Request for Information on Payday Loans, Vehicle Title Loans, Installment Loans, and Open-End Lines of Credit

Request for Information on Payday Loans, Vehicle Title Loans, Installment Loans, and Open-End Lines of Credit

Request for Information on Payday Loans, Vehicle Title Loans, Installment Loans, and Open-End Lines of Credit

Richard Cordray
Bureau of Consumer Financial Protection
22 July 2016

[Federal Register Volume 81, Number 141 (Friday, July 22, 2016)]
[Notices]
[Pages 47781-47789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 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

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Request for information.

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SUMMARY: Congress established the Bureau of Consumer Financial
Protection (Bureau or CFPB) in the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank Act). As set forth in
section 1021 of the Dodd-Frank Act, the Bureau's purpose is to
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
markets for consumer financial products and services are fair,
transparent, and competitive. In discharging this obligation, the CFPB
seeks feedback on practices and products that are related to but may
not be addressed in the Bureau's concurrently published Notice of
Proposed Rulemaking on Payday, Vehicle Title, and Certain High-Cost
Installment Loans (Concurrent Proposal). Specifically, in this Request
for Information (RFI), the Bureau seeks comment on: Potential consumer
protection concerns with loans that fall outside the scope of the
Bureau's Concurrent Proposal but are designed to serve similar
populations and needs as those loans covered by the proposal; and
business practices concerning loans falling within the Bureau's
Concurrent Proposal's coverage that raise potential consumer protection
concerns that are not addressed by the Concurrent Proposal. The Bureau
seeks comment from the public about these consumer lending practices to
increase the Bureau's understanding of and support for potential future
efforts, including but not limited to future rulemakings, supervision,
enforcement, or consumer education initiatives. Where the Bureau
requests evidence, data, or other information regarding a particularly
concern about consumer protections, the Bureau does not seek
information that directly identifies an individual consumer.

DATES: Comments must be received on or before October 14, 2016.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2016-
0026 or RIN 3170-AA40, by any of the following methods:
Email: FederalRegisterComments@cfpb.gov. Include Docket
No. CFPB-2016-0026 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: 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: For general inquiries, submission
process questions, or any additional information, please contact Monica
Jackson, Office of the Executive Secretary, at 202-435-7275.

Authority: 12 U.S.C. 5511(c).

SUPPLEMENTARY INFORMATION: Pursuant to the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act) that established
the Bureau, part of the Bureau's mission is to empower consumers to
take control over their economic lives. Section 1021(c)(3) of the Dodd-
Frank Act provides that one of the primary functions of the Bureau is
collecting, researching, monitoring, and publishing information
relevant to the function of markets for consumer financial products and
services.\1\ Specifically section 1022(c)(1) directs the Bureau to
monitor for risks to consumers in the offering or provision of consumer
financial products or services in order to support its rulemaking and
other functions.\2\ Moreover, the Bureau is charged with using its
rulemaking, supervision, and enforcement authorities under Federal
consumer financial law to prevent unfair, deceptive, or abusive acts or
practices in the consumer financial services markets.\3\ In discharging
these obligations, the Bureau has studied certain types of loans made
to consumers facing liquidity shortfalls, including payday loans,
vehicle title loans, and certain types of installment loans. The Bureau
also has conducted supervisory examinations of payday lenders and
pursued public law enforcement actions against creditors making payday
loans, vehicle title loans, and similar forms of credit.
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\1\ 12 U.S.C. 5511(c)(3).
\2\ 12 U.S.C. 5512(c)(1).
\3\ 12 U.S.C. 5511(b)(2).
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The Bureau is concerned that lenders that make these 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.
The Concurrent Proposal generally would cover two categories of
loans. First, the proposal generally would cover loans with a term of
45 days or less or loans with multiple advances if each advance is
required to be repaid within 45 days. Second, the proposal

[[Page 47782]]

generally would cover loans with a term greater than 45 days, provided
that they (1) have an all-in annual percentage rate greater than 36
percent; and (2) either are repaid directly from the consumer's account
or income or are secured by the consumer's vehicle. For both categories
of covered loans, the proposal would identify it as an abusive and
unfair practice for a lender to make a covered loan without reasonably
determining that the consumer has the ability to repay the loan. The
proposal generally would require that, before making a covered loan, a
lender must reasonably determine that the consumer has the ability to
repay the loan. The proposal also would impose certain restrictions on
making covered loans when a consumer has or recently had certain
outstanding covered loans. The proposal would provide lenders with
options to make covered loans without satisfying the ability-to-repay
requirements, if those loans meet certain conditions. The proposal also
would identify it as an unfair and abusive practice to attempt to
withdraw payment from a consumer's account for a covered loan after two
consecutive payment attempts have failed. The proposal would require
lenders to provide certain notices to the consumer before attempting to
withdraw payment for a covered loan from the consumer's account. The
Bureau's Concurrent Proposal appears in a separate Federal Register
notice concurrently published with this RFI. The Bureau is seeking
comment on that proposal in the rulemaking docket, which is separate
from the docket for this RFI.
The Bureau is also engaged in pre-rulemaking activity concerning
debt collection practices generally and on checking account overdraft
services, which some consumers may use in lieu of small-dollar loans.
Those practices are not the focus of this RFI. Finally, the Bureau has
also proposed to regulate certain credit products offered in
conjunction with prepaid accounts, which is also not the focus of this
RFI.
The Bureau is aware that the Concurrent Proposal may not address
all potential concerns in these markets. Most particularly, while the
Bureau has chosen to issue a proposed rule on payday loans and similar
forms of credit for public comment, the Bureau is aware that the
Concurrent Proposal does not cover all loans made to consumers facing
liquidity shortfalls. Such loans may include other high-cost products,
where the risks to consumers from making unaffordable payments may be
similar to the types of harms detailed in the Concurrent Proposal. The
Bureau is specifically seeking to learn more about the scope, use,
underwriting, and impact of such products for purposes of determining
what types of Bureau action may be appropriate. To protect consumers
from unfair, deceptive, or abusive acts or practices, the Bureau is
expressly empowered to use all of its authorities, not just rulemaking.
Therefore, in this RFI the Bureau is seeking information about certain
consumer lending practices to increase the Bureau's understanding of
whether there is a need and basis for potential future efforts,
including but not limited to future rulemakings, supervisory
examinations, or enforcement investigations.
Similarly, the Bureau is aware that the Concurrent Proposal may not
address all potentially harmful practices with regard to products that
would be covered by the Concurrent Proposal. Specifically, the proposal
focuses on lenders' practices with regard to underwriting and attempts
to withdraw loan payments from consumers' bank accounts. The Bureau is
thus seeking information on other potentially problematic lender
practices and consumer protection concerns regarding products that
would be covered by the proposal, in order to determine whether
additional Bureau actions are warranted.
Accordingly, the Bureau is interested in learning more about
potential consumer protection concerns that may not be addressed by the
Bureau's Concurrent Proposal. The Bureau encourages comments from the
public, including:
Borrowers and their families;
Lenders and their investors or employees;
Debt collectors, payment processors, and other service
providers;
Financial counselors and social workers;
Pastors, priests, nuns, rabbis, imams, and other clergy or
faith leaders;
Accountants;
Journalists;
Consumer advocates;
Banks, thrifts, and credit unions;
State, local, and tribal governments;
Academics including but not limited to psychologists,
economists, sociologists, geographers, and historians; as well as
Any other interested parties.

I. Background

Throughout American history, the Federal government and the States
have taken varied approaches to regulating payday and similar forms of
credit. Early on, the 13 original American States adopted interest rate
limits of between 5 percent and 12 percent per annum in the early years
of the Republic.\4\ Later entrants into the Union typically followed
this pattern and most of these ``general usury limits'' remained in
force throughout the United States during the 19th Century. Later,
Congress passed legislation intended to provide protection to consumers
in the Wheeler-Lea Act of 1938.\5\ The Wheeler-Lea Act amended the
Federal Trade Commission (FTC) Act of 1914 to provide the FTC with the
authority to pursue unfair or deceptive acts or practices in commerce
to protect consumers against oppression that might not amount to common
law or criminal fraud.\6\
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\4\ These State price limits were based on English statutes.
Ransom H. Tyler, A Treatise on the Law of Usury, Pawns or Pledges
and Maritime Loans, at 49-55 (1891). American usury law drew upon an
older legal tradition. For example, historians report that the Roman
Empire capped interest rates at 12 percent per annum. And, the Code
of Hammurabi (c. 1750 BCE) includes an interest rate limit of 33.3
percent for loans payable in grain and a limit of 20 percent on
loans payable in silver. Sydney Homer & Richard Sylla, A History of
Interest Rates, at 30, 49 (3d. ed. 1996).
\5\ Wheeler-Lea Act of 1938, Public Law 75-447, 52 Stat. 111
(1938).
\6\ Richard A. Posner, The Federal Trade Commission: A
Retrospective, 72 Antitrust L.J. 761, 765 (2005).
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In the 1960s, Congress began passing a wave of consumer protection
laws focused on financial products, beginning with the Consumer Credit
Protection Act (CCPA) in 1968.\7\ The CCPA included the Truth in
Lending Act (TILA), which imposed disclosure and other requirements on
creditors.\8\ Congress followed the enactment of TILA with several
other consumer financial protection laws. For example, in 1970,
Congress passed the Fair Credit Reporting Act (FCRA), which promotes
the accuracy, fairness, and privacy of consumer information contained
in the files of consumer reporting agencies, as well as providing
consumers access to their own information.\9\ In 1974, Congress passed
the Equal Credit Opportunity Act (ECOA) to prohibit creditors from
discriminating against applicants with respect to credit
transactions.\10\ In 1977, Congress passed the Fair Debt Collection
Practices Act (FDCPA) to promote the fair treatment of consumers who
are subject to debt collection activities.\11\ Congress has

[[Page 47783]]

placed limitations on the rates Federal credit unions may impose,
generally 15 percent with certain allowance for the NCUA to make
adjustments.\12\ Congress has established a usury limit for loans to
servicemembers. In 2006 Congress established an all-in interest rate
limit of 36 percent annual percentage rate (APR) on consumer credit
extended to military servicemembers and their dependents and charged
the Bureau with enforcing this limit in 2013.\13\
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\7\ Consumer Credit Protection Act, Public Law 90-321, 82 Stat.
146 (1968).
\8\ 15 U.S.C. 1601
\9\ 15 U.S.C. 1681.
\10\ 15 U.S.C. 1691.
\11\ 15 U.S.C. 1692. Other such Federal consumer protection laws
include those enumerated in the Dodd-Frank Act and made subject to
the Bureau's rulemaking, supervision, and enforcement authority:
Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. 3801;
Consumer Leasing Act of 1976, 15 U.S.C. 1667; Electronic Fund
Transfer Act (EFTA), 15 U.S.C. 1693 (except with respect to Sec.
920 of that Act); Fair Credit Billing Act, 15 U.S.C. 1666; Home
Mortgage Disclosure Act of 1975, 12 U.S.C. 2801; Home Owners
Protection Act of 1998, 12 U.S.C. 4901; Federal Deposit Insurance
Act, 12 U.S.C. 1831t (b)-(f); Gramm-Leach-Bliley Act 15 U.S.C. 6802-
09 (except with respect to Sec. 505 as it applies to Sec. 501(b)
of that Act); Interstate Land Sales Full Disclosure Act, 15 U.S.C.
1701; section 626 of the Omnibus Appropriations Act, 2009, 12 U.S.C.
5338; Real Estate Settlement Procedures Act of 1974 (RESPA), 12
U.S.C. 2601; S.A.F.E. Mortgage Licensing Act of 2008, 12 U.S.C.
5101. Federal consumer protection law also includes the Bureau's
authority to take action to prevent a covered person or service
provider from committing or engaging in an unfair, deceptive, and
abusive acts or practices, Dodd-Frank section 1031, and its
disclosure authority, Dodd-Frank section 1032.
\12\ 12 U.S.C. 1757(5)(A)(vi).
\13\ 10 U.S.C. 987(b), (f)(6). Moreover, Congress has also
established criminal laws enforced by the Department of Justice that
address some forms of payday and similar credit. First, Congress
established a threshold of 45 percent per annum as a limitation in
determining whether the government is entitled to a presumption that
a debtor believed a creditor used extortionate collection methods in
criminal loansharking prosecutions under the Consumer Credit
Protection Act. 18 U.S.C. 892(b)(2). And second, the Racketeer
Influenced and Corrupt Organizations Act established a federal crime
for collecting an unenforceable debt with a price in excess of twice
an applicable federal or state usury limit. 18 U.S.C. 1961(6)(B),
1962(c), 1963. See, e.g., U.S. v. Scott Tucker and Timothy Muir,
Sealed Indictment, No. 16 Crim 091 (S.D.N.Y. 2016); Press Release,
Department of Justice, U.S. Attorney's Office, Southern District of
New York, Manhattan U.S. Attorney Announces Charges Against owner
of, and Attorney For, $2 Billion Unlawful Internet Payday Lending
Enterprise (February 10, 2016), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-charges-against-owner-and-attorney-2-billion-unlawful.
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In addition, in the early 20th Century many States began to adopt
small loan laws that allowed licensed lenders to make small consumer
loans at interest rates of between 2 and 4 percent per month, or 24 to
48 percent per year \14\ A variety of ``special'' usury limits along
these lines proliferated in most States throughout the 20th Century. By
1965, all States limited interest rates on small loans, with an annual
rate of 36 percent per annum being the most common ceiling.\15\
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\14\ Elizabeth Anderson, Experts, Ideas, and Policy Change: The
Russell Sage Foundation and Small Loan Reform, 1910-1940 (March 8,
2006), 16. See also David J. Gallert, Walter Stern, and Geoffrey
May, Small Loan Legislation: A History of the Regulation of the
Business of Lending Small Sums, at 89 (1932).
\15\ Christopher L. Peterson, Usury Law, Payday Loans, and
Statutory Sleight of Hand: Salience Distortion in American Credit
Pricing Limits, 92 Minn. L. Rev. 1110, 1138-1142 (2008).
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In the 1960s, States began passing their own consumer protection
statutes modeled on the FTC Act to prohibit unfair and deceptive
practices. The FTC encouraged the adoption of consumer protection
statutes at the State level and worked directly with the Council of
State Governments to draft model legislation that influenced many state
consumer protection statutes.\16\ Currently, ``[e]very state has a
consumer protection law that prohibits deceptive practices, and many
prohibit unfair or unconscionable practices as well.'' \17\ At the same
time that States have become more active in providing substantive
consumer protection, there has been some movement away from State
regulation of interest rates. In States with usury limits, a majority
of State legislatures have created carve outs for payday loans,
permitting licensed businesses to make payday loans with average
effective interest rates of over 300 percent per annum.\18\
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\16\ Dee Pridgen and Richard M. Alderman, Consumer Protection
and the Law Sec. 2:10 (2015).
\17\ See Carolyn L. Carter, Nat'l Consumer L. Ctr., Consumer
Protection in the States, at 5 (2009), available at https://www.nclc.org/images/pdf/udap/report_50_states.pdf.
\18\ As discussed in further detail within the Concurrent
Proposal, 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. The remaining 14 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.
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As discussed in greater detail in the Concurrent Proposal, some
states and municipalities have set other limits on payday and similar
lending. For example, Washington and Delaware have restricted repeat
borrowing by imposing limits on the number of payday loans consumers
may obtain. 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.\19\ 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 borrowers' accounts as a single-payment payday
loan. At least 35 Texas municipalities have adopted local ordinances
setting business regulations on payday lending (and vehicle title
lending).\20\
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\19\ 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--Demographic and
Statistical Information July 2000 Through December 2012, at 15-16
(2014), available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/DemoStatsInfo/ddlasummary2000-2012.pdf.
\20\ 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, Texas Mun. League,
http://www.tml.org/payday-updates (last visited May 6, 2016).
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In the wake of the financial crisis, Congress adopted the Dodd-
Frank Act. Title X of the Dodd-Frank Act established the Consumer
Financial Protection Bureau to regulate the offering and provision of
consumer financial products and services under the Federal consumer
financial laws.\21\ The Dodd-Frank Act defines Federal consumer
financial law to include certain enumerated federal consumer laws,
including the TILA, FCRA, FDCPA, EFTA as well as Title X of the Dodd-
Frank Act itself. Congress provided the Bureau with a range of
enforcement and regulatory tools to fulfill its mission. For example,
the Bureau has both supervisory and enforcement authority over all
banks, savings associations, and credit unions with over 10 billion
dollars in assets, as well as over a variety of nondepository financial
companies including payday lenders.\22\ Congress also provided the
Bureau with a range of rulemaking authorities. Section 1022(b) 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
evasion thereof.\23\ Section 1031(b) of the Dodd-Frank Act also
provides the Bureau with authority to prescribe rules to identify 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.\24\ Rules issued identifying as unlawful

[[Page 47784]]

unfair, deceptive, or abusive acts or practices may include
requirements for the purpose of preventing such acts or practices.\25\
The Bureau also has the authority to prescribe rules to ensure that the
features of any consumer financial product or service are fully,
accurately, and effectively disclosed to consumers.\26\ Finally, the
Bureau is also charged with conducting financial education programs to
assist consumers in making responsible decisions about financial
transactions.\27\
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\21\ 12 U.S.C. 5491(a).
\22\ 12 U.S.C. 5514(a), 5515, 5516(a)
\23\ 12. U.S.C. 5512(b)(1).
\24\ 12 U.S.C. 5531(b).
\25\ 12 U.S.C. 5531(b).
\26\ 12 U.S.C. 5532(a).
\27\ 12 U.S.C. 5511(b)(1), (c)(1).
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In addition to establishing the Bureau, Title X of the Dodd-Frank
Act also prohibits any unfair, deceptive or abusive act or practice in
connection with any transaction with a consumer for a consumer
financial product or service or the offering of such product or
service.\28\ The Bureau is charged with conducting examinations of
institutions within its jurisdiction for the purpose, among others, of
assessing compliance with the requirements of Federal consumer
financial laws; \29\ this includes assessing compliance with the
prohibition on unfair, deceptive and abusive acts and practices. The
Bureau is likewise charged with conducting investigations ``for the
purpose of ascertaining whether any person is or has been engaged in
any conduct that is a . . . violation of any provision of Federal
consumer finance law,'' again including the prohibition on unfair,
deceptive, or abusive acts or practices in consumer finance markets.
Congress specifically provided that ``No provision of [Title X] 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.'' \30\
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\28\ 12 U.S.C. 5536(a)(1)(B) (``It shall be unlawful'' for any
covered person or service provider ``to engage in any unfair,
deceptive, or abusive act or practice.'').
\29\ 12 U.S.C. 5515(b)(1)(A).
\30\ 12 U.S.C. 5517(o). As discussed in greater detail in the
Concurrent Proposal, the Bureau believes the prohibition in this
section is reasonably interpreted not to prohibit differential
regulation such as certain requirements contained in the Bureau's
Concurrent Proposal.
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The Bureau is aware that the Concurrent Proposal may not address
all potential concerns relating to loans made to consumers facing
liquidity shortfalls. Most particularly, while the Bureau has chosen to
issue a proposed rule on payday, vehicle title, and certain high-cost
installment loans, the Bureau is aware that the Concurrent Proposal
does not cover all loans made to consumers facing liquidity shortfalls.
Such loans may include other high-cost products, where the risks to
consumers from making unaffordable payments may be similar to the types
of harms detailed in the Concurrent Proposal. The Bureau is
specifically seeking to learn more about the scope, use, underwriting,
and impact of such products for purposes of determining what types of
Bureau action may be appropriate. To protect consumers from unfair,
deceptive, or abusive acts or practices, the Bureau is expressly
empowered to use all of its authorities, not just rulemaking.
Therefore, in this RFI the Bureau is seeking information about certain
consumer lending practices to increase the Bureau's understanding of
whether there is a need and basis for potential future efforts,
including but not limited to future rulemakings, supervisory
examinations, or enforcement investigations.
Similarly, the Bureau is aware that the Concurrent Proposal may not
address all potentially harmful practices with regard to products that
would be covered by the Concurrent Proposal. Specifically, the proposal
focuses on lenders' practices with regard to underwriting and attempts
to withdraw loan payments from consumers' bank accounts. The Bureau is
thus seeking information on other potentially problematic lender
practices and consumer protections concerns regarding products that
would be covered by the proposal, in order to determine whether
additional Bureau actions are warranted.
Accordingly, the Bureau is interested in learning more about
potential consumer protection concerns that may not be addressed by the
Bureau's Concurrent Proposal.

II. Potential Consumer Protection Concerns With High-Cost Installment
Loans and Open-End Lines of Credit Not Covered Within the Bureau's
Concurrent Proposal

As detailed in the Concurrent Proposal, the Bureau believes that
there may be a high likelihood of consumer harm in connection with
loans that would be covered by the Concurrent Proposal. As noted above,
the Concurrent Proposal generally would cover loans with a term of 45
days or less or loans with multiple advances if each advance is
required to be repaid within 45 days. Second, the Concurrent Proposal
generally would cover loans with a term greater than 45 days, provided
that they (1) have an all-in annual percentage rate greater than 36
percent; and (2) either are repaid directly from the consumer's account
or income (i.e., have a ``leveraged payment mechanism'' \31\) or are
secured by the consumer's vehicle.
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\31\ In the Concurrent Proposal, the Bureau refers to methods by
which the lender can obtain payment directly ``leveraged payment
mechanisms.'' As provided in proposed Sec. 1041.3(c), in general, a
lender or service provider would obtain a leveraged payment
mechanism if it has the right to initiate a transfer of money,
through any means, from a consumer's account to satisfy an
obligation on a loan, except that the lender or service provider
does not obtain a leverage payment mechanism by initiating a one-
time electronic fund transfer immediately after the consumer
authorizes the transfer, has the contractual right to obtain payment
directly from the consumer's employer or other source of income, or
requires the consumer to repay the loan through a payroll deduction
or deduction from another source of income.
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Thus, the Bureau's Concurrent Proposal would not cover either
closed-end installment loans or open-end lines of credit with durations
longer than 45 days with no vehicle title or leveraged payment
mechanisms, regardless of the total cost of credit. The Bureau's
Concurrent Proposal also would not cover loans that fall within the
proposed exceptions, including non-recourse pawn loans, certain money
purchase loans, real-estate secured credit, student loans, and credit
card loans. In this RFI, the Bureau refers to loans that fall outside
the scope of the proposal as ``non-covered products.''
The Bureau believes that most loans made to consumers facing
liquidity shortfalls would fall within the scope of the proposal. As
discussed further in the Concurrent Proposal, these consumers tend to
have low or non-existent credit scores and limited access to mainstream
sources of credit. The loans that are made to them tend to be at a high
interest rate and the Bureau believes that, with most of these loans,
lenders generally obtain either a security interest in the borrower's
vehicle or the ability to secure repayment directly from the consumer's
deposit account or paycheck. On the other hand, the Bureau also has
identified a limited number of lenders offering non-covered longer
duration loans with high annual percentage rates that lack a vehicle
security interest or leveraged payment mechanism and that may raise
consumer protection concerns.\32\
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\32\ For example, in New Mexico, Idaho, Utah, and Wisconsin The
CashStore offers 140 day installment loans of $500 repayable in cash
only with a 780 percent APR. Cash Store APR And Rate Card
Information, Thecashstore.com, https://www.cashstore.com/apr-rate-card (last visited March 24, 2016). In Utah, Mountain Loan Centers,
Inc. has offered seven month, 432 percent APR, ``signature'' loans
of $800 with no post-dated check or account access. Mountain Loan
Centers, Inc. v. Audra Crizer, Complaint, Fourth Judicial District
Court, Utah (March 25, 2015). See also Mountain Loan Centers, Inc.,
Mountain Loan Centers Get $5000! EZ Approval!, YouTube (Nov. 7,
2011), https://www.youtube.com/watch?v=PtipWKKOoAo (advertisement
stating ``we don't hold a check and we don't even care if you have a
bank account.''). And in Missouri Capital Solutions Investments,
Inc. (d/b/a Loan Express Co.) has made five month loans of $100 with
no account access and an interest rate of 199 percent APR. Hollins
v. Capital Solutions Investments, Inc. 477 SW.3d 19, 21 (Mo. Ct.
App. 2015); Defendant's Statement of Uncontroverted Material Facts
Supporting Motion for Summary Judgment, Exhibit B-1, Case, Hollins
v. Capital Solutions Investments, Inc., No. 11SL-CC04216 Div. 7,
(Mo. Cir. Ct. St. Louis County, 21st Jud. Cir. Nov. 7, 2012).

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[[Page 47785]]

The Bureau believes that some non-covered products may be different
in significant ways from loans that would be covered under the
Concurrent Proposal. For example, in bona fide pawn transactions,
borrowers grant a possessory security interest in personal property in
exchange for a non-recourse loan. Because these loans are non-recourse
and because the consumer turns over physical possession of the
collateral to the lender at the outset, the Bureau believes the
consumer risks posed by these loans are somewhat different from the
consumer risks posed by other high-cost products. In a bona fide pawn
loan, the borrower has the option to either repay the loan or permit
the pawnbroker to retain and sell the pledged collateral at the end of
the loan term, relieving the borrower of any additional financial
obligation, and the process of surrendering the item may reinforce to
the consumer what the consequences will be if the consumer is later
unable to repay the pawn loan.
The Bureau is seeking additional information about forms of non-
covered credit offered to the types of consumers who use covered loans
to deal with cash shortfalls, including the types and volume of
installment and open-end credit products that would not be covered by
the Concurrent Proposal and are offered in this market segment, their
pricing structures, and lenders' practices with regard to marketing,
underwriting, servicing and collections. For example, an installment
loan or open-end line of credit without a leveraged payment mechanism
or vehicle security interest would be beyond the scope of the Bureau's
Concurrent Proposal even if the agreement calls for non-amortizing,
interest-only payments and without regard to the cost. Such loans could
raise substantial consumer protection concerns and might potentially be
unfair, deceptive, or abusive depending on the circumstances, including
instances where there are long-term financial hardships imposed by such
loans or where consumers fail to understand the payment structure of
the loans. Since such loans lack vehicle security or leveraged payment
mechanisms, the Bureau is also particularly interested in any other
mechanisms or practices that lenders may use with regard to such loans
to mitigate the risk that consumers would be unable to repay their
loans.
Because Congress has charged the Bureau with protecting consumers
from unfair, deceptive, or abusive credit practices, the Bureau is
interested in learning more about the potential consumer protection
concerns that may arise in high-cost loans that are not covered by the
Bureau's Concurrent Proposal. The Bureau is also looking ahead to
anticipate potential changes in the consumer lending market in response
to both the Concurrent Proposal and other regulatory and economic
developments. Accordingly, the Bureau seeks public feedback to better
understand the prevalence of problematic business practices in this
market.
While the Bureau invites all comments relevant to this general
topic, the Bureau specifically invites commenters to address the
following questions. With respect to these non-covered, high-cost,
longer-duration installment loans and open-end lines of credit that
lack vehicle security or leveraged payment features:
1. Is there a viable business model in extending high-cost, non-
covered loans for terms longer than 45 days without regard to the
borrower's ability to repay the loan as scheduled? If so, what are the
essential characteristics of this business model or models and what
consumer protection concerns, if any, are associated with such
practices? For example:
a. Are there non-covered loan products with particular payment
structures that make it viable for a lender to extend loans without
regard to the consumer's ability to repay?
b. Are there non-covered loan products with security or possessory
interests in products or documents other than the consumer's vehicle
(and without leveraged access to the consumer's transaction account)
that make it viable for a lender to extend loans without regard to the
consumer's ability to repay?
c. Are there particular collection practices that make it viable
for lenders to make high-cost, non-covered loans without regard to the
consumer's ability to repay?
d. Are there other loan features or practices that make it viable
for lenders to extend loans without regard to the consumer's ability to
repay?
e. To the extent there are loans made in categories a through d,
how prevalent are such practices? How easy is it for consumers to find
and obtain such products? To what extent are these loans leading to
injury to consumers? To what extent are consumers aware of the costs
and risks of such loans?
f. Are there changes in technology or the market that make such
practices more likely to develop or spread in the future?
2. To the extent that certain business models enable lenders to
extend non-covered loans to consumers facing liquidity shortfalls
without regard to the consumer's ability to repay, what factors might
limit or encourage growth of these business models going forward?
a. What are the State and Federal regulations that affect their
viability and growth?
b. What effect, if any, would the Bureau's Concurrent Proposal, if
finalized, have on their viability and growth?
c. Are technology, investment, and other market factors affecting
their viability and growth?
d. What factors affect competition in these markets, particularly
the emergence of new market players and development of new product
alternatives?
3. To what extent are consumers able to protect themselves in the
selection or use of products identified in response to questions number
1(a) through 1(d)? For example:
a. What evidence, data, or other information exists with respect to
the ability of consumers to shop effectively for products of the type
described above and for alternative products that may better serve
consumers' needs? Are there currently Web sites or other digital tools
that facilitate effective price comparison among lenders offering
products designed to serve the needs of liquidity-constrained
borrowers, including comparison of prices, prior to surrendering
personal information such as names, email addresses, and bank account
numbers? Are consumers in search of a loan to meet a liquidity
shortfall able to avail themselves of common internet search engines to
effectively shop for loans to meet their needs?
b. Are new business entrants in the market for high-cost, non-
covered loans able to offer loans at a lower cost than those offered by
established lenders? What factors enhance or inhibit the ability of new
market entrants to do so? Are new business entrants with lower pricing
able to effectively raise customer awareness about the benefits of
their products in comparison to established covered or non-covered
loans?
c. Are there cognitive, behavioral, or psychological limitations
that make it

[[Page 47786]]

more difficult for consumers facing a liquidity crisis to shop
effectively for a non-covered loan to meet their needs?
d. Are there marketing practices or loan features that take
advantage of these cognitive, behavioral, or psychological limitations?
e. What evidence, data, or other information exists with respect to
the existence and prevalence of any such limitations, marketing
practices, or loan features?

III. Potential Consumer Harm from Garnishment Orders, Judgment Liens,
or Other Forms of Enhanced Collection

As discussed above, the Bureau's Concurrent Proposal would cover
high-cost, longer-term loans that include a leveraged payment mechanism
or a vehicle security interest and would generally require lenders
making such loans to first reasonably determine whether the consumer
has the ability to repay the loan.\33\ The Bureau anticipates that, if
the Concurrent Proposal is finalized, even where lenders do
successfully determine a consumer's ability to repay, some consumers
will nonetheless end up defaulting on their loans if, for example, the
consumer becomes disabled and is unable to work for a prolonged period
of time.
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\33\ Under the Concurrent Proposal a lender with a leveraged
payment mechanism generally includes a lender that has the right to
initiate a transfer of money from a consumer's transaction account
to satisfy an obligation, to obtain payment directly from the
consumer's employer or other source of income, or to require the
consumer to repay the loan through a payroll deduction or deduction
from another source of income.
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The Bureau's Concurrent Proposal does not address the collection
practices of lenders making covered loans. The Bureau anticipates that
at a future date it will be issuing a proposal to regulate debt
collection practices that will apply to the collection of covered and
non-covered loans alike. But the Bureau is concerned that there may be
certain practices that are more prevalent with respect to high-cost
loans made to consumers facing cash shortfalls and that pose serious
risks for such consumers. The Bureau is concerned that these practices
could become more prevalent with covered or non-covered high-cost loans
if the Bureau finalizes the Concurrent Proposal.
In particular, the Bureau seeks information about possible
alternatives to leveraged payment mechanisms and vehicle security
interests that may exist currently or develop in response to the
Bureau's Concurrent Proposal and market or technology changes. For
example, the laws of some States allow creditors to sue borrowers over
a debt, and subsequently obtain garnishment orders that permit lenders
to seize borrowers' wages, bank account funds, or vehicles under some
circumstances. The Federal CCPA and implementing regulations issued by
the Department of Labor provide some protection for consumers by
limiting the amount of wages that can be garnished during a pay
period.\34\ Moreover, State and Federal due process guarantees as well
as debtor asset exemption statutes also provide borrowers with some
protection. However, the Bureau's market monitoring and research
suggests that State laws vary widely in this regard and may place
burdens on consumers that they may not be prepared to meet and that the
consumer financial services market has seen substantial and potentially
problematic innovation and change in recent years. For example, a
recent case in the Missouri Court of Appeals highlights a lender
practice of allowing interest and fees to accrue post-default--as
discussed further in part V of this RFI--and then suing and obtaining a
garnishment order for amounts that a concurring opinion found ``shocks
the conscience'' such as the following seven consumers that
``exemplif[ied] the situation of the class action members in this
case'':
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\34\ Subject to certain exceptions, the Title III of the
Consumer Credit Protection Act protects employees by limiting the
amount of earnings that may be garnished in any workweek or pay
period to the lesser of 25 percent of disposable earnings or the
amount by which disposable earnings are greater than 30 times the
federal minimum hourly wage prescribed by Section 6(a)(1) of the
Fair Labor Standards Act of 1938. 15 U.S.C. 1673(a). This limit
applies regardless of how many garnishment orders an employer
receives. The Federal minimum wage is $7.25 per hour effective July
24, 2009. Wages and Hours Worked: Wage Garnishment, Department of
Labor, https://www.dol.gov/compliance/guide/garnish.htm (last
visited May 24, 2016).
---------------------------------------------------------------------------

Class member, D.W., took out a $100 loan from CSI. A judgment was
entered against him for $705.18; the garnishment is still pending. So
far, $3.174.81 has been collected, and a balance of $4.105.77 remains
Class member, S.S., took out an $80 loan from CSI. A judgment was
entered against her for $2.137.68; the garnishment is still pending. So
far, $5.346.41 has been collected, and a balance of $19,643.48 remains.
Class member, C.R., took out a $155 loan from CSI. A judgment was
entered against her for $1.686.93; the garnishment is still pending. So
far, $9.566.15 has been collected, and a balance of $2.162.07 remains.
Class member, C.N., took out a $155 loan from CSI. A judgment was
entered against him for $1.627.44. There is now a lien on C.N.'s
property.
Class member, S.L., took out a $360 loan from CSI. A judgment was
entered against her for $1.305.17; the garnishment is still pending. So
far, $6.021.80 has been collected, and a balance of $2.182.90 remains.
Class member, F.H., took out a $100 loan from CSI. A judgment was
entered against her for $380.82; the garnishment is still pending. So
far, $3.935.54 has been collected, and a balance of $707.98 remains.
Class member, B.D., took out a $200 loan from CSI. A judgment was
entered against her for $853.05; the garnishment is still pending. So
far, $4.692.31 has been collected, and a balance of $1.531.57
remains.\35\
---------------------------------------------------------------------------

\35\ Hollins v. Capital Sols. Investments, Inc., 477 SW.3d at
27.
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The Bureau believes that business practices of this nature, which
might be referred to as enhanced collections practices, may raise
substantial consumer protection concerns. Therefore, the Bureau
requests information about methods creditors may use in connection with
loans covered under the Concurrent Proposal or with non-covered loans
to seize wages, funds, vehicles or other forms of personal property
from borrowers that face liquidity crisis and obtain loans outside
mainstream credit systems.
4. Are there practices in obtaining or using wage garnishment
orders to collect covered or non-covered loans that raise consumer
protection concerns? If so, what data, evidence, or other information
tends to show these concerns exist or are likely to emerge in the
future?
5. Are there practices in obtaining or using attachment or
garnishment orders to seize funds from deposit accounts, prepaid cards,
or other consumer assets to collect covered or non-covered loans that
raise consumer protection concerns? If so, what data, evidence, or
other information tends to show these concerns exist or are likely to
emerge in the future?
6. Are there practices in obtaining or using judgment liens on
vehicles or other consumer goods that raise consumer protection
concerns? If so, what data, evidence, or other information tends to
show these concerns exist or are likely to emerge in the future?
7. With respect to each of these questions, what is the prevalence
of these practices in the current market? And, can the Bureau
reasonably anticipate that these practices would increase or decrease
if the Bureau were to finalize a rule along the lines of the

[[Page 47787]]

Bureau's Concurrent Proposal? If so, why?
8. Do particular Federal, State, or local laws affect consumer
protection concerns associated with enhanced collection practices that
would not be addressed by the Concurrent Proposal?

IV. Potential Consumer Harm From Loan Churning, Prepayment Penalties,
and Slowly Amortizing Credit in Covered and Non-Covered High-Cost
Credit

The Bureau's research into high-cost installment loans indicates
that a substantial percentage of consumers refinance their loans during
the term of their loans. Under the Concurrent Proposal, where consumers
reborrow because their loan payments have proven to be unaffordable, a
presumption would apply that a new loan with similar payment terms
would likewise be unaffordable. However, that presumption would not
apply in circumstances in which there is not an indication of financial
distress or evidence that the refinancing was masking unaffordability
of the outstanding loan.
The Bureau is concerned, however, that under certain circumstances
lenders may have an incentive to encourage borrowers to refinance their
loans in a way that creates extended patterns of payment that do not
serve consumers' interests. These patterns of extended repayment may be
caused or exacerbated by marketing or business practices that tend to
frustrate the ability of borrowers to understand their loan terms. For
example, some lenders may structure their loans such that a refinancing
generates additional revenue for the lender, beyond the incremental
finance charges, as a result of prepayment penalties, rebates
calculated under the Rule of 78s, new origination fees, or new fees to
purchase ancillary products associated with the refinancing. Moreover,
because, in some high-cost loans, repayment of loan principal does not
occur until the final few payments of the borrower's payment schedule,
refinancing can deprive borrowers of the opportunity to make
substantial progress in escaping their debts. The Bureau seeks to
better understand the use of incentives and sales practices that might
encourage borrowers to refinance high-cost loans, including practices
that encourage refinancing after the consumer has made multiple
payments allocated to interest and fees, but before making substantial
progress reducing the loan principal.
The Bureau also requests information about the nature of consumer
protection concerns associated with the imposition of prepayment
penalties in longer-duration, high-cost covered loans and also whether
comparable concerns exist in non-covered loan products. In the
Concurrent Proposal, the Bureau has noted that penalizing consumers for
prepaying loans with durations of less than 24 months is likely to be
inconsistent with consumers' expectations for their loans and may
prevent consumers from repaying debts that they otherwise would be able
to retire. Accordingly the proposal would prohibit lenders from
imposing a prepayment penalty in connection with certain covered longer
duration loans that are made under a conditional exemption from the
proposed ability-to-repay requirements. While the Bureau believes there
is a basis for proposing to prohibit prepayment penalties from
conditionally exempt covered loans, the Bureau requests further
information about whether consumer protection concerns may exist more
generally with respect to prepayment penalties incorporated into longer
duration covered and non-covered loans marketed to consumers facing
liquidity crises. In particular, the Bureau seeks to explore whether
there may be informal methods of imposing prepayment penalties, such as
denial of a promised rebate, which could make it more costly for
borrowers in either covered or non-covered longer duration high-cost
loans to repay those loans. The Bureau also seeks to obtain more
information about the prevalence of prepayment penalties and potential
consumer protection concerns associated with non-covered, longer
duration, high-cost loans.
The Bureau is also concerned that, for borrowers facing cash
shortfalls that lack access to the mainstream credit system, loans
could be structured in such a way that even if borrowers have the
ability to make their payments, doing so could cause borrowers to
suffer undue, long-term hardships. These hardships could be caused or
exacerbated by marketing, business practices, or contract terms that
tend to frustrate the ability of borrowers to understand their payment
obligations or otherwise interfere with their ability to protect their
interests. For example, a lender might aggressively market a payment-
option, adjustable-rate installment loan that allows borrowers to
temporarily make negatively amortizing payments until a later recast
date. After the recast date, borrowers facing larger, adjusted
installment payment obligations could be vulnerable to payment shock
because their income may be insufficient to cover the adjusted payment
along with their other obligations and basic living expenses at that
time.
Similarly, a lender might offer a fully amortizing loan with a
sufficiently long term and high interest rate and apply most payments
to interest for a large portion of the loan's life. Consider, for
example, a $500 consumer loan with a 450 percent APR and a two-year
duration payable in equal monthly installments. This borrower would
face 24 monthly payments of about $188 each. After the first three
months, a successfully repaying borrower would have repaid more than
the initial amount financed, but reduced that balance by less than 50
cents. After 18 of 24 payments, the successfully repaying borrower
would still owe over $400 of the $500 originally borrowed. Under the
Bureau's Concurrent Proposal, if the loan included a leveraged payment
mechanism or vehicle security interest, the lender would be required to
reach a reasonable determination of the borrower's ability to repay
each $188 monthly payment. On the other hand, a lender making this loan
without a leveraged payment mechanism or vehicle security interest
would not be subject to the proposed ability-to-repay requirement. In
either case, the Bureau requests information about whether loans along
the lines of these or similar examples currently exist or could be
anticipated to evolve if the Bureau finalizes the Concurrent Proposal.
With respect to these potential concerns:
9. Are there marketing or other business practices with respect to
lender incentives or encouragement of loan refinancing that raise
consumer protection concerns?
a. If so, what specific business practices or contractual terms are
associated with consumer harm?
b. What data, evidence, or other information tends to show the
current or likely future prevalence of consumer harm associated with
these practices?
10. Are there circumstances in which the imposition of prepayment
penalties raises consumer protection concerns in non-covered loans
marketed to consumers facing a liquidity crisis?
a. If so, what specific contractual terms or business activities
are associated with consumer harm?
b. What evidence, data, or other information tends to show the
current or likely future prevalence of consumer harm associated with
prepayment penalties in non-covered loans?
11. Are there methods of imposing informal penalties for
prepayment, such as withholding a promised rebate, which raise consumer
protection

[[Page 47788]]

concerns in either covered or non-covered loans marketed to consumers
facing liquidity crisis?
a. If so, specifically what contractual terms or business
activities are associated with consumer harm?
b. What evidence, data, or other information tends to show the
current or likely future prevalence of consumer harm associated with
such informal penalties for prepayment.
12. Are there circumstances in which excessively slow amortization
of high-cost installment loans or open-end lines of credit raise
consumer protection concerns?
a. If so, what specific contractual terms or business activities
are associated with consumer harm?
b. To what extent are consumers aware of the costs and risks of
such loans? Are there other factors that might frustrate the ability of
consumers to protect their interests in using such loans?
c. Is there consumer harm from loan payment schedules where the
bulk of repayment allocated to principal occurs in the final few
payments of an even-payment loan? What specific criteria should the
Bureau consider in identifying such consumer harm, if any?
d. What data, evidence, or other information tends to show the
current or likely future prevalence of consumer harm, if any,
associated with payment schedules of this type?
e. What evidence exists that consumers who make an even-payment
understand that the lower principal is not being evenly paid down?
13. With respect to each of these questions, what is the prevalence
of these practices in the current market? And, can the Bureau
reasonably anticipate that these practices would increase or decrease
if the Bureau were to issue a final rule along the lines of the
Bureau's notice of proposed rulemaking? If so, why?

V. Potential Consumer Harm From Default Interest Rates, Late Payment
Penalties, Teaser Rate Loans, or Other Back-End Pricing Practices

In the Bureau's experience, post-delinquency or default revenue
terms such as late fees, default interest rates, or other contractual
remedies can lead to consumer protection concerns. For example, in 2009
Congress adopted the Credit Card Accountability, Responsibility, and
Disclosure Act (CARD Act) to curb excessive or unfair late fees by
generally requiring card issuers to refrain from imposing a late fee
unless the creditor has adopted reasonable policies and procedures to
ensure that consumers are given at least 21 days to pay their bill and
by limiting late fees to an amount that is ``reasonable and
proportional'' to the violation of the account terms in question.\36\
---------------------------------------------------------------------------

\36\ 15 U.S.C. 1665d, 1666b. To assist credit card issuers in
complying with their CARD Act obligations Regulation Z establishes a
safe harbor benchmark for reasonable and proportional penalty fees.
12 CFR 1026.52(b)(1)(ii).
---------------------------------------------------------------------------

Unlike credit card markets, there are currently no broadly
applicable Federal rules comparable to the CARD Act's late payment
provisions for consumers of high-cost payday, vehicle title,
installment loans, or open-end lines of credit. The Bureau seeks
information about whether post-delinquency or default revenue terms
such as late fees, default interest rates, or other back-end pricing
practices may create a mismatch between borrowers' expectations and
their actual experiences with their loans over time. For example, some
consumers may have the ability to repay at origination but changes in
their circumstances such as illness, loss of employment, family
disruptions such as divorce or separation, or unexpected expenses could
nevertheless lead to delinquency or default. Similarly, some consumers
may fall into arrears due to inattention to detail, miscommunication,
payment system delay, or clerical error. The Bureau seeks to learn
whether revenue generation provisions imposed on consumers in these and
similar situations may raise consumer protection concerns.\37\ The
Bureau is not, however, soliciting information in this RFI on the
examples of such practices that would constitute evasions of the
Concurrent Proposal, as described in proposed Sec. 1041.19 and its
commentary.
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\37\ For example, Mountain Loan Centers' seven-month, 432
percent APR ``signature'' loans of $800 include a default interest
rate of 600 percent imposed when any installment payment is more
than three days past due. Complaint, Mountain Loan Centers, Inc. v.
Audra Crizer, No. 159401338.
---------------------------------------------------------------------------

The Bureau is also aware that teaser rate products can, under some
circumstances, give rise to consumer protection concerns. With a teaser
rate, the initial interest rate and payment may remain in effect for a
limited period of time. For some such loans, the initial rate and
payment can vary considerably from the rate and payment obligations
later on. Teaser rate loans can lead to unexpected ``payment shock''
when borrowers face payments associated with a recast interest rate
that increases borrower payments.\38\ The Bureau seeks to learn whether
covered or non-covered high-cost loans made to consumers facing
liquidity crisis are being offered with teaser rate features. If so,
the Bureau would like to obtain information about whether the use of
teaser rate loan terms in this market may create risks to consumers.
---------------------------------------------------------------------------

\38\ Federal Reserve Board of Governors, Consumer Handbook on
Adjustable-Rate Mortgages, available at http://files.consumerfinance.gov/f/201204_CFPB_ARMs-brochure.pdf.
---------------------------------------------------------------------------

With respect to these issues:
14. Other than circumstances identified in the Concurrent Proposal,
as discussed above, under what circumstances do lenders' use of post-
delinquency or default revenue terms such as late fees, default
interest rates, or other contractual provisions or remedies in either
covered or non-covered loans marketed to consumers facing liquidity
crisis raise consumer protection concerns?
a. To what extent do lenders making covered loans or non-covered,
high-cost loans to consumers facing cash shortfalls consider post-
delinquency or default revenue generating terms such as late fees,
default interest rates, or other contractual provisions or remedies
when they perform underwriting? If they do so, how do they do it?
b. If lenders' current underwriting practices do not include
consideration of the borrower's ability to repay post-delinquency or
default revenue generating terms, what would be a reasonable method of
underwriting for this factor?
c. What evidence, data, or other information shows the current or
likely future prevalence of consumer harm, if any, associated with
post-delinquency or default revenue terms in covered or non-covered
high-cost consumer loans?
15. Are there circumstances in which the use of teaser rates which
reset to high-cost loans made to consumers facing liquidity crisis
raise consumer protection concerns?
a. If so, what specific contractual terms or business activities
are associated with consumer harm?
b. Do teaser rate products, to the extent any exist, create a
mismatch between borrowers' repayment expectations and their actual
experiences in either covered or non-covered loans?
c. If lenders offer teaser rate products in loans to consumers
facing liquidity needs, do they consider recast interest rates in
underwriting? If they do so, how do they do it?
d. What data, evidence, or other information tends to show the
current or likely future prevalence of consumer harm, if any,
associated with adjustable interest rates products in covered or non-
covered high-cost loans?
16. Are there other circumstances in which ``back-end'' pricing
impedes the

[[Page 47789]]

ability of consumers to afford or to understand and compare credit
options marketed to consumers facing liquidity crisis in a way that
raises consumer protection concerns or impedes their ability to
understand or anticipate the full cost of the loan to that consumer?
a. If so, what specific back-end pricing fees, contractual terms,
or other business activities exist in the marketplace or are likely to
evolve in the future?
b. If so, what back-end pricing fees, contractual terms, or other
business activities are associated with consumer harm?
c. What data, evidence, or other information tends to show the
current or likely future prevalence of consumer harm, if any,
associated with such back-end pricing in covered or non-covered high-
cost loans?

VI. Potential Consumer Harm from Ancillary Products

In the Bureau's experience, the marketing of ancillary products,
sometimes called ``add-ons,'' can lead to consumer protection
concerns.\39\ For instance, the Bureau is concerned that some creditors
may engage in sales and marketing practices that raise consumer
protection concerns with respect to the sale of credit insurance, debt
suspension or debt cancellation agreements, and other credit related
ancillary products. For example, in the past four years the Bureau has
announced numerous different public enforcement actions associated with
illegal marketing of add-ons that led to approximately $2.4 billion in
consumer redress, refunds, and forgiven debts. In these ancillary
product matters, the Bureau, in some instances working in cooperation
with other Federal or State regulators, imposed over $128 million in
civil money penalties. Among other practices and concerns, the Bureau
has found or alleged that some companies offering ancillary products
failed to accurately describe those products, offered products that
provided little or no benefit to consumers without disclosing this
fact, stated or implied that ancillary products were required as a
condition of borrowing when they were not, and billed consumers for
add-on products without permission.\40\ For both covered and non-
covered loans, the Bureau seeks to learn more about the marketing of
ancillary products to consumers facing liquidity crisis and borrowing
outside the mainstream credit system.
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\39\ Examples of ancillary products include credit insurance,
debt suspension or debt cancellation agreements, and identity theft
protection plans.
\40\ See, e.g., Citibank, N.A., CFPB No. 2015-CFPB-0015 (July
21, 2015), available at http://files.consumerfinance.gov/f/201507_cfpb_consent-order-citibank-na-department-stores-national-bank-and-citicorp-credit-services-inc-usa.pdf; Am. Express Centurion
Bank, CFPB No. 2012-CFPB-0002 (Oct. 1, 2012), available at http://files.consumerfinance.gov/f/2012-CFPB-0002-American-Express-Centurion-Consent-Order.pdf; Discover Bank, CFPB No. 2012-CFPB-0005
(Sept. 24, 2012), available at http://files.consumerfinance.gov/f/201209_cfpb_consent_order_0005.pdf.
---------------------------------------------------------------------------

Moreover, ancillary products can affect the affordability of
consumer credit. The Bureau's Concurrent Proposal includes the cost of
credit insurance, debt suspension agreements, and credit-related
ancillary products sold in originating a loan in calculating the total
cost of credit for purposes of determining whether a longer duration
loan is covered by the proposed rule. The Bureau's Concurrent Proposal
also would require that creditors consider the cost of these products
in determining borrowers' ability to repay. Nevertheless, the Bureau
seeks to obtain more information about the prevalence and affordability
of add-on products in non-covered loans made to consumers facing
liquidity crisis.
With respect to these potential issues:
17. Aside from affordability, are there consumer protection
concerns arising out of the marketing of ancillary products in covered
payday, vehicle title, or similar loans? If so, what evidence, data, or
other information shows the current or likely future prevalence of
these concerns?
18. To what extent do lenders making non-covered, high-cost loans
consider the cost of ancillary products in determining whether
borrowers have the ability to repay?
a. If they do so, how do they do it?
b. If lenders do not currently consider the affordability of such
products, what would be a reasonable method of underwriting for this
component of the loan?
c. What evidence, data, or other information shows the current or
likely future prevalence of unaffordable ancillary products in non-
covered loans?
19. Are there other consumer protection concerns associated with
the marketing or use of ancillary products in combination with covered
or non-covered, high-cost credit? If so, what evidence, data, or other
information shows the current or likely future prevalence of such
consumer protection concerns?

VII. Potential Market Evolution and Other Topics Not Identified

The market for high-cost consumer credit is currently in transition
due to regulatory and technological change. Many lenders are developing
new technological channels for delivering consumer financial products
to the market place. State, local and tribal laws are continually
evolving in response to these forces. The Bureau seeks to apprise
itself of current and expected changes in the marketplace for high-cost
loans that could present consumer protection concerns. Moreover, the
Bureau is mindful that, in the past, markets supplying credit to
borrowers facing cash shortfalls have evolved in response to regulatory
action, thereby causing the government considerable difficulty in
addressing some consumer protection issues.
Bearing in mind the potential for future evolution in this market
and in lender practices:
20. Are there other marketing, origination, underwriting, or
collection practices that currently exist or, if the Bureau issues a
final rule along the lines of the Concurrent Proposal, are likely to
emerge, that pose risk to consumers and may warrant Bureau regulatory,
supervisory, enforcement, or consumer educational action?
21. Are there arrangements with brokers, credit service
organizations, or other intermediaries in the marketing, origination,
underwriting, collection or information-sharing practices associated
with non-covered high-cost credit markets that pose risk to consumers
and may warrant Bureau regulatory, supervisory, enforcement, or
consumer educational action?
22. If so, what specific actions or policies should the Bureau
consider in addressing such consumer harm? Other than usury limits
applicable to an extension of credit, which Congress has not authorized
the Bureau to establish, are there examples of existing law,
regulations, or other policy interventions that the Bureau should
consider?

Dated: June, 2016.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2016-13492 Filed 7-21-16; 8:45 am]
BILLING CODE 4810-AM-P