required under Sec. 1041.9(b)(2). For example, 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.
Paragraph 9(c)(3)(ii)
1. Verification requirement. Section 1041.9(c)(3)(ii)
establishes requirements for a lender to obtain verification
evidence for the amounts and timing of a consumer's net income and
required payments for major financial obligations.
Paragraph 9(c)(3)(ii)(A)
1. Income. Section 1041.9(c)(3)(ii)(A) requires a lender to
obtain a reliable record (or records) of income payment (or
payments) covering sufficient history to reasonably support the
lender's projection under Sec. 1041.9(c)(1). 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.
Paragraph 9(c)(3)(ii)(B)
1. Payments under debt obligations. To verify a consumer's
required payments under debt obligations, Sec. 1041.9(c)(3)(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 currently registered pursuant to Sec.
1041.17(c)(2) or (d)(2), if available. A lender satisfies its
obligation under Sec. 1041.10(a)(2) to obtain a consumer report
from an information system currently registered pursuant to Sec.
1041.17(c)(2) or (d)(2), if available, when it complies with the
requirement in Sec. 1041.9(c)(3)(ii)(B) to obtain this same
consumer report. 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.
Paragraph 9(c)(3)(ii)(D)
1. Housing expense. Section 1041.9(c)(3)(ii)(D) requires a
lender to obtain verification evidence for the consumer's housing
expense. It provides three methods for complying with this
obligation.
i. For a housing expense under a debt obligation (i.e., a
mortgage), Sec. 1041.9(c)(3)(ii)(D) provides that a lender may
satisfy the requirement by obtaining a national consumer report that
includes the housing expense under a debt obligation pursuant to
Sec. 1041.9(c)(3)(ii)(B).
ii. Under Sec. 1041.9(c)(1)(ii)(D)(1), a lender may satisfy the
obligation to obtain verification evidence of housing expense by
obtaining a reliable transaction record (or records) of recent
housing expense payments or a rental or lease agreement. For
purposes of this alternative, reliable transaction records include a
facially genuine original, photocopy or image of a receipt,
cancelled check, or money order, or an electronic or paper record of
depository account transactions or prepaid account transactions
(including transactions on a general purpose reloadable prepaid card
account, a payroll card account, or a government benefits card
account), from which the lender can reasonably determine that a
payment was for housing expense as well as the date and amount paid
by the consumer.
iii. Under Sec. 1041.9(c)(1)(ii)(D)(2), a lender may satisfy
its obligation to obtain verification evidence of housing expense
using an amount determined under a reliable method of estimating a
consumer's housing expense based on the housing expenses of
consumers with households in the locality of the consumer. The
lender may estimate a consumer's share of housing expense based on
the individual or household housing expenses of similarly situated
consumers with households in the locality of the consumer seeking a
covered loan. For example, a lender may use data from a statistical
survey, such as the American Community Survey of the United States
Census Bureau, to estimate individual or household housing expense
in the locality (e.g., in the same census tract) where the consumer
resides. Alternatively, a lender
[[Page 48205]]
may estimate individual or household housing expense based on
housing expense and other data 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. A lender may estimate a consumer's share of
household housing expense based on estimated household housing
expense by reasonably apportioning the estimated household housing
expense by the number of persons sharing housing expense as stated
by the consumer, or by another reasonable method.
Section 1041.10--Additional Limitations on Lending--Covered Longer-
Term Loans
10(a) Additional Limitations on Making a Covered Longer-Term Loan Under
Sec. 1041.9
10(a)(1) General
1. General. Section 1041.10 specifies circumstances in which a
consumer is presumed to not have the ability to repay a covered
longer-term loan under Sec. 1041.9 and circumstances in which a
covered longer-term loan under Sec. 1041.9 is prohibited. The
presumptions and prohibition apply to making a covered longer-term
loan under Sec. 1041.9.
2. Application to rollovers. The presumptions in Sec. 1041.10
apply to new covered longer-term loans under Sec. 1041.9, as well
as to loans that are a rollover of a prior loan (or what is termed a
``renewal'' in some States), as applicable. In the event that a
lender is permitted under State law to roll over a loan, the
rollover would be treated as a new covered longer-term loan subject
to the presumptions in Sec. 1041.10. For example, assume a lender
is permitted under applicable State law to roll over a covered
short-term loan into a covered longer-term balloon-payment loan; the
lender makes a covered short-term loan with $500 in principal and a
14-day contractual duration; the consumer returns to the lender on
day 14 and is offered the opportunity to roll over the loan for 46
days for a $75 fee. Fewer than 30 days would have elapsed between
consummation of the new covered longer-term balloon-payment loan
(the rollover) and the consumer having had a covered short-term loan
made under Sec. 1041.5 outstanding. Therefore the rollover would be
subject to the presumption of unaffordability in Sec. 1041.10(b).
3. Relationship to Sec. 1041.9. A lender's determination that a
consumer will have the ability to repay a covered longer-term loan
is not reasonable within the meaning of Sec. 1041.9 if under Sec.
1041.10(b) or (c) the consumer is presumed to not have the ability
to repay the loan and the lender is not able to overcome the
presumption in the manner set forth in Sec. 1041.10(d).
10(a)(2) Borrowing History Review
1. Relationship to Sec. 1041.9(c)(3)(ii)(B). A lender satisfies
its obligation under Sec. 1041.10(a)(2) to obtain a consumer report
from an information system currently registered pursuant to Sec.
1041.17(c)(2) or (d)(2), if available, when it complies with the
requirement in Sec. 1041.9(c)(3)(ii)(B) to obtain this same
consumer report.
2. Availability of information systems currently registered
pursuant to Sec. 1041.17(c)(2) or (d)(2). If no information systems
currently registered pursuant to Sec. 1041.17(c)(2) or (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.
A lender may be unable to obtain a consumer report from an
information system currently registered pursuant to Sec.
1041.17(c)(2) or (d)(2) if, for example, all registered information
systems are temporarily unavailable.
10(b) Presumption of Unaffordability for Certain Covered Longer-Term
Loans Following a Covered Short-Term Loan or Covered Longer-Term
Balloon-Payment Loan
10(b)(1) Presumption
1. General. Section 1041.10(b)(1) means that a lender cannot
make a covered longer-term loan under Sec. 1041.9 during the time
period in which the consumer has a covered short-term loan made
under Sec. 1041.5 or a covered longer-term balloon-payment loan
made under Sec. 1041.9 outstanding and for 30 days thereafter
unless either the exception to the presumption in Sec.
1041.10(b)(2) applies or the lender determines in the manner set
forth in Sec. 1041.10(d) that there is sufficient improvement in
the consumer's financial capacity such that the consumer will have
the ability to repay the new loan according to its terms despite the
unaffordability of the prior loan. The presumption would not apply,
however, if the loan is subject to the prohibition in Sec.
1041.10(e). See Sec. 1041.10(e) and accompanying commentary.
10(b)(2) Exception
1. Exception to the presumption. Under Sec. 1041.10(b)(2), the
presumption in Sec. 1041.10(b)(1) does not apply if every payment
on the new covered longer-term loan would be substantially smaller
than the largest required payment on the prior loan. For a loan that
has a single payment, that single payment is the largest payment for
the purposes of Sec. 1041.10(b)(2). For a loan that has multiple,
equal-sized payments, the largest payment for purposes of Sec.
1041.10(b)(2) is the amount of each of those payments. For the
purposes of Sec. 1041.10(b)(2), the specific timing of payments on
the prior loan and the new covered longer-term loan is not relevant
to the determination about whether the exception applies.
2. Example. The presumption in Sec. 1041.10(b) would cover the
situation in which, for example, a consumer had a 30-day covered
short-term loan featuring two biweekly payments of $250 each (Loan
A) and then sought to reborrow on a covered longer-term loan (Loan
B) within 30 days of making the final payment on Loan A. If Loan B
was a 90-day covered longer-term loan featuring six biweekly
payments of $250 each, the exception to the presumption in Sec.
1041.10(b)(2) would not apply and the consumer would be presumed to
not have the ability to repay Loan B. The presumption in Sec.
1041.10(b) would also apply if, in the example above, Loan A was a
42-day loan repayable in two biweekly payments of $100 each and a
third biweekly payment of $300 and the biweekly payments on Loan B
were still $250, because the payments on Loan B would not be
substantially smaller than the largest payment on Loan A. In
contrast, if Loan A was repayable in three biweekly payments of $167
and Loan B was repayable in six biweekly payments of $75, then every
payment on Loan B would be substantially smaller than the highest
payment on Loan A and the exception to the presumption Sec.
1041.10(b)(2) would apply.
10(c) Presumption of Unaffordability for a Covered Longer-Term Loan
During an Unaffordable Outstanding Loan
10(c)(1) Presumption
1. General. Section 1041.10(c)(1) provides that, except for
loans subject to the presumption under Sec. 1041.10(b) or the
prohibition under Sec. 1041.10(e), a consumer is presumed not to
have the ability to repay a covered longer-term loan under Sec.
1041.9 if, at the time of the lender's determination under Sec.
1041.9, the consumer currently has a covered or non-covered loan
outstanding that was made or is being serviced by the same lender or
its affiliate and one or more of the conditions in Sec.
1041.10(c)(1)(i) through (iv) are present. Section 1041.10(c) means
that a lender cannot make a covered longer-term loan under Sec.
1041.10 if any of the conditions in Sec. 1041.10(c)(1)(i) through
(iv) is present unless either one of the exceptions to the
presumption in Sec. 1041.10(c)(2) applies or the lender determines
in the manner set forth in Sec. 1041.10(d) that there is sufficient
improvement in the consumer's financial capacity such that the
consumer will have the ability to repay the new loan according to
its terms despite the unaffordability of the prior loan.
2. Applicability. Section 1041.10(c) applies any time a consumer
has a loan outstanding that was made or is being serviced by the
same lender or its affiliate and one or more of the other conditions
are present, except if the presumption under Sec. 1041.10(b) or the
prohibition under Sec. 1041.10(e) would otherwise apply. For
example, if a consumer has outstanding with the same lender a non-
covered installment loan with scheduled biweekly payments of $100
and the lender is determining whether the consumer will have the
ability to repay a new covered longer-term loan that would have
scheduled monthly payments of $200, Sec. 1041.10(c) would apply if
the consumer has, within the prior 30 days, expressed an inability
to make a payment on the outstanding loan as provided for in Sec.
1041.10(c)(1)(ii). If a consumer instead has a non-covered
installment loan outstanding with a different and unaffiliated
lender, Sec. 1041.10(c) does not apply.
3. Indicia of distress. Section 1041.10(c)(1) applies only if at
least one of the four circumstances in Sec. 1041.10(c)(1)(i)
through (iv) is present at the time that the lender is making the
determination of ability to repay for the new covered longer-term
loan under Sec. 1041.9.
[[Page 48206]]
Paragraph 10(c)(1)(i)
1. Significant delinquency. Under Sec. 1041.10(c)(1)(i), a
delinquency is relevant to the presumption if the consumer is more
than seven days delinquent at the time that the lender is making the
determination under Sec. 1041.9 for the new covered longer-term
loan or has been more than seven days delinquent at any point in the
30 days prior to the ability-to-repay determination. Delinquencies
that have been cured and are older than 30 days do not trigger the
presumption in Sec. 1041.10(c)(1). For example, if a consumer has a
non-covered installment loan outstanding with the lender, was 10
days delinquent on a payment three months prior, and is current on
payments at the time of the ability-to-repay determination for the
new covered longer-term loan, the prior delinquency would not cause
the application of the presumption of unaffordability.
Paragraph 10(c)(1)(ii)
1. Expression of inability to make one or more payments. Under
Sec. 1041.10(c)(1)(ii), a consumer's expression of inability to
make one or more payments on the outstanding loan causes the
application of the presumption in Sec. 1041.10(c)(1) only if such
an expression was made within the 30 days prior to the ability-to-
repay determination under Sec. 1041.9 for the new covered longer-
term loan. Consumers may express inability to make a payment on the
outstanding loan in a number of ways. For example, a consumer may
make a statement to the lender or its affiliate that the consumer is
unable to or needs help to make a payment or a consumer may request
or accept an offer of additional time to make a payment.
Paragraph 10(c)(1)(iii)
1. Skipped payment. Under Sec. 1041.10(c)(1)(iii), the
presumption in Sec. 1041.10(c)(1) applies if the period of time
between consummation of the new covered longer-term loan and the
first scheduled payment on that loan would be longer than the period
of time between consummation of the new covered longer-term loan and
the next regularly scheduled payment on the outstanding loan. Such a
transaction would have the effect of permitting the consumer to skip
a payment that would otherwise have been due on the outstanding
loan. For example, if a consumer has a non-covered installment loan
outstanding from the lender and the loan has a regularly scheduled
payment due on March 1 and another due on April 1, the circumstance
in Sec. 1041.10(c)(1)(iii) would be present if the new covered
longer-term loan would be consummated on February 28 and would not
require payment until April 1.
Paragraph 10(c)(1)(iv)
1. Cash to cover payments on existing loan. Under Sec.
1041.10(c)(1)(iv), the presumption in Sec. 1041.10(c)(1) applies if
the new covered longer-term loan would result in the consumer
receiving no disbursement of loan proceeds or an amount of funds as
disbursement of the loan proceeds that is not substantially more
than the amount due in payments on the outstanding loan within 30
days of consummation of the new covered longer-term loan. For
example, assume a consumer has a non-covered installment loan
outstanding that is being serviced by the same lender, the loan has
regularly scheduled payments of $100 due every two weeks, and the
new covered longer-term loan would result in the consumer receiving
a disbursement of $200. Since $200 in payments on the outstanding
loan would be due within 30 days of consummation, the circumstance
in Sec. 1041.10(c)(1)(iv) would be present and under Sec.
1041.10(c)(1) the consumer would be presumed to not have the ability
to repay the loan. In contrast, if, in the same scenario, the new
covered longer-term loan would result in the consumer receiving a
disbursement of $1,000, then the disbursement of loan proceeds would
be substantially more than the amount due in payments on the
outstanding loan within 30 days of consummation of the new covered
longer-term loan and the circumstance in Sec. 1041.10(d)(1)(iv)
would not be present.
10(c)(2) Exception
1. Exception. Under Sec. 1041.10(c)(2), the presumption in
Sec. 1041.10(c)(1) does not apply if either the circumstance in
Sec. 1041.10(c)(2)(i) or the circumstance in Sec.
1041.10(c)(2)(ii) is present at the time of the ability-to-repay
determination under Sec. 1041.9 for the new covered longer-term
loan.
Paragraph 10(c)(2)(i)
1. Size of payments. Under Sec. 1041.10(c)(2)(i), the
presumption in Sec. 1041.10(c)(1) does not apply if the size of
every payment on the new covered longer-term loan would be
substantially smaller than the size of every payment on the
outstanding loan. For example, if a consumer has a non-covered
installment loan outstanding from the lender with monthly payments
of $300 and the consumer has indicated within the preceding 30 days
an inability to make those payments, the consumer generally would be
presumed under Sec. 1041.10(c)(1) to not have the ability to repay
a new covered longer-term loan under Sec. 1041.9 from the same
lender. However, if the new covered longer-term loan would be
repayable in monthly payments of $100, then the exception in Sec.
1041.10(c)(2)(i) applies and the new loan would not be subject to
the presumption of unaffordability. In contrast, if the new covered
longer-term loan would be repayable in monthly payments of $250,
then the payments would not be substantially smaller than payments
on the outstanding loan and the presumption of unaffordability would
still apply.
Paragraph 10(c)(2)(ii)
1. Cost of credit. Under Sec. 1041.10(c)(2)(ii), the
presumption in Sec. 1041.10(c)(1) does not apply if the new covered
longer-term loan would result in a substantial reduction in the
total cost of credit for the consumer relative to the outstanding
loan. See Sec. 1041.2(a)(18) for the definition of total cost of
credit. For example, if a consumer is more than seven days
delinquent on payments due on an outstanding covered longer-term
loan with a lender and the outstanding loan carries a total cost of
credit of 100 percent, the presumption of unaffordability for a new
covered longer-term loan with the same lender would generally apply.
However, if the new covered longer-term loan would carry a total
cost of credit of 45 percent, then the new covered longer-term loan
would result in a substantial reduction in the total cost of credit
for the consumer. The exception in Sec. 1041.10(c)(2)(ii) would
apply and the new loan would not be subject to the presumption of
unaffordability. In contrast, if the new covered longer-term loan
would carry a total cost of credit of 90 percent, then the new
covered longer-term loan would not result in a substantial reduction
in the total cost of credit relative to the outstanding loan and the
presumption in Sec. 1041.10(c)(1) would apply.
10(d) Overcoming the Presumption of Unaffordability
1. General. When a consumer seeks to borrow a covered longer-
term loan in certain circumstances, Sec. 1041.10(b) and (c) create
a presumption that the consumer would not be able to afford a new
covered longer-term loan. Section 1041.10(d) permits the lender to
overcome the presumption in limited circumstances evidencing a
projected improvement in the consumer's financial capacity for the
new loan relative to the consumer's financial capacity since
obtaining the prior loan or, in some circumstances, during the prior
30 days. See comments 10(d)-2 and -3 for examples of such
circumstances. To overcome the presumption of unaffordability, Sec.
1041.6(d) requires a lender to reasonably determine, based on
reliable evidence, that the consumer will have sufficient
improvement in financial capacity such that the new loan would not
exceed the consumer's ability to repay despite the unaffordability
of the prior loan. Section 1041.10(d) requires lenders to measure a
sufficient improvement in financial capacity by comparing the
consumer's financial capacity during the period for which the lender
is required to make an ability-to-repay determination for the new
loan pursuant to Sec. 1041.9(b)(2) to the consumer's financial
capacity since obtaining the prior loan or, if the prior loan was
not a covered short-term loan or a covered longer-term balloon-
payment loan, during the 30 days prior to the lender's
determination.
2. Example. Under Sec. 1041.10(d), a lender may reasonably
determine that a consumer will have the ability to repay a new loan
despite the unaffordability of the prior loan where there is
reliable evidence that the need to reborrow is prompted by a decline
in income during the prior 30 days (or, if the prior loan was a
covered short-term loan or covered longer-term balloon-payment loan,
since obtaining the prior loan) that is not reasonably expected to
recur for the period during which the lender is required to make an
ability-to-repay determination for the new covered longer-term loan.
For instance, assume a consumer obtained a covered longer-term loan
with required bi-weekly payments of $100, made the first six
payments on that loan, but missed the next two payments and sought
to refinance the loan to re-amortize the unpaid balance while
keeping the bi-weekly payment constant at $100. The presumption of
unaffordability in Sec. 1041.10(c) applies to the new covered
longer-term loan. However, suppose that the
[[Page 48207]]
consumer presents evidence showing that the consumer normally works
40 hours per week but that during the second week preceding the
first missed payment and the first week preceding the second missed
payment the consumer was unable to work, and thus the consumer
earned half of the consumer's usual pay during that pay period. If
the lender reasonably determines that the consumer's residual income
projected under Sec. 1041.9(b)(2)(i) for the new covered longer-
term loan will return to normal levels and would be sufficient to
enable the consumer to make payments on the new loan and still have
sufficient income to meet basic living expenses, the lender may
determine that the presumption of unaffordability in Sec.
1041.10(c) has been overcome.
3. Example. Under Sec. 1041.10(d), a lender also may reasonably
determine that a consumer will have the ability to repay a new loan
despite the unaffordability of the prior loan where there is
reliable evidence that the consumer's financial capacity will be
sufficiently improved relative to the consumer's financial capacity
during the prior 30 days (or, if the prior loan was a covered short-
term loan or covered longer-term balloon-payment loan, since
obtaining the prior loan) because of a projected increase in net
income or a decrease in major financial obligations for the period
during which the lender is required to make an ability-to-repay
determination for the new covered longer-term loan. For instance,
assume a consumer obtains a covered longer-term loan with monthly
payments of $300. During repayment of the loan, the consumer becomes
more than seven days delinquent on the outstanding loan and seeks to
refinance into a new covered longer-term loan with the same total
cost of credit and monthly payments of $250. The presumption of
unaffordability in Sec. 1041.10(c)(1) applies to the new covered
longer-term loan and the new monthly payment is not sufficiently
smaller than the prior payment to fall within the exception in Sec.
1041.10(c)(2). However, suppose that the consumer presents reliable
evidence indicating that during the prior 30 days the consumer moved
to a new apartment and reduced housing expenses going forward by
more than $100. If the lender reasonably determines that the amount
of the consumer's residual income projected under Sec.
1041.9(b)(2)(i) for the new covered longer-term loan will exceed the
amount of the consumer's residual income during the prior 30 days by
an amount that indicates a sufficient improvement in financial
capacity for the new covered longer-term loan, and will be
sufficient to enable the consumer to make payments on the new loan
and still have sufficient income to meet basic living expenses, the
lender may determine that the presumption of unaffordability in
Sec. 1041.10(c) has been overcome.
4. Reliable evidence for the determination under Sec.
1041.10(d). In order to make a reasonable determination under Sec.
1041.10(d) of whether the consumer's financial capacity will have
sufficiently improved relative to the consumer's financial capacity
during the prior 30 days (or, if the prior loan was a covered short-
term loan or covered longer-term balloon-payment loan, since
obtaining the prior loan) such that the new loan would not exceed
the consumer's ability to repay the new loan according to its terms
despite the unaffordability of the prior loan, the lender must use
reliable evidence. Reliable evidence consists of verification
evidence regarding the consumer's net income and major financial
obligations sufficient to make the comparison required under Sec.
1041.10(d). For example, bank statements indicating direct deposit
of net income from the consumer's employer during the periods of
time for which the consumer's residual income must be compared to
determine whether sufficient improvement in the consumer's financial
capacity has taken place would constitute reliable evidence. In
contrast, a self-certification by the consumer that his or her
financial capacity has sufficiently improved as compared to his or
her financial capacity during the prior 30 days (or, if the prior
loan was a covered short-term loan or covered longer-term balloon-
payment loan, since obtaining the prior loan) would not constitute
reliable evidence unless the lender verifies the facts certified by
the consumer through other reliable means.
10(e) Prohibition on Making a Covered Longer-Term Loan Under Sec.
1041.9 Following a Covered Short-Term Loan Made Under Sec. 1041.7
1. Prohibition. Section 1041.10(e) provides that, during the
time period in which a covered short-term loan made by a lender or
its affiliate under Sec. 1041.7 is outstanding and for 30 days
thereafter, the lender or its affiliate must not make a covered
longer-term loan under Sec. 1041.9 to a consumer. During the time
period in which a covered short-term loan made by a lender or its
affiliate under Sec. 1041.7 is outstanding and for 30 days
thereafter, a lender or its affiliate may make a covered longer-term
loan under Sec. 1041.11 or Sec. 1041.12 to a consumer.
10(f) Determining Period Between Consecutive Covered Loans
1. General. To determine whether 30 days has elapsed between
covered loans for the purposes of Sec. 1041.10(b) and (e), the
lender must not count the days during which a non-covered bridge
loan is outstanding. See comments 1041.6(h)-1 and -2.
Section 1041.11--Conditional Exemption for Certain Covered Longer-
Term Loans of Up to 6 Months' Duration
11(a) Conditional Exemption for Certain Covered Longer-Term Loans
1. General. Section 1041.11(a) provides a conditional exemption
from certain provisions of part 1041 for certain covered longer-term
loans that satisfy the conditions and requirements set forth in
Sec. 1041.11(b) through (e). Section 1041.11(a) provides a
conditional exemption from certain provisions of part 1041 only;
nothing in Sec. 1041.11 provides lenders with an exemption from the
requirements of other applicable laws, including State laws. The
conditions for a loan made under Sec. 1041.11 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. 1041.11, provided that such loans are
permissible under other applicable laws, including State laws. Under
Sec. 1041.11(a), if the loan term conditions set forth in Sec.
1041.11(b) are satisfied, the lender determines that the consumer's
borrowing history on covered loans satisfies the conditions set
forth in Sec. 1041.11(c), and the lender satisfies the income
documentation condition in Sec. 1041.11(d), then the covered
longer-term loan is not subject to Sec. 1041.8, Sec. 1041.9, Sec.
1041.10, or Sec. 1041.15(b). Section 1041.11(e) specifies certain
actions that a lender must not take with respect to a loan made
under Sec. 1041.11 and requires a lender to furnish information
concerning the loan in either of two ways. A lender may use Sec.
1041.11(a) only to make covered longer-term loans; therefore, all
loans made under Sec. 1041.11 must have a duration of more than 45
days.
11(b) Loan Term Conditions
Paragraph 11(b)(4)
1. Payments due no less frequently than monthly. Under Sec.
1041.11(b)(4), a lender may make a covered longer-term loan under
Sec. 1041.11 only if the scheduled payments fall due no less
frequently than monthly, and each of those payments is substantially
equal in amount and due in substantially equal intervals. Payments
may also be due more frequently, such as biweekly.
2. Substantially equal payments. 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.
3. 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 each 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
year. Section 1041.11(b)(4) does not prevent a lender from accepting
prepayment on a loan made under Sec. 1041.11.
Paragraph 11(b)(5)
1. Amortization. Section 1041.11(b)(5) requires that the
scheduled payments fully amortize the loan over the contractual
period
[[Page 48208]]
and prohibits lenders from making loans under Sec. 1041.11 with
interest-only payments or with a payment schedule that front-loads
payments of interest and fees. Under Sec. 1041.11(b)(5), the
interest portion of each payment must be computed by applying a
periodic interest rate to the outstanding balance due. While under
Sec. 1041.11(b)(5) 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; however, that interest must reflect
only the periodic rate applied to the outstanding balance.
Paragraph 11(b)(6)
1. Cost of credit. Under Sec. 1041.11(b)(6), the conditional
exemption is limited to loans that carry a total cost of credit of
not more than the cost permissible for Federal credit unions to
charge under 12 CFR 701.21(c)(7)(iii), meaning that the consumer
must not be required to pay any fees or interest other than those
permitted under 12 CFR 701.21(c)(7)(iii).
11(c) Borrowing History Condition
1. Relevant records. Under Sec. 1041.11(c), a lender may make a
covered longer-term loan under Sec. 1041.11 only if the lender
determines from its records and the records of its affiliates that
the consumer's borrowing history on covered longer-term loans made
under Sec. 1041.11 meets the criteria set forth in Sec.
1041.11(c). The lender is not required to obtain information about a
consumer's borrowing history from persons that are not affiliates of
the lender, as defined in Sec. 1041.2(a)(2), and is not required to
obtain a consumer report from an information system currently
registered pursuant to Sec. 1041.17(c)(2) or (d)(2).
2. Determining 180-day period. For purposes of counting the
number of loans made under Sec. 1041.11, the 180-day period begins
on the date that is 180 days prior to the consummation date of the
loan to be made under Sec. 1041.11 and ends on the consummation
date of such loan.
3. Total number of loans made under Sec. 1041.11. Section
1041.11(c) prohibits a lender from making a loan under Sec. 1041.11
if the loan would result in the consumer being indebted on more than
three outstanding loans made under Sec. 1041.11 from the lender or
its affiliates in any consecutive 180-day period. See Sec.
1041.2(a)(15) for the definition of outstanding loan. Under Sec.
1041.11(c), the lender is required to determine from its records and
the records of its affiliates the consumer's borrowing history on
covered longer-term loans made under Sec. 1041.11 by the lender and
its affiliates. 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.
1041.11 from the lender or its affiliates in a consecutive 180-day
period, determined in the manner described in comment 11(c)-2.
Section 1041.11(c) does not prevent lenders from making a covered
short-term loan subject to the requirements of Sec. Sec. 1041.5 and
1041.6 or Sec. 1041.7 or a covered longer-term loan subject to the
requirements of Sec. Sec. 1041.9 and 1041.10 or Sec. 1041.12.
4. Example. For example, assume that a lender seeks to make a
loan under Sec. 1041.11 to a consumer. The lender checks its own
records and the records of its affiliates 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. 1041.11 from the lender or its affiliates. The loan, if made,
would be the third loan made under Sec. 1041.11 on which the
consumer would be indebted during the 180-day period and, therefore,
would not be prohibited under Sec. 1041.11(c). If, however, the
lender determined that the consumer was indebted on three
outstanding loans under Sec. 1041.11 from the lender or its
affiliates during the 180 days preceding the consummation date of
the prospective loan, the condition in Sec. 1041.11(c) would not be
satisfied and the loan could not be extended under Sec. 1041.11.
11(d) Income Documentation Condition
1. General. Section 1041.11(d) requires lenders to maintain
policies and procedures for documenting proof of recurring income
and to comply with those policies and procedures when making loans
under Sec. 1041.11. Section 1041.11(d) does not require lenders to
undertake the same income documentation procedures required by Sec.
1041.9(c)(3). For the purposes of Sec. 1041.11(d), 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.
Paragraph 11(e)(1)(ii)
1. Restriction on collection methods. Section 1041.11(e)(1)(ii)
prohibits a lender that holds funds on deposit in a consumer's name
from taking certain actions in the event that the consumer becomes
delinquent or defaults on a loan made under Sec. 1041.11 or the
lender anticipates such delinquency or default. The prohibition in
Sec. 1041.11(e)(1)(ii) applies regardless of the type of account in
which the consumer's funds are held. The prohibition in Sec.
1041.11(e)(1)(ii) does not apply to transactions in which the lender
does not hold any funds on deposit for the consumer. For example, if
a credit union makes a covered longer-term loan under Sec. 1041.11
to a consumer who also has a checking account with the credit union
and the consumer becomes delinquent on payments on the loan, Sec.
1041.11(e)(1)(ii) prohibits the credit union from sweeping the
consumer's checking account to a negative balance in order to cover
the delinquency. The credit union would not, however, be prohibited
from drawing from the consumer's checking account, up to the amount
of available funds, to cover the delinquency, if otherwise permitted
to do so.
2. Preservation of other legal recourse. The prohibition in
Sec. 1041.11(e)(1)(ii) does not alter or affect the right of a
lender acting under State or Federal law to do any of the following
with regard to funds of a consumer held on deposit by the lender if
the same procedure is constitutionally available to lenders
generally: Obtain or enforce a consensual security interest in the
funds; attach or otherwise levy upon the funds; or obtain or enforce
a court order relating to the funds.
Section 1041.12--Conditional Exemption for Certain Covered Longer-
Term Loans of Up to 24 Months' Duration
12(a) Conditional Exemption for Certain Covered Longer-Term Loans
1. General. Section 1041.12(a) provides a conditional exemption
from certain provisions of part 1041 for certain covered longer-term
loans that satisfy the conditions and requirements set forth in
Sec. 1041.12(b) through (f). Section 1041.12(a) provides a
conditional exemption from certain provisions of part 1041 only;
nothing in Sec. 1041.12 provides lenders with an exemption from the
requirements of other applicable laws, including State laws. Under
Sec. 1041.12(a), if the loan term conditions set forth in Sec.
1041.12(b) are satisfied, the lender determines that the consumer's
borrowing history on covered loans satisfies the condition set forth
in Sec. 1041.12(c), and the lender complies with the und erwriting
method requirement set forth in Sec. 1041.12(d), then the covered
longer-term loan is not subject to Sec. 1041.8, Sec. 1041.9, Sec.
1041.10, or Sec. 1041.15(b). Section 1041.12(e) defines the manner
in which a lender must calculate the portfolio default rate. Section
1041.12(f) specifies certain actions that a lender must not take
with respect to a loan made under Sec. 1041.12 and requires a
lender to furnish information concerning the loan in either of two
ways. A lender may use Sec. 1041.12(a) only to make covered longer-
term loans; therefore, all loans made under Sec. 1041.12 must have
a duration of more than 45 days.
12(b) Loan Term Conditions
Paragraph 12(b)(3)
1. Payments due no less frequently than monthly. Under Sec.
1041.12(b)(3), a lender may make a covered longer-term loan under
Sec. 1041.12 only if the scheduled payments fall due no less
frequently than monthly, and each of those payments is substantially
equal in amount and due in substantially equal intervals. Payments
may also be due more frequently, such as biweekly.
2. Substantially equal payments. 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. See comment
11(b)(4)-2.
3. 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 each scheduled payment. See comment 11(b)(4)-3.
Paragraph 12(b)(4)
1. Amortization. Section 1041.12(b)(4) requires that the
scheduled payments fully amortize the loan over the contractual
period and prohibits lenders from making loans
[[Page 48209]]
under Sec. 1041.12 with interest-only payments or with a payment
schedule that front-loads payments of interest and fees. See comment
11(b)(5)-1.
Paragraph 12(b)(5)
1. Cost of credit. Under Sec. 1041.12(b)(5), the conditional
exemption is limited to loans that carry a modified total cost of
credit of less than or equal to an annual rate of 36 percent. Under
Sec. 1041.12(b)(5), the modified total cost of credit is generally
calculated in the same manner in which total cost of credit is
calculated under Sec. 1041.2(a)(18)(iii)(A); however, for the
purposes of Sec. 1041.12(b)(5) only, the lender may exclude from
that calculation a single origination fee meeting the criteria in
either Sec. 1041.12(b)(5)(i) or (ii). Loans meeting the criteria
for covered longer-term loans under Sec. 1041.3(b)(2) and that have
a modified total cost of credit in compliance with Sec.
1041.12(b)(5) remain covered longer-term loans; the effect of Sec.
1041.12(b)(5) is to specify the permissible cost of credit
associated with covered longer-term loans made pursuant to the
conditional exemption in Sec. 1041.12.
12(b)(5)(i) Fees Based on Costs
1. General. A lender is permitted to exclude from the
calculation of modified total cost of credit calculation a single
origination fee on a covered longer-term loan made under Sec.
1041.12 if the origination fee represents a reasonable proportion of
the lender's cost of underwriting loans made under Sec. 1041.12. To
be a reasonable proportion of the lender's cost of underwriting, an
origination fee must reflect costs that the lender incurs as part of
the process of underwriting loans made under Sec. 1041.12. A lender
may make a single determination of underwriting costs for all loans
made under Sec. 1041.12.
12(b)(5)(ii) Safe Harbor
1. Safe harbor. A lender may exclude from the calculation of
modified total cost of credit a single origination fee of up to $50
without determining the costs associated with underwriting loans
made under Sec. 1041.12.
12(c) Borrowing History Condition
1. Relevant records. Under Sec. 1041.12(c), a lender may make a
covered longer-term loan under Sec. 1041.12 only if the lender
determines from its records and the records of its affiliates that
the consumer's borrowing history on covered longer-term loans made
under Sec. 1041.12 meets the criterion set forth in Sec.
1041.12(c). The lender is not required to obtain information about a
consumer's borrowing history from persons that are not affiliates of
the lender, as defined in Sec. 1041.2(a)(2), and is not required to
obtain a consumer report from an information system currently
registered pursuant to Sec. 1041.17(c)(2) or (d)(2).
2. Determining 180-day period. For purposes of counting the
number of loans made under Sec. 1041.12, the 180-day period begins
on the date that is 180 days prior to the consummation date of the
loan to be made under Sec. 1041.12 and ends on the consummation
date of such loan.
3. Total number of loans made under Sec. 1041.12. Section
1041.12(c) prohibits a lender from making a loan under Sec. 1041.12
if the loan would result in the consumer being indebted on more than
two outstanding loans made under Sec. 1041.12 from the lender or
its affiliates in any consecutive 180-day period. See Sec.
1041.2(a)(15) for the definition of outstanding loan. Under Sec.
1041.12(c), the lender is required to determine from its records and
the records of its affiliates the consumer's borrowing history on
covered longer-term loans made under Sec. 1041.12 by the lender and
its affiliates. The lender must use this information about borrowing
history to determine whether the loan would result in the consumer
being indebted on more than two outstanding loans made under Sec.
1041.12 from the lender or its affiliates in a 180-day period,
determined in the manner described in comment 12(c)-2. Section
1041.12(c) does not prevent lenders from making a covered short-term
loan under Sec. 1041.5 or Sec. 1041.7 or a covered longer-term
loan under Sec. 1041.9 or Sec. 1041.11.
4. Example. For example, assume that a lender makes a covered
longer-term loan (Loan A) to a consumer under Sec. 1041.12 on March
1, which the consumer repaid on April 30, and then makes a second
covered longer-term loan (Loan B) under Sec. 1041.12 to the same
consumer on March 15, which the consumer repaid on May 14. Under
Sec. 1041.12(c), the lender would not be permitted to make a third
covered longer-term loan under Sec. 1041.12 until October 27, 180
days after the consumer repaid Loan A. However, prior to October 27,
the lender would be permitted to make another covered longer-term
loan under Sec. 1041.9 or Sec. 1041.11 to the same consumer,
subject to the limitations contained in those sections.
12(d) Underwriting Method
1. General. Section 1041.12(d) requires a lender to maintain
policies and procedures for effectuating an underwriting method
designed to result in a portfolio default rate of less than or equal
to 5 percent per year, and to comply with those policies when making
loans under Sec. 1041.12. A lender's underwriting method may be
based upon past experience making loans similar to loans meeting the
conditions under Sec. 1041.12(b) or based upon a lender's
projections in light of the lender's underwriting criteria. A lender
may make loans pursuant to Sec. 1041.12 regardless of the
performance of prior loan portfolios.
Paragraph 12(d)(1)
1. Requirement to calculate portfolio default rate. Under Sec.
1041.12(d)(1), a lender making loans under Sec. 1041.12 must
calculate a portfolio default rate for loans made under that section
at least once every 12 months on an ongoing basis. A lender must
calculate portfolio default rate in the manner set forth in Sec.
1041.12(e).
Paragraph 12(d)(2)
1. Refund required. Under Sec. 1041.12(d)(2), if the lender's
portfolio default rate for covered longer-term loans made under
Sec. 1041.12 exceeds 5 percent per year, the lender must, within 30
calendar days of identifying the excessive portfolio default rate,
refund to each consumer that received a loan included in the
calculation of the portfolio default rate any origination fee
imposed in connection with the covered longer-term loan and excluded
from the modified total cost of credit pursuant to Sec.
1041.12(b)(5). A lender may satisfy the refund requirement of Sec.
1041.12 by, at the consumer's election, depositing the refund into
the consumer's deposit account.
2. Prior excessive portfolio default rates. A lender that has
made loans pursuant to Sec. 1041.12 in the past but did not achieve
a portfolio default rate of less than or equal to 5 percent may make
loans under Sec. 1041.12 for a subsequent 12-month period, provided
that the lender refunds origination fees in accordance with Sec.
1041.12(d)(2) for the prior 12-month period. For example, if a
lender makes loans under Sec. 1041.12 and the portfolio default
rate on those loans is 6 percent following the first 12 months of
lending and the lender refunds origination fees in accordance with
Sec. 1041.12(d)(2), then the lender may again make loans under
Sec. 1041.12 for a subsequent 12-month period.
12(e) Calculation of Portfolio Default Rate
1. General. Section 1041.12(e) sets forth the method for
calculating the portfolio default rate of a loan portfolio. A lender
must use this method of calculation regardless of the lender's
accounting methods.
Paragraph 12(e)(2)
1. Loans included in the calculation. Section 1041.12(e)(2)
requires lenders making loans under Sec. 1041.12 to include in the
calculation of portfolio default rate all covered longer-term loans
made under that section that were outstanding at any time during the
calculation period. Under Sec. 1041.12(e)(2), a lender must
calculate the gross portfolio default rate; therefore, the portfolio
default rate is unaffected by recoveries through collections
following default or 120 days of delinquency. Under Sec.
1041.12(e)(2), a lender must consider in the relevant sum both all
loans that are on balance sheet and all loans that are off balance
sheet. For example, a lender that originates a covered longer-term
loan under Sec. 1041.12 and then sells that loan to a third party
must nonetheless include the performance of that loan in the
calculation of the portfolio default rate.
Paragraph 12(e)(4)
1. Timing of calculation. A lender must calculate the portfolio
default rate within 90 days following the last day of the 12-month
period included in the calculation. For example, for the period from
January 1 through December 31 of a given year, the lender would need
to calculate the portfolio default rate under Sec. 1041.12(e) no
later than March 31 of the following year.
Paragraph 12(f)(1)(ii)
1. Restriction on collection methods. Section 1041.12(f)(1)(ii)
prohibits a lender that holds funds on deposit in a consumer's name
from taking certain actions in the event that the consumer becomes
delinquent or defaults on a loan made under Sec. 1041.12 or the
lender anticipates such delinquency or default. The prohibition in
Sec. 1041.12(f)(1)(ii) applies regardless of the type of account in
which the consumer's funds are held. The prohibition in Sec.
1041.12(f)(1)(ii) does not apply to transactions in which the lender
[[Page 48210]]
does not hold any funds on deposit for the consumer. See comment
11(e)(1)(ii)-1.
2. Preservation of other legal recourse. The prohibition in
Sec. 1041.12(f)(1)(ii) does not alter or affect the right of a
lender acting under State or Federal law to do any of the following
with regard to funds of a consumer held on deposit by the lender if
the same procedure is constitutionally available to lenders
generally: Obtain or enforce a consensual security interest in the
funds; attach or otherwise levy upon the funds; or obtain or enforce
a court order relating to the funds.
Section 1041.14--Prohibited Payment Transfer Attempts
14(a) Definitions
14(a)(1) Payment Transfer
1. General. A transfer of funds meeting the general definition
in Sec. 1041.14(a)(1) is a payment transfer regardless of whether
it is initiated by an instrument, order, or means not specified in
Sec. 1041.14(a)(1)(i) through (v).
2. Lender-initiated. A lender-initiated debit or withdrawal
includes a debit or withdrawal initiated by the lender's agent, such
as a payment processor.
3. 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.
4. Amount purportedly 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. 1041.14(a)(1).
5. 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 14(a)(1)(i)
1. Electronic fund transfer. Any electronic fund transfer
meeting the general definition in Sec. 1041.14(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 14(a)(1)(ii)
1. Signature check. A transfer of funds by signature check
meeting the general definition in Sec. 1041.14(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 lenders for purposes of collecting an
amount due in connection with a covered loan.
Paragraph 14(a)(1)(v)
1. Transfer by account-holding institution. Under Sec.
1041.14(a)(1)(v), a transfer of funds by an 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.
1041.14(a)(1). An example of such a payment transfer is when a
consumer's account-holding institution initiates an internal
transfer of funds from a consumer's account to collect payment on a
deposit advance product.
14(a)(2) Single Immediate Payment Transfer at the Consumer's Request
Paragraph 14(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. 1041.14(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 14(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
14(a)(2)(ii)-1.
2. Check provided by mail. For purposes of Sec.
1041.14(a)(2)(ii), if the consumer provides the check by mail, the
check is deemed to be obtained on the date that the lender receives
it.
14(b) Prohibition on Initiating Payment Transfers From a Consumer's
Account After Two Consecutive Failed Payment Transfers
1. General. When the prohibition in Sec. 1041.14(b) applies, a
lender is generally restricted from initiating any further payment
transfers from the consumer's account in connection with the covered
loan, unless the requirements and conditions in either Sec.
1041.14(c) or (d) are satisfied. The prohibition therefore 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. 1041.14(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. Application to bona fide subsequent loan. If a lender
triggers the prohibition in Sec. 1041.14(b), the lender is not
prohibited under Sec. 1041.14(b) from initiating a payment transfer
in connection with a bona fide subsequent covered loan made to the
consumer, 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.
14(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. 1041.14(b) applies as
of the date on which the lender or its agent, such 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. 1041.14(b).
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
that results in the collection of less than the amount for which the
payment transfer is initiated because the account lacks sufficient
funds, the payment transfer is a failed payment transfer for
purposes of the prohibition in Sec. 1041.14(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. Such a lender does not
[[Page 48211]]
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.
14(b)(2) Consecutive Failed Payment Transfers
14(b)(2)(i) First Failed Payment Transfer
1. Examples. The following examples illustrate concepts of first
failed payment transfers under Sec. 1041.14(b)(2)(i):
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 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
convert and process the check through the ACH system, or initiate
any other type of 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 failed payment transfers remains at one, because the
consumer's cash payment was not a payment transfer as defined in
Sec. 1041.14(a)(2).
14(b)(2)(ii) Second Consecutive Failed Payment Transfer
1. General. Under Sec. 1041.14(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: A 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 a covered loan, which is also returned for
nonsufficient funds. The second returned transfer is the second
consecutive failed payment transfer.
2. Previous payment transfer. Section 1041.14(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. 1041.14(b)
is triggered: A lender has made no other payment transfers in
connection with a 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. 1041.14(b)(2)(ii),
and the prohibition in Sec. 1041.14(b) is therefore triggered.
3. Application to exception in Sec. 1041.14(d). When, after a
second consecutive failed transfer, a lender initiates a single
immediate payment transfer at the consumer's request pursuant to the
exception in Sec. 1041.14(d), the failed transfer count remains at
two, regardless of whether the transfer succeeds or fails. The
exception therefore 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. 1041.14(c) or
(d).
14(b)(2)(iii) Different Payment Channel
1. General. Section 14(b)(2)(iii) provides that if a failed
payment transfer meets the descriptions set forth in Sec.
1041.14(b)(2), 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. 1041.14(b)(2)(ii).
14(c) Exception for Additional Payment Transfers Authorized by the
Consumer
1. General. Section 1041.14(c) sets forth one of two exceptions
to the prohibition in Sec. 1041.14(b). Under the exception in Sec.
1041.14(c), a lender is permitted to initiate additional payment
transfers from a consumer's account 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. 1041.14(c), a lender is permitted to execute a
single immediate payment transfers at the consumer's request under
Sec. 1041.14(d), if certain requirements and conditions are
satisfied.
14(c)(1) General
1. Consumer's underlying payment authorization or instrument
still required. The consumer's authorization required by Sec.
1041.14(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.
14(c)(2) General Authorization Requirements and Conditions
14(c)(2)(i) Required Transfer Terms
1. General. Section 1041.14(2)(i) sets forth the general
requirement that, for purposes of the exception in Sec. 1041.14(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. 1041.14(c)(2)(iii)(A) 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. 1041.14(c)(3)(iii). For guidance on the
requirements and conditions that apply when obtaining the consumer's
signed authorization, see Sec. 1041.14(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.
1041.14(c)(2) does not apply if the lender initiates a payment
transfer for an amount larger than the specific amount authorized by
the consumer, unless the payment transfer satisfies the requirements
and conditions in 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. Accordingly, such a transfer would violate the prohibition
on additional payment transfers under Sec. 1041.14(b).
4. Smaller amount. A payment transfer initiated pursuant to
Sec. 1041.14(c) is initiated for the specific amount authorized by
the consumer if its amount is equal to or smaller than the
authorized amount.
14(c)(2)(iii) Special Authorization Requirements and Conditions for
Payment Transfers To Collect a Late Fee or Returned Item Fee
Paragraph 14(c)(2)(iii)(A)
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. 1041.14(c)(2)(iii)(A), the general requirement in Sec.
1041.14(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
[[Page 48212]]
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.
Paragraph 14(c)(2)(iii)(B)
1. General. The exception in Sec. 1041.14(c)(2) does not apply
to a payment transfer to which the amount of a late fee or returned
item fee is added to the original amount authorized by the consumer,
unless the consumer authorizes the lender to add the amount of late
fee or returned item fee to the original amount of a payment
transfer in accordance with the requirements and conditions in Sec.
1041.14(c)(2)(iii)(B).
2. Requirements for specifying highest fee amount. For guidance
on how to satisfy 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, see comment
Sec. 1041.14(c)(2)(iii)(A)-2. For guidance on how to calculate the
highest fee amount if the amount may vary due to the remaining loan
balance or other factors, see comment Sec. 1041.14(c)(2)(iii)(A)-3.
14(c)(3) Requirements and Conditions for Obtaining the Consumer's
Authorization
14(c)(3)(ii) Provision of Payment Transfer Terms to the Consumer
1. General. A lender is permitted under Sec. 1041.14(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.
1041.15(d). For the exception in Sec. 1041.14(c)(2) 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.
1041.14(c)(3)(iii).
2. Different options. Nothing in Sec. 1041.14(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. 1041.14(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 14(c)(3)(ii)(A)
1. Request by email. Under Sec. 1041.14(c)(3)(ii)(A), a lender
is permitted to provide the required terms and statements 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. 1041.15(a)(4) or agrees to receive the terms and statements by
email in the course of a communication initiated by the consumer in
response to the consumer rights notice required by Sec. 1041.15(d).
The following example illustrates a situation in which the consumer
agrees to receive the required terms and statements by email after
affirmatively responding to the notice:
i. After a lender provides the consumer rights notice in Sec.
1041.15(d) by mail to a consumer who has not consented to receive
electronic disclosures under Sec. 1041.15(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. 1041.14(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. 1041.14(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
statements. The required terms and statements may be provided to the
consumer electronically in accordance with the requirements for
requesting the consumer's authorization in Sec. 1041.14(c)(2)(ii)
without regard to the E-Sign Act. However, under Sec.
1041.14(c)(3)(iii), 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. 1041.14(c)(3)(iii) and comment 14(c)(3)(iii)-1.
3. Same communication. Nothing in Sec. 1041.14(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. 1041.15(d), including, but not
limited to, the segregation requirements that apply to the notice.
Thus, for example, if a lender mails the request for 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. 1041.15(d).
Paragraph 14(c)(3)(ii)(B)
1. Request by oral telephone communication. Nothing in Sec.
1041.14(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.
1041.14(c)(3)(ii)(B), a lender is permitted to provide the required
terms and statements 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. 1041.15(d) and agrees to
receive the terms and statements by that method of delivery in the
course of, and as part of, the same communication.
14(c)(3)(iii) Signed Authorization Required
14(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.
14(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 recorded telephone call, notwithstanding that the
authorization was obtained in that manner.
3. Electronic delivery. A lender is permitted under Sec.
1041.14(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. 1041.14(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.
1041.15(a)(4), the lender may provide the memorialization to the
consumer by email, as specified in Sec. 1041.14(c)(3)(ii)(A).
14(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. 1041.14(a)(2) and accompanying commentary.
2. Application of prohibition. A lender is permitted under the
exception in Sec. 1041.14(d) to initiate the single payment
transfer requested by the consumer only once and thus is prohibited
under Sec. 1041.14(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.
1041.14(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. 1041.14(d), provided that the requirements
and conditions are satisfied for each such transfer. See comment
14(b)(2)(ii)-3 for further guidance on how the prohibition in Sec.
1041.14(b) applies to the exception in Sec. 1041.14(d).
3. Timing. A consumer affirmatively contacts the lender when,
for example, the
[[Page 48213]]
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.
Section 1041.15--Disclosure of Payment Transfer Attempts
1. General. Section 1041.15 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. 1041.15(b), is a payment notice required to be provided to a
consumer in advance of a initiating a payment transfer from the
consumer's account, subject to certain exceptions. The second, set
forth in Sec. 1041.15(d), 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. 1041.14(b). In addition, Sec. 1041.15 requires
an electronic short notice when lenders are providing notices
through electronic delivery. The first, set forth in Sec.
1041.15(c), is an electronic short notice that must be provided
along with the payment notice. The second, set forth in Sec.
1041.15(e), is an electronic short notice that must be provided
along with the consumer rights notice.
15(a) General Form of Disclosures
15(a)(1) Clear and Conspicuous
1. Clear and conspicuous standard. Disclosures are clear and
conspicuous for purposes of Sec. 1041.15 if they are readily
understandable and their location and type size are readily
noticeable to consumers.
15(a)(2) In Writing or Electronic Delivery
1. Electronic delivery. Section 1041.15(a)(2) allows the
disclosures required by Sec. 1041.15 to be provided electronically
as long as the requirements of Sec. 1041.15(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.).
15(a)(3) Retainable
1. General. Electronic disclosures, to the extent permitted by
Sec. 1041.15(a)(4), are retainable for purposes of Sec. 1041.15 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.
15(a)(4) Electronic Delivery
1. General. Section 1041.15(a)(4) permits disclosures required
by Sec. 1041.15 to be provided through electronic delivery if the
consumer consent requirements under Sec. 1041.15(a)(4) are
satisfied.
15(a)(4)(i) Consumer Consent
15(a)(4)(i)(A) General
1. General. Section 1041.15(a)(4)(i) permits disclosures
required by Sec. 1041.15 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 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.
15(a)(4)(i)(B) Email Option Required
1. General. Section Sec. 1041.15(a)(4)(i)(B) provides that when
obtaining consumer consent to electronic delivery under Sec.
1041.15(a)(4), a lender must always 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. 1041.15(a)(4).
15(a)(4)(ii) Subsequent Loss of Consent
1. General. The prohibition in Sec. 1041.15(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. 1041.15(a)(4) are satisfied.
2. Loss of consent applies to all notices. The loss of consent
applies to all notices required by Sec. 1041.15. For example, if a
consumer revokes consent in response to the electronic short notice
text message delivered along with the payment notice under Sec.
1041.15(c), that revocation also applies to text delivery of the
electronic short notice that would be delivered with the consumer
rights notice under Sec. 1041.15(e).
Paragraph 15(a)(4)(ii)(A)
1. Revocation. For purposes of Sec. 1041.15(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 15(a)(4)(ii)(B)
1. Notice. A lender receives notification for purposes of Sec.
1041.15(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.
15(a)(5) Segregation Requirements for Notices
1. Segregated additional content. Although segregated additional
content that is not required by Sec. 1041.15 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.
15(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.
15(b) Payment Notice
15(b)(2) Exceptions
15(b)(2)(ii) General
1. Exception for first transfer applies even if the transfer is
unusual. The exception in Sec. 1041.15(b)(2)(ii) applies even if
the situation would otherwise trigger the additional disclosure
requirements for unusual attempts under Sec. 1041.15(b)(5). For
example, if the payment channel of the first transfer after
obtaining the consumer's consent is different than the payment
channel used before the prohibition under Sec. 1041.14 was
triggered, the exception in Sec. 1041.15(b)(2)(ii) applies.
2. Multiple transfers in advance. If a consumer has
affirmatively consented to multiple transfers in advance, as
described in Sec. 1041.14(c)(2)(ii)(B), the exception in Sec.
1041.15(b)(2)(ii) applies only to the first transfer.
15(b)(3) Timing
15(b)(3)(i) 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
Monday, June 8, the 6th business day following mailing of the
notice.
15(b)(3)(ii) Electronic Delivery
Paragraph 15(b)(3)(ii)(A)
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 15(b)(3)(ii)(B)
1. General. In some circumstances, a lender may lose a
consumer's consent to receive
[[Page 48214]]
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 any future payment
attempt following the one that was disclosed in the previously
provided notice, the lender must provide notice for that future
payment attempt through alternate means, in accordance with the
applicable timing requirements in Sec. 1041.15(b)(3).
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. 1041.15(b)(3).
3. Illustrative example. The following example illustrates
actions that would satisfy the requirement in Sec.
1041.15(b)(3)(ii)(B) to provide the notice again in accordance with
any of the timing requirements in Sec. 1041.15(b)(3):
i. On the seventh business day prior to initiating a transfer, a
lender transmits the notice to the consumer via email and
immediately receives a notification that the email account is no
longer active. The next business day, the lender mails the notice to
the consumer. Because the notice is mailed on the sixth business day
prior to initiating the transfer, the timing requirement in Sec.
1041.15(b)(3)(i) is satisfied.
15(b)(4) Content Requirements
15(b)(4)(ii) Transfer Terms
15(b)(4)(ii)(A) 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 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 its payment
processor, the lender's agent, 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.
15(b)(4)(ii)(B) 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. 1041.15(b)(4)(ii)(B) is $80.00.
15(b)(4)(ii)(E) Payment Channel
1. General. Payment channel is the specific payment network that
the transfer will travel through. 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. 1041.15(b)(4)(ii)(E). A lender that initiates a payment
from a consumer's prepaid card would specify whether that payment is
processed as an ACH transfer, PIN debit network payment, or credit
card network payment.
2. Illustrative examples. Payment channel includes, but is not
limited to, ACH transfer, check, remotely created check, remotely
created payment order, internal transfer, and debit card payment.
The use of the term ``debit card payment'' may include any network
that processes debit card payments, including the PIN debit network
and credit card network.
15(b)(4)(iv) Payment Breakdown
15(b)(4)(iv)(B) 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.
15(b)(4)(iv)(D) 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.''
15(b)(4)(iv)(E) 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.''
15(b)(5) Additional Content Requirements for Unusual Attempts
1. General. If the payment transfer is unusual according to the
circumstances described in Sec. 1041.15(b)(5), the payment notice
must contain both the content required by Sec. 1041.15(b)(4),
except for APR, and the content required by Sec. 1041.15(b)(5).
5(b)(5)(i) Varying Amount
1. General. The additional content requirement in Sec.
1041.15(b)(5)(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.
15(b)(5)(ii) Date Other Than Due Date of Regularly Scheduled Payment
1. General. The additional content requirement in Sec.
1041.15(b)(5)(ii) 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 regularly scheduled payment date
according to the payment schedule.
15(c)(2) Content
1. Identifying statement. If the lender is using email as the
method of electronic delivery, the identifying statement required in
Sec. 1041.15(c)(2)(i) must be provided in both the email subject
line and the body of the email.
15(d)(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. 1041.15(d)(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.
15(e)(2) Content
1. Identifying statement. If the lender is using email as the
method of electronic delivery, the identifying statement required in
Sec. 1041.15(e)(2)(i) must be provided in both the email subject
line and the body of the email.
Section 1041.16 Furnishing Information to Registered Information
Systems
16(a) Loans Subject To Furnishing Requirement
1. Loan made under Sec. 1041.11 or Sec. 1041.12. Section
1041.16(a) requires that, for each covered loan a lender makes other
than a covered loan that is made under Sec. 1041.11 or Sec.
1041.12, the lender must furnish the information concerning the loan
described in Sec. 1041.16(c) to each information system described
in Sec. 1041.16(b). With respect to a loan made under Sec. 1041.11
or Sec. 1041.12, a lender may furnish information concerning the
loan described in Sec. 1041.16(c) to each information system
described in Sec. 1041.16(b) in order to satisfy Sec.
1041.11(e)(2) or Sec. 1041.12(f)(2), as applicable.
16(b) Information Systems to Which Information Must Be Furnished
1. Provisional registration and registration of information
system while loan is outstanding. Pursuant to Sec. 1041.16(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. 1041.17(c)(2) for 120 days or
more or has been provisionally registered pursuant to Sec.
1041.17(d)(1) for 120 days or more or subsequently has become
registered pursuant to Sec. 1041.17(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 June 29,
2020, 120 days from the date of provisional registration. A lender
is not required to furnish information about a loan consummated on
June 28, 2020 to an information system that is provisionally
registered on March 1, 2020.
2. Preliminary approval. Section 1041.16(b) requires that
lenders furnish information to information systems that are
provisionally registered pursuant to Sec. 1041.17(d)(1) and
information systems that are registered pursuant to Sec.
1041.17(c)(2) or Sec. 1041.17(d)(2). Lenders are not required to
furnish information to entities that have received preliminary
approval for registration
[[Page 48215]]
pursuant to Sec. 1041.17(c)(1) but are not registered pursuant to
Sec. 1041.17(c)(2).
16(c) Information To Be Furnished
1. Deadline for furnishing under Sec. 1041.16(c)(1) and (3).
Section 1041.16(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 1041.16(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.
1041.16(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.
16(c)(1) Information To Be Furnished at Loan Consummation
1. Type of loan. Section 1041.16(c)(1)(iii) requires that a
lender furnish information that identifies a covered loan as either
a covered short-term loan, a covered longer-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, Sec. 1041.7, or
Sec. 1041.9. Section 1041.16(c)(1)(iv) requires that a lender
furnish information that identifies a covered loan as made under
Sec. 1041.5, made under Sec. 1041.7, or made under Sec. 1041.9.
For example, a lender must identify a loan made under Sec. 1041.5
as a loan made under Sec. 1041.5. A lender furnishing information
concerning a covered loan that is made under Sec. 1041.11 or Sec.
1041.12 is not required to furnish information that identifies the
covered loan as subject to one of these sections.
16(c)(2) Information To Be Furnished While Loan Is an Outstanding Loan
1. Examples. Section 1041.16(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.
1014.16 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 loan, Sec. 1041.16(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 Sec.
1041.16(c)(1)(vii)(B), and to the amount due on each payment date,
previously furnished pursuant to Sec. 1041.16(c)(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. 1041.16(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. 1041.16(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. 1041.16(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.
1041.16(c)(vii)(B), or the amount due on each payment date,
previously furnished pursuant to Sec. 1041.16(c)(vii)(C). Section
1041.16(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.
1041.16(c)(2). Section 1041.16(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.
1014.16 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.
1014.16(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. 1041.16(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.
1041.16(c)(2) requires that the lender must furnish an update to the
information previously furnished pursuant to Sec. 1041.16(c)(2).
Section 1041.17 Registered Information Systems
17(b) Eligibility Criteria for Registered Information Systems
17(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. 1041.16 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. 1041.16, but any delay must reasonable.
17(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 part
1041. 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,
``[w]henever 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.'' 15 U.S.C. 1681e(b). If including information
furnished pursuant to Sec. 1041.16 in a consumer report would cause
a provisionally registered or registered information system to
violate this requirement, Sec. 1041.17(b)(3) would not require that
the information be included in a consumer report.
17(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.
17(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. 1041.17(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.
1041.17(b)(5) need not conform to any particular format or style as
long as it succinctly and accurately conveys the required
information.
17(b)(7) Independent Assessment of Information Security Program
1. Periodic assessments. Section 1041.17(b)(7) requires that, to
maintain its registration, an information system must
[[Page 48216]]
obtain and provide to the Bureau, on at least a biennial basis, a
written assessment of the information security program described in
Sec. 1041.17(b)(6). The time 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. 1041.17(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.
1041.17(b)(7) need not conform to any particular format or style as
long as it succinctly and accurately conveys the required
information.
17(c) Registration of Information Systems Prior to Effective Date of
Sec. 1041.16
17(c)(1) Preliminary Approval
1. In general. An entity seeking to become preliminarily
approved for registration pursuant to Sec. 1041.17(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. 1041.17(b) as of
the deadline set forth in Sec. 1041.17(c)(3)(ii). The application
must describe the steps the entity plans to take to satisfy the
conditions set forth in Sec. 1041.17(b) by the deadline and the
entity's anticipated timeline for such steps. The entity's plan must
be reasonable and achievable.
17(c)(2) Registration
1. In general. An entity seeking to become a registered
information system pursuant to Sec. 1041.17(c)(2) must submit an
application to the Bureau by the deadline set forth in Sec.
1041.17(c)(3)(ii) containing information and documentation adequate
for the Bureau to determine that the conditions described in Sec.
1041.17(b) are satisfied. The application must succinctly and
accurately convey the required information, and must include the
written assessments described in Sec. 1041.17(b)(5) and (7).
17(d) Registration of Information Systems on or After Effective Date of
Sec. 1041.16
17(d)(1) Provisional Registration
1. In general. An entity seeking to become a provisionally
registered information system pursuant to Sec. 1041.17(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. 1041.17(b) are satisfied. The
application must succinctly and accurately convey the required
information, and must include the written assessments described in
Sec. 1041.17(b)(5) and (7).
Section 1041.18--Compliance Program and Record Retention
18(a) Compliance Program
1. General. Section 1041.18(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 part 1041. These written policies and
procedures would provide guidance to a lender's employees on how to
comply with the requirements in part 1041. In particular, under
Sec. 1041.18(a), a lender would need to develop and follow detailed
written policies and procedures reasonably designed to achieve
compliance, as applicable, with the ability-to-repay requirements in
proposed Sec. Sec. 1041.5 and 1041.6 and proposed Sec. Sec. 1041.9
and 1041.10, alternative requirements in proposed Sec. Sec. 1041.7,
1041.11, and 1041.12, payments requirements in proposed Sec. Sec.
1041.14 and 1041.15, and requirements on furnishing loan information
to registered and provisionally registered information systems in
proposed Sec. 1041.16. The provisions and commentary in each
section listed above provide guidance on what specific directions
and other information a lender would need to include in its written
policies and procedures.
2. Examples. The written policies and procedures a lender would
have to develop and follow under Sec. 1041.18(a) depend on the
types of loans that the lender makes. A lender that makes a covered
short-term loan under Sec. 1041.5 would have to 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. In addition,
if, for example, a lender uses an estimated housing expense when
making a covered short-term loan under Sec. 1041.5, it would have
to develop and follow written policies and procedures for reliably
estimating housing expense. These written policies and procedures
could stipulate that the lender use, for example, data from the
American Community Survey of the United States Census Bureau or a
prescribed formula for estimating a consumer's housing expense.
Among other written policies and procedures, a lender that makes a
covered loan under Sec. 1041.5, Sec. 1041.7, or Sec. 1041.9 or a
covered longer-term loan under Sec. 1041.11 or Sec. 1041.12 for
which loan information is not furnished to a consumer reporting
agency that compiles and maintains files on consumers on a
nationwide basis would have to develop and follow written policies
and procedures to furnish loan information to registered and
provisionally registered information systems in accordance with
Sec. 1041.16. A lender that makes a covered loan subject to the
requirements in Sec. 1041.7 or Sec. 1041.15 would also have to
develop and follow written policies and procedures to provide the
required disclosures to consumers.
18(b) Record Retention
18(b)(1) Retention of Loan Agreement and Documentation Obtained in
Connection With a Covered Loan
1. General. Section 1041.18(b)(1) requires a lender to retain
the loan agreement and documentation obtained in connection with a
covered loan. The items of documentation listed in Sec.
1041.18(b)(1) are non-exhaustive. Depending on the types of
information it obtains in connection with a covered loan, a lender
may need to retain additional documentation as evidence of
compliance with part 1041.
2. Methods of retaining loan agreement and documentation
obtained for a covered loan. Section 1041.18(b)(1) requires a lender
either to retain the loan agreement and documentation obtained in
connection with a covered loan in original form or to be able to
reproduce an image of the loan agreement and documentation obtained
for a covered loan accurately. For example, if the lender uses a
consumer's pay stub to verify the consumer's net income, Sec.
1041.18(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 could retain either the electronic
version or a printout of the report.
Paragraph 18(b)(1)(ii)
1. Types of verification evidence for consumer's net income and
major financial obligations. Section 1041.18(b)(1)(ii) requires a
lender to retain the evidence that it used to verify a consumer's
borrowing history, net income, and major financial obligations.
Comments 5(c)(3)(ii)(A)-1, 5(c)(3)(ii)(B)-1, and 5(c)(3)(ii)(D)-1
and comments 9(c)(3)(ii)(A)-1, 9(c)(3)(ii)(B)-1, and 9(c)(3)(ii)(D)-
1 list types of evidence that can be used to verify a consumer's net
income and major financial obligations.
2. Estimate of housing expense. Sections 1041.5(c)(3)(ii)(D)(2)
and 1041.9(c)(3)(ii)(D)(2) permit a lender to rely on an estimated
housing expense for a consumer. Section 1041.18(b)(1)(ii) does not
require a lender to retain verification evidence for estimated
housing expense. Section 1041.18(b)(2)(ii)(B), however, does require
a lender to retain an electronic record of this estimate.
Furthermore, Sec. 1041.18(a) requires a lender that uses an
estimated housing expense to develop and maintain policies and
procedures for reliably estimating housing expense.
18(b)(2) Electronic Records in Tabular Format Regarding Origination
Calculations and Determinations for a Covered Loan
1. General. Section 1041.18(b)(2) requires a lender to retain
records regarding origination calculations and determinations for a
covered loan in electronic, tabular format that establish compliance
with part 1041. The items listed in Sec. 1041.18(b)(2) are non-
exhaustive. Depending on the types of covered loans it makes, a
lender may need to retain additional records as evidence of
compliance with part 1041.
[[Page 48217]]
2. Electronic records in tabular format. Section 1041.18(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 or document formats used by word
processing programs, are not tabular formats. A lender would not
have to retain the records required in Sec. 1041.18(b)(2) in a
single, combined spreadsheet or database with the records required
in Sec. 1041.18(b)(3) through (b)(5). Section 1041.18(b)(2),
however, requires a lender to be able to associate the records for a
covered loan in Sec. 1041.18(b)(2) with unique loan and consumer
identifiers in Sec. 1041.18(b)(4).
18(b)(3) Electronic Records in Tabular Format for a Consumer Who
Qualifies for an Exception to or Overcomes a Presumption of
Unaffordability for Obtaining a Covered Loan
1. General. Section 1041.18(b)(3) requires a lender to retain
records for a consumer who qualifies for an exception to or
overcomes a presumption of unaffordability for a covered loan in
electronic, tabular format that establish compliance with part 1041.
The items listed in Sec. 1041.18(b)(3) are non-exhaustive.
Depending on the types of covered loans it makes, a lender may need
to retain additional records as evidence of compliance with part
1041.
2. Electronic records in tabular format. Section 1041.18(b)(3)
requires a lender to retain records for a consumer who qualifies for
an exception to or overcomes a presumption of unaffordability for a
covered loan in electronic, tabular format. See comment 18(b)(2)-1
for a description of how to retain electronic records in tabular
format. A lender would not have to retain the records required in
Sec. 1041.18(b)(3) in a single, combined spreadsheet or database
with the records required in Sec. 1041.18(b)(2), (b)(3), and
(b)(5). Section 1041.18(b)(3), however, requires a lender to be able
to associate the records for a covered loan in Sec. 1041.18(b)(3)
with unique loan and consumer identifiers in Sec. 1041.18(b)(4).
18(b)(4) Electronic Records in Tabular Format Regarding Loan Type and
Terms
1. General. Section 1041.18(b)(4) requires a lender to retain
records regarding loan type and terms, including unique loan and
consumer identifiers, for a covered loan in electronic, tabular
format that establish compliance with part 1041. The items listed in
Sec. 1041.18(b)(4) are non-exhaustive. Depending on the types of
covered loans it makes, a lender may need to retain additional
records as evidence of compliance with part 1041.
2. Electronic records in tabular format. Section 1041.18(b)(4)
requires a lender to retain records regarding loan type and terms
for a covered loan in electronic, tabular format. See comment
18(b)(2)-1 for a description of how to retain electronic records in
tabular format. A lender would not have to retain the records
required in Sec. 1041.18(b)(4) in a single, combined spreadsheet or
database with the records required in Sec. 1041.18(b)(2), (b)(3),
and (b)(5).
18(b)(5) Electronic Records in Tabular Format Regarding Payment History
and Loan Performance
1. General. Section 1041.18(b)(5) requires a lender to retain
records regarding payment history and loan performance for a covered
loan in electronic, tabular format that establish compliance with
part 1041. The items listed in Sec. 1041.18(b)(5) are non-
exhaustive. Depending on the types of covered loans it makes, a
lender may need to retain additional records as evidence of
compliance with part 1041.
2. Electronic records in tabular format. Section 1041.18(b)(5)
requires a lender to retain records regarding loan performance and
payment history for a covered loan in electronic, tabular format.
See comment 18(b)(2)-1 for a description of how to retain electronic
records in tabular format. A lender would not have to retain the
records required in Sec. 1041.18(b)(5) in a single, combined
spreadsheet or database with the records required in Sec.
1041.18(b)(2) through (b)(4). Section 1041.18(b)(5), however,
requires a lender to be able to associate the records for a covered
loan in Sec. 1041.18(b)(5) with unique loan and consumer
identifiers in Sec. 1041.18(b)(4).
Paragraph 18(b)(5)(iii)
1. Maximum number of days, up to 180 days, any full payment was
past due. Section 1041.18(b)(5)(iii) requires a lender that makes a
covered loan to retain information on the maximum number of days, up
to 180 days, any full payment, including the amount financed,
charges included in the total cost of credit, and charges excluded
from the cost of credit, was past due, in relation to the payment
schedule established in the loan agreement. If a consumer makes a
partial payment on the contractual due date and the remainder of the
payment 10 days later, the lender would have to record a full
payment as being 10 days past due. If multiple full payments were
past due, the lender would have to record the number of days for the
full payment that was past due for the longest period of time. For
example, if a consumer made one full payment on a covered loan 21
days after the contractual due date and another full payment on the
loan 8 days after the contractual due date, the lender would have to
record a full payment on the loan as being 21 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 would only have
to record a full payment as being 180 days past due.
Paragraph 18(b)(5)(v)
1. Initiation of vehicle repossession. Section 1041.18(b)(5)(v)
requires a lender that makes a covered loan with vehicle security to
retain information on whether it initiated repossession of the
consumer's vehicle. Initiation of vehicle repossession includes but
is not limited to the lender mailing a notice to the consumer that
it will physically repossess the consumer's vehicle within a certain
period of time. Initiation of vehicle repossession also covers other
actions that deprive or commence the process of depriving the
consumer of the use of her vehicle. For example, if a lender
installs a device that can remotely disable a consumer's vehicle as
a condition of making the loan, the activation of that device, which
renders the consumer's vehicle non-operational, or a notice that the
device will be activated on or after a particular date would be an
initiation of vehicle repossession.
Section 1041.19--Prohibition Against Evasion
1. Lender action taken with the intent of evading the
requirements of the rule. Section 1041.19 provides that a lender
must not take any action with the intent of evading the requirements
of part 1041. In determining whether a lender has taken action with
the intent of evading the requirements of part 1041, 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 part 1041. If the
lender's action is taken solely for legitimate business purposes, it
is not taken with the intent of evading the requirements of part
1041. 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. A lender
action that is taken with the intent of evading the requirements of
part 1041 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 part 1041,
but fraud, deceit, or other unlawful or illegitimate activity is not
a prerequisite to such a finding.
2. Illustrative examples--lender actions that may have been
taken with the intent of evading the requirements of the rule. The
following non-exhaustive examples illustrate lender actions that,
depending on the relevant facts and circumstances, may have been
taken with the intent of evading the requirements of part 1041 and
thus may have violated Sec. 1041.19:
i. A lender makes non-covered loans to consumers without
assessing their ability to repay and with a contractual duration of
46 days or longer and a total cost of credit exceeding a rate of 36
percent per annum, as measured at the time of consummation. As a
matter of lender practice for loans with these contractual terms,
more than 72 hours after consumers receive the entire amount of
funds that they are entitled to receive under their loans, the
lender routinely offers consumers a monetary or non-monetary
incentive (e.g., the opportunity to skip a payment) in exchange for
allowing the lender or its affiliate to obtain a leveraged repayment
mechanism or vehicle security, and consumers routinely agree to
provide the leveraged payment mechanism or vehicle
[[Page 48218]]
security. The lender began the practice following the issuance of
the final rule that is codified in 12 CFR part 1041. The lender's
prior practice when making loans to consumers with these contractual
terms was to obtain a leveraged payment mechanism or vehicle
security at or prior to consummation. See Sec. 1041.3(b)(2)(ii) and
related commentary.
ii. A lender makes covered short-term loans to consumers without
assessing their ability to repay and with a contractual duration of
14 days and a lump-sum repayment structure. The loan contracts
provide for a ``recurring late fee'' as a lender remedy that is
automatically triggered in the event of a consumer's delinquency
(i.e., if a consumer does not pay the entire lump-sum amount on the
contractual due date, with no grace period). The recurring late fee
is to be paid biweekly while the loan remains outstanding. The
amount of the recurring late fee is equivalent to the fee that the
lender charges on transactions that are considered rollovers under
applicable State law. For consumers who are delinquent, the lender
takes no other steps to collect on the loan other than charging the
recurring late fees for 90 days. The lender also gives non-
delinquent consumers who express an inability to repay the principal
by the contractual due date the option of paying the recurring late
fee. See Sec. Sec. 1041.6, 1041.7, and related commentary.
iii. A lender makes non-covered loans to consumers without
assessing their ability to repay, and the loans have the following
terms: contractual duration of 60 days, repayment through four
periodic payments each due every 15 days, and a total cost of credit
that is below 36 percent per annum, as measured at the time of
consummation. The lender also obtains a leveraged payment mechanism
at or prior to consummation. The loan contract imposes a penalty
interest rate of 360 percent per annum, i.e., more than 10 times the
contractual annual percentage rate, as a lender remedy that is
automatically triggered in the event of the consumer's delinquency
(i.e., if the consumer does not make a periodic payment or repay the
entire loan balance when due, with no grace period). For consumers
who are delinquent, the lender takes no steps to collect on the loan
other than charging the penalty interest rate for 90 days. The
lender also gives non-delinquent consumers who express an inability
to repay the principal by the contractual due date the option of
paying the penalty interest rate. The lender did not include the
penalty interest rate in its loan contracts prior to the issuance of
the final rule that is codified in 12 CFR part 1041. See Sec.
1041.3(b)(2)(ii) and related commentary.
iv. A lender collects payment on its covered longer-term
installment loans primarily through recurring electronic fund
transfers authorized by consumers at consummation. As a matter of
lender policy and practice, after a first ACH payment transfer to a
consumer's account for the full payment amount is returned for
nonsufficient funds, the lender makes a second payment transfer to
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 makes both
payment transfers to 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
the effective date of the rule that is codified in 12 CFR part 1041,
which, among other provisions, prohibits a lender from attempting to
withdraw payment from a consumer's account after two consecutive
attempts have failed due to nonsufficient funds, unless the lender
obtains a new and specific authorization from the consumer. 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. See Sec. Sec. 1041.13 and 1041.14 and related commentary.
3. Illustrative example--lender action not taken with the intent
of evading the requirements of the rule. The following example
illustrates a lender action that is not taken with the intent of
evading the requirements of part 1041 and thus does not violate
Sec. 1041.19. Prior to the effective date of the rule that is
codified in 12 CFR part 1041, a lender offers a loan product to
consumers with a contractual duration of 30 days (Loan Product A).
If the lender had continued to make Loan Product A to consumers
following the effective date of the rule, Loan Product A would have
been treated as a covered short-term loan, requiring the lender to
make an ability-to-repay determination under Sec. 1041.5. However,
as of the effective date, the lender ceases offering Loan Product A
and, in its place, offers consumers an alternative loan product with
a 46-day contractual duration and other terms and conditions that
result in treatment as a covered longer-term loan (Loan Product B).
For Loan Product B, the lender does not make an ability-to-repay
determination under Sec. 1041.9, but the lender satisfies the
requirements of Sec. 1041.11 or Sec. 1041.12, i.e., one of the
conditional exemptions for covered longer-term loans. See Sec. Sec.
1041.11 and 1041.12 and related commentary.
Dated: June 1, 2016.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2016-13490 Filed 7-21-16; 8:45 am]
BILLING CODE 4810-AM-P
[Federal Register Volume 81, Number 145 (Thursday, July 28, 2016)]
[Notices]
[Page 49634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: C1-2016-13492]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
[Docket No. CFPB-2016-0026]
RIN 3170-AA40
Request for Information on Payday Loans, Vehicle Title Loans,
Installment Loans, and Open-End Lines of Credit
Correction
In notice document 2016-13492, appearing on pages 47781 through
47789 in the issue of Friday, July 22, 2016, make the following
correction:
On page 47781, in the second column, on the sixth line, ``October
14, 2016'' should read ``November 7, 2016''.
[FR Doc. C1-2016-13492 Filed 7-27-16; 8:45 am]
BILLING CODE 1505-01-D